Marketing Channels: Delivering Cu

stomer Value
Supply Chains and Value Delivery Network
Producing and making products available to buyers
requires building relationships with upstream and
downstream supply chain partners.
Upstream: Firms that supply the raw materials,
components, parts, and other elements necessary
to create a good.
Downstream: Marketing channel partners that link
the firm to the customer.
Value delivery network: The network made up of the
company, suppliers, distributors, and ultimately
customers who partner with each other to improve
the performance of the entire system in delivering
customer value.
Marketing channels represent the downstream side of
the value delivery network.
Key Concepts
Manufacturer Customer
Suppliers
(Assembler) s

Upstream Downstream
Supply Chain Marketing Channel
(Transvection (Transaction
Channel) Channel)

Value Delivery Network

Supply Chain

Economic Discrepancies
(Separations)
Marketing Functions and Activities
Marketing Flows
Intermediation
Channel Services
 Economic Separations and Marketing
Separations Functions Activities
Information Informational market research, ad, promotion, self-choice, complaining

Valuation Value Matching price negotiation, marketing communications

Accumulation
Quantity

Commerce
accumulation, allocation, packaging
Allocation
Sorting Out
standardization, classification by kind or by grade
(Type; Grade)
Quality
Assortment combining items across types and/or grades

Buying
Ownership Selling
contracting, title transfer, physical delivery

collection, distribution, stocking, embarking/debarking,

Distribution

Spatial Transportation
Physical

check-up, packaging
inventory management, debarking, packaging,
Temporal Storage distributive processing

Payment
Supporting

Financing factoring, loan, credit provision/collection

Risks Insurance risk management, safety management, risk pooling

 Marketing Flows

Information

Information

Ownership
Seller Buyer
Physical Goods

Payment
Channel Functions
How channel members add value
The use of intermediaries results from their greater
efficiency in making goods available to target
markets.
Channel members offer the firm more than it can
achieve on its own in terms of: contacts,
experience, specialization, and scale of operation.
Key functions performed by channel members
Transaction Completing
Information
Promotion
Contact
Matching
Negotiation
Transaction Fulfilling
Physical distribution
Financing
Intermediation and Transactional Efficiency
Without Intermediaries
Mfg. A Mfg. A Mfg. A

1 2 3 4 5 6 7 8

With Intermediaries
Mfg. A Mfg. A Mfg. A

Intermediary

1 2 3 4 5 6 7 8
Decision Areas of Channels Management
Formulating Channel
Strategy(+Service
Goals)
Designing Channel
Structure
Selecting the Channel
Members
Motivating the Channel
Members
Coordinating with Other
Marketing Mix
Evaluating Member
Performance
McKinseys 7-S Model

Strategies

Structure Management
of Organization Systems
Superordinate
Goals
Style of
Skills
Leadership

Staffing
Channel Decision Process
New Product, New Market, Mix Changes, New Middleman,
Design Needs Customer Need Changes, Channel Conflict/Performance

Service Goal Variety, Spatial Convenience, Lot Size, Delivery Time, etc.

Channel Tasks

Alternative Structures Levels, Intensity at Levels, Type of Middlemen,

Spatial Deployment, Responsibilities, Management
1. Market: Size, Density, Purchase Behavior
Evaluation 2. Product: Volume, Weight, Decay, Price, Complexity, etc.
3. Firm: Mission, Size, Finance & Management Capabilities
4. Middlemen: Availability, Costs, Services
Optimal Structure
5. Controllability: Communication, Cooperation, Conflicts
6. Other Environmental Factors
Member Selection Economic (Sales, Costs), Control, and Adaptive Criteria

Member Management Power, Influence, VMS

Perceptions of Interdependence
Evaluation Members Performance
Key Issues in Channel Organization
Number of channel levels: The length of a channel.
Direct marketing channels: Have no intermediary levels
between the manufacturer and the customer.
Indirect marketing channels: Contains one or more
intermediaries.
All channel institutions are connected by several types of
flows.
Channel Behavior and Organization
The channel will be most effective when:
Each member is assigned tasks it can do best.
All members cooperate to attain overall channel goals.
If this does not happen, conflict occurs:
Horizontal conflict occurs among firms at the same
level of the channel (e.g., retailer to retailer).
Vertical conflict occurs between different levels of the
same channel (e.g., wholesaler to retailer).
Some conflict can be healthy competition.
The type of channel organization affects channel
Channel Design (1): Consumer Need Analysis
Requires answering key questions to help determine
customer needs:
Do consumers want to buy from nearby locations or
are they willing to travel?
Do they value breadth of assortment or do they
prefer specialization?
Do consumers want many add-on services?
Firm must balance needs against costs and consumer
price preferences.
Channel Design (2): Setting Channel Goals
Objectives are stated in terms of targeted levels
of customer service.
Channel objectives are influenced by:
Cost
Nature of the company
The firms products
Marketing intermediaries
Competitors
Environment
Customer Values Created by Channel
Bucklin, Louis P.
Variety
Spatial Convenience
Lot Size
Delivery Time
Bucklin, Randy
Information
Tends to deteriorate when passed through the hands of
intermediaries
Where critical to the end-user, intermediaries become
more specialized and/or channels become shorter
Logistics
Tends to improve as intermediaries hold inventory to
facilitate end-user access to goods or services
Where critical to the end-user, channels become longer
or suppliers offer specialized logistical arrangements
Information Services of Channel
Primary Information
Education about basic product benefits
Product demonstrations and training
Advice/consultation on early use
Comparative Information
Product comparisons: advantages and
disadvantages versus competition)
Price, special promotions
Product Quality Assurance
Customization of the Transaction
Product configuration, build to order, etc.
Elaborate price negotiations, complex
contract terms
Logistics Services of Channel
Product Variety
Assortment available at the point of sale
Involves both breadth and depth
Convenience/Accessibility
Ease of locating point of sale
Travel time
Immediacy of Availability
Time between order and receipt of goods
Lot Size Flexibility
Minimum order quantity or product size
Channel Design (3): Alternative Development
Number of channel levels
Types of intermediaries
Company sales force
Manufacturers agency
Industrial distributors
Number of marketing intermediaries
Intensive
Selective
Exclusive distribution
Responsibilities of channel members
Channel Design (4): Alternative Evaluation
Economic criteria
Compares the likely sales, costs, and profitability of
different channel alternatives
Control issues
How and to whom should control be given?
Adaptive criteria
Consideration of long-term channel commitment
vs. channel flexibility.
Number of Customer Channel Levels
2 level 3 level 4 level 5 level
Manufacturer Manufacturer Manufacturer Manufacturer

Agent

Wholesaler Wholesaler

Retailer Retailer Retailer

Consumer Consumer Consumer Consumer

Heuristic for Ideal Channel Structure

Direct
High Hybrid
Channel

Information
Needs

Indirect
Low Hybrid
Channel

High Low
Logistical Needs
Hybrid System: Division of labor/functions between
the firm and intermediaries
Implications for Channel Selection

Direct Selling
High
(No Orders) Direct
Intermediaries Sales
take orders.
Information
Needs
Brokers
Low
Retailers/ (No Title)
Dealers The firm keeps
the title.

High Low

Logistical Needs
21
Channel Management Decisions
Selecting channel members
Managing and motivating channel
members
Partner relationships management
Conflict management
Assuring proper level of cooperation
Evaluating channel members
Types of Channel Organization
Conventional distribution channel: Consists of one or more
independent producers, wholesalers, and retailers, each a
separate business seeking to maximize its own profits even at
the expense of profits for the system as a whole.
Vertical marketing system (VMS)
A distribution channel structure in which producers,
wholesalers, and retailers act as a unified system.
One channel member owns the other, has contracts with
them, or has so much power that they all cooperate.
Horizontal marketing systems: Two or more companies at one
level join together to follow a new marketing opportunity.
Multichannel distribution system
Occurs when a single firm sets up two or more marketing
channels to reach one or more customer segments.
Also called hybrid marketing channel system.
Changing channel organization: Disintermediation occurs when
product and service producers cut out traditional intermediaries
or displace resellers with radical new types of intermediaries.
Comparison of CMS with VMS
CMS VMS
(Conventional Marketing System)
(Vertical Marketing System)

Producer
Producer

Retailer
Wholesaler Wholesaler

Retailer

Consumer Consumer
Types of VMS
Corporate VMS: combines successive stage of production
and distribution under single ownership. Channel
leadership is established via common ownership.
Contractual VMS: Independent firms at different levels of
production/distribution join together through contracts to
obtain more economies of scale than they could alone.
Franchise organizations
A common form of contractual vertical marketing
system.
Types
Manufacturer-sponsored retailer franchise (e.g., Ford
and its independent franchised dealers)
Manufacturer-sponsored wholesaler franchise (e.g.,
Coca-Colas licensed bottlers)
Service-firm sponsored retailer franchise (e.g.,
McDonalds, Avis, Holiday Inn)
Administered VMS: Leadership is assumed through the size
Multichannel Distribution System
Producer

Catalogs Sales
Telephone force
Internet
Distributor

Retailer Dealer

Consumer Consumer Business Business

Segment 1 Segment 2 Segment 1 Segment 2
Omnichannel Distribution System

Source: Bell, David R., Santiago Gallino, and Antonio Moreno (2014), How to Win in an Omnichannel World,
MIT Sloan Management Review, Dall 2014.
Public Policy and Distribution Decisions
Exclusive distribution
Exclusive dealing
Exclusive territorial
agreements
Tying agreements
Marketing Logistics
Marketing logistics (physical distribution)
Goals of the logistics system: Deliver a targeted level of
customer service at the least cost.
Marketing Logistics Management: Planning,
implementing, and controlling the physical flow of
goods, services, and related information from points of
origin to points of consumption to meet customer
requirements at a profit.
Greater emphasis has been placed on logistics recently
because:
Firms can gain a competitive advantage when logistics
result in better service or lower prices.
Improved logistics can lower costs.
Increased product variety has created a need for
improved logistics management.
Improvements in information technology have created
Marketing Logistics and SCM
Involves the entire supply chain
Outbound distribution
Inbound distribution
Reverse distribution

Inbound Outbound
Logistics Logistics
Customer
Suppliers Company Resellers
s

Reverse
Logistics
Major Logistics Functions
Warehousing
How many, what types, and where?
Types
Storage warehouses
Distribution centers
Automated warehouses
Inventory management
Must balance between too much and too little inventory
Just-in-time logistics systems
RFID or smart tag technology
Transportation
Alternatives: Trucks, Railroads, Water carriers, Pipelines,
Air, Internet
Intermodal transportation: Piggyback, Fishyback, Trainship
Logistics information management
Integrated logistics management
The logistics concept that emphasizes teamwork,
both inside the company and among all the
marketing channel organizations, to maximize
the performance of the entire distribution
system.
Requires:
Cross-functional teamwork inside the company
Building logistics partnerships
Third-party logistics
Retailing and Wholesaling
Retailing
Retailing: Includes all the activities involved in selling goods
or services directly to final consumers for their personal,
non-business use.
Most retailing is done by retailers, but nonstore retailing has
recently grown by leaps and bounds.
Retailer Marketing Decisions
Retailer Strategy
Segmentation and targeting
Store differentiation and positioning
Retailers cannot make meaningful decisions related to the
retail marketing mix until they first define and profile their
target market.
Retailer marketing mix
Product and service assortment
Retail prices
Promotion
Distribution (location)
The retail strategy and retail marketing mix must combine to
create value for targeted retail customers.
Retailer Marketing Mix
Product and Service Assortment
Product assortment should differentiate the retailer while matching
target shoppers expectations.
Services mix can help differentiate one retailer from another (e.g.,
Home Depots how-to classes for do-it-yourselfers).
Store atmosphere is important as:
The physical layout can help or hinder shopping
Experiential retailing helps sell goods
Unusual, exciting shopping environments are becoming more
common
The price policy must fit with the target market and positioning, the
product and service assortment, and the competition.
Retailers can use any or all of the promotion toolsadvertising, personal
selling, sales promotion, public relations, and direct marketingto reach
consumers.
Distribution decisions
Location is the key to success
Retailers can locate in: Central business districts, Various types of
shopping centers, Strip malls, Power centers, or Lifestyle centers
Category Management
Since retailers handle thousands of SKUs, an SKU is a stock
keeping unit and refers to a distinct merchandise item in the
retailer's merchandise assortment, they have found category
management very effective as a marketing tool.
Category management is a process of managing and planning all
SKUs within a product category as a distinct business.
The major goal the category manager has is to achieve a certain
level of profit per square foot of space (allocated to the product
category) and profit per unit of inventory investment (in the product
category). These two measures of financial performance will guide
all marketing decisions.
A key advantage of category management is that it allows the
retailer to concentrate its purchases with a more limited number of
suppliers as well as the ability to fully embraced information
technology to help them better manage their category.
The Future of Retailing
New retail forms, shortening retail life cycles, and
retail convergence
Rise of megaretailers
Growth of direct and online retailing
Growing importance of retail technology
Green retailing
Global expansion of major retailers
Fuel for Thought
Many retail stores are becoming communities or
hangouts either in the brick-and-mortar or virtual
worlds
What can retailers do to make their brick-and-mortar
stores community friendly?
Are there circumstances in which it would be
undesirable to encourage patrons to hang-out?
Explain.
The Wheel of Retailing Hypothesis
- Moderate to high prices
- Elaborate facilities
- Increase in skills

Trading-Up
Phase

Vulnerability
Phase
Entry
- Low prices Phase - High prices
- Limited facilities - Excellent facilities
- Limited service - Excellent service
- Declining ROI
An Example of the Wheel of Retailing
Supermarket Supermarket
+ Bakery + Bakery
+ Delicatessen + Delicatessen
+ Florist

Supermarket
+ Bakery
New Entrant

Supermarket
The Retail Life Cycle
Implications of the Retail Life Cycle
Three primary implications can be derived from the discussion of the retail
life cycle:
Retailers should remain flexible so that they are able to adapt their
strategies to various stages in the life cycle.
Since profits vary by stage in the retail life cycle, retailers need to
carefully analyze the risks and profits of entering the various life cycle
stages or expanding their outlets at various stages in life cycle.
Retailers need to extend the maturity stage. Since they will have
substantial investments in a particular form of retailing by the time
maturity stage arrives, they will have a strong interest in trying to work
that investment as long as possible.
The importance of these three points are reinforced by the fact that the
retail life cycle is accelerating today. New concepts now move quickly from
introduction to maturity as the leading operators will have aggressive
growth goals and their investors demand a quick return on investment.
Types of Retailers
The different types of retailers can be classified based on:
The amount of service they offer.
Self-service retailers serve customers who are willing to perform their own locate-compare-select process to save
money.
Limited-service retailers provide more sales assistance because they carry more shopping goods about which customers
need information.
Full-service retailers usually carry more specialty goods for which customers need or want assistance or advice.
The breadth and depth of product lines.
Specialty stores
Department stores
Supermarkets:
Category killers
Convenience stores
Discount stores
Off-price retailers
Superstores
Service retailers
The relative prices charged.
Discount stores
Off-price retailers:
Independent off-price retailers
Factory outlets:
Factory outlet malls

Value-retail centers

Warehouse clubs
How they are organized.
Corporate chain stores
Voluntary chain
Retailer cooperative
Franchise
Merchandising conglomerates
Major Types of Retail Formats
Store-based Retailers operate from a fixed location that requires consumers to
travel to the store to view and select merchandise and/or services.
Department stores
Specialty stores
Supermarkets
Supercenters
Category killers
Convenience stores
Nonstore-based Retailers attempt to reach the consumer at home, work, or any
place other than a store where they might be susceptible to purchasing. Industry
analysts contend that changes here will lead to the next revolution in retailing. The
mechanics for such a revolution are already in place as a variety of established
selling techniques permit consumers to purchase goods and services without
having to leave home. With accelerated communications technology and changing
consumer life-styles, the growth potential for non-store retailing is explosive. In
addition, some innovative store based retailers are using dual retail formats, both
store based and non-store based with multiple techniques within each format, to
reach their target markets.
Street peddlers
Direct selling
Mail-order
Automatic merchandising machine operators
Electronic Shopping is that electronic, interactive, at-home shopping commonly
referred to as Internet Shopping.
Store-Based, Non-Food Retailers

Department stores
Department stores offer many customer services, such as knowledgeable and helpful sales
clerks, delivery and wrapping services, liberal return policies, and store credit cards.
Discount department stores are an outgrowth of this format. These stores feature a variety
of product lines and use departmental merchandising techniques. However, they do so at
lower prices than conventional department stores. Their lower prices are the result of
offering fewer customer services, having less up-scale facilities, and using self-service to
reduce operating expenses.
Specialty stores
Relatively small-scale stores offering a great deal of depth in a narrow range of product lines.
These stores are common in womens wear, mens wear, jewelry, footwear, electronics,
furniture, sporting goods, painting supplies, flowers, liquor, pets, bridal wear, and fabrics.
Such stores pursue a strong store positioning strategy, in which all elements of the store's
marketing mix are aimed at a well-defined target market, which is segmented from the total
market based on some specific demographic or life-style variable.
Category killers
Got their name from their marketing strategy: carry such a large amount of merchandise in a
single category at such good prices that it makes it impossible for the customer to walk-out
without purchasing what they needed; thus "killing" the competition.
Many category killers are also diverting business away from traditional wholesale supply houses.
Store-Based Food Retailers
Supermarkets
The supermarket concept of retailing, which was first developed in the 1930s, involves
selling groceries and some general merchandise products through large-scale physical
facilities with self-service and self-selection displays in order to shift the performance of
some distribution functions to consumer.
Most grocery retailing is still done through supermarkets.
Recently, the supermarket retailing concept has been used in developing two new types of
non-food retailing: the supercenter and the category killer.
Scrambled merchandising, the handling of merchandise lines based solely on the
profitability criterion and without regard to the consistency of a particular product line with
other products in the retailer's product mix, is another out-growth.
Supercenters
Are cavernous, one-stop combination supermarkets and discount department stores, which
range in size from 120,000 to 160,000 square feet, carrying between 80,000 to 100,000
products ranging from televisions to peanut butter to fax machines.
However, there is a question if older consumers can get around in these stores, if the
younger ones will take the time to shop these mammoth stores, or if folks will buy tires,
apparel, and tomatoes on the same shopping trip.
Convenience stores
Stocks frequently purchased products such as gasoline, bread, tobacco, and milk that tend
to be consumed within 30 minutes of purchase
Offering services such as ATMs and car washes.
The Supermarket Concept
Self-service and self-selection displays
Centralization of customer services at the checkout
counter/desk
Large-scale, low-cost physical facilities
A strong price emphasis
A broad assortment of merchandise to facilitate multiple-item
purchases
Scrambled Merchandising: unrelated lines of merchandise
being carried by a single retailer
Nonstore-Based Retailers
Street peddlers sell their merchandise from a push-cart or temporary stall set up on a street.
Direct sellers are primarily engaged in the retail sale of merchandise on a personal basis, through
party plans or one-on-one contact in the home or workplace, away from a fixed place of business.
Now, they Move to cold-calling instead of canvassing.
Mail-order houses, which send out nearly 14 billion catalogs a year, are primarily engaged in the retail
sale of products by catalog and mail order.
Automatic merchandising machine operators are primarily engaged in the retail sale of products by
means of automatic merchandising units, or vending machines. This industry does not include coin-
operated service machines, such as amusement and game machines.
Electronic Shopping is that electronic, interactive, at-home shopping commonly referred to as Internet
Shopping.
Many e-tailers fail to keep one of the simple rules of any business: Cash in must exceed cash out.
According to webmergers.com, a total of 895 Internet companies have shut down or declared
bankruptcy between January, 2000 and September 30, 2002. Also, the study tracked more than
3,700 healthy or distressed Internet companies that have been acquired by or merged with other.
Home-based Internet shopping hurdles include: cost of being on-line; payment fraud; too many
men, too few women; loss of cultural tradition; inadequate delivery services; slow transmission
rates; and possible channel conflict.
As the Internet grows, real-time, three-dimensional video that is fully immersable should improve
shopping experiences.
However, before conceding e-tailing will replace traditional stores, several key factors should be
considered:
The Internet will not increase overall consumer demand.
Click-and-brick strategies that integrate a single message are more powerful.
E-tailers must pay better attention to service.
Internet shoppers would likely buy more online if it were easier to return merchandise.
Wholesaling
Wholesaling: Includes all activities involved in selling goods
and services to those buying for resale or business use.
Wholesalers add value for producers by performing one or
more channel functions.
Functions performed by wholesalers
Selling and promoting
Buying and assortment building
Bulk-breaking
Warehousing
Transportation
Financing
Risk bearing
Market information
Management services and advice
Wholesaler Marketing Decisions
Wholesaler Strategy
Segmentation and targeting
Store differentiation and positioning
Wholesaler marketing mix
Product assortment and services
Price
Promotion
Distribution (location)
Types of Wholesalers
Merchant Wholesalers
Largest group of wholesalers
Account for 50% of wholesaling
Two broad categories:
Full-service wholesalers
Wholesale merchants

Industrial distributors

Limited-service wholesalers
Cash-and-carry wholesalers

Truck wholesalers

Drop shippers

Producers cooperatives

Mail-order wholesalers

Brokers and agents

Do not take title to goods.
Perform only a few functions.
Specialize by product line or customer type.
Brokers bring buyers and sellers together.
Agents represent buyers on a more permanent basis.
Manufacturers agents
Selling agents
Purchasing agents
Commission merchants
Manufacturers agents are the most common type of agent wholesaler.
Manufacturers sales branches and offices
Involves wholesaling by sellers or buyers themselves rather than through independent wholesalers.
Sales branches and offices
Purchasing officers
Trends in Wholesaling
Need for ever greater efficiency
Demands for lower prices
Winnowing out of suppliers who are not adding value
based on cost and quality
Blurring distinction between large retailers and
wholesalers
The tight economy and the demand for increased
services have put the squeeze on wholesaler profits
Wholesalers have to find efficient ways to deliver
value to customers to stay in the race
Increased use of computerized, automated, and
Internet-based systems will help wholesalers contain
their costs
Selecting and Working with Wholesalers
A major decision in designing any channel is selecting the right
wholesaler for the tasks to be performed.
To select the best wholesalers, manufacturers need a screening
device to help analyze potential wholesalers on at least five broad
dimensions
Management skills
Financial characteristics
Physical facilities
Objectives and policies
Marketing skills/strengths
If manufacturers want cooperation and commitment of wholesalers,
they must offer them
Financial aid
Promotional aid
Training aid
General management aid