Kerin Chapter 15

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Chapter 15
MANAGING MARKETING CHANNELS AND WHOLESALING

NATURE AND IMPORTANCE OF MARKETING CHANNELS

A. Defining Marketing Channels of Distribution

Derived from the Latin word canalis (canal). A marketing channel can be viewed as a canal or pipeline for products.
Individuals and firms involved in the process of making a product or service available for use or consumption by consumers or industrial users.
Terms used for marketing intermediaries are defined in Figure 15-1.

B. Value Created by Intermediaries

Functions Performed by Intermediaries Intermediaries

Transactional and Logistical Functions
MUST be performed by someone.
It could be the producer, wholesaler, retailer, end user, or another party.

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Transactional functions.

Contacting buyers
Promoting the product to be sold
Negotiating
transportation
Quantity
Reduce contacts between producers and users.
Risk-taking (with possession of products.)

Logistical functions.

Physical Distribution	Moving products from production to consumer Overcomes temporal discrepancies. Overcomes spatial discrepancies.
Sorting Functions	Overcome discrepancies of quantity Overcome discrepancies assortment

Facilitating functions.

Research	Gathering information about other channel members and consumers.
Financing	Some wholesalers give credit Inventories are financed as products flow through or are held in channels retailers may give credit for purchasers

2. Consumer Benefits from Intermediaries through the four utilities:

Time utility

having a product or serviced when you want it.

Place utility

having a product or service where you want it.

Form utility

having a product or service in the form you want it by, for example, enhancing it to make it more appealing to buyers.

Possession

utility–helping buyers to take possession of a product or service.

Channels Overcome Discrepancies

Quantity

Difference between the amount produced and the amount a buyer wants.

Assortment

Lack of all the items needed to get full satisfaction from a purchase.

Temporal

Product is produced and a consumer is not ready to buy it.

Spatial

Difference between producer location and market locations.

Channels Improve Contact (buying trip) Efficiency

Reduces the transactions needed to get products to consumers.
Retailers assemble a selection of merchandise so that one contact can result in the purchase of many different items.

CHANNEL STRUCTURE AND ORGANIZATION

A. Marketing Channels for Consumer Goods and Services

Consumer Channel Structures The appropriate configuration of channel members.
Direct Channel	Retailer Channel	Wholesaler Channel	Agent Broker Channel
Producer	Producer	Producer	Producer

			Agent or Broker

		Wholesaler	Wholesaler

	Retailer	Retailer	Retailer

Consumer	Consumer	Consumer	Consumer
a producer and ultimate consumers deal directly with each other.	Large retailer Cost of inventory makes it too expensive to use a wholesaler.	low-cost, low-unit value frequently purchased Manufacturer sells to wholesalers in large quantities; Wholesalers break bulk Retailers order in smaller quantities.	Many small manufacturers and Many small retailers Agent coordinates a large supply of the product. Manufacturer uses agents to sell to wholesalers, which then sell to many small retailers.

B. Marketing Channels for Business Goods and Services

Industrial Product Channels

Direct Channel	Industrial Distributor	Agent Broker Channel	Agent Broker Industrial
Producer	Producer	Producer	Producer

		Agent or Broker	Agent or Broker

			Wholesaler

	Distributor		Distributor

Industrial Consumer	Industrial Consumer	Industrial Consumer	Industrial Consumer
Large,well defined buyers Extensive negotiations High unit value products Hands-on expertise in terms of installation.	Distributor performs channel functions, selling, stocking, and delivering a full product assortment and financing. Like wholesalers in consumer channels.	Agent, serves primarily as the independent selling arm of producers Represents a producer to industrial users.	Agents and distributors.

C. Electronic Marketing Channels

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Using the Internet to make goods & services available to consumers or business buyers.
Combine electronic and traditional intermediaries to create utility.
Electronic intermediaries can not perform some logistical functions
Inability of many electronic intermediaries to master the logistical function in a cost-effective manner contributed to their demise in the “dot-com crash” of 2001.

D. Direct Marketing Channels

Allow consumers to buy products by interacting with various advertising media without a face-to-face meeting with a salesperson.
U.S. sales revenue attributed to direct marketing channels exceeds $1.7 trillion.
These channels account for
- 20% of all retail transactions in the U.S.
- 10% of those in Europe.

E. Multiple Channels and Strategic Alliances

Dual distribution

A firm reaches different buyers by employing two or more different types of channels for the same basic product

Multiple channels

may be paired with a multibrand strategy to minimize cannibalization of the firm’s family brand and to differentiate channels.

Strategic channel alliances

One firm's marketing channel is used to sell another firm's products.
Popular in global marketing, where the creation of marketing channel relationships is expensive and time consuming.

Types of Channel Intermediaries
Merchant Wholesalers - Take Title

Full-service merchant wholesalers
General merchandise (or full-line)	Carry a broad assortment of merchandise Perform all channel functions.
Specialty merchandise (or limited-line)	Relatively narrow range of products Extensive assortment within lines carried. Perform all channel functions.
Limited-service wholesalers
Rack jobbers	Furnish racks that display merchandise in stores Perform all channel functions Sell on consignment to retailers Retain the title to the products displayed Bill retailers only for the product sold.
Cash and carry wholesalers	Take title to merchandise Sell only to buyers Who call on them Pay cash for merchandise Furnish their own shipping.
Drop shippers desk jobbers,	Own the merchandise they sell Do not physically handle, stock, or deliver it. Solicit orders Have the merchandise shipped directly from producer to buyer.
Truck jobbers	Small wholesalers with a small warehouse Stock their trucks for distribution to retailers. Usually handle limited assortments Fast-moving or perishable items Sold for cash directly from trucks in their original packages.
Agents and Brokers - Do Not Take Title
Manufacturer's agents Manufacturer’s reps	Work for several producers Carry noncompetitive, complementary merchandise in an exclusive territory.
Selling agents	Represent a single producer Are responsible for the entire marketing function of that producer.
Brokers	Independents whose principal function is to bring buyers and sellers together to make sales. No continuous relationship with buyer or seller Negotiate a contract between the two parties and then move on.
3. Manufacturer’s Branches and Offices
Manufacturer's branch office	Carries a producer's inventory Performs the functions of a full-service wholesaler.
Manufacturer's sales office	Does not carry inventory Typically performs only a sales function Serves as an alternative to agents and brokers.

Vertical Marketing Systems and Channel Partnerships

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Corporate Systems

Successive stages of production and distribution under a single ownership
Forward integration	Producer owns an intermediary at the next level down in the channel.
Backward integration	Retailer owns a manufacturing operation.

Contractual Systems

Production & distribution firms integrate their efforts on a contractual basis Greater functional economies Greater marketing impact.
Wholesaler-sponsored voluntary chains	Wholesaler develops a contractual relationship retailers Standardize and coordinate buying practices merchandising programs inventory management.
Retailer-sponsored cooperatives	Retailers organize to operate a wholesale facility.
Franchising	Franchisor	the parent company
	Franchisee	an individual or firm
	Contractual arrangement lets the franchisee
	Operate a specific business Under an established name According to specific rules.

Administered Systems

Size and influence of one channel member mandates cooperation.

Channel Partnerships

Similar to supply partnerships (Chapter 6).
Agreements & procedures among channel members
- Ordering & physically distributing a producer's products through the channel to the ultimate consumer.
- Collaborative use of information and communication technology
- Better serve customers
- Reduce the time and cost of performing channel functions.

CHANNEL CHOICE AND MANAGEMENT
Factors Affecting Channel Choice and Management
Environmental Factors	General economic conditions Changing family lifestyles Technological advance Market size Competition
Consumer Factors	Who are your customers? Where do they buy? How do they buy?.
Product Factors	Product sophistication Product Unit value Product Standardization Stage in the life cycle Price
Company Factors	Financial capabilities Human capabilities Technological capabilities. Managerial capabilities Marketing Resources Number of product lines Desire for control of marketing channels
B. Channel Design Considerations
1. Target Market Coverage
Intensive distribution	Try to place its product or services in as many outlets as possible. Little manufacturer control Convenience goods Supplies Low-value Frequently purchased may require a long channel of distribution
Exclusive distribution	Establish one or a few dealers within an area. Consumer specialty goods Some shopping goods Major industrial equipment. Creates image of exclusiveness for the product. Usually chosen for specialty goods. Maximum manufacturer control
Selective distribution	A few retail outlets Better coverage Some manufacturer control
2. Satisfying Buyer Requirements
Information	Do buyers have limited knowledge or desire specific data about a product or service?
Convenience	Proximity or driving time to a retail outlet Amount of time and hassle. Websites must be easy to locate and navigate and downloads must be fast.
Variety	Buyers’ interest in having the choice of numerous items. Breadth and depth of products and brands.
Attendant services	Delivery requirements Installation requirements Credit requirements.
3. Profitability
Distribution costs Advertising costs Selling expenses

Global Dimensions of Marketing Channels
Manufacturers introducing products in global markets must determine what type of channel structure to use.		Channel structure not be very similar to channels in the United States. Channel types available in differ as well"
Grey Marketing	selling products through distribution channels that are not authorized by the trademark holder.
Diverting	Gray marketing within a market
Parallel Importing	Gray marketing across international markets
It is almost impossible to determine the scale of grey market selling Estimated $10-15 billion worth of goods per year through gray market channels in the United States.
Global trade growth requires a well-thought-out global logistics strategy.
What are the legalities of trade in other countries? What is the transportation infrastructure?

Channel Relationships: Conflict, Cooperation, and Law
Conflict in Marketing Channels
Vertical conflict	disintermediation - channel member bypasses another member Disagreements over how profit margins. manufacturers believe wholesalers or retailers are not giving their products adequate attention.
Horizontal conflict	Manufacturer increases its distribution coverage in a geographical area. Dual distribution causes conflict when different types of retailers carry the same brands.
2. Cooperation in Marketing Channels
Channel captain	a channel member that coordinates, directs, and supports other channel members
Source of influence (power)	Economic influence. Expertise. Strong brand Identification Legitimate (contractual) right of one channel member to direct behavior of others
3. Legal Considerations
Dual distribution	Not specifically illegal Can be seen as anticompetitive under Sherman & Clayton Acts.
Vertical integration	Can be seen as anticompetitive under Sherman & Clayton Acts..
Exclusive dealing	Requirements for channel members to sell only one supplier's products Restrictions on distributors from selling directly competitive products. Prohibited under the Clayton Act when it lessens competition or creates monopolies.
Tying arrangements	Distributor must purchase some products in order to buy others. Prohibited under the Clayton Act Illegal if the tied products could be purchased at fair market values from other suppliers at the desired quality standard.
Resale restrictions	Supplier’s attempt to stipulate to whom distributors may resell the suppliers' products in what specific geographic areas or territories they may be sold. These practices have been prosecuted under the Sherman Act. Today courts apply the “rule of reason” and consider whether such restrictions have a demonstrable economic effect.
Even though a supplier has a legal right to choose intermediaries, a refusal to deal with existing channel members may be illegal under the Clayton Act.

Chapter 15 MANAGING MARKETING CHANNELS AND WHOLESALING

Chapter 15
MANAGING MARKETING CHANNELS AND WHOLESALING