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Marketing Channels
A Marketing Channel is a set ofinterdependent organizations involved in
the process of making a product orservice available for USE ORCONSUMPTION
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WHO BELONGS TO A MARKETING
CHANNEL:
MANUFACTURERS
INTERMEDIARIES
END-USERS
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ALTERNATE CHANNEL FORMATS:
1. Manufacturer based Channel Formats:
Manufacturers DirectManufacturer owned full-service distr.Company Store
LicenseeBrokers
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Marketing Flows
P Phy. Poss. > W > R > C
R Ownership > H > E > O
O Promotion > O > T > N
D L < > A< > S
U E < > I < > UC S < > L < > M
E
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2. Retailer based Channel Formats:
FranchiseeDealer DirectBuying Club
Mail-Order CatalogsFood RetailersDepartment StoresMass MerchandisersSpecialty Stores
Specialty DiscountersConvenience StoreHypermarket (at least 100,000 sq.ft. floor space)
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3.Service provider based Channel Formats:
Contract Warehousing
Sub-ProcessorsRail/Truck Integrators (Road-Railers)
Roller Freight (Full-Truck Load)
Direct MailersScheduled Freight Train
Outsourcing (IT, Janitorial, Security etc.)
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4. Other Channel Formats:
Door-to-Door
Home Party
Multi-Level
Vending Kiosk
TV Home Shopping
Internet Shopping
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Distribution Strategy
Corporate Strategy
Marketing Strategy
Distribution Strategy
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FACTORS TO BE LOOKED AT:
* Defining Customer Service LevelsWhat is the customer most interested in?
* Defining distribution objectives to achievethese service levels.
* Outlining the steps or activities necessary toto achieve these activities.
* Deciding on the structure of the network to implementto implement these activities.
Could be combination- Inside Resources and Outside Resources* Clearly defined Policies and Procedures.* State Key Performance Indicators.
Worked out separately for each Channel Member* Understand the Critical Success Factors to make the distribution Strategy
effective
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1. Customer Service Level:
Categorize:
Cat. A= Customers who contribute the
maximum to revenues.Cat. B= Customers who contribute
regularly but moderate levels ofrevenues.
Cat. C= Low contributors and may not be
regular.
EXTENT OF COMPETITION LEVEL CAN ALSO DECIDESERVICE LEVELS.
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2. Distribution Objectives:
Broadly, to provide:
TIME UTILITY
PLACE UTILITY
POSSESSION UTILITY
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3. Set of Activities:
- Periodic (normally monthly) salesforecasts.
- Dispatch to C&F Agents closest to the
market.- Beat Plans for Market Coverage.- Collection of Payments.- Promotional Activities.- Regular Sales Calls on Cat. A Customers to
build long-term relationships.
THESE ARE JUST EXAMPLES OF THE MOST COMMON SETOF ACTIVITIES.
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4. Distribution Organization is based on:
- Extent of in-company support.
- Affordability.- Selecting Channel Partners.
- Setting Clear Objectives for each
Channel Partner.- Correct Level of Financial Investment by each
Channel Partner.
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5. Policies and Procedures:
- Create an Operations Manual.
- Also Requires:
- Complaint Redressal
- Dispute Settling Mechanisms
- Additional, beyond norms, payments
to Channel Members
- Coverage of institutional business
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Key Performance Indicators (KPAs):
- Quota/Target Achievement- Market Share Increase- Profitability
- Complaints Reduction- Stock Returns- Market Coverage- Emergencies Handling- Damage to Products (Storage Competence)
- Collection of Payments
AND MANY OTHERS
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CRITICAL SUCCESS FACTORS OFSTRATEGY:
- Clear, transparent and unambiguous
Policies and Procedures- Serious commitment of ChannelPartners
- Fair dealing with Partners
- Clearly defined Customer Service Policy- Integrity- Equitable Distribution in times of Shortages- Compensation to Channel Partners on time
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Channel Design
Channel Design Process
1. Segmentation 2. Positioning 3. Targeting 4A. Establish New 5. ChannelChannels Implementation
-Define Service -Define optimal -Choose - Channel Flow Identify IdentifyOutput Demands channel flow segments Performance Power Channelby Segment. Performance to target Sources Conflicts
for each segment. subject to: - Channel Structure
-Identify Environ-mental character- * Environmental 4B. Refine Existing Use Power toistics and * Managerial Channels Manageconstraints. Bounds Conflicts
* Competitive Gap Analysis Benchmarks Goal:
Channel FlowPerformance Channel Coordination
Channel Structure
> >PROCESS
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Segmentation
Service Outputs- Bulk-Breaking- Spatial Convenience- Waiting or Delivery Time- Product Variety
End-User Channel Preferences Trends- In B to B Buyers
Out sourcingDownsizing
Alphabet Soup- ECR, EFR, JIT etc.- In Consumer PreferencesPoverty of timeIncreased Knowledge- Products/AvailabilityIncreased Polarity in IncomesIncreased Numbers of Self-Employed Workers
Segmenting the market by Service Output Demands:- Typical Parameters:
References & CredentialsFinancial Stability/LongevityProduct Demonstrations/Trials
Proactive Advice/ConsultingResponsive Assistance during the Decision-making processOne-stop SolutionLowest PriceInstallation and Training SupportResponsive after sale problem solvingOngoing Relationship with supplier
MEETING SERVICE OUTPUT DEMANDSCOSTCOMPETITIVENESSEASE OF ENTRY
OTHER ELEMENTS OF EXCELLENCE IN THE MARKETING OFFERING
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Positioning
What is the Optimal Channel to serve eachSegment?
This is called Positioning orConfiguration of the Channel
OPTIMAL CHANNEL IS DEFINEDFIRST & FOREMOST BY THE
NECESSARY CHANNEL FLOWS, THATMUST BE PERFORMED IN ORDER TOGENERATE THE SPECIFIC SEGMENTS
SERVICE OUTPUT DEMANDS.
Use an Efficiency Template by using Costs, Benefit Potentialand assign Weightages.
Channel Intensity: How many of each types of Channel Members?
Therefore, Channel Structure Decisions of Type, Identity and Intensityof Channel Members should be made with a minimization of ChannelCosts in mind.
ACTIVITY BASED COSTING (ABC) ANALYSIS IS USEFUL FOR THEBEST ALLOCATION OF CHANNEL FLOWS.
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Channel Structure
Decision Process: Who should be a Channel Member?
Use Intermediaries?-Is demand for assortment variety low?-Do we have the capability to sell direct?-Can an independent Channel member performflows at lower cost?- What is the value placed on control of the processes?
NO YES
Self-Direct What type(s) of Intermediaries to Use?
Non-Retail Intermediaries Retail Intermediaries
-What channel flows do we outsource? -What flows does the retailer perform?-Who is willing/available in the target -What retailers are willing/available in the targetmarket to perform the desired flows? Market to perform the desired flows-Is there synergistic value in allocating -How do target end-users currently buy in thismultiple flows to one intermediary? Category?
WHICH SPECIFIC INTERMEDIARY(IES) TO USE?
-How costly is it to use each retail intermediary?-Who is likely to be the most committed and cooperativechannel partner to perform each desired flow?
CREATE CHANNEL STRUCTURE
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APPROPRIATEINTERMEDIARIES
Flow to be Performed Intermediaries
Physical Possession Contract WarehouseShipping Company eg. FedEx, Blue DartDistributorRetailer
Ownership Contract WarehouseRetailerDistributor
Promotion DistributorIndependent Sales RepresentativeBrokerRetailer
FranchiseesNegotiation Distributor
Export marketing CompanyIndependent Sales Representative
Financing DistributorBrokerRetailerCredit Card CompanyBanksFranchisees
Risking DistributorRetailerCredit Card Company
FranchiseesOrdering Distributor
Independent Sales RepresentativeRetailerFranchisees
Payment DistributorShipping CompanyRetailerFranchisees
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Gap Analysis Framework
Sources of Gaps
Environmental Bounds Managerial Bounds-Local legal constraints -Constraints due to lack of-Local physical, retailing knowledgeinfrastructure -Constraints due to optimi-
zation at a higher level
Types of Gaps
Demand- side Gaps Supply-side Gaps- SOSSOD -Which Flows?-Which Service Outputs?
Closing Gaps
Demand-side Gaps Supply-side Gaps
-Offer tiered service levels -Change flow responsibilities of current- Expand-contract provision of channel membersof service outputs -Invest in new low-cost distribution
- Change segment(s) technologiestargeted -Bring in new channel members
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Gap Analysis TemplateBulk
Breaking
Spatial
Convenience
Waiting &
DeliveryTime
Assortment
& Variety
Level Provided
Low-OK-High
Efficiency
OK-High CostSource of
Problem
Environmental/
ManagerialBounds
OutcomeDesired
Tactics to
Close Gap
Predicted
change inchannel perf.
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Vertical Integration
Make or Buy: A Critical Determinant of Company
Competencies
-Make or Buy: A Difficult Decision
-Vertically Integrate or Outsource?
-A decision, once made is difficult to reverse
-Many companies DO NOT DECIDE HOW TO STRUCTURE CHANNELS!
-Just react to opportunities/problems & then give POST FACTO RATIONALE
-THERFORE, IT IS NECESSARY TO FRAME A COHERENT, COMPREHENSIVE
RATIONALE AND REACH A DECISION THAT CAN BE CONVEYED
CONVINCINGLY
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The Continuum of Degrees of VerticalIntegration
BUY MAKE
Classical Market > Quasi-Vertical > Vertical
Contracting Integration Integration
Third party does it < How does the work > You do it
(for a price) get done
Its people < The Costs > Your people
Its money Your money
Its risk Your risk
Its responsibility Your responsibility
You and third party share
costs and benefits
Its operation (control) < The benefits > Your operation (control)
Its gain or loss Your gain or loss
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FRAMEWORK FOR THE DECISION
- MARSHALL ALL SUPPORTING ARGUMENTS
- CHALLENGE PRELIMINARY OUTSOURCE DECISION
- IF THE LOGIC OF OUTSOURCING DOES NOT HOLD, THEN CONSIDERWHETHER VERTICAL INTEGRATION CAN REPLACE IT
-THREE ROLES: A. REASONS ARE THE ADVOCATE OF OUTSOURCING
B. CRITIC WHO ATTACKS THE OUTSOURCING DECISION
C. ARBITRATOR WHO DETERMINES WHETHER THEADVOCATE OF OUTSOURCING HAS BEEN
COMPELLINGLY OVERTURNED
IF NOT, THE OUTSOURCING DECISION CARRIES THE DAY
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Six Reasons To Outsource Distribution
- Motivation
- Specialization
- Survival of the Economically Fittest
- Economies of Scale
- Heavier Market Coverage
- Independence from any single manufacturer
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Road Map to the Vertical Integration Decision
Presume Outsourcing is more attractive than Vertical Integration
START HERE
> NO > STOP- Outsourcing Preferable
IS POTENTIAL BUSINESS MAJOR OR SUBSTANTIAL
YES
EXAMINE HOW FUNCTION WILL DEVELOP
(Take Both Roads and See Where They Go)
Will Performance Ambiguity be High? Will substantial Co-Specific Inv. Accrue?
NO YES NO YES
STOP Consider Overturning STOP Railway Crossing
Outsource Presumption:
Vert. Integr. Attractive Volatile, Uncertain Environ.
( accelerates effect of co-spec inv.)
Out sourcing Attractive Out sourcing Attractive
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Channel Implementation AndPerformance Measurement
CHANNEL POWER
POWERIS THE ABILITY OF ONE CHANNEL MEMBER (A) TO GET ANOTHER
CHANNEL MEMBER (B) TO DO SOMETHING IT OTHERWISE WOULD NOT
HAVE DONE.
THUS POWER IS THE POTENTIAL TO INFLUENCE.
IS POWER GOOD OR BAD? NEITHER- THOUGH IT HAS NEGATIVE
CONNOTATIONS: Abuse, Oppression, Exploitation,
Inequity & Brutality.
THIS VIEW IS ONE-SIDED.
POWER IS THE POTENTIAL FOR INFLUENCE, GREAT BENEFITS
CAN BE ACHIEVED BY THE JUDICIOUS USE OF POWER TO DRIVE A
CHANNEL TO OPERATE IN A COORDINATED WAY.
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Why Marketing Channels Require Power?
- Marketing Channels must work with each other to serve end-users.- THIS INTERDEPENDENCE DOES NOT MEAN WHAT IS GOOD FOR ONE
IS GOOD FOR THE OTHER.EACH CHANNEL MEMBER IS SEEKING ITS OWN PROFIT.
MAXIMIZING THE SYSTEMS PROFIT IS NOT THE SAME AS MAXIMIZING EACH MEMBERS PROFIT.
LEFT ALONE, MOST CHANNEL MEMBERS WILL NOT FULLY COOPERATE TO ACHIEVE SOME SYSTEM LEVEL GOAL.
ENTER POWER, AS A WAY FOR ONE PLAYER TOCONVINCE ANOTHER PLAYER TO CHANGE WHATIT IS INCLINED TO DO.
THE TOOLS OF POWER CAN BE USED TO CREATE VALUE OR DESTROY IT, TOAPPROPRIATE VALUE OR TO REDISTRIBUTE IT.
POWER MUST BE EMPLOYED BY CHANNEL MEMBERS, BOTH TO DEFEND THEMSELVES ANDTO PROMOTE BETTER WAYS FOR THE CHANNEL TO GENERATE VALUE.
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FIVE SOURCES OF POWER
-REWARD POWER
- COERCIVE POWER
- EXPERT POWER
- LEGITIMATE POWER
- REFERENT POWER
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EXERCISING POWER : INFLUENCESTRATEGIES
SIX INFLUENCE STRATEGIES:
1. PROMISE STRATEGY
2. THREAT STRATEGY
3. LEGALISTIC STRATEGY
4. REQUEST STRATEGY
5. INFORMATION EXCHANGE STRATEGY
6. RECOMMENDATION STRATEGY
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USING POWER TO EXERT INFLUENCE
INFLUENCE STRATEGY POWER SOURCE(S) NECESSARY FOR
THIS TO WORK
1. PROMISE REWARD
2. THREAT COERCION
3. LEGALISTIC LEGITIMACY
4. REQUEST REFERENT, REWARD, COERCION
5. INFORMATION EXCHANGE EXPERT, REWARD
6. RECOMMENDATION EXPERT, REWARD
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CONSEQUENCES OF EACH STRATEGY
1. PROMISE, THREAT, LEGALISTIC- Provoke Backlash, perceived as
heavy-handed, high pressure tactics.
Effective in the short-term, damaging
long-term effects.
2. PROMISE- Should be seen as a reward, but often
seen as bribe, insulting, unprofessional.
3. REQUEST, INFORMATION Are more subtle, more nuanced.
EXCHANGE, RECOMMENDATION Channel counterparts welcome their
usage and do not take offense
IMPORTANT CAVEAT: POWER IS CULTURE SPECIFIC.
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CHANNEL INFORMATION SYSTEMS
The purpose of CHANNEL INFORMATION SYSTEMS is to collect and analyze data
about the operations in order to assess performance and take timely corrective
Action to continuously improve performance.
ADVANTAGES OF HAVING TIMELY INFORMATION:
- Helps in market planning.
- Helps in tapping market opportunities.
- Keeps marketing people alert against competitive threats.
- Helps spot market trends.
- Helps develop action plans for growth.
- Keeps the company aware of consumer needs.
- Quality of marketing decisions depends on the quality of information available.
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STAGES IN CHANNEL INFORMATIONSYSTEMS
COLLECTION
PROCESSING
STORAGE
USE
DEVELOPMENT OF A CIS
Decide what information is required
Organize information in a manner suitable for interpretation and action
Decide who will use the information, when and for what purpose
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BASIC CHARACTERISTICS OF A GOODCIS
- Be an integrated system to handle all regular data.
- Be a useful decision support system.
- Reflect the style of the marketing organization.
- Has to be user friendly and user oriented.
- Be convincing to the providers of the information, as why they should
keep providing accurate information on time.
- Be cost effective.
- Should not need verification from other sources.
- Be fast and totally reliable.
ELEMENTS OF A CHANNEL INFORMATION SYSTEM
MARKET INFORMATION COMPETITION TRACKING
DISTRIBUTOR PROFILE & DATABASE PRIMARY SALESSECONDARY SALES PRICING TRENDS PROMOTIONS HISTORY
PROMOTIONS EVALUATION FREIGHT & STORAGE COSTS
INVENTORY CONTROL ORDER HISTORY DISTRIBUTION COST
DISTRIBUTOR ROI RETAILER CARDS STATUTORY REPORTING
DISTRIBUTORS PAYMENT RECORD
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CHANNEL PERFORMANCE EVALUATION
EXPERT OPINION SAYS THAT THE PURPOSE OF DISTRIBUTION IS
TO GET A COMPANYS PRODUCTS WITHIN ARMS REACH OF DESIRE.
The frequency of Channel Member Evaluation is based on the following factors:
- The degree of control the manufacturer has on channel members.
- The importance of the channel member to the performance of the company
itself.
- The nature of the product is also important in the evaluation frequency
decision.
- The number of channel members- more the number, more often the evaluation.
- The category of the channel member- distributor, stockist, retailer etc.
- The agreement or contract in operation with the channel member.
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CRITERIA FOR EVALUATION
CRITERIA FOR EVALUATION POPULAR PERFORMANCE MEASURES
Sales Target Achievement - Primary Sales- Secondary Sales- Sales Target Achievement- Market Share- Sales Growth
Inventory Management - Average Inventory Level- Inventory Turnover- Storage Quality
Selling Resources - Number of Salespeople- Target Achievement by each Salesperson
Market Coverage - Calls per Day- Productive Calls per Day- Extension of Credit- Support to New Product Launches- Support to Promotions
Back Office Support - Use of Computers- Trained Manpower- Reports, Records etc.
EACH CRITERION CAN BE GIVEN A WEIGHTAGE AND THE EVALUATION DONE.
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LOGISTICS MANAGEMENT
DEFINITION OF LOGISTICS:
- Logistics means having the right thing at the right place at the right time.
TODAY, we also add a rider, at the right cost.
- The procurement, maintenance, distribution and replacement of personnel
and materials.
- The science of planning, organizing and managing activities that provide
goods or services.
- A business planning framework for the management of materials, service,
information and capital flows. It includes the increasingly complex information,
communication and control systems required in todays business environment.
- The process of planning, implementation and controlling the efficient, effective flow
of goods, services and related information from the point of origin to the point of
consumption for the purpose of conforming to the customers requirements.
G OC S O OG S CS
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THE BUILDING BLOCKS OF LOGISTICSIN MARKETING CHANNELS
INVENTORY MANAGEMENT IN MARKETING CHANNELS
Reasons for Holding Inventory:
- Demand surges outstrip production capacity
- Economies of Scale in production and transportation
- Distance between point of production and the point of consumptionmeans that transportation takes time
- Both Supply and Demand are UNCERTAIN
Inventory Holding Costs:
- Capital: the internal cost of funds multiplied by the value of inventory
- Storage: climate control, security, insurance etc.
- Obsolescence: loss of value due to the products decay
- Quality Loss
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REDUCING INVENTORY
- CUT VARIETY BY USING MODULAR DESIGN
- MOVE FROM A PUSH SYSTEM TO A PULL SYSTEM eg. TOYOTA
- GUARD AGAINST THE BULLWHIP EFFECT:
----- Consumption Customer Retailer Wholesaler Manufacturer Supplier
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KEY LOGISTICS ACTIVITIES
- CUSTOMER SERVICE
- DEMAND FORECASTING
- DISTRIBUTION COMMUNICATIONS
- INVENTORY CONTROL
- MATERIALS HANDLING
- ORDER PROCESSING- AFTER SALES PARTS AND SERVICE SUPPORT
- PLANT AND WAREHOUSE SITE LOCATION
- PROCUREMENT
- PACKAGING
- RETURNED GOODS HANDLING
- REVERSE LOGISTICS
- SALVAGE AND SCRAP DISPOSAL
- TRAFFIC AND TRANSPORTATION
- WAREHOUSING AND STORAGE
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