Designing

the Marketing Channel

 What is Design
• what comes to your mind when we use the
word Design
 What is Channel Design
There are variations in usage of the term
‘design’ of marketing channel:
• a noun to describe channel structure
• The formation of a new channel from scratch/
modifications to existing channels
• ‘Selection’
 What is Channel Design

• It refers to those decisions involving the

development of new marketing channels
where none had existed before, or to
modification of existing channels.
 Channel Design
Key distinguished points associated with channel design:
• It is presented as a decision faced by the marketer (same as
other marketing mix).
• It is used in the broader sense to include either setting up
channels from the scratch or modifying existing channels
(reengineering).
• The management has taken a proactive role in the
development of the channel.
• The term ‘selection’ refers to only 1 phase of channel design
(selection of the actual channel members).
• It is a strategic tool for gaining a differential advantage.
Who Engages in Channel Design
Producers/
Manufacturers

Wholesalers

Retailers

Market
 A Paradigm of the
Channel Design Decision
The channel design decision can be broken down
into 7 phases or steps:
1. Recognizing the need for a channel design
decision
2. Setting and coordinating distribution objectives
3. Specifying the distribution tasks
4. Developing possible alternative channel
structures
 A Paradigm of the
Channel Design Decision
The channel design decision can be broken
down into 7 phases or steps:
5. Evaluating the variables affecting channel
structures
6. Choosing the best channel structure
7. Selecting the channel members
Phase 1: Recognizing the Need for a Channel
Design Decision
Many situations can indicate the need for a channel design decision.
Among them are the following:
1. Developing a new product/product line
2. Aiming an existing product at a new target market (i.e. additional
channel from b2b to b2c)
3. Making a major change in some other component of the
marketing mix (i.e. new pricing policy emphasizing lower prices)
4. Establishing a new firm
5. Adapting to changing intermediary policies (i.e. if intermediaries
begin to emphasize their own private brands, adding new retailers
for the manufacturer may be needed.)
Phase 1: Recognizing the Need for a Channel
Design Decision
Many situations can indicate the need for a channel design decision.
Among them are the following:
6. Dealing with changes in availability of particular kinds of
intermediaries
7. Opening up new geographic marketing areas (territories)
8. Facing the occurrence of major environmental changes
9. Meeting the challenge of conflict or other behavioral problems
(i.e. A loss of power by a manufacturer to his/her distributors or
communication difficulties)
10. Reviewing and evaluating undertaking by a firm may point to the
need for changes in existing channels/ need for new channels
 Phase 2: Setting and Coordinating
Distributing Objectives
In order to set distribution objectives that are well
coordinated with other marketing and firm
objectives and strategies, the channel manager
needs to perform 3 tasks:
1. Become familiar with the objectives and strategies in
the other marketing mix areas
2. Set distribution objectives and state them explicitly
3. Check to see if the distribution objectives set are
congruent with marketing and other general
objectives and strategies of the firm
 Phase 2: Setting and Coordinating
Distributing Objectives
1. Becoming familiar with the objectives and
strategies in the other marketing mix areas
Short shelf life

Uses almost 13,000

drivers/salespeople to
deliver products directly
Longer shelf life
to grocery stores

“Freshness”
 Phase 2: Setting and Coordinating
Distributing Objectives
2. Set distribution objectives and state them explicitly
Example:

Coca-cola - exclusive distribution contracts &

Amazon – Providing best customer EXPERIENCE

IBM originally was to “have retailers displaying PCs within

driving distance of anyone in the U.S. who wanted to buy
one”.
Later, when IBM decided to use mail order channels, its
distributor objective was broadened to “make its PCs
directly available wherever its customers are”
 Phase 2: Setting and Coordinating
Distributing Objectives
3. Check to see if the distribution objectives set are
congruent with marketing and other general
objectives and strategies of the firm
Firm’s overall
objectives and
strategies

*Interrelationships
General and Hierarchy of
marketing
Objectives and
objectives and
strategies Policies in the Firm

Product Pricing Promotion Distribution

objectives and objectives and objectives and objectives and
strategies strategies strategies strategies
 Phase 3: Specifying the
Distribution Tasks (Functions)
• The kinds of tasks required to meet specific
distribution objectives must be precisely
stated.
Example:
A manufacturer of high-quality tennis racquets
aimed at serious amateur tennis players would
need to specify distribution tasks as the
following:
 Phase 3: Specifying the
Distribution Tasks (Functions)
Example:
1. Gather info. on target market shopping patterns
2. Promote product availability in the target market
3. Maintain inventory storage to assure timely
availability
4. Compile info. about product features
5. Provide for hands-on tryout of product
6. Sell against competitive products
 Phase 3: Specifying the
Distribution Tasks (Functions)
Example:
7. Process and fill specific customer orders
8. Transport the product
9. Arrange for credit provisions
[Link] product warranty service
[Link] repair and restringing service
[Link] product return procedure
 Phase 4: Developing Possible
Alternative Channel Structures
• Number of levels

• Intensity at the various levels

• Types of Intermediaries
 Phase 5 : Evaluating the Variables
Affecting Channel Structure
• Market Variables
– Market Geography, Market size, Market Density
• Product Variables
– Bulk and weight, Perishability, Unit value, Degree of
Standardization, Technical vs nontechnical, Newness,
Product prestige
• Company Variables
– Size, Financial Capacity, Managerial Expertise, Objectives
and strategies
• Intermediary Variables
– Availability, cost, Services
• Environmental Variables
• Behavioral Variables
 Choosing the “Best” Channel
Structure
• Channel Manager – to select optimal channel
structure
• Channel manager would choose the one
alternative offering the highest pay off
– Difficult to identify all possible channel structure
– Complexity in evaluating all variables affecting the
channel
– No exact methods – literature suggests few
methods to identify the best channel alternative
 Aspinwall’s approach
• Provides way for channel manager to relate how product
characteristic might affect channel structure
o Choosing channel structure depends on product variables
o All products described by 5 things
i. Replacement rate - rate good is purchased and consumed by
user, get satisfaction consumer expects from product
ii. Gross margin - difference between cost and sales price
iii. Adjustment - service applied to goods in order to meet
exact needs of consumer
iv. Time of consumption - measured time of consumption,
which product gives up utility desired
v. Searching time - measure time and distance from retail
store
• Red, Orange & Yellow goods
 Financial Approach
• Channel decisions are long term when
compared with the other areas of the
marketing mix
• Choosing a channel structure is analogous to
an investment decision
• Channel manager to justify his choice and
compare with the alternate investment
options
 Transaction cost analysis
• Based on the work of Williamson
• Choice of channel structure in the case of
manufacturer performing all distribution tasks
vs using independent intermediaries
• Cost of conducting the transactions necessary
for a firm to accomplish distribution tasks.
• Transactions include gathering information,
negotiating, monitoring performance and a
variety of others
• Motorola joins Sangeetha Mobiles to boost
India retail footprint
Bucklin’s basis of channel design strategy
• At distribution, four service output levels are important: market
decentralization (fragmentation), lot size, assortment, and waiting time.
• According to the author firms chose channels that minimized the
distribution costs associated with delivery time of these outputs.
• Delivery time is the main factor that predicts the structure of a channel.
According to the author with a very short delivery time, the intermediate
inventory is necessary because only in this way can goods be rushed
quickly to the consumer.
• As more the consumer wants the good quickly, the more the inventory
and safety stock is needed. These factors create high costs and an indirect
channel is required.
• But, there are a point that the delivery time allowed to the consumer
receives the good is larger, that it becomes possible and cheaper to the
manufacturer ship goods directly.
• As the greater the delivery time the greater are the economies of direct
shipment because eliminates the costs of handling, and maintaining the
inventory.
 Channel Member Selection

The last phase of channel design

Selection may or may not be the result of channel design.

Firm may need additional
outlets to allow for growth

To replace channel
members that have left
 Selection & Distribution Intensity

The greater the intensity of distribution

The less the emphasis on selection

 The Selection Process

2. Applying
3. Securing the
selection criteria
1. Finding prospective prospective
to determine the
channel members channel members
suitability of
as actual
prospective
channel members
channel members
 Finding Members

1. Field sales
organization

7. Other sources 2. Trade sources

6. Trade shows 3. Reseller inquiries

5. Advertising 4. Customers
 Field Sales Organization

Salespeople are the

best positioned to
BUT:
know about potential
intermediaries

• They are often able to • The manufacturer must

pick up information adequately reward
about likely salespeople for their
intermediaries. time & effort
• They may have lined up establishing connections.
prospective
intermediaries.
 Trade Sources

For Example:
• Industrial Distribution
• Trade associations magazine
• Trade publications • The Verified Directory of
• Directories Manufacturers’
• Trade shows Representatives
• Firms selling similar • The National Association
products of Wholesaler-
Distributors
• The National Retail
Federation
• The Encyclopedia of
Associations
 Reseller Inquiries

Many firms learn about direct

inquiries from intermediaries
interested in handling their product.

This is the main source of

information about potential new channel
members for some manufacturers.

Firms receiving the highest number

of inquiries are the more
prestigious in their industry.

Reseller
Inquiries
 Customers
Customers are willing to give frank opinions
about the intermediaries who call on them.

Manufacturer conducts formal or informal surveys of

customers’ views of various distributors.

Manufacturer obtains information about

potential intermediaries.
Advertising

Trade magazine advertising

can generate a large number
of inquiries from prospective
Members.

It therefore can provide a large

pool from which to make selections.
 Trade Shows

Wholesale and retail trade associations

hold annual conventions.

Attending manufacturers have access to a

wide variety of potential channel members.

** Small manufacturers meet face-to-face with

wholesalers & retailers.
 Other Sources

1. Chambers of commerce, banks, & local real

estate dealers
2. Classified telephone directories or the yellow
pages
3. Direct-mail solicitations
4. Contacts from previous applications
5. Independent consultations
6. List brokers that sell lists of names of
businesses
7. Business databases
8. The Internet
 Selection Criteria
(Pegram’s)

• Credit & Financial • Sales Performance

Condition • Management Succession
• Sales Strength • Management Ability
• Product Lines • Attitude
• Reputation • Size
• Market Coverage
Adapting Selection Criteria

Because no list of criteria is adequate

for a firm under all conditions,

the channel manager should be flexible when

using selection criteria.
 Securing Channel Members
• Manufacturers ask:
– Why should this
company carry my
products?
• Intermediaries ask:
– Why should they
want to distribute
products through us?
Offering Inducements

Good, profitable product line

Advertising & promotional support

Management assistance

Fair dealing policies &

Friendly relationships
 Product Line

Product line inducements:

1. Manufacturer offers good product line with

strong sales & profit potential

2. Stress the value of good product line from

channel members’ perspective
Advertising & Promotion

Advertising & promotion inducements

Consumer Market:
Gain immediate credibility by using a strong program
of national advertising.

Business Market:
Gain recognition by using a strong program of
trade paper advertising.
Management Assistance

Management assistance inducements:

Prospective members want to know whether the

Manufacturer will help with the following:

• training programs
• financial analysis & planning
• market analysis
• inventory control procedures
• promotional methods
 Fair Dealing &
Friendly Relationship

Channel Leader’s Responsibility:

To convey to prospective channel members that

he or she is genuinely interested in
establishing a good relationship based on trust
and concern for their welfare as both business
Entities and as people