Marketing for Customer Value

Module -3
Delivering Customer Value

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 Distribution Channels
Distribution Channels and Physical Distribution Decisions

Nature, functions

types of distribution channels

Distribution channel intermediaries

Channel management decisions

Retailing and wholesaling

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 Marketing Channels
A marketing channel is the people, organizations, and 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, and
is also known as a distribution channel.

Channel Management is defined as the process where the company

develops various marketing techniques and sales strategies to reach its
customer base.

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 Characteristics of distribution Channels

➢Place Utility

➢Time Utility

➢Convenience Value

➢Possession Value

➢Marketing Tools

➢Supply-Demand Linkage

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 Additional functions

➢Risk Taking

➢Sorting

➢Allocation

➢Assorting

➢Product Promotion

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 Types of Marketing Channels
Producer of manufacture

Direct Indirect Multi channel or hybrid

Selling at Door to Door Mail orders Multiple

manufacturer’s Selling Shops
Plant

Wholesale Retailer

Retailer

Customer
Direct selling
• Selling at manufacturer’s plant: this is otherwise known as direct selling. It is one
of the earliest, easiest and cheapest method of distribution of goods. Under this
system, the goods are sold by the producers directly to the consumers . It is usually
preferred in case of perishable goods like bread, milk, ice-cream, fish meat etc.
• Door-to-door: It is a canvassing technique that is generally used for sales,
marketing, advertising, or campaigning, in which the person or persons walk from
the door of one house to the door of another, trying to sell or advertise a product or
service to the general public.
• Mail order sales: It is a type of direct selling technique in which a customer will
place an order for purchase and the goods will be delivered to his or her home.
Orders will normally be placed through a telephone call or a website.
• Sale opening own shops: Manufacturer of perishable and non perishable
products commonly sell their products to customers by opening their own shops.
These manufacturer can provide the goods quickly through shops and can offer
satisfactory service to customers, thereby building goodwill.

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Indirect Selling
• One-Level Channel: A one level channel contains one selling intermediary.

• Two-Level Channel: A two level channel encompasses two intermediary levels – a wholesaler and a
retailer.

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• A Three Level Channel: A third level channel, as the name implies, encompasses three
intermediary levels – a wholesaler, a retailer and a jobber.

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• Multi-Channel Distribution Systems Definition
A multi-channel distribution system is a system in which a single firm sets up two or more
marketing channels to reach one or more customer segments. It is also called a hybrid
distribution system

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Intermediaries of members of marketing channels

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 Intermediaries of members of marketing channels
• Value added Resellers:

• A value added reseller (VAR) offers services that go beyond selling of products. VARS typically buy
products from suppliers, add ‘value’ to them in the form of features and services, and then resell to
end-users.

• C & F Agent:

• It means "Clearing and forwarding agent." Definition of Clearing and forwarding agent - Any person
who is engaged in providing any service, either directly or indirectly, concerned with the clearing
and forwarding operations in any manner to any other person and includes a consignment agent.

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 Wholesaling Vs Retailing

Point of Difference Wholesaling Retailing

A retailer purchases products

A wholesaler purchases products from a wholesaler and sells
Meaning
in bulk from a manufacturer. them further in small quantities
to the end customer.

Price Lower Higher

Transaction Volume Larger Smaller
Business Reach Broader Narrower
Competition Lower Higher
Product Range Limited Wider
Need For Promotion Less More
Cost Lower Higher
Capital Investment Huge Little
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 Intensive Distribution
Common For snacks, soft drinks and juices, foods, basic supplies, magazines

Profit Margin high volumes of goods at lesser prices and earn lower margins.

Pros • Increased sales

• Wider customer recognition
• Impulse buying

Cons • Characteristically low price

• Low-margin products that require a fast turnover
• Difficult to control large number of retailer

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 Selective Distribution
Common For Items such as prestige or designer goods e.g. Puma, Fila, Nike,
Adidas

Pros • Save expenses

• Improve marketing efficiency
• Control the marketing

Cons • Difficult to attain a variety of business objectives in relaxed

conditions of the marketing environment
• Lack of adaptability to goods that are not selective
• A certain risk as firm has to provide more services to selected
middlemen

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 Exclusive Distribution
Common For most luxurious items & brands like Gucci, Prada

Pros • More control over the market

• More aggressive middleman
• High brand loyalty

• Difficult to maintain a high level of brand image

Cons
• Betting on one dealer in each market
• Only suitable for high priced & low volume products

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 Channel Integration
Channel integration is essentially the idea of combining efforts across

different customer channels

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 Types of Channel Integration

Vertical marketing Horizontal Marketing

Multi-marketing Systems
system System
 Advantages of Backward Integration:
•Better Control: Since the company having a good control over the the raw material supply,
on time production and delivery are possible. Also the Quality of the raw material can be
controlled based on the product quality required in the final product.

•Cost Control: By In-house production of raw material we can avoid the profits eaten-up by
the middlemen and also the transportation costs.

•Competitive advantage: For example in the technology Industry, companies can go for
their own new low cost, high beneficial technology by making it proprietary, trademarks or
by patenting allowing the competitors to search for the alternative methods.
 Disadvantages of Backward Integration:

•Inefficiencies: Since the raw materials are produced In-House, the company may limit
competition resulting in the lack of Innovation leading to poor quality of final products,
increasing the cost of customer complaint handling.

•Investment: Since huge initial investment is required, company may be forced to utilize all
it's reserves and even take more debts resulting in losses in case of failure of business.
 Advantages of Forward Integration

•Increases Market Share: Since there is a transportation cost and other transactional cost
reduction, company can sell the product at a lower price, achieving more market shares.

•Control over distribution: since we can eliminate the 3rd party intervention like wholesale
retailers or brokers we will be having better control over the dispatches.

•Competitive advantage: Lower costs and controlled distribution gives companies

competitive advantage over the other companies.
 Disadvantages of Forward Integration:

•Realization of synergies between the companies: Improper implementation of strategy can be

the reason for not realizing the synergy potential.

•High Costs: Mergers/acquisitions may need substantial high funds, benefits obtained from the
strategy implementation may be less compared to the cost spent.
Horizontal Marketing System
 Types of Channel Integration
• Vertical marketing system
A vertical marketing system (VMS) is one in which the main members of a distribution
channel—producer, wholesaler, and retailer—work together as a unified group in order
to meet consumer needs. In conventional marketing systems, producers, wholesalers,
and retailers are separate businesses that are all trying to maximize their profits. When
the effort of one channel member to maximize profits comes at the expense of other
members, conflicts can arise that reduce profits for the entire channel. To address this
problem, more and more companies are forming vertical marketing systems.
Vertical marketing systems can take several forms. In a corporate VMS, one member of
the distribution channel owns the other members. Although they are owned jointly,
each company in the chain continues to perform a separate task. In an administered
VMS, one member of the channel is large and powerful enough to coordinate the
activities of the other members without an ownership stake. Finally, a contractual VMS
consists of independent firms joined together by contract for their mutual benefit. One
type of contractual VMS is a retailer cooperative, in which a group of retailers buys
from a jointly owned wholesaler. Another type of contractual VMS is a franchise
organization, in which a producer licenses a wholesaler to distribute its products.
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Advantages of VMS:
• Easier to control
• Easy to eliminate the conflicts that results when independent channel
members pursue their own objectives.
• Improves distribution efficiency
• Economies of scale can be achieved
Disadvantages
• It may associate with additional cost associated with administrating the
processes
• There is possibility of inflexibility in operations for the company
• As the company has to manage the different functions in the channels, it might
not have the opportunity to specialize or gain expertise in a particular
functional area of distribution channel.

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• Horizontal Marketing System
A Horizontal Marketing system is a form of distribution channel wherein two or more
companies at the same level unrelated to each other come together to gain the
economies of scale. In other words, Horizontal marketing system is the merger of two
unrelated companies who have come together to exploit the market opportunities.
Generally, this type of marketing system is followed by companies who lack in capital,
human resources, production techniques, marketing programs and are afraid of
incurring the huge losses. In order to overcome these limitations, the companies join
hands with other companies who are big in size either in the form of joint venture –that
can be temporary or permanent, or mergers to sustain in the business.
Horizontal marketing system has gained popularity in the recent times due to an
immense competition in the market where everybody is striving to gain a good position
in the market along with huge profits.
e.g. Nike and Apple have entered into a partnership, with the intent to have a Nike+
footwear in which the iPod can be connected with these shoes that will play music
along with the display of information about time, distance covered, calories burned and
heart pace on the screen.
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Advantages

▪ Helps in achieving economies of scale

▪ Synergies achieved by sharing of resources common to different products, and

reduction in cost of international trade by operating factories in foreign countries

Disadvantages

▪ Conflicts between members

▪ Decrease in flexibility

▪ Lack of coordination

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 Channel design
Channel design refers to those decisions involving the development of
new marketing channels where none had existed before or to the
modification of existing channels
Channel design is presented as a decision faced by the marketer, and it
includes either setting up channels from scratch or modifying existing
channels. This is sometimes referred to as reengineering the channel and
in practice is more common than setting up channels from scratch
Major task in Channel design:
• Designing the right channel
• Implementing that design

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Channel design Process

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1. Analyzing the Needs of the Customer
When a marketer designs a marketing channel, he must understand the service output levels desired by the target
customers. Different customers have different levels of service requirements. A high potential customer needs to
be offered effective and professional service backup, ensured availability of varied products compared to the low
potential customer. The marketing channel designer has to know at this stage itself that providing superior service
output means increased channel costs and higher prices for customers.
i. Lot size – most convenient pack size which the consumer can buy at a time
ii. Waiting time – time elapsed between the desire to buy the product and the time when he can actually buy it –
should be almost zero
iii. Variety – choice of products, brands, packs
iv. Place utility – choice of buying where he wants. For a consumer product it has to be at a location closest to
his residence
v. Product information: customer seek more information about the product specially in case if technically
complex products.
vi. Product customisation
vii. Quality assurance
viii. After sale services
ix. Logistics
x. Spatial convenience

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2. Setting and Coordinating Distribution Objectives: Channel objectives are
a part of and result from the company’s marketing objectives that need to be
stated in terms of targeted service output levels. Profit considerations and
asset utilization must be reflected in channel objectives and the resultant
design. It should be the endeavor of the channel members to minimize the
total channel costs and still provide with the desired level of service outputs.
Channel objectives keep varying depending on the characteristics of the
products.
• Perishable products requires more direct marketing
• Bulky products, such as building materials, require channels that minimize
the shipping distance and amount of handling.
• non- standard products, such as custom-built machinary and specialised
business forms, are sold directly by company sales representatives.
• High- unit- value products such as generators and turbines are often sold
through a company sales force rather than intermediaries.

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3. Considering Channel Constraints
The industrial marketer develops his channel objectives keeping into consideration various constraints like the
company, competition, the environment, product characteristics and the level of service output desired by the
target customers.
• Company: If a company has financial limitation as constraint, then it may restrict its direct distribution
approach through company sales force to few high potential customers.
• Competition: If a competitor has been very successful through direct service then it may force all other
firms also to adopt the same strategy of direct selling.
• Environment: Economic conditions, legal regulations are the environmental factors that affect channel
design. During recession, producers use economical ways to sell the products to avoid additional costs.
Similarly, the law looks down upon those channel arrangements that tries to build a monopoly market
or minimize competition.
• Product characteristics: As already mentioned, complex and non-standard products require direct
distribution without any intermediaries. Eg. If an industrial marketer is providing customized machinery to his
customer, then he deals directly with him rather than involving any intermediary to understand the customer
needs better.
• Customer: The industrial marketers depends on intermediaries to offer services to customers who are either
giving less business or are located at far-off places and prefers to serve the nearby or high potential
customers by themselves.
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• Listing Channel Tasks
The industrial marketers have to creatively structure the necessary tasks
or functions to meet customer requirements and company goals. They
have to first make a list of various tasks to be performed, identify the
critical tasks, take objective and realistic decisions on which tasks can be
effectively performed by the company and which cannot be performed
due to certain constraints. The careful analysis of customer needs,
establishing objectives, considering constraints and listing the channel
tasks form the backbone of channel design process. Once these aspects
are delineated individually, the next step of identifying and evaluating
channel alternatives starts.

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4. Channel alternative:
A company looks at alternatives for its distribution channel after it has decided on the
targeted customers and the customer service deliverables it desires from its channel
partners to reach these customers. At the time of deciding the company will scan for:
• The types of business intermediaries: There are different types of intermediaries
that the industrial marketers should identify. They have to consider various factors
like the tasks to be performed, product and market conditions before selecting
either manufacturer’s representatives or agents, industrial distributors, brokers,
commission merchants or value-added resellers. The marketers should search for
innovative or combination of marketing channels.
• Number of intermediaries: The manufacturers have to settle on the number
of intermediaries they wish to use in their channel structure. They may either go
for intensive, selective or exclusive distribution.
• Intensive distribution: In this strategy, standard products that are purchased more
frequently and have less unit value like raw materials and other convenience goods
are distributed intensively i.e. products are stocked in numerous outlets so as to
make them available to varied customers on demand.

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• Selective distribution: The industrial marketer selects few intermediaries to distribute the
products to the target customer. This gives the marketer to develop a good working relation with
the selected intermediaries, have better control, incur less costs and finally expect a better
than average selling effort.
• Exclusive distribution: This strategy helps to enhance the product image and is more prevalent
in consumer markets where some intermediaries exclusively deal and distribute the products of
one manufacturer. They are not allowed to handle the competitor’s products. The manufacturer
expects aggressive selling by the intermediaries and tries to have control over their pricing
policies, promotion strategy, credit terms and other services.
• Number of channels: Industrial marketers need to serve various market segments. This
necessitates them to use more than one channel for distributing and marketing their products.
This multi-channel approach helps them not only to increase their market share but also reduce
their costs. However, the industrial marketers need to take care of possible channel conflicts
like proper demarcation of territory to channel members to sell and serve the customers in their
respective areas.
• Terms and responsibilities of Channel Members: There are various terms and conditions
which the industrial marketer must make clear to the participating channel members like the
responsibilities and tasks, conditions of sale and territorial rights that would enable both of
them to enhance their performance.

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• Responsibilities and tasks: In order to avoid any future
disagreements, there should be clarity in the roles of both the
industrial marketers and the channel partners. Each should comply
with the commitments about their individual responsibilities and
tasks to be performed.
• Conditions of sale: It should be clearly mentioned well in advance
about the discounts offered by the manufacturers to the distributors,
the commission to be paid to the agents or brokers. Other terms
relating to warranty period, replacement of defective parts also
should be appropriately stated.
• Territorial rights: The territory between the distributors should be
well demarcated so as to avoid any future confusion that may lead to
legal issues.

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5. Evaluating Alternate Channels
The major problem before the producer is to decide which of the alternatives would be
best satisfy the long term objectives of the firm taking in view the factors which would
affect the channel decision. For this purpose, each alternative must be rated against
economic; control and adequate criteria:
• Economic Performance: Different channel alternatives generate different levels of
sales and incur different levels of costs. An industrial marketer has to pose a question
whether sales generation would be more by direct selling through company sales force
or through the channel members. Many of the industrial marketers believe that sales
will be more from company sales force as they exclusively concentrate on company’s
product, they are given proper training to sell the product, they show more
aggressiveness as their career depends on company’s success and finally customers
prefer to deal with the company directly. But it may also happen that the intermediary
can sell more than the company sales force. The possible reasons for this could be the
agency having many sales people with it or its sales force are much motivated with the
commission offered by the company or the customers prefer to deal with agents who
have extensive contacts. The marketing manager has to similarly estimate the total
costs of selling through different channel members.

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• Degree of control: This is another important factor while evaluating the
channel alternatives. An industrial marketer exercises different levels of
control over different channel members. The degree of control is more on
company sales force and least on distributors. The distributor may
concentrate more on those products that earn him high products rather
than following the instructions of the manufacturer to push less preferred
products. Similarly an agent entertains his potential customers most rather
than concentrating on manufacturer’s product.
• Degree of adaptability of channel members: With the market changing
dynamically, the channel members should have the capacity to adapt
themselves to the changing environment. The industrial marketer must be
able to control as well as modify the channel structure. Each channel
member should be committed to the agreement they have with
other members.
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6. Ideal channel structure:
With the completion of forgoing steps, the number of alternatives would
have narrowed down considerably. The firm must evaluate design and
choose the best among them.

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 Channel Management
The process by which a producer or supplier directs marketing activity by involving and motivating
parties comprising its channel of distribution.

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 CHANNEL MANAGEMENT TASKS
Design of
the channel
Ex ante
structure
Phase
Establishing
Distribution Channel Strategy the channel
• Channel Objective
• Activity Finalization
• Organizing the activities Motivating
Channel
• Developing Policy Guidelines
Members
Ex Poste
Resolving Phase
Conflicts
among channel
members
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▪ The ex ante phase involves all the activities that are associated with
the design and establishment of the distribution channel. These
activities actually take place before the distribution channel actually
starts functioning.
▪ The ex poste phase involves managing the day to day activities of
the channel wherein the behaviour of the individual channel
members are coordinated

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 The Ex Ante phase
• Channel Design
▪ The number of channel entities in the channel network,
▪ The way in which they are linked,
▪ The roles and responsibilities of the entities in the network
▪ The rewards for participating in the activities
▪ Clear cut guidelines for the major activities to be performed during the
normal functioning of the channel.

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THE CHANNEL ESTABLISHMENT PLAN

▪ The main purpose of the channel to be set-up

▪ The profile of the customers who are the target market for the channel
▪ The needs and requirements of the target market with regard to the
identified service outputs provided by the proposed/ existing channel

▪ Analysis of the operations of the existing channels that deal in similar

product/service lines
▪ Detailed activity chart for achieving the service output objectives

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▪ Details about the various channel constituents who will be performing these tasks

▪ The cost of performing the activities

▪ The designated roles and responsibilities of the channel constituents

▪ The proposed remuneration for performing these roles and responsibilities

▪ Standards for measuring the performance

▪ Procedures for reporting and information sharing

▪ Monitoring mechanisms

▪ Criteria for appointing the channel members

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 The Ex Poste phase

• Motivating Channel Members: The day-to-day managing of the channel will involve
motivating the channel members to perform effectively within the system, influencing
the channel members to participate in sales promotion activities or the other schemes
implemented by the firm.

• Resolving conflicts among channel members: A channel is a complex system

comprising interdependent yet autonomous entities. Each of the members of the
channel system will always strive to achieve its goals. The channel manager, hence, has
the responsibility to lead the channel towards achieving its system-wide objective.

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 Channel Conflict

• Channel conflict is a situation in which channel partners have to compete against one another
or a vendor's internal sales department.

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Stages in Channel Conflict

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 Impact of channel Conflict

➢Decrease in productivity

➢Members leave the organization

➢Violence

➢Inspire

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 Remedies for channel conflict
➢Communication
➢Persuasion
➢Bargaining/negotiations

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 Retailing

Retailing is a distribution process, in which all the activities involved in selling the
merchandise directly to the final consumer (i.e. the one who intends to use the product)
are included. It encompasses sale of goods and services from a point of purchase to the
end-user, who is going to use that product.

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 Nature of retailing

➢Direct interaction with customers

➢Lower average amount of sales transaction

➢Point of purchase display and promotions

➢Larger number of retail business units

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 Scope of retailing

➢Store management

➢Supply chain management

➢Vendor management

➢Inventory management

➢Category management

➢Customer relationship management

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 Functions of Retailing

▪ Merchandising
▪ Inventory Management
▪ Customer Service
▪ Pricing Strategy
▪ Promotions and Marketing
▪ Store Design and Visual Merchandising
▪ Omnichannel Integration
▪ Payment Processing

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 Factors Affecting Retailing

➢ Increase in per capita income

➢ Demographical changes

➢ High standard of living

➢ Change in consumption pattern

➢ Availability of low-cost consumer credit

➢ Improvements in infrastructure

➢ Entry to various sources of financing

➢ Computerisation

➢ Communication

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Types of retailing

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 STORE LAYOUT
• This is Also known as a layout design or store design; a retail store layout is a term used to
describe how retailers set up their merchandise, product displays and fixtures in store.

• Components

• Store design: The store design encompasses the intentional use of space management and
floor plans, including displays, furniture, fixtures, signage and lighting
• Customer flow: The way that a customer navigates a store’s aisles is the customer flow.

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Diagonal Store Layout
Forced Path Store Layout
 Wholesaling Meaning

Wholesaling involves purchasing goods in bulk from the manufacturer

and then reselling them to the retailer for a profit

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 Importance Of Wholesalers

➢Breaks down the bulk

➢Provide storage facility

➢Risk Bearing

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