Marketing Channels & Logistics Management: Chapter Four- Marketing Channel Management

Chapter Four: Marketing Channel Management

4.1 Marketing Channel Concept
Marketing Channel: A set of interdependent organizations (intermediaries) involved in the
process of making a product or service available for use or consumption by the consumer or
business user.
A marketing channel is consists of individuals and firms involved in the process of making a
product or service available for use or consumption by consumers or industrial users.
Marketing channels can be defined as the set of external organizations that a firm uses to achieve
its distribution objectives. Essentially, a channel is the route, path, or conduit through which
products or things of value flow, as they move from the manufacturer to the ultimate user of the
product. The marketing channel (inter-organizational network of institutions comprised of
agents, wholesalers, and retailers), by performing a variety of distribution tasks, plays a
significant role in the flow of products from producers to consumers and on company
profitability. Thus, manufacturers are increasingly concerned about the level of performance
their channel institutions provide.
A marketing channel is a set of practices or activities necessary to transfer the ownership of
goods, from the point of production to the point of consumption. It is the way products and
services get to the end-user, the consumer; also known as a distribution channel. A marketing
channel is a useful tool for management, and is crucial to creating an effective and well-planned
marketing strategy.
Another less known form of the marketing channel is the Dual Distribution channel. This
channel is a less traditional form that allows the manufacturer or wholesaler to reach the end-user
by using more than one distribution channel. The producer can simultaneously reach the
consumer through a direct market, such as a website, or sell to another company or retailer that
will reach the consumer through another channel, i.e., a store. An example of this type of channel
would be franchising.
The Role of Marketing Channels in Marketing Strategy

 Links producers to buyers.

 Influences the firm's pricing strategy.
 Affecting product strategy through branding, policies, willingness to stock.
 Customizes profits, install, maintain, offer credit, etc.
 Facilitating the exchange process by reducing the number of marketplace contacts necessary
to make a sale

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 Adjusting for discrepancies in the market’s assortment of goods and services via sorting
 Standardizing exchange transactions by setting expectations for products
 Facilitating searches by both buyers and sellers
Types of Marketing Channels
There are four main types of marketing channels:
Producer --> Customer
The producer sells the goods or provides the service directly to the consumer with no
involvement with a middle man such as an intermediary, a wholesaler, a retailer, an agent, or a
reseller. The consumer goes directly to the producer to buy the product without going through
any other channel. This type of marketing is most beneficial to farmers who can set the prices of
their products without having to go through the Canadian Federation of Agriculture.
Producer --> Retailer --> Consumer
Retailers, like Walmart and Target, buy the product from the manufacturer and sell them directly
to the consumer. This channel works best for manufacturers that produce shopping goods like,
clothes, shoes, furniture, tableware, and toys. Since consumers need more time with these items
before they decide to purchase them, it is in the best interest of the manufacturer to sell them to
another user before it gets into the hand of the consumers. It is also a good strategy to use
another dealer to get the product to the end-user if the producer needs to get to the market more
quickly by using an established network that already has brand loyalty.
Producer --> Wholesaler/Distributor --> Customer
Wholesalers, like Costco, buy the products from the manufacturer and sell them to the consumer.
In this channel, consumers can buy products directly from the wholesaler in bulk. By buying the
items in bulk from the wholesaler the prices of the product are reduced. This is because the
wholesaler takes away extra costs, such as service costs or sales force costs, that customers
usually pay when buying from retail; making the price much cheaper for the consumer.
However, the wholesaler does not always sell directly to the consumer. Sometimes the
wholesaler will go through a retailer before the product gets into the hands of the consumer.
Each dealer (the manufacture, the wholesaler, and the retailer) will be looking to make a decent
profit margin from the product. So each time the buyer purchases the merchandise from another
source, the price of the product has to increase, in order to maximize the profit each person will
receive. This raises the price of the product for the end-user.
Producer --> Agent/Broker --> Wholesaler or Retailer --> Customer

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This distribution channel involves more than one intermediary before the product gets into the
hands of the consumer. This middleman, known as the agent, assists with the negotiation
between the manufacturer and the seller. Agents come into play when the producers need to get
their product into the market as quickly as possible. This happens mostly when the item is
perishable and has to get to the market fresh before it starts to rot. At times the agent will directly
go to the retailer with the goods, or take an alternate route through the wholesaler who will go to
a retailer and then finally to the consumer.
Dual Distribution

▮ Movement of products through more than one channel to reach the firm’s target market

▮ Used to maximize the firm’s coverage in the marketplace

▮ To increase the cost-effectiveness of the firm’s marketing effort

Example: Nordstrom sells through stores, catalogs, and the Internet

Reverse Channels

▮ Channels designed to return goods to their producers

▮ Gained increased importance with:

• Rising prices for raw materials

• Increasing availability of recycling facilities

• The passage of additional antipollution conservation laws

▮ Used for recalls and repairs

4.2 Marketing Flows in Marketing Channel

A marketing channel performs the work of moving goods from producers to consumers. It
overcomes the time, place, and possession gaps that separate goods and services from those who
would use them. Members in the marketing channel perform a number of key functions and
participate in the following marketing flows:
- Information: the collection and dissemination of marketing research information about
potential and current customers, competitors, and other actors and forces in the marketing
environment.
- Promotion: the development and dissemination of persuasive communications about the
offer designed to attract customers.

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- Negotiation: the attempt to reach final agreement on price and other terms so that transfer
of ownership or possession can be effected.
- Ordering: the backward communication of intentions to buy by the marketing channel
members to the manufacturer.
- Financing: the acquisition and allocation of funds required to finance inventories at
different levels of the marketing channel.
- Risk taking: the assumption of risks connected with carrying out the channel work.
- Physical possession: the successive storage and movement of physical products from raw
materials to the final goods.
- Payment: buyers paying their bills through banks and other financial institutions to the
sellers.
- Title: the actual transfer of ownership from the organization or person to another.
These functions and flows are listed in the normal order in which they arise between any two
channel members. Some of these flows are forward flows (physical, title, and promotion): others
are backward flows (ordering and payment); and still others move in both directions.
The question is not whether these functions need to be performed – they must be – but rather
who is to perform them. All of the functions have three things in common: they use up scarce
resources; they can often be performed better through specialization; and they are suitable among
channel members. To the extent that the manufacturer performs the functions, the manufacturer's
costs go up, and its prices must be higher. When some functions are shifted to middle men, the
producer's costs and prices are lower, but the middle men must add a charge to cover their work.
If the middle men are more efficient than the manufacturer, the prices faced by consumers should
be lower. Consumers might decide to perform some of the functions themselves, in which case
they should enjoy lower prices. The issue of who should perform various channel tasks is one of
relative efficiency and effectiveness.

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4.3 Analyzing the Marketing Channel Structure

Channel structure refers to the group of channel members to which a set of distribution tasks has
been allocated. In many cases, a particular firm might use a combination of different channel
structures to implement its distribution strategy. This approach is now frequently referred to as a
multi-channel structure, especially when one of the channel structures involves E-commerce via
online sales in addition to conventional channels. Ancillary structure is the group of institutions
and parties that assists channel members in performing distribution tasks. The channel manager
would like to develop optimum channel and ancillary structures based on specialization, division
of labor, and contractual efficiency. The ability to do so is limited, however, because the inter-
organizational setting in which the channel manager must operate reduces the capacity to control
the independent channel members and facilitating agencies.
The concept of channel structure is one that is often not explicitly defined in the marketing
literature. When channel structure is presented, we frequently see diagrams such as that shown in
below Figure. Or sometimes symbolic notations such as the following are used:
M →C (two-level) Where A = Agent
M →R→ C (three-level) M = Manufacturer
M →W →R →C (four-level) C = Consumer

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 Marketing Channels & Logistics Management: Chapter Four- Marketing Channel Management
M →A →W →R →C (five-level) W = Wholesale
R = Retailer

While these approaches do convey a general idea of the kinds of participants in the marketing
channel and the levels at which they appear, they do not explicitly define channel structure.
Moreover, they fail to suggest the relationship between channel structure and channel
management.
The group of channel members to which a set of distribution tasks has been allocated. This
definition suggests that in developing channel structure, the channel manager is faced with an
allocation decision; that is, given a set of distribution tasks that must be performed to accomplish
a firm’s distribution objectives; the manager must decide how to allocate or structure the tasks.
Thus, the structure of the channel will reflect the manner in which he or she has allocated these
tasks among the members of the channel. For example, if after making the allocation decision the
channel structure appears as M →W →R →C, this means that the channel manager has chosen
to allocate the tasks to his or her own firm as well as to wholesalers, retailers, and consumers.
In recent years, the term multi-channel strategy has been heard with increasing frequency. This
simply means that the firm has chosen to reach its customers through more than one channel. A
multi-channel marketing strategy naturally results in a multi-channel structure because
distribution tasks have been allocated among more than one channel structure. With the
emergence of E-commerce and online sales during the last few years of the twentieth century,
many firms developed multi-channel structures that include online channels.
The use of multiple-channel structures to reach customers is not at all unusual in both consumer
and business markets. In fact, firms that sell all of their products strictly through a single-channel
structure are the exception today rather than the rule. Most firms already have or soon will use a
multi-channel strategy, with many taking advantage of E-commerce technology to include online
sales in their multi-channel structures.
Fig: Structure of Marketing Channels

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Marketing channels are how businesses reach customers. There are three types of marketing
channels: communication, distribution and service channels. Communication channels deliver
marketing messages to potential customers. Distribution channels are the delivery method for
products. Service channels aid companies in carrying out business transactions. The term supply
chain is used to describe the long channel stretching from acquiring raw materials to delivering
finished products to customers. The supply chain channel includes elements of other marketing
channels.
Communication
Communication channels present information to pools of potential consumers known as the
product’s target markets. Communication channels may carry a company’s advertisements, other
types of persuasive messages, and business correspondence. Examples of communication
channels include television, radio, magazines, newspapers, billboards, webpages, direct mailers
and email. Marketers structure communication channels around the media choices of the target
market. For example, a marketer attempting to target tech-savvy young adults might run an
Internet advertising campaign. Marketers modify the structure of marketing channels if the
communications aren’t reaching the target market and when attempting to reach new markets.
Distribution
Products reach customers through distribution channels. Distribution channels include product
displays and product delivery methods. Distribution channels also include the customer point of
purchase, such as retail stores, wholesalers and websites with sales capabilities. Similar to

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communication channels, distribution channels are based on the shopping preferences of the
product’s target market. Changes to the distribution channel structure happen because the
product isn’t reaching the target market or because of shifts in available distribution channels,
such as retail store closings.
Service
Transactions are facilitated through service channels. Types of service channels include banks,
warehouses, insurers and transportation companies. Unlike communications and distribution
channels, target market preferences have little bearing on the marketer’s choice of service
channels. This is because most service channel action is invisible to consumers. Marketers may
change service channel structure to improve efficiency or for cost-effectiveness.
Supply Chain
Also known as the value delivery network, the supply chain refers to the process of turning raw
material into products in customers' hands. Elements of the supply chain include distribution and
service channels, as well as the supply of raw material. Companies modify the supply chain
structure for strategic business alliance purposes, to cut costs and to streamline product delivery.
Some companies strive to own several elements of a product's supply chain channel, which aids
in strategic control and helps deliver value to customers.
4.4 Channel Management, Channel Relationship and Competitive Dynamics

4.4.1 Channel Management

It is the process by which a producer or supplier directs marketing activity by involving and
motivating parties comprising its channel of distribution.
Channel management is a term that refers to the way that a business or supplier of products uses
various marketing techniques and sales strategies to reach the widest possible customer base. The
channels are all of the various outlets by which the product is marketed and sold to customers.
When done properly, channel management motivates those channels to sell the product and
ultimately develops a better relationship between customer and product. This is achieved by
identifying the goals for each distinctive channel and then implementing various marketing
strategies to make sure that those goals are attained, all while staying consistent to the overall
brand of the business.
That’s where Channel Management comes in. Channel management, as a process by which a
company creates formalized programs for selling and servicing customers within a specific
channel, can really impact your business—and in a positive way! To get started, first segment

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your channels by like characteristics (their needs, buying patterns, success factors, etc.) and then
customize a channel management program that includes:

1. Goals. Define the specific goals you have for each channel segment. Consider your goals for
the channel as whole as well as individual accounts. And, remember to consider your goals
for both acquisition and retention.
2. Policies. Construct well-defined polices for administering the accounts within this channel.
Be sure to keep the unique characteristics of each segment in mind when defining policies for
account set up, order management, product fulfillment, etc.
3. Products. Identify which products in your offering are most suited for each segment and
create appropriate messaging. Also, determine where your upsell opportunities lie.
4. Sales/Marketing Programs. Design support programs for your channel that meet their
needs, not what your idea of their needs are. To do this, you should start by asking your
customers within this segment, “How can we best support you in the selling and marketing of
our products?” That being said, the standard considerations are product training, co-op
advertising, seasonal promotions, and merchandising. Again, this is not a one-size fits all, so
be diligent about addressing this segment’s specific needs in these areas.

Defining a channel management strategy for each segment allows you to be more effective
within each segment, while gaining efficiency at the same time. Still, maintaining brand
consistency across all channel segments is critical to your long-term success. So find a good
balance between customization and brand consistency and you’ll be on your way to successful
channel management.
4.4.2 Establishing Channel Relationships
▮ Keys to successful management of channel relationships include the development of high
levels include:
• Coordination
• Commitment
• Trust between channel members
Since channel members must be convinced to handle a marketer’s product it makes sense to
consider channel partner’s needs in the same way the marketer considers the final user’s needs.
However, the needs of channel members are much different than those of the final customer. As

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we noted in the Business Buying Behavior tutorial, resellers seek products of interest to the
reseller’s customers but are also concerned with many other issues such as:
 Delivery – Resellers want the product delivered on-time and in good condition in order to
meet customer demand and avoid inventory out-of-stocks.
 Profit Margin – Resellers are in business to make money so a key factor in their decision to
handle a product is how much money they will make on each product sold. They expect that
the difference (i.e., margin) between their cost for acquiring the product from a supplier and
the price they charge to sell the product to their customers will be sufficient to meet their
profit objectives.
 Other Incentives – Besides profit margin, resellers may want other incentives to entice them
especially if they are required to give extra effort selling the product. These incentives may
be in the form of additional free products or even bonuses (e.g., bonus, free trips) for
achieving sales goals.
 Packaging – Resellers want to handle products as easily as possible and want their suppliers
to ship and sell products in packages that fit within their system. For example, products may
need to be a certain size or design in order to fit on a store’s shelf, or the shipping package
must fit within the reseller’s warehouse or receiving dock space. Also, many resellers are
now requiring marketers to consider adding identification tags to products (e.g., RFID tags)
to allow for easier inventory tracking when the product is received and also when it is sold.
 Training – Some products require the reseller to have strong knowledge of the product
including demonstrating the product to customers. Marketers must consider offering training
to resellers to insure the reseller has the knowledge to present the product accurately.
 Promotional Help – Resellers often seek additional help from the product supplier to
promote the product to customers. Such help may come in the form of funding for
advertisements, point-of-purchase product materials, or in-store demonstrations.
Relationship Issues in Channels
A good distribution strategy takes into account not only marketing decisions, but also considers
how relationships within the channel of distribution can impact the marketer’s product. In this
section we examine three such issues:
Channel Power
A channel can be made up of many parties each adding value to the product purchased by
customers. However, some parties within the channel may carry greater weight than others. In
marketing terms this is called channel power, which refers to the influence one party within a

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channel has over other channel members. When power is exerted by a channel member they are
often in the position to make demands of others. For instance, they may demand better financial
terms (e.g., will only buy if prices are lowered, will only sell if price is higher) or demand other
members perform certain tasks (e.g., do more marketing to customers, perform more product
services). Channel power can be seen in several ways:
 Backend or Product Power – Occurs when a product manufacturer or service provider
markets a brand that has a high level of customer demand. The marketer of the brand is often
in a power position since other channel members have little choice but to carry the brand or
risk losing customers.
 Middle or Wholesale Power – Occurs when an intermediary, such as a wholesaler, services
a large number of smaller retailers with products obtained from a large number of
manufacturers. In this situation the wholesaler can exert power since the small retailers are
often not in the position to purchase products cost-effectively and in as much variety as what
is offered by the wholesaler.
 Front or Retailer Power – As the name suggests, the power in this situation rests with the
retailer who can command major concessions from their suppliers. This type of power is
most prevalent when the retailer commands a significant percentage of sales in the market
they serve and others in the channel are dependent on the sales generated by the retailer.
Channel Conflict
In an effort to increase product sales, marketers are often attracted by the notion that sales can
grow if the marketer expands distribution by adding additional resellers. Such decisions must be
handled carefully, however, so that existing dealers do not feel threatened by the new distributors
who they may feel are encroaching on their customers and siphoning potential business. For
marketers, channel strategy designed to expand product distribution may in fact do the opposite
if existing members feel there is a conflict in the decisions made by the marketer. If existing
members sense a conflict and feel the marketer is not sensitive to their needs they may choose to
stop handling the marketer’s products.
Need for Long-Term Commitments
Channel decisions have long-term consequences for marketers since efforts to establish new
relationships can take an extensive period of time while ending existing relationships can prove
difficult. For instance, Company A, a marketer of kitchen cabinets that wants to change
distribution strategy, may decide to stop selling their product line through industrial supply
companies that distribute cabinets to building contractors and instead sell through large retail

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home centers. If in the future Company A decides to once again enter the industrial supply
market they may run into resistance since supply companies may have replaced Company A’s
product line with other products and, given what happened to the previous relationship, may be
reluctant to deal with Company A. As another example of problems with long-term
commitments, building contractors may be comfortable purchasing kitchen cabinets from
industrial suppliers. If Company A decides to change their reseller network they may find it
difficult to regain the building contractor customer base, who may continue to purchase from the
industrial suppliers but are now purchasing products from Company A’s competitors. In this
case, Company A may have to give serious thought to whether breaking their long-term
relationship with industrial suppliers is in the company’s best interest.
4.4.3 Competitive Dynamics
• Competitors
 Firms operating in the same market, offering similar products and targeting similar
customers.
• Competitive Rivalry
 The ongoing set of competitive actions and responses occurring between competitors.
 Competitive rivalry influences an individual firm’s ability to gain and sustain
competitive advantages.
• Competitive Dynamics
 The total set of actions and responses taken by all firms competing within a market.
Conventional Marketing Channels
– A channel consisting of one or more independent producers, wholesalers, and retailers, each
a separate business seeking to maximize its own profits even at the expense of the profits for
the system as a whole
– Individual members performed their own functions
– Lacked strong leadership, damaging channel conflicts, poor performance
Vertical marketing systems (VMS)
A distribution channel structure in which producers, wholesalers, and retailers act as a unified
system. One channel member owns the others, has contracts with them, or has so much power
that they all co-operate.
Corporate VMS
A vertical marketing system that combines successive stages of production and distribution
under single ownership – channel leadership is established through a common ownership.
Contractual VMS

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A vertical marketing system in which independent firms at different levels of production and
distribution join together through contracts to obtain more economies or sales impact than they
could achieve alone.
 Wholesaler-sponsored voluntary chains
– Wholesaler develops a program which standardizes independent retailer operations
 Retail cooperatives
 Retails organize a new, jointly owned business to carry on wholesaling and possibly
production
 Members buy most of their goods through the cooperative, and plan their advertising
jointly
 Franchise organizations
– Channel member called franchiser links several stages in the production distribution process
 Manufacturer-sponsored retailer franchise system (car dealers)
 Manufacturer-sponsored wholesale franchise system (Coca-Cola)
 Service-firm-sponsored retailer franchise system (McDonald's)
Administered VMS
It is a vertical marketing system that coordinates successive stages of production and
distribution, not through common ownership or contractual ties but through the size and power
of one of the parties.
– Leadership assumed by one or few channel members
E.g. General Electric, Procter & Gamble; Wal-Mart, Barnes & Noble
Horizontal marketing systems
A channel arrangement in which two or more companies at one level join together to follow a
new marketing opportunity
– Can combine capital, production capabilities, or marketing resources
– Might join forces with competitors or non-competitors
– Temporary or permanent basis
– May also create a separate company for the co-operation process
E.g. Lamar and Safeway

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