DESIGNING MARKETING

CHANNELS
Chapter 4
 Chapter 4 Outline
 What is Channel Design?
 Who Engages in Channel Design?
 A Paradigm of the Channel Design Decision
 1. Recognizing the Need for a Channel Design Decision
 2. Setting and Coordinating Distribution Objectives
 3. Specifying Distribution Tasks
 4. Developing Possible Alternative Channel Structures
 5. Evaluating the Variables Affecting Channel Structure
 6. Choosing the “Best” Channel Structure
 What is Channel Design?
 Channel design refers to decisions associated with
developing new marketing channels where none
had existed before, or to modifying existing
channels.
 The first point to notice is that channel design is
presented as a decision faced by the marketer.
 In this way, channel design is similar to other
decisions areas of the marketing mix, namely
product, price, and promotions.
 What is Channel Design?
 A second point is that channel design is used in a
broad sense to include either setting up from
scratch or modifying existing channels.
 Modifications or redesign of existing channels,
sometimes referred to as reengineering the
marketing channel is a more common occurrence
than setting up channels from scratch.
 What is Channel Design?
 Third, when used in its verb form, the term design
suggests that the marketer is consciously and
actively allocating the distribution tasks in an
attempt to develop an effective and efficient
channel structure.
 The term is not used to refer to channel structures
that have simply evolved.
 Design means that management has taken a
proactive role in developing the channel.
 What is Channel Design?
 Fourth, selection, as we use the term refers to only
one phase of the channel design—the selection of
the channel members.
 Finally, the term channel design also has strategic
meaning because channel design should be used as
an essential part of the firm’s attempt to gain a
differential advantage or sustainable competitive
advantage in the market.
 Who Engages in Channel Design?
 Producers, manufactures, wholesalers, and retailers all
face design decisions.
 For retailers, channel design is viewed from a point of
view opposite that of producers and manufacturers.
 Retailers look “up the channel” in an attempt to secure
suppliers, rather than “down the channel” toward the
market (as is the case for producers and
manufacturers).
 Wholesale intermediaries face channel design decisions
from both perspectives.
 Who Engages in Channel Design?
 We will use the perspective of a firm (mainly
producers and manufacturers) looking down the
channel toward the market.
 The topic of channel design will be discussed from
an “up the channel” perspective.
A Paradigm of the Channel Design
 The channel design decision can be broken down
into seven steps:
 1. Recognizing the need for a channel design decision
 2. Setting and coordinating distribution objectives
 3. Specifying distribution tasks
 4. Developing possible alternative channel structures
 5. Evaluating the variables affecting channel structure
 6. Choosing the “best” channel structure
 7. Selecting the channel members
1. Recognizing the Need for a Channel
Design Decision
 Many situations can indicate the need for a channel
design decision. Among them are the following:
 1. Developing a new product or product line: If
existing channels for other products are not suitable for
a new product or product line, a new channel may have
to be set up or the existing channels modified in some
way.
 2. Aiming an existing product at a new target market:
A common example of this situation is a company’s
introduction of a product in the consumer market after it
has sold it in the industrial market.
1. Recognizing the Need for a Channel
Design Decision
 3. Making a major change in some other part of the
marketing mix: For example, a new pricing policy
emphasizing lower prices may require a shift to lower-
price dealers such as discount mass merchandisers.
 4. Adapting to changing intermediary policies that
may restrict the accomplishment of the firm’s
distribution objectives: For example, if intermediaries
begin to emphasize their own private brands, then the
manufacturer may want to add new distributors who
will promote the company’s products better.
1. Recognizing the Need for a Channel
Design Decision
 5. Opening new geographic marketing areas
(territories).
 6. Reviewing and evaluating: The regular periodic
reviews and evaluations undertaken by a firm may
point to the need for changes in the existing
channels and possibly the need for new channels.
Q:
 Channel design refers to all of the following except:
 a. The development of new channels.
 b. The modification of existing channels.
 c. The allocation of distribution tasks among channel
members.
 d. The selection of channel members.
 e. The development of methods used to motivate
channel members.

 ANS: E
Q:
 In marketing channels, the term “reengineering” refers
to:
 a. A change in an intermediary’s product assortment.
 b. Appointment of a new channel manager.
 c. Modification of an existing channel.
 d. Selecting new intermediaries to replace current
ones.
 e. Completely redesigning the marketing mix and
selecting new channel managers.

 ANS: C
Q:
 Which of the following does not engage in channel
design?
 a. Manufacturers
 b. Wholesalers
 c. Retailers
 d. Producers
 e. Facilitating agencies

 ANS: E
 2. Setting and Coordinating
Distribution Objectives
 In order to set distribution objectives that are well
coordinated with other marketing and firm objectives
and strategies, the channel manager needs to perform
three tasks:
 A) Become familiar with the objectives and strategies in
other marketing mix areas and any other relevant
objectives and strategies of the firm.
 B) Set distribution objectives and state them clearly.
 C) Check to see if the distribution objectives are
congruent with marketing and other general objectives
and strategies of the firm.
 2. Setting and Coordinating
Distribution Objectives
 A) Become familiar with the objectives and strategies
in other marketing mix areas and any other relevant
objectives and strategies of the firm:
 The person responsible for setting distribution
objectives needs to make an effort to learn which
existing objectives and strategies in the company
may stand in the way of the distribution objectives
that are to be set.
 2. Setting and Coordinating
Distribution Objectives
 B) Set distribution objectives and state them clearly:
 Distribution objectives are statements describing the
part that distribution is expected to play in
achieving the firm’s overall marketing and/or
corporate objectives.
 Class Exercise
 Go online and find a company and give an
example of one of its distribution objectives.
 2. Setting and Coordinating Distribution
Objectives
 Examples of Distribution Objectives # 1
 Apple Computer set a distribution objective to
reach more customers with what it refers to as the
“Apple experience,” So Apple developed a chain
of its own retail stores to maximize its control of
how its products would be presented to consumers
at the retail level.
 Class Exercise
 Vending machines have existed as a mechanical
channel for distributing a variety of products for many
years.
 Traditionally the typical products found in vending
machines were soft drinks, candy, and snack foods.
 But in recent years the variety of products sold through
vending machines has broadened to include cameras,
DVDs, IPods, and even gold bars.
 Question: From a channel design viewpoint, what do you
see as a key element to consider in determining
whether vending machines could be a feasible channel
choice for any give product of your choice.
 2. Setting and Coordinating Distribution
Objectives

 Examples of Distribution Objectives # 2

 The Coca Cola Co., based on a distribution strategy
to increase its penetration in the school and
university markets, has used exclusive distribution
contracts where schools or universities agree to sell
only Coca Cola products.
 These exclusive contracts lock out competitors, and
help Coke achieve its distribution objective of
gaining a high penetration rate in this market.
 2. Setting and Coordinating Distribution
Objectives
 C) Check to see if the distribution objectives are
congruent with marketing and other general objectives
and strategies of the firm:
 A congruency check involves verifying that the
distribution objectives do no conflict with objectives in
the other areas of the marketing mix (product, price,
and promotion)
 3. Specifying Distribution Tasks
 After distribution objectives have been set and coordinated,
a number of distribution tasks must be performed.
 The following are some tasks that are required to meet
specific distribution objectives:
 1. Gather information on target market shopping patterns
 2. Maintain inventory storage to assure timely availability
 3. Process and fill specific customer orders
 4. Transport the product
 5. Provide product warranty service
 6. Establish product return procedure
 4. Developing Possible Alternative
Channel Structures
 The channel manager should consider alternative
ways of allocating distribution tasks.
 Often, the channel manager will choose more than
one channel structure in order to reach the target
markets effectively and efficiently.
 For example: Kraft Food Inc., sells it food products
through supermarkets, wholesale food distributors,
convenience store, drugstores, and vending
machines.
 5. Evaluating the Variables Affecting
Channel Structure
 The channel manager needs to evaluate a number of
variables to determine how they are likely to influence
various channel structures.
 There six basic categories of variables are:
 1. Market variables
 2. Product variables
 3. Company variables
 4. Intermediary variables
 5. Environmental variables
 6. Behavioral variables.
 5. Evaluating the Variables Affecting
Channel Structure
 1. Market variables: Four basic subcategories of
market variables are important in influencing
channel structure:
 A) Market geography: Refers to the geographical
size of markets and their physical location and
distance from the producer or manufacturer.
 The greater the distance between the manufacturer
and its markets, the higher the probability that the use
of intermediaries will be less expensive than direct
distribution.
 5. Evaluating the Variables Affecting
Channel Structure
 B) Market size: The number of customers making up
a market (consumer or industrial) determines the
market size.
 If the market size is large, the use of intermediaries is
more likely needed because of the high transaction
costs of serving large numbers of individual
customers.
 If the market is small, a firm is more likely to be able
to avoid the use of intermediaries.
 5. Evaluating the Variables Affecting
Channel Structure
 C) Market density: The number of buying units
(consumers or industrial firms) per unit of land area
determines the density of the market.
 The less dense the market, the more likely it is that
intermediaries will be used.
 The greater the density of the market, the higher the
likelihood of eliminating intermediaries.
 5. Evaluating the Variables Affecting
Channel Structure
 D) Market behavior: Refers to the following four
types of buying behaviors:
 A) How customers buy
 B) When customers buy
 C) Where customers buy
 D) Who does the buying
 5. Evaluating the Variables Affecting
Channel Structure
 2) Product variables: Some of the most important
product variables are:
 A) Bulk and Weight
 B) Perishablility
 C) Unit value
 D) Degree of standardization
 E) Technical vs. nontechnical
 F) Newness
 G) Prestige
 5. Evaluating the Variables Affecting
Channel Structure
 A) Bulk and Weight: Heavy and bulky products
have very high handling and shipping costs relative
to their value.
 The producers of heavy and bulky products attempt
to minimize their costs by shipping only in large lots
to the fewest possible points.
 B) Perishablility: Products subject to fast
deterioration (such as fresh foods) and those that
experience rapid fashion obsolescence are
considered to be highly perishable.
 5. Evaluating the Variables Affecting
Channel Structure
 When products are highly perishable, channel
structures should be designed to provide for quick
delivery from producers to consumers.
 C) Unit value: In general, the lower the unit value
of a product, the longer the channels should be.
 This is because the low unit value leaves a small
margin for distribution costs.
 For example: It would be difficult to imagine the
sale of a package chewing gum directly from
Wrigley’s to the consumer.
 5. Evaluating the Variables Affecting
Channel Structure
 Only by spreading the costs of distribution over the
wide variety of products handled by wholesale
and retail intermediaries is it possible to buy a
package of gum at a retail price of .25 Dinars.
 D) Degree of standardization: Custom-made
products go directly from producer to the user.
 As products become more standardized, the
opportunity to lengthen the channel by including
intermediaries increase.
 5. Evaluating the Variables Affecting
Channel Structure
 E) Technical versus Nontechnical: In the industrial
market, a highly technical product will usually be
distributed through a direct channel.
 F) Newness: Many new products in both consumer
and industrial markets require extensive and
aggressive promotion in the introductory stage to
build demand.
 Usually, the longer the channel, the more difficult it
is to achieve this kind of promotional effort from all
channel members.
 5. Evaluating the Variables Affecting
Channel Structure
 Therefore, in the introductory stage, a shorter
channel is generally viewed as an advantage for
gaining product acceptance.
 G) Product Prestige: Prestigious products often
associated with famous luxury brands such a Gucci,
Rolex, Mercedes-Benz need to maintain an aura of
exclusivity and rareness that would not fit with mass
market distribution channels.
 Class Exercise
 Give an example of a company or product where one
of following product variables is critical to their
marketing channel design.
 Give an example for each product variable:
 A) Bulk and Weight
 B) Perishablility
 C) Unit value
 D) Degree of standardization
 E) Technical vs. nontechnical
 F) Newness
 G) Prestige
 5. Evaluating the Variables Affecting
Channel Structure
 3) Company variables: The most important company
variables affecting channel design are:
 A) Size
 B) Financial capacity
 C) Managerial expertise
 D) Objectives and strategies
 5. Evaluating the Variables Affecting
Channel Structure
 A) Size: The power basses available to larger
companies allows them to exercise a significant
amount of power in the channel
 This gives large companies a high degree of
flexibility in choosing channel structures compared
to smaller companies.
 B) Financial capacity: Usually, the greater the
capital available to a company, the lower is its
dependence on intermediaries.
 5. Evaluating the Variables Affecting
Channel Structure
 C) Managerial expertise: Some companies do not
have the managerial skills necessary to perform
distribution tasks.
 D) Objectives and strategies: Marketing and
general objectives and strategies ( such as the need
to exercise a high degree of control over the
product and its service) may limit the use of
intermediaries.
 5. Evaluating the Variables Affecting
Channel Structure
 4) Intermediary variables: The key intermediary
variables related to channel structure are:
 A) Availability
 B) Costs
 C) Services offered
 5. Evaluating the Variables Affecting
Channel Structure
 A) Availability: In many cases, the availability of
adequate intermediaries will influence channel
structure.
 For example: The lack of availability of
appropriate intermediaries led Michael Dell, the
founder of Dell Computer Corp., to design a direct
mail-order channel that provided strong technical
expertise as well as custom-designed personal
computers.
 5. Evaluating the Variables Affecting
Channel Structure
 B) Cost: The cost of using intermediaries is always a
consideration in choosing a channel structure.
 C) Services: The services offered by intermediaries
is closely related to the selection of channel
members.
 Companies evaluate the services offered by
intermediaries to see which one can perform them
most effectively at the lowest cost.
 5. Evaluating the Variables Affecting
Channel Structure
 5) Environmental variables: Environmental variables
may affect all aspects of channel development and
management.
 6) Behavioral variables: When a channel manager
chooses a channel structure, he or she should review
different behavioral variables.
 For example: Developing more congruent roles for
channels members can reduce the major sources of
conflict.
 6. Choosing the “Best” Channel
Structure
 In theory, the channel manager should choose an
optimal channel structure that would offer the
desired level of effectiveness in performing the
distribution tasks at the lowest possible cost.
 If a firm’s goal is to maximize its long-term profits,
an optimal channel structure would be consistent
with that goal.
 In reality, choosing an optimal channel structure, in
the strictest sense of the term, is not possible.
 6. Choosing the “Best” Channel
Structure
 Why not?
 First, management is not capable of knowing all the
possible alternatives.
 Second, even if it were possible to specify all
possible channel structures, exact methods do not
exist for calculating the exact payoffs connected
with each of the alternative structures.
 Reference
 Bert Rosenbloom (2013) Marketing Channels, 8th
Edition, Cengage Learning, International Edition.