Marketing channel.

A marketing channel is the people, organizations, and activities

necessary to transfer the ownership of goods from the point of production to the point of
consumption. It is the way products get to the end-user, the consumer; and is also known as
a distribution channel.
A distribution channel is the path through which products pass to get from the producer to the
consumer. This may be business-to-business (B2B) or business-to-customer
(B2C) distribution. ... They may also be indirect, in which goods travel from the producer,
through an intermediary or intermediaries, to the consumer.Jan 3, 2016

What Is a Distribution Channel?

The distribution function of marketing is comparable to the place component of the marketing mix in
that both center on getting the goods from the producer to the consumer. A distribution channel in
marketing refers to the path or route through which goods and services travel to get from the place
of production or manufacture to the final users. It has at its center transportation and logistical
considerations.
Business-to-business (B2B) distribution occurs between a producer and industrial users of raw
materials needed for the manufacture of finished products. For example, a logging company needs a
distribution system to connect it with the lumber manufacturer who makes wood for buildings and
furniture.
Business-to-customer (B2C) distribution occurs between the producer and the final user. For
instance, the lumber manufacturer sells lumber to the furniture maker, who then makes the furniture
and sells it to retail stores, who then sell it to the final customer.

Direct vs. Indirect

In marketing, goods can be distributed using two main types of channels: direct distribution channels
and indirect distribution channels.
Direct Distribution
A distribution system is said to be direct when the product or service leaves the producer and goes
directly to the customer with no middlemen involved. This occurs, more often than not, with the sale
of services. For example, both the car wash and the barber utilize direct distribution because the
customer receives the service directly from the producer. This can also occur with organizations that
sell tangible goods, such as the jewelry manufacturer who sells its products directly to the consumer.
Indirect Distribution
Indirect distribution occurs when there are middlemen or intermediaries within the distribution
channel. In the wood example, the intermediaries would be the lumber manufacturer, the furniture
maker, and the retailer. The larger the number of intermediaries within the channel, the higher the
price is likely to be for the final customer. This is because of the value adding that occurs at each
step within the structure.
Direct or indirect distribution structures may include any combination or all of the following entities:

 A wholesaler or distributor
 The Internet (direct)
 Catalogs (direct)
  Sales teams (direct)
 The value-added reseller (VAR)
 Consultants
 Dealers
 Retailers
 Agents

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Distribution Channels: Types, Functions, And Examples

A distribution channel is the set of steps a good or service has to go

through to reach the final consumer. At a higher level, distribution
channels can be either direct or indirect.
At the same time, direct and indirect distribution channels can have
multiple variations, according to how the good or service gets to the final
consumer.
Apple Distribution: The Apple Store Is Not About Selling iPhones

When you walk through the urban streets of cities around the world, in
crowded and selected locations you’ll find an Apple Store. From Piazza
Liberty in Milan, Cotai Central in Macau or Grand Central Terminal in New
York, the Apple brand leaves a strong impression in the mind of its
consumers.

Those impressions might also create a cognitive gap. In short, people

might assume that those Apple Stores are also the primary driver of Apple’s
revenues.
While Apple Stores are a crucial driver of its revenues, they are not a
primary driver. Thus, let’s give a glance at Apple distribution strategy and
why its stores aren’t necessarily what you think and what business function
they have instead
Apple distribution strategy in a nutshell
When it comes to distribution channels companies, usually use a direct
or indirect approach. In many other cases through a mixture of direct and
indirect channels make more sense.
For instance, the Apple business model leverages both on direct and
indirect channels. Apple sells its products directly via its Apple Stores.
This is critical to Apple success as it enables it to deliver a high-quality
buying experience for its products in which service and education are
emphasized.
That is also why Apple keeps expanding its stores worldwide. While this
is a critical part of Amazon distribution strategy, it is also quite
expensive. Yet Apple has full control over the customer experience and
control over a distribution strategyrequires massive resources.
With this approach, Apple can employ experienced and knowledgeable
personnel able to offer a wide selection of third-party hardware, software and
other accessories that complement Apple’s products.
Types of distribution channels
At a higher level, distribution channels can be broken down in direct and
indirect. This primarily depends on how long is a chain between who
makes the product and the final consumer.

The number of steps it takes will make the distribution channel direct or
indirect. Let’s visualize a distribution chain to understand the difference
between direct and indirect strategy:

Where in a direct distribution strategy a producer can access the

consumer, in an indirect distribution strategy, the producer will meet its
consumer demands via third-parties wholesalers or retailers.
Thus, a direct approach makes the value chain shorter and at the same
time allows more control by the producer on how the final customer
experiences the product or service offered.

At the same time, a direct to consumer strategy is quite expensive and

not always effective enough to allow proper distribution. Therefore,
companies often use a mixture of direct and indirect distribution
strategies, which determine their marketingmix.
Between the direct-to-consumer and entirely indirect
distribution strategy (where the producer sells to a wholesaler), there are
several indirect variations, based on how many steps it takes to reach
the final consumer and how long is the value chain.
For instance, in the scenarios in which a producer sells to a wholesaler,
the wholesaler sells to retailers, who reach the final consumers.
However, in some other cases, the distribution channels might be
shorter.

Think of the Costco business model, where the company purchases a

selected variety of goods in bulk from producers. Yet instead of reselling
that to retailers, Costco itself acts as a retailer, by leveraging on
its membership-based business model and selling those items in bulk
quantity directly to consumers, who appreciate the convenience of its
prices together with the selection of high-quality products.

iPhone 6 and the larger brother iPhone 6 Plus are now available in the official
Apple Philippines Online Store, as well as other official Apple Resellers like
Globe and Smart. The price for the iPhone 6 16GB model starts at P35,990
while the iPhone 6 plus 16GB model starts at P41,990.

It’s finally here! The first official Apple Store in the Philippines has opened in Bonifacio Global
City without much noise. This we confirmed after a chance encounter and quick interview with a
Marketing Manager overseeing the operations of the store.
Read more at https://www.yugatech.com/anything-apple/first-official-apple-store-opened-in-the-
philippines/#ceoDQ3VcXIUHalRg.99

We first reported on a possible Apple Store Manila back in 2009 as mentioned by

design company CB Engineers but was supposed to be housed in the proposed
Philippine Stock Exchange in The Fort.
In 2012, a small group was formed to open Apple Philippines office in Manila but they
mainly interact with distributors and resellers.

Read more at https://www.yugatech.com/anything-apple/first-official-apple-store-

opened-in-the-philippines/#ceoDQ3VcXIUHalRg.99
 Where to buy original Apple
products in the Philippines?
Updated 2014: Check them here:

Take note I only listed the resellers who sell ipad, ipod, iphone and Mac
devices. Some stores like Electroworld and Abensons don’t sell all Apple
products. The following has all the latest Apple devices after release.

Manila and Luzon Area:

Silicon Valley

 Harrison Plaza – Malate

 Trinona
 SM Marikina
 SM Pampanga – Cyberzone G/F
 SM Calamba

Scan and Print at Silicon Valley

 Ermita
 SM Manila
 SM Megamall – 4th Floor Cyberzone
 SM Mall of Asia – 2nd Floor Central Business Park
 SM City North Edsa – Level 5 Annex
 SM Baliwag – Ground Floor
 SM Cavite – 3rd Floor

Power Mac Center

 Trinoma
 Rockwell – 3rd Floor Power Plant Mall
 Greenbelt – 2nd Floor Greenbelt 3
 SM Megamall – 4th Floor Cyberzone, Bldg B
 Podium – 2nd Floor
 SM Mall of Asia – 2nd Floor Bay Boulevard
 SM City North Edsa – 4th Floor, Annex
 SM Marikina – Ground Level
 Festival Mall – 3rd Level
 SM Bacoor
 SM Pampanga – Cyberzone G/F
 Harbor Point, Subic Bay, Zambales

iStudio by Macintel

 SM Manila – Cyberzone Unit

 V Mall Greenhills

Octagon

 Robinsons Place Ermita – 3rd Floor Pedro Gil Wing

 Robinsons Magnolia
 Cash and Carry – 2nd Floor, Filmore St. Makati
 MOA – SM Mall of Asia, 2nd Floor, North Wing
 SM Marikina
 SM Valenzuela – 3rd Floor
 SM Rosario – 2nd Floor
 SM Dasma
 SM Marilao – Mc Arthur Highway, Bulacan
 SM Pampanga – Cyberzone G/F
 SM Clark – 2nd Floor
 SM Calamba
 SM Sta. Rosa
 SM Taytay – 2nd Floor
 Sta. Lucia East Grand Mall
 SM Lipa
 Octagon Olongapo City

Proton at Octagon

 SM Megamall – 4th Floor Cyberzone, Bldg B

 Park Square – Ground Floor Park Square Mall, Makati
 SM City North Edsa – Level 5, Annex
 SM Fairview
 SM Sucat – 3rf Floor
 SM Bacoor
 SM South Mall
 Festival Mall – Level 4 Festival Supermall
 ATC – Level 3 Alabang Town Center
 SM Baliwag

School of Design & Arts – Switch Creative Center

Savers at Roosevelt – Roosevelt Avenue, QC
Sencolink iCampus Ateneo University
Savers Alabang – Zapote road

Cebu City
 Silicon Valley SM Cebu
 Octagon SM Cebu
 iStore by HPS – Ayala Center Cebu
 iStore by HPS – SM City Cebu
 iCampus at University of San Carlos, Cebu

Bacolod City and Iloilo

 Octagon at SM Bacolod
 Octagon at Robinsons Bacolod
 Proton at Octagon SM Iloilo
 Octagon at Robinsons Iloilo

Davao City
 Power Mac Center – 2nd Floor Abreeza Mall
 Proton at Octagon – Abreeza, Ayala Business Park
 Silicon Valley _ Abreeza, Ayala Business Park
 Silicon Valley – NDCC Mall
 Powerhub by Digital Walker – Chimes Specialty Store
 Octagon SM City Lanang
 Proton at Octagon – Gaisano Mall

Dumaguete
 Octagon at Robinsons Place Dumaguete

Your Complete Guide for Understanding

Multichannel Distribution Systems
There are many ways to deliver your products to your customers. Most merchants start
with just one distribution channel, like a brick-and-mortar or an online store.

As your business grows, you might want to reach your customers through more
channels, such as a physical store, online store, and marketing through direct mail.

No matter what channels you choose, selling through various channels requires a
multichannel distribution system. This complete guide demonstrates everything you
need to know about a multichannel distribution system.

Multichannel Distribution System Definition

Merchants can choose which channels they want to distribute products to their
customers. Distribution channels can be physical stores, branded websites,
marketplaces like Amazon and eBay, and direct mail.

Each of these distribution channels represents a different way for a customer to buy
from a merchant. They can buy directly from you, as you provide the product directly to
them. Consumers can also buy indirectly, as when you provide another retailer, or third-
party with your goods to sell to customers.

A multichannel distribution system then is when a merchant decides to strategically

distribute their products to customers via multiple channels, such as directly through
physical stores, an online marketplace like Amazon, or through another large retail
chain.
Multichannel Distribution Example
For example, Starbucks uses a multichannel distribution system by selling in their own-
stores, grocery stores, and their own online site.
Another example would be a manufacturer. A manufacturer can sell their products to
distributors to sell to customers. They also can have their own eCommerce site to sell
directly to customers.

There’s many reasons why a merchant would want to use a multichannel distribution
system.

Advantages of a Multichannel Distribution

System
Today’s customers shop across all different channels for convenience and to find the
best price. As a merchant, you want to be where your customer is. This is causing
merchants to expand their business to new channels and benefit from its advantages.

Reach Same Customers in New Channels

A multichannel distribution system allows you to provide your customers new channels
to shop in. Instead of a customer always having to make a trip in-store, they can
conveniently buy from you online or another store, like a grocery or department store.
You’ll allow your customer to shop as they want.

Expand Customer Reach

Selling in multiple channels can lead to new customers. If you start selling on Amazon,
there’s a whole new audience for you to appeal to. Each channel has the potential of
expanding your customer reach.

Provide Omnichannel Experience

Customers expect to be able to research, shop, and buy across multiple channels. They
will bounce back and forth between different channels to ensure they’re getting the best
price and purchase as they want. Making your product available across multiple
channels allows you to provide that “omnichannel” experience that customers are
searching for.

Grow Sales
The main advantage of expanding your business to new channels is the opportunity to
grow your sales. New customers and new channels can lead to more opportunities for
revenue. Growing your sales is a key reason for expanding to new channels.
Even with advantages like these, there are some disadvantages that hold merchants
back from expanding their business.

Disadvantages of a Multichannel Distribution

System
A multichannel distribution system can cause problems for some merchants.

Cannibalization of Sales
One fear of selling on new sales channels is the cannibalization of your sales. If you
invest in your online business, you can see a major drop in your physical store sales as
customers flock to the convenience of buying online.

This can be a problem for retailers who see lower margins and higher costs to sell
online. With fierce online competition, product prices can be forced too low for
merchants to make a meaninful profit.

Complexity of Multichannel Selling

Another fear of multichannel selling is the complexity of it. It’s complicated to sell on
multiple channels. You have inventory to manage, orders to fulfill, and suppliers to work
with. All of your order, items, inventory, and customer data must be exchanged between
multiple systems.

This complexity can lead to management problems. Online orders can be fulfilled slowly
and incorrectly. Inventory levels can be displayed wrong, which can lead to overselling.
Product information can be inconsistent across sales channels.

These problems lead to a poor customer experience which can be the downfall of your
company.

What can you do though to ensure that these problems don’t hurt your business?

How to Overcome Complexities of

Multichannel Distribution Systems
The fear of multichannel complexity shouldn’t stop you from your growing your
business. There are ways to overcome the complexities of a multichannel distribution
system.
Choosing the Right Channels to Sell On
First, merchants need to be strategic in what channels you choose to sell on. Not every
channel is going to be best for your business. Think strategically about where your
customers are, what type of products you sell, and how you run your business.

If you sell old, collector items, eBay is probably a better choice than Amazon. If you’re a
manufacturer that traditionally sells to distributors, do you have the capabilities to sell
directly to consumers via your own online store?

To help you determine what channels to expand to, check out our guide: Evaluating
Channel Expansion Opportunities. It’ll help you determine what channel type is the best
fit for your business model.
Invest in a Multichannel Integration Platform
As your multichannel business plan comes together, you need to think about how to
connect your business. It’s too complex to manage your multiple systems and
processes in their own silos.

You might be tempted to believe that each channel should operate as its own line of
business. Each channel would have its own processes, different from your other
channels. This becomes too difficult to manage.

Instead, you must view your company holistically. Sales, customer types, and fulfillment
processes should be unified and managed consistently.

If an online order comes in, whether it’s Amazon or your own site, you should be able to
fulfill through it the same process. If you’re out of stock in-store, an associate should be
able to order the product for the customer online. A customer should be able to return
an online order to your physical store.

This is much harder to achieve if you’re operating each channel as its own. You won’t
have the visibility you need to manage it properly. (Read more about understanding the
complexities of the multichannel experience.)
Breaking down capabilities stored into their own channels helps merchants deliver the
buy anywhere, receive anywhere, return anywhere that today’s shoppers demand.

To help you do that, merchants can invest in multichannel integration platforms that help
connect their systems and processes.
Through integration, merchants can update inventory availability across channels as
transactions occur. They can fulfill orders automatically through workflows, no matter
what channel they come in from. They can push consistent product information across
sales channels. You’ll have tight integration with your suppliers.

See how an integration platform works by checking out nChannel’s multichannel

management platform.

What to Do Next
There are many different types of integration platforms available. Choose the one that
allows you to operate your multichannel business as you need.

Stay up to date with multichannel news by subscribing to Multichannel Insights, what

you’re reading right now!
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Get advice and best practices about eCommerce, multichannel, retail, and more,
delivered right to your inbox, every Monday. Start your work week with us.

A multichannel conflict occurs when a manufacturer has 2 or more channels that are
competing against each other for sales in the same market. For example, if a company had a
retail store and an e-store selling the same products at different prices, this would be
a multichannel conflict.SHARE:

Question:
What is a multichannel conflict?

Channels of Distribution and Production:

A channel refers to a distribution chain or process where a product goes from the manufacturer to
the customer. This can be at a brick and mortar retail store or via the Internet. A company with
multiple channels may have a retail store, and e-store, or a wholesale distribution center. Each
component is a channel whereby a customer can receive products or services.

Answer and Explanation:

A multichannel conflict occurs when a manufacturer has 2 or more channels that are competing
against each other for sales in the same market. For example, if a company had a retail store and an
e-store selling the same products at different prices, this would be a multichannel conflict. Both
entities are targeting the same customer, regarding the same product, in the same area. Each
selling platform serves as a channel, and the conflict is in the competition for the sale listed at 2
different amounts.

3 common Types of Channel conflicts – Levels of channel conflicts

By Hitesh Bhasin Tagged With: Marketing management articles

A company establishes a network of distributors and dealers in order to

get the products to the end consumers. However, because this network is
operated manually, it will always have friction. This friction comes in the
form of channel conflict, which arises due to various reasons.
Price differentiation can be one reason and territory encroachment can be
another. However, if you look at the overall picture, there are many
different reasons for channel conflicts but there are only three different
types of such conflicts.

It is important that a company which sells its products through channel

marketing, understanding the different types of channel conflicts and
thereby take steps to manage channel conflicts. Let us understand the
typical distribution channel first.

A typical channel will flow like this

Manufacturer >> C&F >> Distributor >> Retailer >> End consumer

In the above case, the manufacturer is level 1, the C&F or carrying or

forwarding agent is level 2, the distributor is level 3, the retailer is level 4
and the end consumer is level 5. Understanding the levels is important to
understand which level the channel conflict is arising from or is it on
multiple levels. Let us delve deeper into these conflicts.

Page Contents

The three type of channel conflicts which can occur are

1) Horizontal channel conflicts
One of the most common type of channel conflicts to occur are the
horizontal ones. Horizontal channel conflict is a conflict between two
players at the same level in the distribution channel. So a conflict between
2 distributors or a conflict between 2 retailers is known as horizontal
channel conflict.

Example of Horizontal channel conflict

There are two stores in a region which are given a territory each. Store 1
is given territory 1. Store 2 is given territory 2. Now the channel conflict
occurs, when store 1 services customers from territory 2 or vice versa.
This means that the channels are not following rules set by the company
and hence it is creating conflict.

There is a difference between competition and horizontal channel conflict.

If store 1 and store 2 were both performing optimally so that they can show
the best figures to the company and win the prize for the best channel
dealer, then they are competitors. However, if they are breaking the
company rules and encroaching each others territories, then this is clearly
channel conflict. And it has to be managed by the company by setting a
rule or a policy.

Such channel conflicts are one of the most common kinds of conflict in
channel management. These arise due to human nature. Distributor in
territory 1 might be more aggressive and the one in territory 2 might be
passive. Thus, encroachment happens and is not controlled till the
distributor 2 raises his voice against the injustice. Such Horizontal channel
conflicts can happen at various levels in the channel and it is not
necessary that it happen at retailer level only or the reason be
encroachment only.
2) Vertical Channel conflict
Another type of conflict seen in channel management is the Vertical
channel conflict. Where the horizontal channel conflict exists between
players within the same level of the distribution channel, the vertical
channel conflict happens at different levels of the distribution channel. A
typical conflict might be between the retailer and the distributor, or it might
be between the distributor / C&F and the company.

Example of vertical channel conflict –

Lets take the example of an Ice cream company. To motivate its dealers,
many ice cream companies provide FREEZERS at discounted price along
with the ice cream to their retailers. These freezers are used to keep the
ice cream at frozen temperatures. Now, an ice cream company notices
that Region 1 is not performing well and it can motivate region 1 by
providing the freezer completely free. So it gives freezers for free in the
market with ice cream so that ice cream sale rises. It actually does and
because retailers are taking the freezer for free, they are stocking more
ice cream and selling more ice cream. The company is happy.

However, Region 2 now gets news that this is happening in region 1 and
that freezers are being provided for free to all retailers in region 1. The
retailers of region 2 immediately revolt and ask for further discounts on
freezers or to give the freezers completely free. They don’t understand
that sales in region 2 is already high and margins are low for the company.
Ultimately, this creates a vertical channel conflict for the company. Now
the company has to decide whether it will support region 1 or region 2.

As you can see, handling vertical channel conflicts is far difficult for
companies as compared to handling horizontal conflicts. Horizontal
conflicts always happen at a lower level then the company. But vertical
channel conflicts might involve the manufacturer or the distributors
themselves. Hence, managing vertical channel conflicts becomes
important for the company.
Another example of vertical channel conflict is a Distributor preferring one
retailer over the other. In such a case, retailer 1 might get extra credit, he
might get deliveries faster, he might get further discounts, whereas due to
whatever reasons, retailer 2 might not get such benefits. It might be due
to the distributors relations with Retailer 1 or it might be due to the nature
of retailer 2 (haggling, rudeness). But this can be another real live example
of vertical channel conflict.

3) Multiple channel conflict

Because of their very nature, vertical channel conflicts happen rarely,
but once they happen, they have a long lasting effect. In the recent
decade, we have seen some fantastic examples of Multi channel conflicts.

When Small retailers and businessmen were thriving in business, Modern

retail came in the picture. Large hypermarkets and malls were started
where people could do all their shopping. An altogether different
distribution channel was created. Due to their bulk buying power, these
hypermarkets were giving huge discounts and making huge sales as well.

As a result, many companies were boycotted by small retailers because

they felt left out and they could not cope with the price. This created a
huge multiple channel conflict with small retailers standing in unity against
the tyranny of large markets. Ultimately, the companies had to come in
and settle the dispute by maintaining the price across multiple channels.
So they set a standard price of products, whether it was selling in hyper
markets or small retail.

Now, the same thing is repeating but the players are three fold – Small
business, Modern retail and E-commerce. E-commerce went a step
ahead of modern retail and even small businessmen got back at modern
retailers by offering even lower prices on online platforms. There was no
store to be leased, no rent to be paid, not a dollar to be spent but only
material had to be bought and it had to be shipped. The lower the price of
buying, the lower the selling price.

In the times of E-commerce, Hypermarkets had leased huge spaces for

which they were paying sky high rents. When E-commerce started,
hypermarkets dropped a bit in demand and today all of them are fighting
each other. It is a constant multiple channel conflict for each company
because if there are lower prices anywhere, it immediately gets public and
then the other channel starts complaining or demanding lower prices.
Furthermore, one channel might complain about the other and vice versa.

In the end, these are the three types of channel conflicts which exist in
channel marketing. Horizontal conflict might be quite regular but its effect
will be localised. Vertical conflict is not regular and its effect might be
regional. However, multiple channel conflict generally has a national level
effect because it always occurs when the company has made major
changes.

Have you faced channel conflict? If yes, which type of channel conflict
have you faced?

The network includes manufacturers, retailers, wholesalers, agents and brokers

commonly known as channel participants. These participants play a vital role in
success and failure of any business. ... In the world of retail, several types of
participants make up a distribution channel.

Distribution Channel and It’s

Participants
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ADVERTISEMENTS:

Manufacturers can only produce the goods but it is the intermediary

who supplies these goods to the people who are in need of it. To reach
end consumers effectively, businesses need a well knitted network.
The network includes manufacturers, retailers, wholesalers, agents
and brokers commonly known as channel participants.

These participants play a vital role in success and failure of any

business. They actually bridge the gap between suppliers and end
consumers thus framing the outline for a company in end users
mindset. In the world of retail, several types of participants make up a
distribution channel.

Some of these might overlap each other because of the simple reason
that retailers belong to several supply chains, each group focused on
making and marketing different products.

1. Retailers:
ADVERTISEMENTS:

Retailers are the gate keepers to the market for all other members of
the sales distribution process. The distinguishing feature that sets a
retailer apart from other members of its distribution channel is that
the retailer is the person who ultimately sells the goods to its end
consumers.

2. Wholesalers:
Wholesalers are intermediaries or middlemen who buy products from
manufacturers and resell them to the retailers. They take the same
types of financial risks as retailers, since they purchase the products,
keep them in inventory until they are resold to retailers, and may
arrange for shipment to those retailers. Wholesalers can gather
product from around a country or region, or can buy foreign product
lines by becoming importers.

3. Agents and Brokers:

Agents (occasionally called brokers) are also intermediaries who work
between suppliers and retailers, but their agreements are different, in
that they do not take ownership of the products they sell. They are
independent sales representatives who typically work on commission
based on sales volume, and they can sell to wholesalers as well as
retailers. In B2B arrangements, this means they sell to distributors
and end consumers.

4. Resident Sales Agents:

Resident sales agents are good examples in retail. They reside in the
country to which they sell products, but the products come from a
variety of foreign manufacturers. The resident sales agents represent
those manufacturers, who pay the agent on commission.
THE CHANNEL PARTICIPANTS Chapter Objectives This chapter defines the different and various types of
channel participants and the distribution tasks they perform. It is important to note to the students that
not all channel members perform all of these functions and that various terms/nomenclature is assigned
to different participants. The chapter defines wholesalers/retailers/brokers/manufacturing agents and
other channel members. The chapter makes a point of excluding consumers (or final users) as members
of the channel discussions. The chapter closes discussing the why, how and implication of wholesale
channel concentration and its affect on manufacturers and producers. Learning objectives 1)
Familiarization of the classification of the major participants in the marketing channels. 2)
Understanding why producers and manufacturers find it necessary to shift many of the distribution tasks
to intermediaries. 3) Identify the major types of wholesalers. 4) Awareness of the major trends in
wholesaling structure, including patterns on size and concentration of wholesaling. 5) Recognize the
value of distribution tasks performed by the majority of wholesalers. 6) Appreciate the complexity of the
retail structure and familiarize the student with the different approaches used to classify retailers. 7)
Identify the major trends occurring in retail structure with regards to size and concentration. 8) Identify
the distribution tasks performed by retailers. 9) Identify the retailer’s changing role in the marketing
channel. 10) Appreciate the role played by facilitating agencies in marketing channels. Chapter Topics 1)
An Overview of the Channel Participants 2) Producers and Manufacturers 3) Intermediaries 4) Retail
Intermediaries 5) Facilitating Agencies The Channel Participants 2-2 Chapter Outline An Overview of
Channel Participants The three basic divisions of the marketing channel are: producers and
manufacturers, intermediaries and final users.  Channel participants are defined as participants that
engage in negotiatory functions linked together by the flows of negotiation or ownership.  Producers
and manufacturers and intermediaries are further broken down into wholesale and retail intermediaries
and consumer and industrial users.  Final users are defined as target markets and are excluded from
further discussions of channel members. Producers and Manufacturers Producers and manufacturers
consist of firms that are involved in the extracting, growing, or making of products. For the needs of the
customers to be satisfied products must be made available to customers when, where and how they
want them. This theme is expanded to illustrate that producers and manufacturers often do not have
the expertise in distribution as they do in manufacturing or producing. The section then goes into a
detailed explanation regarding the firm Binney & Smith, the makers of Crayola® crayons. Figure 2.2 deals
with hypothetical average cost curves for Binney & Smith. The message to be derived from Figure 2.2 is
that Binney & Smith would never be able to sell enough crayons to individual consumers to absorb the
enormous fixed costs associated with the performance of the distribution task. Intermediaries then
because they distribute the products of many producers are able to spread their fixed costs and achieve
the desired economies of scale. Producing and manufacturing firms often face high average costs for
distribution tasks when they attempt to perform them by themselves. Intermediaries Key Terms and
Definitions  Intermediaries: Are independent businesses that assist producers and manufacturers in
the performance of negotiatory functions and other distribution tasks.  Wholesalers: Consist of
businesses that are engaged in selling goods for resale or business use to retail, industrial, commercial,
institutional, professional, or agricultural firms, as well as to other wholesalers. Marketing Channels 7e
2-3 A) Types and Kinds of Wholesalers Three major types of wholesalers as defined by the Census of
Wholesale Trade. These are: 1. Merchant wholesalers 2. Agents, brokers, and commission merchants 3.
Manufacturer’s sales branches and offices 1. Merchant Wholesalers are firms engaged primarily in
buying, taking title to, usually storing, and physically handling products in relatively large quantities and
then reselling the products in smaller quantities to others. They go under many different names such as:
wholesaler, jobber, distributor, industrial distributor, supply house, assembler, importer, exporter, and
others. 2. Agents, brokers, and commission merchants are independent middlemen who do not take
title to the goods in which they deal, but who are actively engaged in the buying and selling functions on
behalf of others. They are usually compensated in the form of commissions on sales or purchases. They
also go under other names such as selling agents and import and export agents. 3. Manufacturer’s sales
branches and offices are owned and operated by manufacturers but are physically separated from the
manufacturing plants. B) Structure and Trends in Wholesaling Figures 2.4 and 2.5 show the trends in
wholesaling. The key point to emphasize here is that the absolute sales of all three types of wholesalers
increased substantially over a tenyear period from 1987 – 1997. C) Size and Concentration in
Wholesaling Most wholesalers (40%) are small businesses with sales less than $1,000,000 in annual
revenue. D) Distribution Tasks Performed by Merchant Wholesalers Modern well-managed merchant
wholesalers perform the following types of distribution tasks for producers and manufacturers: 1.
Providing market coverage 2. Making sales contacts 3. Holding inventory 4. Processing orders 5.
Gathering market information 6. Offering customer support 1. Market coverage is performed because
the market for products consists of many customers spread across large geographical areas. Table 2.4
shows the percentage of manufacturers use of merchant agents. The Channel Participants 2-4 2. Making
sales contact is a valuable service provided because the cost of maintaining an outside sales force for
many firms is prohibitively high. This becomes even more apparent if the firm wishes to sell outside of
the United States. 3. “Holding” inventory is when the wholesaler takes title to and possession of the
producer and manufacturer’s product. This can help the producers and manufacturer’s financial burden
and help their production process. 4. Processing orders is very helpful to producers and manufacturers
because many customers purchase in small quantities. The wholesaler can “break down” a large order of
product into smaller more manageable pieces. 5. Gathering market information: Wholesalers are close
to their customers through frequent sales contacts. As such, they are in a good position to learn about a
customer’s product or service requirements. Such information then can aid producers and
manufacturers in their product planning, pricing, and the development of new products. 6. Customer
support is the final distribution task performed for producers and manufacturers on their behalf.
Products may need to be assembled, set up or require technical assistance. This allows the wholesaler to
provide “value added services” to the customer thus increasing the competitive advantage of one
wholesaler over another. This extra support plays a crucial role in making wholesalers vital members of
the marketing channel from the standpoint of both the producers and manufacturers and the customers
they serve. In addition to the above services, merchant wholesalers are equally well suited to perform
the following distribution tasks for their customers: 1. Assuring product availability 2. Providing
customer service 3. Extending credit and financial assistance 4. Offering assortment convenience 5.
Breaking bulk 6. Helping customers with advice and technical support 1. Assuring product availability:
Assuring that both the quantity and the variety demanded by the customer is available to them when
needed. 2. Providing customer service: Services such as delivery, repairs or warranty work saves the
customer time and effort. 3. Extending credit and financial assistance: Wholesalers provide this service
in two ways. First by extending “open” accounts to customers on products sold to them and second by
stocking the needed inventory for the customer, thus reducing the financial and space expenses for the
customer. Marketing Channels 7e 2-5 4. Assortment convenience: By bringing together a variety of
products from hundreds of manufacturers, the customer need only place one order for many products.
5. Breaking bulk: Shipping costs dictate the shipment of many products by rail or truckload quantities.
Most customers order in single units; thus, the large loads must be “broken” down into single unit sales.
A wholesaler provides this service to its customers. 6. Helping customers with advice and technical
support: Even the most unsophisticated product may require setup or technical support. The
wholesaler, being closer to the customer than either the producer or manufacturer is better able to
fulfill this service. This also allows the wholesaler to differentiate its firm from others by these
“valueadded” services. E) Distribution Tasks Performed by Agent Wholesalers These wholesalers do not
take title to the products they sell and as a rule do not perform as many distribution tasks as a typical
merchant wholesaler. They do however perform a variety of key functions. Manufacturer’s agents
(manufacturer’s representatives) specialize in performing the market coverage and sales contact and
distribution tasks for manufacturers. Manufacturing agents generally represent several manufacturers
at the same time and operate in a wide range of product and service categories. Selling agents are
another type of agent wholesaler performing more distribution tasks than manufacturing agents. Selling
agents may perform many, if not most, of the other distribution tasks such as: market coverage, sales
contacts, order processing, marketing information, product availability and customer services. Brokers,
the second major category of non-title-taking wholesalers offers another example of the wide deviation
between definitions based on performance presented in marketing literature and actual practice. Figure
2.9 lists the distribution tasks commonly performed by food brokers and serves as an example of the
wide range of distribution tasks actually performed. Finally, the third major category of agent
wholesalers, the commission merchant, is mainly significant in the agricultural markets. Their distinction
from the other merchant agents is that commission merchants typically take possession of the goods
although not title. The key points of these definitions of agents is that the terminology used to define an
agent is often misleading as to the actual services provided by the agent. The Channel Participants 2-6
Retail Intermediaries Key Term and Definition  Retailers: Consist of business firms engaged primarily in
selling merchandise for personal or household consumption and rendering services incidental to the sale
of goods. A) Kinds of Retailers Retailers in the United States comprise an extremely complex and diverse
conglomeration ranging from mom-and-pop neighborhood stores to giant mass merchandising chains
such as Wal-Mart®. B) Structure and Trends in Retailing Here it is important to note that in 1997 (latest
year for which data are available) there were 1,118,447 retail establishments in the United States. This
was a decline from 1992 of approximately 27% but sales increased from $1.9 trillion to $2.5 trillion
dollars a 32% increase in that same time period. This indicates that the size of the retail establishments
has increased significantly. (See Table 2.7) C) Concentration in Retailing From strictly an economic
standpoint, large firms increasingly dominate retailing in the United States.  Figure 2.10 illustrates that
large firms represent only 4 percent of all firms but represent 80% of total retail sales.  Figure 2.11
shows that in 1997, the 50 largest firms accounted for 26% of total retail sales.  Figure 2.12 shows
kinds of retailers where the largest four firms account for at least 50% of total sales.  Table 2.8 lists the
100 largest retailers in the United States. D) Retailers’ Growing Power in Marketing Channels The power
and influence of retailers in marketing channels have been growing mainly due to three major
developments: a) Increase in size and thus buying power b) Application of advanced technologies c) Use
of modern marketing strategies Since size translates into power, the largest retailers have the capacity
to influence the action(s) of other channel members, wholesalers and manufacturers. In many cases, the
giant retailers can literally dictate to the manufacturers (most manufacturers are considerably smaller
than the large retailers) the terms of sale they want and the product offering they require. These large
retailers are referred to as “power retailers” and “category killers”. Marketing Channels 7e 2-7 Growing
size and concentration of retailers is the most fundamental reason for greater retailer power in
marketing channels. But two other factors, advanced technology and uses of modern marketing
strategies are also important. Modern retailers have become astute followers and ardent users of many
new technologies such as the Internet, scanners, sophisticated inventory management software, shelf
management software, forecasting, and consumer shopping trip studies. Perhaps the most exciting
technological development being embraced by retailers is their growing use of the Internet to enhance
the shopping experience. Conventional retailers are integrating Internet-based E-commerce with their
store and catalog operations. A new term called threetailing has emerged to describe the convergence
of in-store, catalog, and online channels. Turning now to retailers’ growing emphasis on marketing, a
fundamental change has been evolving in thinking by leading retailers about the application of
marketing strategy in a retail setting. In the past, retailers have been more supplier (vendor) driven than
market driven. To sum up, retailers in the United States have become much larger, more concentrated,
more technologically adept, and more sophisticated marketers. As a result, they have become far more
powerful members of marketing channels and indeed have come to dominate many of the marketing
channels. The implications of the retailer’s new position are potentially ominous. A producer or
manufacturer’s marketing strategies in the areas of product planning and development, pricing, and
promotion will be increasingly constrained and shaped by the considerable demands of the powerful
retailers. F) Distribution Tasks Performed by Retailers Retailers are especially suited to the following
distribution tasks: 1. Offering manpower and physical facilities that enable producers/manufacturers
and wholesalers to have many points of contact with consumers close to their places of residence 2.
Providing personal selling, advertising, and display to aid in selling supplier’s products 3. Interpreting
consumer demand and relaying this information back through the channel 4. Dividing large quantities
into consumer-sized lots, thereby providing economies for suppliers and convenience for consumers 5.
Offering storage, so that suppliers can have widely dispersed inventories of their products at low cost
and enabling consumers to have close access to the products of producers/manufacturers and
wholesalers 6. Removing substantial risk from the producer/manufacturer by ordering and accepting
delivery in advance of the season The Channel Participants 2-8 Facilitating Agencies Key Term and
Definition  Facilitating agencies: Are business firms that assist in the performance of distribution tasks
other than buying, selling, and transferring title. By properly allocating distribution tasks to facilitating
agencies, the channel manager will have an ancillary structure that is an efficient mechanism for
carrying out the firm’s distribution objectives. Some of the more common types of facilitating agencies:
 Transportation agencies such as United Parcel Service (UPS®) and common carriers  Storage
agencies which consist mainly of public warehouses that specialize in the storage of goods on a fee basis
 Order processing agencies which are firms that specialize in order fulfillment tasks  Advertising
agencies which offer the channel member expertise in the development of promotion strategy 
Financial agencies such as banks, finance companies and factors that specialize in discounting accounts
receivable  Insurance companies providing the channel member with means for shifting the
risksassociated with the industry  Marketing research firms to help the channel member gain relevant
marketing information

Functions of the Channel Intermediary

•
Buying
:
–
An intermediary buys products for resale to
other intermediaries or to final business
users.
•
Selling
Functions of the Channel Intermediary
•
Storing
:
–
An inventory commitment is composed of
products to satisfy
customer purchase
requirements in a timely manner.
•
Transporting
:
–
A vast array of transportation alternatives
are available for intermediaries to use to
manage the physical flow of the product to
the business user.
(continued)

•
Sorting
:
–
Most intermediaries buy in large quantities
and then sort (
breaking of bulk
)
shipments
into smaller lots (often in combinations) for
resale to business users.
•
Financing
:
–
Intermediaries may invest in inventory, sell
and deliver merchandise to business user,
and provide credit terms, then finance the
exchange process.
Functions of the Channel Intermediary
(continued)

•
Risk taking
:
–
Because of obsolescence and deterioration,
risk is inherent in the ownership of
inventory; additional risk comes from
uncollectable customer accounts.
•
Providing market information
:
–
Importance of continuous and accurate flow
of market information concerning final user
needs, pricing conditions, competitive
conditions, and user satisfaction is critical to
the success of the channel.
Functions of the Channel Intermediary
1.Number of levels to be included in
the channel.
2.Types of intermediaries to employ.
3.Number of channel intermediaries.
4.Number of channels to employ.
Channel Alternatives Issues
:
–
An intermediary with a capable sales force
supported by established warehouse
distribution centers, which is already
serving other product needs of a wide user
customer base, would be a valuable
channel addition.
Distributors
•
Full
-
service intermediaries
–
Take title to the products they sell
–
Perform full range of marketing functions
–
Compensated by their profit margins
•
Classification of Distributors
–
General
-
line Distributors
•
Cater to broad array of industrial needs
•
Stock extensive variety of products
–
Specialists
•
Focus on one line or a few related lines
–
Combination House
•
Operates in 2 markets: industrial and consumer
Manufacturers’ Representatives
•
Do not take title to the products
•
Do not hold inventory of the products
•
Usually limited to defined geographic
areas
•
Typically represent several companies
in the same geographic area
–
Sell noncompeting, but complementary
products
•
Compensated on a commission basis
Sales Branches
•
Part of the manufacturer’s
organization
•
Can be on
-
site or off
•
Typically do not carry inventory
•
Role is to sell the organization’s
products
Sales Agents & Brokers
•
Do not take title to the products
•
Do not hold inventory of the
products
•
Usually no limit on geographic areas
•
May represent several companies in
the same geographic area
–
Sell competing products
•
Compensated on commission basis
Channel Transaction Facilitators
•
Do not take title
•
Do not carry inventory
•
Provide services such as storage,
transportation, or arranging of sales.
•
Includes
–
independent warehouses
–
Carriers
–
manufacturer’s representatives
•
Can be very important to success of the
channel.
Channel Conflict
•
Channel
conflict
may result when channel
members have mutually exclusive values,
interests, or goals.
–
Manufacturers may want control of distribution
channels for better execution of their marketing
strategies.
–
Intermediaries may not see the manufacturer
-
determined strategies as in their best interest.
•
The Key
to remember:
–
Channel conflict cannot be fully eliminated
–
It can be properly managed
Types of Channel Width
•
Intensive distribution
:
–
Gain access to as many resellers as possible
within a particular geographic area.
•
Selective distribution
:
–
Distribute product to limited number of resellers
in a particular geographic region; highly chosen
based on distinctive capabilities and high
-
quality
service.
•
Exclusive distribution
Only one channel member can sell a
manufacturer’s products in a given geographic area
wholesaler versus distributor
A wholesaler only fulfils orders from retailers and assumes no role other than satisfying retailer
demands. A distributor, on the other hand, in addition to executing passively received orders, acts as a
sales representative for the producer. A distributor actively looks out for orders from various sources in
the market, executes the orders and also manages returns. Whereas a distributor is actively involved in
promoting a company’s products a wholesaler is not.

Source of Revenue

A wholesaler's main source of revenue is the discount charged on products. They purchase products in
bulk at a lower price from producers and sell them to retailers in smaller units that attract relatively
higher prices. In contrast, distributors charge service fees. Distributors demand a percentage of the net
sales for rendering their services. They act as sales personnel for the company and thus demand pay in
proportion to their efforts for promoting the company’s products.

Customer Focus

Wholesalers view retailers as their key customers. Many wholesalers concentrate on the big retail
houses. In contrast, distributors work for producers by being actively involved in the actual promotion
and selling in the overall market. Distributors work as if they are salaried employees of the producer.
Producers are the primary clients of the distributors.

Scope of Operation

Distributors have a wider scope of operation than wholesalers. Wholesalers simply rely on orders from
retailers, unlike distributors, who supply the retailers and the wholesalers as well as look for other
opportunities in the market. Wholesalers rarely work with small producers since they are many in the
market; distributors, on the other hand, work indiscriminately with both small and large producers.

Manufacturers mainly focus on production and creating products or

finished goods. Manufacturers rarely sell their products directly to
consumers or the end users of the products. Instead, manufactures
usually sell their products to other businesses down the chain like a
retailer, dealer, or wholesaler.
Brokers can work independently or employ otheragents. The biggest difference between the
three titles is a broker can work on his own, while an agent must work under a licensed broker.
A real estate associatebroker is an agent that's working on a broker'slicense.
Channel management is a technique for selecting the most efficient channels or routes to
market for your products and services, and deriving the best results from those channels by
applying appropriate financial,marketing or training resources.

Definition of 'Channel Management'

Definition: The term Channel Management is widely used in sales marketing parlance. It is
defined as a process where the company develops various marketing techniques as well as sales
strategies to reach the widest possible customer base. The channels are nothing but ways or
outlets to market and sell products. The ultimate aim of any organization is to develop a better
relationship between the customer and the product.

Description: Channel management helps in developing a program for selling and servicing
customers within a specific channel. The aim is to streamline communication between a business
and the customer. To do this, you need to segment your channels according to the characteristics
of your customers: their needs, buying patterns, success factors, etc. and then customize a
program that includes goals, policies, products, sales, and marketing program (1). The goal of
channel management is to establish direct communication with customers in each channel. If the
company is able to effectively achieve this goal, the management will have a better idea which
marketing channel best suits that particular customer base. The techniques used in each channel
could be different, but the overall strategy must always brand the business consistently throughout
the communication (2).

A business must determine what it wants out of each channel and also clearly define the
framework for each of those channels to produce desired results. Identifying the segment of the
population linked to each channel also helps to determine the best products to pitch to those
channels.

Channel management involves managing channels associated

with reaching and satisfying the customer, managing partners
who help with the ...

Channel management involves managing channels associated with reaching and

satisfying the customer, managing partners who help with the distribution process and
managing vendors who keep your internal controls working smoothly. Channel
management successfully gains and maintains the cooperation of various organizations
by aligning the enterprise as a whole with customer needs in mind. Each department
and flow of information has the potential to impact customer service, affecting your
entire organization and your reputation.

Effective channel management involves a partner relationship management (PRM)

solution with a holistic viewpoint of the organization. Vendor management is a
crossover channel often included in partner relationship management. When
establishing your channel management solutions, set clear goals for each channel
segment. Be sure to define policies and procedures to manage your channels. Identify
which products you offer that are appropriate for a particular channel. Develop sales
and marketing programs for each channel to meet their needs, not what you think their
needs are. Communication is vital to success and increased profits.

1. Create a channel management system through enterprise alignment.

2. Incorporate partner relationship management as an integral part of your

organization.

3. Establish a vendor management system to include risk management.

Identify channel management solutions

Utilize a holistic viewpoint when identifying channel management solutions. Communication internally
and externally is the key to successful channel management.

Identify PRM solutions

Partner relationship management is vital to channel management. Make sure PRM solutions match your
company needs.

Identify vendor management software

Vendor management software is part of channel management but is a crossover aspect of partner
relationship management. Identify your needs and how vendor management software can help you
accomplish your goals, improve efficiency and increase profits.
Business.com lists an article entitled "Guide to Purchasing Software: Vendor Management" by Linda C.
Ray for more information on vendor management software, specialists and consultants.
 Keeping up to date with technology and making sure your partners are on track with
technology will help control the risk management involved with channel management.

 Technology continues to change CRM and PRM, often causing process overlap.
Technology updates, communication and enterprise alignment are vital to success. View
your company as a whole and understand how each part interacts with the other from
the smallest purchase at the local office supply store to complex technology systems. Do
this without forgetting the most important aspect of your company, your customer.
Chapter 11 PRICING ISSUES IN CHANNEL MANAGEMENT Chapter Objectives Pricing strategy should
incorporate channel considerations before being implemented. If the channel members perceive a
manufacturer’s pricing strategy to be congruent with their own interests, they are likely to have a higher
level of cooperation and the reverse is also true. In developing pricing strategies, there are eight
guidelines: (1) profit margins should be adequate for channel members, (2) margins offered to different
classes of channel members should vary in proportion to the functions the channel members perform,
(3) margins should be competitive with those of rival brands, (4) special arrangements that result in
either an increase or decrease in services rendered should be reflected in the margins, (5) the
manufacturer should conform to conventional norms for margins in the trade, (6) variations in margins
on different models should be logical, (7) if price points exist at the wholesale/retail levels they should
be recognized and prices set to meet these price points, and (8) variations in prices by a manufacturer
for different products in its line should be associated with visible or identifiable differences in its line.
There are five major pricing issues a manufacturer is likely to face: (1) pricing control in the channel, (2)
the impact of major price policy changes, (3) the passing of price increases through the channel, (4) use
of price incentives, and (5) the problems created by “gray market” and “free riding”. Learning objectives
1) Be aware of the importance of pricing issues in marketing channel management. 2) Understand the
“anatomy” of channel pricing structure and the pervasiveness of its influence in channel pricing strategy.
3) Recognize the channel manager’s role in influencing the firm’s pricing strategy. 4) Know the eight
basic guidelines for developing effective channel pricing strategy. 5) Realize that these guidelines are not
simple prescriptions for channel pricing strategies. 6) Be cognizant of some of the most basic and
recurring issues in channel pricing policies. Chapter Topics 1) Anatomy of Channel Pricing Structure 2)
Guidelines for Developing Effective Channel Pricing Strategies 3) Other Issues in Channel Pricing Pricing
Issues in Channel Management 11-2 Chapter Outline Anatomy of Channel Pricing Strategy Participants
at the various levels in the channel each want a part of the total price (the price paid by the final buyer)
sufficient to cover their costs and provide a desired level of profit. The “golden rule” of channel pricing
when developing a pricing strategy is stated as follows: “It is not enough to base pricing decisions solely
on the market, internal cost considerations, and competitive factors. Rather, for those firms using
independent channel members, explicit considerations of how pricing decisions affect channel member
behavior is an important part of pricing strategy.” Pricing decisions can have a substantial impact on
channel member performance. If channel members perceive the manufacturer’s pricing strategy as
congruent with their own interests, then a higher level of cooperation can be expected. And the reverse
is also true. Therefore, the major challenge facing the channel manager in the area of pricing is to help
foster pricing strategies that promote channel member cooperation and minimize conflict. An
evaluation of how the manufacturer’s existing or proposed pricing strategies influence channel member
behavior would normally be included as part of the general evaluation of channel member needs and
problems identified in Chapter 9. Whenever possible, the channel manager should attempt to have
channel members’ viewpoints on pricing issues included as an integral part of the manufacturer’s
pricemaking process. Guidelines for Developing Effective Channel Pricing Strategies Oxenfeldt offers a
set of eight classic guidelines for developing pricing strategies that incorporate channel considerations.
While not comprehensive, they do provide a basic framework and benchmark for pricing decisions that
incorporate channel considerations. These are: 1) Each efficient reseller must obtain unit profit margins
in excess of unit operating costs. 2) Each class of reseller margins should vary in rough proportion to the
cost of the Marketing Channels 7e 11-3 3) At all points in the vertical chain (channel levels), prices
charged must be in line with those charged for comparable rival brands. 4) Special distribution
arrangements–variations in functions performed or departures from the usual flow of merchandise–
should be accompanied by corresponding variations in financial arrangements. 5) Margins allowed to
any type of reseller must conform to the conventional percentage norms unless a very strong case can
be made for departing from the norms. 6) Variations in margins on individual models and styles of a line
are permissible and expected. They must, however, vary around the conventional margin for the trade.
7) A price structure should contain offerings at the chief price points, where such price points exist. 8) A
manufacturer’s price structure must reflect variations in the attractiveness of individual product
offerings. 1) Profit Margins Channel members need margins that are more than adequate to cover the
costs associated with handling a particular product. Channel members generally will not carry, let alone
enthusiastically support, products whose margins are inadequate to cover their costs and provide room
for profit. Over time, those channel members who feel that the manufacturer is not allowing them
sufficient margins are likely to seek out other suppliers or establish and promote their own private
brands. Thus, the channel manager should be involved in a continuous review of channel member
margin structures to determine if they are adequate and pay particular attention to changes in the
competitive environment that is likely to influence channel member perceptions of the existing margin
structures. 2) Different Classes of Resellers Ideally, the channel manager would like to set margins so
that they would vary in direct proportion to the functions performed by different classes of channel
members. In reality, however, margins at the wholesale and retail levels are typically governed by strong
traditions that permeate the industry. Nevertheless, periodic reviews of the margin structures available
to different classes of channel members should be made, with a view toward making gradual changes if
warranted. Oxenfeldt suggests that the following questions be posed in this review: Pricing Issues in
Channel Management 11-4 a. Do channel members hold inventories? b. Do they make purchases in
large or small quantities? c. Do they provide repair services? d. Do they extend credit to customers? e.
Do they deliver? f. Do they help train the customers’ sale force? The main point of periodically reviewing
channel member services in relation to the margins granted them, is to find out whether there are any
major inequities that are creating problems in the ranks of particular classes of channel members. 3)
Rival Brands Differentials in the margins available to channel members carrying competitive brands
should be kept within tolerable limits. The practical question facing the channel manager attempting to
apply this guideline is: What levels of margin differentials are within tolerable limits? Unfortunately,
there is no straightforward answer to this question. Channel managers, then, should attempt to weight
any margin differentials between their own and competitive brands in terms of what kind of support
their firms offer and what level of support they expect from channel members. If this relationship is
found to differ significantly from the competition, differentials in margins should be examined in terms
of these differences. 4) Special Arrangements If the usual allocation of distribution tasks between the
manufacturer and the channel members changes, the margin structure should reflect these changes. 5)
Conventional Norms in Margins Oxenfeldt points to the almost universal tendency of channel members
to expect margins to meet generally accepted norms. This strong commitment among channel members
to what they consider to be normal, fair or proper margin makes it very difficult for the manufacturer to
deviate from the conventional margin structures. Thus it is the job of the channel manager to attempt to
explain to the channel members any margin changes that deviate downward from the norm. While this
might not guarantee that the channel members will support this change, at least it will convey the
reasons for taking this action. Marketing Channels 7e 11-5 6) Margin Variation on Models Variations in
margins on individual models and styles in a product line are common. Traffic builders (often referred to
as promotional products) are usually the lowest priced in the line and yield relatively low margins for
both the manufacturer and channel members. Fortunately, channel members are often amenable to
accepting the lower margins associated with these products so long as they are convinced of the
promotional value of the product in building patronage. Margins on products in the line that are
significantly below the norm and that are not intended as promotional products are much more difficult
to justify in the eyes of the channel members. The channel manager should attempt to influence
product line pricing to use low-margin products for promotional purposes whenever possible. 7) Price
Points Key Term and Definition  Price points: Specific prices, usually at the retail level, to which
consumers have become accustomed. In other words, consumers come to expect certain products to be
available at customary prices. While most price points rise, sometimes price points can actually move
down, as in the case for the under-$1,000 personal computer. 8) Product Variations When a
manufacturer attaches prices to the various models within a given product line, it should be careful to
associate price differences in product features. If the price differences are not closely associated with
visible or identified product features, the channel members will have a more difficult selling job to the
consumer. Other Issues in Channel Pricing The channel manager is faced with other channel pricing
issues that require more specific and detailed attention. Five of the most important are discussed in this
section. 1) Exercising Control in Channel Pricing As stated earlier, the manufacturer’s pricing strategies
often require channel member support and cooperation if they are to be implemented effectively. Of all
of the elements of the marketing mix, channel members view pricing as the area that is most in their
domain. As soon as the manufacturer seeks to exercise some control Pricing Issues in Channel
Management 11-6 over channel members’ pricing strategies, channel members may feel that the
manufacturer has stepped out of its proper boundary. Yet, from the manufacturer’s point of view, some
of the most important pricing strategies may call for having some degree of control over the channel
members’ pricing policies. In attempting to influence some control, the manufacturer is faced with the
difficult and delicate task of enforcing pricing policies without alienating channel members. Although
there is no surefire way to avoid the problem, several guidelines can be offered. These are: a. Any type
of coercive approaches to controlling channel member pricing policies should be ruled out. b.
Encroachment by the manufacturer into the domain of channel member pricing policies should be
undertaken only if the manufacturer believes that it is in his or her vital long-term strategic interests to
do so. c. If the manufacturer does feel that it is necessary to exercise some control over channel
member pricing policies, an attempt should be made to do so through what might be called “friendly
persuasion”. 2) Changing Price Policies Another important channel pricing issue that the manufacturer is
almost sure to face at one time or another is dealing with channel member reactions to major changes
in the manufacturer’s pricing policies and related terms of sale. Major changes in the manufacturer’s
pricing policies are bound to affect channel members. Typically, channel members become very uneasy
when they hear about significant changes in manufacturer pricing policies or terms of sale. Indeed,
channel members’ own pricing strategies may be closely tied to the existing policies of the
manufacturer. Hence, a significant amount of communication and research into the problems and issues
of channel members is needed to prevent channel conflicts from developing. 3) Passing Price Increases
through the Channel So long as each channel member is able to pass along manufacturer-initiated price
increases to the next channel member, and ultimately to the final user, the price increase issue is not
too worrisome. But, when the increased prices cannot be totally passed through the channel, and hence
channel members have to begin absorbing some or all of the price increases by cutting into their
margins, price increases become a critical issue. Marketing Channels 7e 11-7 Added to the direct
monetary difficulties arising from such nontransferable price increases is the ill will that they can create
as each channel member blames the next for the price increase. Unfortunately, such price increases are
too simply passed along in rote fashion by the manufacturer (and other channel members) before other
alternatives or strategies that could help mitigate the effects of the price increase are given adequate
consideration. Such alternatives and strategies include the following: a. More thought to the long- and
short-term implications of going through with the price increase versus attempting to hold the line on
prices should be considered. b. If passing on the price increase is unavoidable, the manufacturer should
do whatever possible to mitigate the negative effects of the increase on channel members. Examples
include: additional financial assistance, more liberal payment terms, special deals, or other price-related
strategies. c. The manufacturer could change its strategies in the other areas of the marketing mix,
particularly product strategy, to help offset the effects of price increases. For example, the product
could be “improved” or the product could be “downgraded” to maintain a price point. 4) Using Price
Incentives in the Channel Pricing strategy is frequently used by manufacturers as a promotional tool. A
wide range of pricing devices is used to carry out such pricing strategy, including special deals, seasonal
discounts, rebates, price reductions, coupons, two for the price of one, and a variety of others. Such
enthusiasm for promotional pricing strategies shown by consumers is not always shared by channel
members. Part of the problem can be solved merely by making pricing promotions as simple and
straightforward as possible, so that channel members can participate with a minimum of time and
effort. The more significant problem underlying some price promotions, however, stems from the
differing price elasticities of consumers versus retailers (and wholesalers). That is, consumers’ responses
to price reductions may differ significantly from those of retailers and wholesalers. The corresponding
price incentives offered to retailers for participating in the price promotion (to consumers) may not be
sufficient to stimulate their desire to be fully involved in the deal. Many retailers as well as wholesalers
will take advantage of manufacturers’ promotions by engaging in forward buying. Key Term and
Definition  Forward buying: Channel members load up on the discounted products featured in the
promotion by passing on the lower price to the consumer for just a portion of time. Pricing Issues in
Channel Management 11-8 The rest of the product is held in inventory by the wholesaler or retailer for
sale at the regular price after the promotional period has ended. The solution to the problem of getting
better mileage out of manufacturer-initiated price promotions begins with the recognition on the part of
the manufacturer of the differingprice elasticities between consumers and retailers. Price promotion
strategies should be designed to be at least as attractive to retailers as they are to consumers. Retailers
and wholesalers often take advantage of price promotions so as to maximize their profit potential
whether or not it helps the manufacturer or the final consumer. 5) Dealing with the Gray Market and
Free Riding Two of the most troublesome developments affecting the pricing policies and strategies of
many manufacturers of branded products are the gray market and the related phenomenon of free
riding. Key Terms and Definitions  Gray market: Refers to the sale, usually at very low prices, of brand-
name products by unauthorized distributors or dealers.  Free riding: A term used to describe the
behavior of distributors and dealers who offer extremely low prices but little if any service to customers.
The discounters get a “free ride” from the services provided by the higher-priced fullservice distributors
and dealers when the consumer uses the full-service distributors and/or dealers for product
information, and then buy from the lower-priced vendor. Gray markets and free riding can both be of
serious concern to the manufacturers of the products involved if these practices are widespread enough
to disrupt the manufacturers’ ability to manage their marketing channels. Channel design decisions that
result in more closely controlled channels and selective distribution as well as changing buyer
preferences may help to limit the growth of the gray market and free riding.

Chapter 11: Pricing Issues in Channel

Management
The importance of pricing
pricing decisions cause top-level marketing executives more concern than any other strategic
marketing decision area
– pricing is viewed as having a more direct link to the firm’s bottom line
The “Golden Rule” of Channel Pricing
it is not enough to base pricing decisions solely on market, internal cost factors, and competitive
factors. For those firms under independent channel members, explicit consideration of how
pricing decisions affect channel members behavior is an important part of pricing strategy
– pricing decisions can have a substantial impact on channel member performance
Influencing pricing strategy. The major challenge for the channel manager is:
– to help foster pricing strategies that promote channel member cooperation and minimize
conflict
Channel Manager;s Role:
channel manager must focus on the channel considerations and work to incorporate them in to
the firms pricing decisions
Channel Pricing Guidelines are necessary because:
1. to help those involved in pricing decision focus more clearly on the channel implications of
their pricing decisions
2. to provide general prescriptions on how to formulate pricing strategies that will help promote
channel member cooperation and minimize conflict
Guidelines for Channel Pricing (8)
1. Profit Margins
2. Different Classes of Resellers
3. Rival Brands
4. Special Arrangements
5. Conventional Norm in Margins
6. Margin Variation on Models
7. Price Points
8. Product Variations
#1: Profit Margins
each efficient reseller must obtain a unit profit margin that exceeds unit of operating costs
#2: Different Classes of Resellers
each class of reseller margins should vary in rough proportion to the cost of the functions the
reseller performs
#3: Rival Brands
at all points in the channel, prices charged must be in line with those charged for comparable
rival brands
#4: Special Arrangements
special distribution arrangements — variations in functions performed or departures from the
usual flow of merchandise — should be accompanied by corresponding variations in financial
arrangements
#5 Conventional Norms in Margins
margins allowed to any type of reseller must conform to the conventional percentage norms
unless a very strong case can be made for departing from the norms
#6: Margin Variation on Models
variations in margins on individual models and styles of a line are permissible and expected.
However, they must vary around the conventional margin for trade
#7: Price Points
a price structure should contain offerings at the chief price points, where such a price point
exists
price point
specific prices, usually at the retailer lever, to which consumers have become accustomed
#8: Product Variations
a manufacturers price structure must reflect variation in the attractiveness of individual product
offerings
Other channel pricing issues
– exercising control in channel pricing
– changing price policies
– passing price increases through the channel
– using price incentives in the channel
– dealing with the gray market and free riding
Gray Market
sale of a brand name product at a very low price by unauthorized dealers
Free Rider
describes behavior of distributors and dealers who offer cheap product but no customer service

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