ABOUT THIS CONTENTChapter notes for the famous marketing textbook by Kotler
What are Marketing Channels?
Sets of interdependent organizations involved in the process of making a product or service available for use or consumption.
Why are They Used?
- Because producers lack resources to carry out direct marketing.
- Because direct marketing is not feasible.
- Because rate of return on manufacturing > rate of return on retailing.
- Because they reduce the amount of work that must be done.
Channel Functions & Flows
Info-Promotion-Negotiation-Ordering-Financing-Risk taking-Physical possession-Payment-Title
All of the functions have 3 things in common:
- They use up scarce resources.
- Can be performed better through specialization.
- They are shiftable among channel members.
Each intermediary that performs work in bringing the product & its title closer is a channel level.
- Zero-channel level (direct-marketing channel) consists of a manufacturer selling directly to the final customer (i.e. door-to-door sales, mail order. Telemarketing, TV selling)
- One level channel contains one selling intermediary (i.e. retailer)
- Two level…(wholesalers, retailers)
- Three level…(wholesalers, jobbers, retailers)
The longer the channel, the more difficult it is to exercise control.
Designing a channel system calls for analyzing customer needs, establishing channel objectives, & identifying & evaluating the major channel alternatives.
Analyzing Customers’ Desired Service Output Levels
Channels produce 5 service output levels:
- Lot size: # of units that the marketing channel permits a typical customer to purchase on a purchase occasion
- Waiting time: Average time that customers of that channel wait for receipt of the goods.
- Spatial convenience: Degree to which the marketing channel makes it easy for customers to purchase the product.
- Product variety: assortment breadth.
- Service backup: add-on services provided by the channel (installation, repairs, credit).
Establishing the Channel Objectives & Constraints
- Channels objectives vary with product characteristics.
- Channel design must take into account the strengths & weaknesses of different types of intermediaries.
- Channel design is also influenced by the competitors’ channels.
- Channel design must also adapt to the larger environment.
- Legal regulations & restrictions also affect channel design.
Identifying the Major Channel Alternatives
A channel alternative is described by three elements:
- Types of intermediaries.
- Number of intermediaries.
- Terms & responsibilities of channel members
The producer must determine the rights & responsibilities of the participating channel members, making sure that each channel member is treated respectfully & given the opportunity to be profitable.
Depends on the service outputs desired by the target market & the channel’s transactions costs. The company must search for the channel alternative that promises the most long-run profitability.
Evaluating the Major Channel Alternatives
Each alternative needs to be evaluated against three criteria.
- Economic Criteria
- The first step is to determine whether a company sales force or a sales agency will produce more sales.
- The next step is to estimate the costs of selling different volumes through each channel.
- The final step is comparing sales & costs.
Each channel will produce a different level of sales & costs.
- Control Criteria
The agents may concentrate on other customers’ products or they may lack the skills to handle our products.
- Adaptive Criteria
The channel members must make some degree of commitment to each other for a specified period of time.
After a company has chosen a channel alternative, individual intermediaries must be selected, motivated & evaluated.
Selecting Channel Members
For some producers this is easy; for others it’s a pain in the ass.
Anyway, in order to select them, producers should determine what characteristics distinguish the better intermediaries (years in business, other lines carried, solvency, reputation, etc.)
Motivating Channel Members
Constant training, supervision & encouragement. Producers can draw on the following types of power to elicit cooperation:
- Coercive power. Manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate. Produces resentment.
- Reward power. Manufacturer offers intermediaries extra benefits for performing specific acts.
- Legitimate power. Manufacturer requests a behavior that is warranted by the contract.
- Expert power. Manufacturer has special knowledge that the intermediaries value.
- Referent power. Intermediaries are proud to be identified with the manufacturer.
Evaluating Channel Members
Underperformers need to be counseled, retrained or re-motivated. If they do no shape up, it might be best to terminate their services.
Modifying Channel Arrangements
Periodic modification to meet new conditions in the marketplace. Modification is necessary when:
- Distribution channel is not working as planned.
- Consumer buying patterns change.
- Market expands.
- New competition arises.
- Innovative channels emerge.
- Product moves into later stages in the product life cycle.
3 levels of channel adaptation can be distinguished:
- Adding or dropping individual channel members.
- Adding or dropping particular market channels.
- Developing a totally new way to sell goods in all markets.
Conventional marketing channel
- Comprises an independent producer, wholesaler(s) & retailer(s).
- Each is a separate entity.
- No channel member has complete or substantial control over the other members.
Vertical Marketing Systems
- Producer, wholesaler(s) & retailer(s) act as a unified system.
- They all cooperate.
- Can be dominated by any of the three members of the system.
- It arose as a result of strong channel members’ attempts to control channel behavior & eliminate the conflict that results when independent channel members pursue their own objectives.
- Has become the dominant mode of distribution in the U.S. consumer marketplace.
3 types of VMS:
- Corporate VMS
Combines successive stages of production & distribution under single ownership. (Sears).
- Administered VMS
Coordinates successive stages of production & distribution through the size & power of one of members (Kodak, Gillete, P&G)
- Contractual VMS
Independent firms at different levels of production & distribution integrating their programs on a contractual basis to obtain more economies &/or sales impact than they could achieve alone. 3 types:
- Wholesaler-sponsored voluntary chains
- Retailer cooperatives
- Franchise organizations
Horizontal Marketing Systems
Two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity.
Multichannel Marketing Systems
A single firm uses two or more marketing channels to reach one or more customer segments. By adding more channels, companies can gain 3 important benefits: increased market coverage, lower channel cost, more customized selling.
Roles of Individual Firms in the Channel
- Insiders. Members of the dominant channel.
- Strivers. Firms seeking to become insiders.
- Complementers. Not part of the dominant channel
- Transients. Outside the dominant channel & do not seek membership. Short-run expectations.
- Outside innovators. Real challengers & disrupters of the dominant channels.
Channel Cooperation, Conflict & Competition
Types of conflict & competition
- Vertical channel conflict exists when there is conflict between different levels within the same channel.
- Horizontal channel conflict exists when there is conflict between members at the same level within the channel.
- Multichannel conflict exists when the manufacturer has established two or more channels that compete with each other in selling to the same market.
Causes of Channel Conflict
- Goal incompatibility
- Unclear roles & rights
- Differences in perception
- Intermediaries’ great dependence on the manufacturer
Managing Channel Conflict
- Some channel conflict can be constructive. It can lead to more dynamic adaptation to a changing environment. But too much is dysfunctional.
- Perhaps the most important mechanism is the adoption of superordinate goals. Working closely together might help them eliminate or neutralize the threat.
- Exchange of persons between two or more channel levels is useful.
- Cooptation is an effort by one organization to win support of the leaders of another organization by including them in advisory councils, boards of directors, etc.
- Encouraging joint membership in & between trade associations.
- When conflict is chronic, the parties may have to resort to diplomacy, mediation or arbitration.
Legal & Ethical Issues in Channel Relations
- Exclusive dealing
- Exclusive territories
- Tying agreements
- Dealers’ rights