Chapter 6 : Marketing

Channels,
Intermediaries and
Physical Distribution
By
Muhammad Danial Bin Zainuddin
IOC000234
6.1 What is marketing
channel?

Marketing channels are sets of interdependent

organisations involved in the process of making a
product or service available for use or
consumption.
Merchants
Agents

Classifications of
Marketing Channel

Facilitators
 MERCHANT

Merchants refer to retailers and wholesalers

The merchant marketing channel purchases

products from firms, takes title of the goods and
resells the merchandise

Merchants make profit from buying and selling.

 AGENT

Agents are manufacturer representatives or

brokers who search for customers and may
negotiate on the producers behalf .

Do not take the title of the goods

Agents obtain revenues in the form of commission

from the manufacturer.
 FACILITATOR

Facilitators are those involved in the firms

merchandise distribution process.

Neither take the title of the goods nor negotiate

purchases or sales.

Provide support services to the firm to ensure the

merchandise distribution process to the
consumers or customers is successfu
6.1.2 Marketing Channel
Functions

Gather and disseminate marketing information

about potential and current customers,
competitors as well as other actors and forces in
the marketing environment
Develop and disseminate persuasive
communication regarding the offer designed to
attract the consumer
To reach agreements on prices and other terms so
that transfer of ownership or possession will not
be affected
To reach agreements on prices and other terms so
that transfer of ownership or possession will not
 Marketing Channel
Functions

Provide the storage and movement of physical

products

Provide for the buyers payment of their bills through

banks and other financial institutions

To oversee actual transfer of ownership from one

organisation or person to another

To assume risks of carrying out responsibilities as

distributors
 6.1.3 Marketing Channel
Levels

Zero-level One-level
channel channel

Two-level Three-level
channel channel
a) Zero Level Channel

A zero-level channel, also called a direct

marketing channel, consists of a manufacturer
selling directly to the final consumers.
b) One Level Channel

A one-level channel consists of one selling

intermediary, such as a retailer.

Sell their merchandise directly to large retailers

c) Two Level Channel

Contains two intermediaries which typically

include a wholesaler and retailer.

This marketing channel normally takes place in

consumer markets like small distributors for
foodstuff and house appliances.
d) Three Level Channel

A three-level channel contains three

intermediaries which typically include a
wholesaler, jobber and retailer.

This marketing channel is normally used in

industrial markets like the meat packaging
industry
6.2 CHANNEL DESIGN
DECISIONS
CHANNEL DESIGN DECISIONS

In designing a marketing channel, the producer

has to consider what is ideal and practical.

The problem of designing marketing channels lies

in identifying a good way to convince the best
intermediary to carry products to consumer
6.2.1 Channel Design System

Establishing
Analysing Channel
Customer Objectives
Needs and
Constraints

Identifying Evaluating
Major Major
Channel Channel
Alternatives Alternatives
 1) Analysing Customer Needs

Normally, consumer needs analysis involves the

following items:
i) Lot size
) Lot size refers to the number of units the channel
permits a
typical customer to purchase on one occasion.

ii) Waiting Time

Waiting time refers to the average time customers of
that
channel wait for receipt of that goods.
 1) Analysing Customer
Needs
iii) Spatial Convenience
Spatial convenience refers to the degree to which the
marketing channel makes it easy for customers to purchase
the product.

iv) Product Variety

) Product variety refers to the assortment and breadth
provided by the marketing channel

v) Service Backup
) Service backup refers to add-on services like installation,
repairs,
credit and delivery.
2) Establishing Channel Objectives and
Constraints
Channel objectives differ based on the characteristics
of the products.

Channel institutions should arrange their functional

tasks to minimise total channel costs with respect to
desired levels of service outputs.

Channel design must take into account the strengths

and weaknesses of different types of intermediaries

Legal regulations and restrictions have to be seriously

considered when deciding channel objectives.
3) Identifying Major Channel
Alternatives
identify major channel alternatives like:

i) Type of intermediaries
A firm needs to identify the types of intermediaries
that are suitable to be appointed to carry on its
channel work.

ii) Number of Intermediaries

Companies have to decide on the number of
intermediaries to be used at each channel level.
 i) Type of intermediaries
Company Sales Force
The company sales force is the company direct selling representatives
who have been appointed to contact all prospects in an area.

Company Agent
The firm appoints or hires manufacturer agents in different regions or
end-user industries to sell its products.

Industrial Distributors
The firm finds distributors in different regions or end user industries
who will buy and carry products to end users. The firm has to offer a
few benefits for the purpose of motivating its distributors.
ii) Number of Intermediaries
Selective Distribution
Exclusive distribution means limiting the number of intermediaries
significantly.
It is used when the seller wants to maintain control of the service level
and products offered.

Intensive Distribution
Intensive distribution involves the manufacturer placing the goods or
services in as many outlets as possible
Responsibilities and rules for channel members refer to the pricing policy,
sales rules, territory rights and certain services that have to be carried
out by elected channel members.

Selective Distribution
Selective distribution involves the use of more than a few but less than
all of the intermediaries willing to carry a particular product.
4) Evaluating Major Channel
Alternatives
Each channel alternative needs to be evaluated against:
(i) Economy
The manufacturing firm has to take into account the sales
level that can be achieved by the channel members and the
different cost of sales estimation for every channel member.
(ii) Control
This refers to a form of control that has to be implemented by
the firm on its elected intermediaries. Control is important if
the intermediary is an independent unit, like an agent.
(iii) Adaptive Criteria
Channel members must have some degree of commitment to
each other for a specified period. The producer needs
channel structures and policies that provide high adaptability.
6.3 CHANNEL MANAGEMENT
DECISIONS
Selecting Evaluating Training
Channel Channel Channel
Members Members Members

CHANNEL
MANAGEMEN
T DECISIONS

Modifying
Motivating
Channel
Channel
Arrangeme
Members
nt
 A) Selecting Channel
Members
The selection of channel members must be done
based on qualifications.

The ability to attract qualified channel members

differs for every producer.

Determine which characteristics distinguish the

better intermediaries from others.
B) Evaluating Channel
Members
Producers must periodically evaluate
intermediaries performance against such
standards as sales quota attainment, average
inventory levels, customer delivery time,
treatment of damaged and lost goods and co-
operation in promotional and training
programmes.

The recruitment process demands that producers

identify the best characteristics of their channel
members.
C) Training Channel Members

Companies need to plan and implement careful

training programmes for their appointed
intermediaries to increase their understanding of
the firm policies, rules and restrictions
D) Motivating Channel
Members
The company should provide training programmes, market
research programmes and other capability building
programmes to improve the intermediaries performance
Producer has to use the power of cooperation to increase its
channel members motivation. They can draw on the following
types of power to elicit cooperation:

(i) Coercive Power

A manufacturer threatens to withdraw a resource or terminate a
relationship if intermediaries fail to cooperate.

(ii) Reward Power

The manufacturer offers intermediaries extra benefits for
performing specific actions or functions.
D) Motivating Channel
Members

(iii) Legitimate Power

The manufacturer requests a behaviour that is warranted under the

contract.

(iv) Expert Power

The manufacturer has special knowledge that the intermediaries value,

It refers to the technology which is owned by the manufacturer.

The manufacturer permits agents use the technology only if the

agents cannot increase their performance level and will be left behind
without it.
D) Motivating Channel
Members

(v) Referent Power

The manufacturer is so highly respected that

intermediaries are proud to be associated with him
(e) Modifying Channel
Arrangements
Modifications become necessary when:
The distribution channel is not working as planned
(ii) There are changes in consumer buying patterns
(iii) The market expands
(iv) New competition arises
(v) Innovative distribution channels emerge
(vi) The product moves into other stages in the
product life cycle.
 6.4 CHANNEL
DYNAMICS
Introduction to Chanel
Dynamic

Channel dynamics refer to marketing channels

that are categorised according to continuous or
dramatic changes.

There are three major developments:

Growth of vertical marketing systems
Growth of horizontal marketing systems
Growth of multi-channel marketing system.
6.4.1 Vertical Marketing
Systems
A vertical marketing system, by contrast
comprises producers, wholesalers, and retailers
acting as a unified system

This system is capable of eliminating conflict and

eliciting complete control over every channel.

There are 3 types of Vertical Marketing system :

a) Corporate Vertical Management System
b) Contractual Vertical Management System
c) Administered Vertical Management System
(a) Corporate Vertical
Management System

Combines successive stages of production and

distribution under a single ownership

Vertical integration is utilised by a company that

requires a high level of control for each channel
that exists.
(b) Contractual Vertical
Management System
Consists of independent firms at different levels of
production and distribution
Able to integrate their programmes on a
contractual basis to obtain more economic or
sales impact
The contractual vertical management system is
divided into three categories:
(i) Wholesaler-sponsored voluntary chain
(ii) Retailer co-operatives
(iii) Franchise organisations.
(c) Administered Vertical
Management System

Coordinates successive stages of production and

distribution through the size and power of one of
its members, and not through normal ownership
or contractual ties.

Able to generate high levels of cooperation from

their resellers in connection with displays, shelf
space, promotions and pricing policies.
Overall of Vertical Marketing
System
6.4.2 Horizontal Marketing
System

Two or more unrelated companies put together

resources or programmes to exploit an emerging
marketing opportunity.

For example, Proton cooperates with a few local

banks to channel multiple loan facilities and
automobile insurance to the consumers.
6.4.3 Multi-channel Marketing
System
Multi-channel marketing occurs when a single firm
uses two or more marketing channels to reach
one or more customer segments.

The benefits of using multichannel marketing are:

(a) Increased market coverage.
(b) Lower channel cost.
(c) Better understanding and priority is given to
consumers in the selling process.
 Through multi-channel marketing, the firm sells to consumer
segment 1 direct through catalogues, telephone and other forms
of t telemarketing.
Then, the firm sells its output to consumer segment 2 through
retailers.
For industrial consumers, the firm sells indirectly to industrial
segment 1 using distributors and agents.
For industrial segment 2, firms use their own sales force.
6.5 CONFLICT, COOPERATION AND
COMPETITION
 Horizontal Channel
Vertical Channel Conflict
Conflict

Vertical channel Horizontal channel

conflict involves conflict involves
conflict between conflict between
different levels members at the
within the same same level within
channel the channel.

Type of
conflict

Multi-channel
conflict exists when
the manufacturer
Multi-channel Conflict has established two
or more channels
that sell to the
same market
MANAGING CONFLICT
The manufacturing firm normally manages all these conflicts
through:

(a) Adoption of superordinate goals. This strategy resolves conflict

by encouraging channel members to come to an agreement
based on the fundamental goals that were outlined when the
agreement was first made.

(b) Exchange of persons between channels.

(c) Co-optation
MANAGING CONFLICT

d) Joint membership in and between trade

associations.

e) Mediator

f) Arbitrator
6.6 LEGAL AND ETHICAL ISSUES IN
CHANNEL RELATIONS
LEGAL AND ETHICAL ISSUES IN
CHANNEL RELATIONS
There are a few legal and ethical issues that have
to be considered in the marketing channel
arrangements. These issues are:

i) Exclusive Dealing
ii) Exclusive Territories
iii) Tying Agreement
iv) Dealers Right
 Exclusive Dealing

Exclusive dealings refer to the arrangements done

between the firm and the intermediary.

For example, the dealers cannot handle

competitors products, dealers can only handle the
firms products.

Exclusive arrangements are legal as long as they

do not substantially lessen competition or create a
monopoly, and as long as both parties enter into
the agreement voluntarily
 Exclusive Territories

Exclusive territories refer to certain areas of

intermediaries.

It is legal as long as the intermediary does not

sell the products outside the predetermined
territory.
 Tying Agreement

Producers of a strong brand name sometimes sell

it to dealers only if they will take some or all of
the rest of their product lines.

This practice is called full-line forcing. Such tying

agreements are not necessarily illegal but it will
become a violation if the elements of market
monopoly exist.
 Dealers Right

Producers are free to select their dealers but their

right to terminate dealers is somewhat restricted

In general, sellers can drop dealers for cause or

for reasons stated in the agreement.
6.7 MANAGING INTERMEDIARIES OF
DISRIBUTION CHANNELS
MANAGING INTERMEDIARIES OF
DISRIBUTION CHANNELS
Distribution channel intermediaries refer to members or a
number of members in the distribution channel.

There are two main forms of distribution channels:

1) The direct distribution channel
Direct distribution refers to the direct distribution channel
which is created by the marketer to channel products to the
consumers

2) The indirect distribution channel.

Indirect distribution refers to forms of distribution channels
which require the presence of a third party or middleman to
channel the products to the consumers.
MANAGING INTERMEDIARIES OF
DISRIBUTION CHANNELS

Marketing intermediaries can be classified into

three categories;

Agents or brokers,
wholesalers
retailers
AGENTS OR BROKERS
Do not take on the risk of business dealings as compared to
wholesalers and retailers

The agent or the broker functions only as a third party who

arranges meetings between the marketer and buyer to
discuss business dealings.

A big portion of the agents or brokers revenue is generated

through commission and price negotiation techniques.

Price negotiation techniques refer to the agents or brokers

skill in keeping the actual offer price a secret from the
consumer and the seller.
Wholesaler and Retailer
Wholesalers and retailers can be differentiated
based on the wholesalers or retailers involvement
with the individual consumer

The wholesaler buys in bulk while the retailer

buys in smaller order sizes.

There are experts who see the difference between

wholesalers and retailers from the aspect of sales
volume
6.7.1 Importance of
Intermediaries
a) Bulk Breaking

The manufacturer faces problems in marketing its

products to end-users (individuals or organisations)
because of the problem in the quantity offered.

b) Product Promotion

intermediaries play an important role in the

promotion of the product to the consumers either
individually or with the manufacturer

c) Transportation

Intermediaries, especially wholesalers, provide

efficient transportation services in the physical
distribution of products for the manufacturers.
Importance of Intermediaries

d) Risk Bearing
Risk Bearing The wholesaler or retailer
purchases the product from the
manufacturer. This means that the
intermediary transfers the financial risk
e)from the manufacturer
Market Information onto itself

Intermediaries, especially retailers, are

known to understand the needs and
wants of consumers better as
compared to manufacturers
Importance of Intermediaries

f) Warehousing Services
there are a few intermediaries
especially wholesalers who provide
warehousing services for the
manufacturers in the physical
g)distribution
Consultation
market
of theirServices
products to the

Some intermediaries provide business

consultation services to the
organisational users from the aspects
of material and financial management
6.8 WHOLESALING
6.8.1 Importance of
Wholesaling

Helping the manufacturer produce a product

distribution process that is far more efficient and
effective.

The facilities provided by the wholesalers enable

the product distribution process in the market to
be carried out more efficiently and effectively.
6.8.2 Type of Wholesalers

Limited-
Merchant Full-Service
Service
Wholesalers Wholesalers
Wholesalers

Manufacturer
s and
Miscellaneous
Retailers
Wholesalers
Branches and
Offices
 These are independently
owned businesses that
Merchant take title to the
Wholesalers merchandise they handle
 This type of wholesaling
provides all the functions
of intermediaries such as
transportation, sales force
supports, credit facilities,
management support
assistance, promotion and
others.

Full-Service
Wholesalers

Full-service wholesalers
are known as wholesale
merchants and industrial
distributors
 This type of wholesaling
provides some
intermediary functions
such as transportation,
sales force support and
credit facilities or a
combination of other
intermediary functions.
Limited-
Service
Wholesalers
The wholesalers from this
category are known as
cash-and-carry
wholesalers, truck
wholesalers, rack jobbers
and producers
cooperatives.
 Are organisation units
that are established by
the manufacturer to
market goods straight to
the consumers
Manufacturer
s and
Retailers
Branches and
Offices Normally, the branch or
sales office is managed by
the companys sales
personnel or the
appointed sales personnel
 A miscellaneous
wholesaler refers to
wholesalers who
specialises in one type of
Miscellaneous business only like
Wholesalers agricultural wholesalers,
rice wholesalers, auction
wholesalers and others
6.8.3 Trend in Wholesaling
Although the number of wholesalers is decreasing due to
changes in consumers taste and preference as well as the
influence of technology, the volume of business through
wholesaling is increasing steadily.

Wholesalers are more aggressive in carrying out

marketing activities which are noticed in the product
distribution system especially from the aspect of sales,
transportation and product promotion

It is not surprising that there are certain brands owned by

wholesalers through the private brand strategy
6.9 RETAILING
6.9.1 Importance of Retailing

Retailing plays an important role in the creation

of an efficient and effective distribution system

Retailing also plays an important role from the

aspects of bulk breaking for the individual
consumers, conducting promotional activities like
internal advertising and sales promotions,
providing transportation services, warehousing,
consumer consultations and others
6.9.2 Forms and Types of
Retailers
The retailing process can be classified into two
main categories which are store retailing and
non-store retailing.

Both forms of retailing differ physically and have

obviously different tangible roles.

Although both have obvious tangible differences,

both still have the same roles in creating an
efficient and effective distribution channel.
 Store Retailing
The classification of store retailing is based on a
few factors like physical form (especially size),
product lines marketed and services preparation
for the customer.
Store retailers can be classified according to the
services that are provided to consumers. Store
retailers can be categorised into three services:
1) full service
2) limited service
3) self-service retailing
 Non-store Retailing

Direct marketing and online marketing are forms

of non-store retailing.

Types of direct marketing are direct selling

6.9.3 Retailing Wheel
The wheel of retailing refers to the life cycle that
is often experienced by most retailers

Most larger retailers started their business as a

small retail outlet first and then later expanded
into a large retail outlet.

There are large retailers that had to close down or

were taken over by other retailers because they
reached the decline stage in the retailing wheel.
6.9.4 Trends in Retailing

Retailing in Malaysia and around the world has

grown significantly.

Other than experiencing a growth rate in

business, the existence of more hypermarkets and
specialty stores as well as the vast development
in electronic transactions through electronic
retailing is an important trend faced by retailers in
Malaysia and around the world.
6.10 AGENTS AND BROKERS
Agents and brokers are traders involved in the
agency business, where the business does not
take the title of goods

Do not bear any risk in the business transaction.

Agents and brokers obtain revenues through

commissions and negotiation price mark-ups.
6.11 MANAGING PHYSICAL
DISTRIBUTION
6.11 MANAGING PHYSICAL
DISTRIBUTION
Physical distribution management is also known
as marketing logistics management and is an
important decision in the distribution channel
management
Physical distribution is important especially in
ensuring that the product reaches the consumer
without any problems
Every marketer has the same objective towards
marketing logistics management, which is to
obtain raw materials and market the products to
the consumers at the bare minimum cost.
6.11.1 Components of Physical Distribution
Management

Warehousin Order
g Processing

Component
Physical
Distribution
System

Inventory
Managemen Transportati
t on