Retail Management

Session: 1

Designing and Managing the

Marketing Channels
 2-2

Marketing Strategy Planning Process

 Distribution Channel System:
Conceptual Framework
• Functions of Distribution System
– Marketing Exchange process
Prospecting Promotion Physical Financing Market
Distribution & Collection Feedback

Transfer of Promotion Physical Money & Risk Feedback

Ownership Flow Flow Flow Flow
Flow
Types of Flows
 2-4
Marketing Strategy Planning Process

1. Place Staples
Objectives Convenience Products Impulse
Place & Development of Product
Channel Systems Class Emergency
Distribution of Customer PLC
Service & Logistics Shopping Products Homogeneous
2. Direct v/s Heterogeneous
Retailers, Wholesalers & Indirect
their strategic planning 3. Channel Specialty Products
Specialists
4. Channel Unsought Products
relationships
5. Market
Exposure
 Distribution Channel System:
Conceptual Framework cont…
• Functionaries in the Distribution System
1. Intermediaries who take physical possession and
transfer to others within an industry – Merchants
(Wholesalers, and Retailers)
2. Intermediaries who facilitate the tasks of Merchants –
Agents, Middlemen
(Selling Agents, Purchasing Agents, Commission Agents etc)
3. Intermediaries who serve different industries –
Supplemental Agents
(Transporters, Insurance Companies & Agents etc)
 Value-Added Chain of
Distribution Channels

Basic activities in channel management:

• Push activities: getting channel members to carry and sell
the product.

• Pull activities: motivating customers to ask for your brand

by name.
Alternative Channel Systems for
Consumer Products
Alternative Channel Systems for
Industrial Products
 Channel Dynamics
• Channel structures must adapt to changes in
the environment.
• Innovation in distribution can create new
marketing opportunities. (discussed later)
• The Internet has evolved into a standard
channel option.
• Differential advantage can be obtained by
means of unique channel structure decisions.
 Innovation in Distribution
• Mumbai’s Apna Bazar Co-operative stores chain recently tied up with MetLife
India for the customer base of over 1.5 million in the metropolis and beyond.
• Earlier, the Department of Post tied up with the Oriental Insurance Company for
the same end.
• Till the opening up of the sector, Indian insurers sold risk products using the agents
majorly. The reliance on a single channel limited reach and penetration.
Future Scenario:
• The postman will not only deliver the mail from now on, he will also sell insurance
products.
• You can buy a toothpaste and win a dental insurance or by a home loan product and
get life insurance cover free.
• Banks have themselves gained from such linkages. In the first quarter of fiscal year
2004-05, SBI Life Insurance’s total premium collection was Rs 51 crore.
• Corporate agents — such as the SBI-GE credit cards venture — contributed Rs 11
crore.
• For banks, it’s a win-win deal — it boosts their income, and helps them gain
some free publicity and advertising space.
 Channel Selection
• The selection of distribution channels is one of the
most critical strategic marketing decisions due to
two reasons:
1. It affects all other marketing mix elements:
– Pricing strategy depends on whether distribution is through high-
mark up dealers or mass distribution.
– Promotional strategy depends on whether selling directly / or
through sales persons/ or retailers.
– Product and packaging strategy depends on whether selling
through department stores or discount stores.
2. Channel choice commits the Company to long term
and complex relationships with intermediaries.
 Channel Selection Process
Three major decisions:
• Length of distribution channel: number channel
intermediaries participate in moving the product.
• Breadth of distribution channel: relative intensity of
distribution coverage i.e. number of retail outlets
and number of wholesalers which will distribute to
these outlets. Retail penetration – intensive,
selective and/or exclusive.
• Whether and how to ‘modify’ the current
distribution channel structure to meet new market
opportunities.
 1. Determining Vertical Length of Channel System
Whether to sell directly or through intermediaries.

Selling Directly (Advantages):

• More cost effective in case of high volume business with an account.
• Can exert more control over distribution functions.
• Better satisfy the customer needs like technical services.
• Direct relationship can provide prompt market information.
Through intermediaries (3 options)
• Corporate system: manufacturer owns and operates vertical integrated
system. E.g. ITC buy wheat from farmers to produce Aashirwad atta and Sunfeast biscuits .
• Contractual system: sign contract b/w Co. and intermediaries.
• Conventional system: utilizes the resources of intermediaries to move its
products.
 Vertical Length of Channels: Corporate Systems
Advantages:
• Company can exercise control over its marketing activities e.g. set and
maintain consistent list price.
• Control quality standards.
• Better coordination in executing its promotional campaigns.
• Achieving operating economies by standardization, automation and better
channel operations like inventory and stock management.
• Better in-store services e.g. brand store can do alterations of suits within the
store; Singer provide in-store demonstrations and sewing lessons.
Disadvantages:
• Large investments in financial and human resources, otherwise performed
by independent intermediaries.
• Difficult to adapt to new market opportunities.
• Legal risks due to vertical mergers or acquisitions e.g. competitive issues.
 Vertical Length of Channels: Contractual Systems
• Contractual systems are a form of Franchising arrangement.
Category:
– Product trade name franchising and
– Business format franchising.
• Product trade name franchising: arrangement where franchisee acquires the
marketing rights within a designated area, using franchisor’s trade name. e.g.
automobile and truck dealers and soft drink bottlers.
• Business format franchising: franchisee acquires rights for –
– Utilizing business know-how (i.e. operating manuals, standards, quality control,
information systems and marketing plans)
– Offering franchisor’s product or services in a designated market area. E.g. fast
food chains, hotel etc.
Disadvantages of Franchising:
• Fly-by-night operators.
• Termination of contract.
• Disagreement over strategic issues.
 Vertical Length of Channels : Conventional System
(to achieve coordination and economies of scale)
• Administered programs – administer inventory plan, advertising
plan, or sales training plan. E.g. GE is using programmed
merchandising plan with its appliance retailers. Through this method
Co. try to satisfy its intermediaries i.e. ‘carrot’ approach / reward.

• Sales agreements – bind the dealers to:

– Meet technical requirements
– To have qualified sales staff
– Allow Co. representatives to inspect the store
– Protect name and reputation of Co.
i.e. ‘stick’ approach/ punishment
 Determining the Breadth of Channel System
• Intensive: when share of distribution translates into share of market.
For commodities with low unit value, consumer prefer conveniently
located outlets. Issue of ‘loss leaders’ in mass merchandisers i.e.
product sold below cost to stimulate store sales like milk, egg, rice etc.
alongwith other purchases of store. A kind of sales promotion using
pricing. E.g. soft drinks, impulse products etc.

• Selective: maintain image, full assortments, consistency in prices at

retail level etc. e.g. apparel companies.

• Exclusive: provide sales assistance, good local reputation and

specialists.
 Choice b/w Intensive or Selective Distribution
• Product characteristics:
– Convenience goods: sold frequently, minimum effort –
intensive
– Shopping/ specialty goods: deep involvement in
purchase, rational/ emotional – selective/ exclusive.
• Buying behaviour:
– Selective distribution when: perceived risk is high,
post-purchase services requirements, frequency of
purchase is low, high brand loyalty, high personal selling
effort required.
– Intensive distribution: ….
 Choice b/w Intensive or Selective Distribution cont…
• Degree of Control:

– Selective distribution is appropriate: (a) to control

retail prices, (b) selling assistance required at point-of-
purchase, (c) display standards, (d) maintaining product
image.

– Intensive distribution is appropriate: (a) penetration,

(b) minimum risk and low exit barrier.

• Competitive strategies: Products frequently move from

Selective to intensive distribution over stages of PLC.
 Modifying the Channel System
A company may develop new channel systems
majorly due to:
• Forced to adopt changes due to competitive
reasons. E.g. competitors are opting for VMS.
• To serve a new customer segment. E.g. automobile
Co. start selling through their own sales force to Car
Rental companies.
• To cover new geographical region. E.g. selling in
host country v/s in foreign markets.
 Channel Conflicts
• Role Conflict: Certain members of the channel deviate
from the agreed/ expected role. Horizontal and Vertical
(Bait and Switch tactics) E.g. A car sales showroom puts a basic
car outside with a very low price-tag. Once the customer is interested,
the sales person trades them up to a more expensive model.
• Goal Conflict: goal(s) of one channel member differs
from the other. E.g. manufacturer want volume growth
whereas small retailers may be satisfied with stability or
higher margins of limited products.
• Lack of Communication: relevant strategic or tactical
information not disseminated in advance. E.g. manufacture
often make changes in product design, prices and promotional
strategies.
 Ways of dealing Channel Conflict
• Motivating Channel Members: financially through better
credit terms, higher gross margins, promotional allowances,
trade discounts etc. Non financially like pep rallies, sales
contests and awards etc.
• Communicating the Channel members: proper flow of
information i.e. changes in product design, prices and
promotional strategies with mutual consent.
• Establishing Controls: Control can be build into the
system after mutual understanding, through measures of
performance standards. Explicit agreements regarding:
territorial coverage, exclusive agreement, participation in
promotional programs and treatment of damaged goods etc.
 Channel-Design Decisions
Push strategy: Manufacturer uses the Sales force and trade
promotion to induce intermediaries to carry, promote and
sell the product to the consumers.
– Appropriate when these is low brand loyalty, and impulse
purchase.
Pull strategy : Manufacturer using advertising and promotion
to induce consumers to ask intermediaries for the product.
– Appropriate when these is high brand loyalty, and high
involvement in the product purchase.
– Designing a channel system involves four steps:
• Analyzing customer needs
• Establishing channel objectives
• Identifying major channel alternatives
• Evaluating major channel alternatives
 Channel-Design Decisions
• Analyze Customers’ Desired Service Output Levels:
Channel provides 5 Service outputs -
– Lot size: No. of units channel permits to a customer to
purchase on one occasion.
– Waiting time: The average waiting time of customers for
receiving the product/service from the channel.
– Spatial convenience: degree of convenience provided by
the channel for the customers to shop.
– Product variety: Depth in the choices of a product
category.
– Service backup: Add-on services (credit, home-delivery,
installation, repairs etc).
The Value-Adds versus Costs of Different Channels