Principles of Marketing Seventeenth Edition

Chapter 12

Marketing Channels:
Delivering Customer Value
Learning Objectives

12-1 Explain why companies use marketing channels and discuss the functions
these channels perform.
12-2 Discuss how channel members interact and how they organize to perform
the work of the channel.
12-3 Identify the major channel alternatives open to a company.
12-4 Explain how companies select, motivate, and evaluate channel members.
12-5 Discuss the nature and importance of marketing logistics and integrated
supply chain management.
Supply Chain & Value Delivery Networks

Marketing (distribution) are interdependent organizations that help

Channels make a product or service available for use or
consumption

• Independent dealers are the key to

it’s success
• Caterpillar stresses dealer
profitability, extraordinary dealer
support, and full and honest
communications with its dealers
Supply Chain & Value Delivery Networks

are firms that supply raw materials,

Upstream partners
components, parts, information, finances, and
expertise needed to create a product or service.

Downstream include the marketing channels or distribution

partners channels that look toward the customer,
including retailers and wholesalers.(Marketing or
distribution Channels)

Supply Chain

Manufacturer Customers
Upstream Downstream
Partners Partners
Supply Chain & Value Delivery Networks

Value delivery network is

composed of the company,
suppliers, distributors, and,
ultimately, customers who partner
with each other to improve the
performance of the entire
system.
Pepsi manages people within
the company plus thousands
of outside suppliers, bottlers,
retailers and marketing
services firms to create
customer value
The Nature & Importance of Marketing Channels
How Channel Members Add Value
Intermediaries offer producers greater efficiency in making goods
available to target markets. Through their contacts, experience,
specialization, and scale of operations, intermediaries usually offer the
firm more than it can achieve on its own

• Transform the assortment of products into assortments wanted by

consumers. (break-bulks)
• Play a role in matching supply and demand
• Bridge the major time, place, and possession gaps that separate goods
and services from users.
The Nature & Importance of Marketing Channels

How Channel Members Add Value: Increase Efficiency

The Nature & Importance of Marketing Channels

How Channel Members Add Value

Information Promotion Contact

Physical
Matching Negotiation
distribution

Financing Risk taking

The Nature & Importance of Marketing Channels

Number of Channel Levels

is a layer of intermediaries that performs some
Channel level work in bringing the product and its ownership
closer to the final buyer.

Direct Marketing is a marketing channel that has no intermediary

Channel levels.

Indirect Marketing is a marketing channel containing one or more

Channel intermediary levels.
The Nature & Importance of Marketing Channels

• Channel 1 - Direct marketing channel

• Channels 2 & 3 - Indirect channels, contain one or more intermediaries
The Nature & Importance of Marketing Channels

Number of Channel Levels

Channel members are connected by several types of flows (which

increase complexity):

• Physical flow of products

• Flow of ownership
• Payment flow
• Information flow
• Promotion flow
Channel Behavior and Organization

Channel Behavior
consists of firms that have partnered for their
Marketing channel common good with each member playing a
specialized role

refers to disagreement among channel members

Channel conflict over goals, roles & rewards

• Horizontal conflict: Conflict among

members at the same channel level
• Vertical conflict: Conflict between different
levels of the same channel
Channel Behavior and Organization
Channel Behavior and Organization

Vertical Marketing Systems

Conventional distribution systems consist of one or more independent

producers, wholesalers, and retailers, each separate business seeking to
maximize its own profits, perhaps even at the expense of profits for the
system as a whole.

• Little control over the other members

• No formal means for assigning roles and resolving conflict
• Poor performance and less value delivered to the customer
Channel Behavior and Organization

Vertical Marketing Systems

Vertical marketing systems (VMSs) provide channel leadership and

consist of producers, wholesalers, and retailers acting as a unified
system.

• Corporate marketing systems

• Contractual marketing systems
• Administered marketing systems
Channel Behavior and Organization

Vertical Marketing Systems

Corporate vertical marketing systems

combine successive stages of production and
distribution under single ownership.

Coordination and conflict resolution through

regular organizational channels
Channel Behavior and Organization

Vertical Marketing Systems

Contractual vertical marketing systems consist of independent firms at

different levels of production and distribution who join together through
contracts, to obtain more economies or sales impact than each could
achieve alone. The most common form is the franchise organization

Franchise organization is a contractual vertical marketing system in

which a channel member, called a franchisor, links several stages in the
production-distribution process.
Channel Behavior and Organization

Vertical Marketing Systems

Types of franchise organizations:
• Manufacturer-sponsored retailer franchise system (car dealerships)
• Manufacturer-sponsored wholesaler franchise system (soft drink
industry)
• Service firm-sponsored retailer franchise system (fast food
restaurants)
Channel Behavior and Organization

Vertical Marketing Systems

Administered vertical marketing system has a few dominant

channel members without common ownership or contracts.
Leadership comes from size and power

In-demand manufacturers like Sony can command unusual co-

operation from resellers regarding displays, shelf space, promotions,
and price policies

Large retailers like Carrefour can exert strong influence on

manufacturers
Channel Behavior and Organization

Horizontal Marketing Systems

Horizontal marketing system is a channel arrangement in which two

or more companies at one level join together to follow a new marketing
opportunity. (may be competitors or not)
Companies combine production or marketing resources to accomplish
more than any one company could alone
Channel Behavior and Organization

Multichannel Distribution Systems

Multichannel Distribution Systems (or Hybrid Marketing Channels)

When a single firm sets up two or more marketing channels to reach
one or more customer segments
Channel Behavior and Organization
Multichannel Distribution
Systems

Advantages: Increased sales and market coverage

Challenges: Hard to control. Can create channel conflict
Channel Behavior and Organization

Changing Channel Organization

Disintermediation occurs when:

• Producers cut out intermediaries and go

directly to final buyers, or…
• When new types of channel
intermediaries displace traditional ones
Channel Design Decisions

Marketing channel design

Designing effective marketing

channels by:
Channel Design Decisions

1. Analyzing Consumer Needs

• Find out what target consumers want from the channel
• Balance the level of service offered in each channel
• Determine the best channels to use
• Minimize the cost of meeting customer service requirements

2. Setting Channel Objectives

• Determine targeted levels of customer service
• Balance consumer needs against costs and customer price preferences
Channel Design Decisions
3. Identifying Major Alternatives
Strategies
Types of intermediaries refers
to channel members available to
carry out channel work. Intensive distribution

Direct sales force or through

distributors? Exclusive distribution

Responsibilities of Channel Members Selective distribution

Price policies, Conditions of sale,
Territory rights, Specific services
Channel Design Decisions

4. Evaluating Major Alternatives

• Economic criteria: Likely sales and

profitability of different channel
alternatives

• Control: How much is needed?

• Adaptive criteria: Long term

commitment vs. need to adapt to
environmental changes
Channel Design Decisions

Designing International Distribution Channels

• Channel systems can vary from country

to country.

• Marketers must be able to adapt channel

strategies to structures within each
country.
Channel Management Decisions

Selecting Managing Motivating Evaluating

channel channel channel channel
members members members members
Channel Management Decisions

• Selecting Channel Members: Identify your company requirements

• Years in business & profit record
• Existing lines carried
• Size and quality of sales force

• Managing & Motivating Channel Members: Partner relationship

management (PRM) is key

• Evaluating Channel Members: Based on performance, channel

members should be rewarded or replaced
Public Policy and Distribution Decisions

Exclusive distribution is when the producer gives only a limited number of

dealers the exclusive right to distribute its products in their territories.

Exclusive dealing is when the seller requires that the exclusive distribution
sellers not handle competitor’s products.

Exclusive territorial agreements are where producer or seller limit territory.

Tying agreements are agreements where the dealer must take most or all of
the line.
Marketing Logistics and Supply Chain Management

Nature and Importance of Marketing Logistics

Marketing logistics (physical distribution)

involves planning, implementing, and controlling
the physical flow of goods, services, and related
information from points of origin to points of
consumption to meet consumer requirements at
a profit.
Marketing Logistics and Supply Chain Management

• Logistics can provide a competitive advantage

• Cost savings & speed to market
• Product variety requires improved logistics
• IT helps get distribution efficiency
Marketing Logistics and Supply Chain Management

Major Logistics Functions

Inventory
Warehousing
management

Logistics
Transportation information
management
Marketing Logistics and Supply Chain Management

Warehousing A company must decide on how many and what types of

warehouses it needs and where they will be located. The
company might use either storage warehouses or
distribution centers.

Transportation affects the product price, delivery performance and the

condition of goods on arrival

Truck Rail Water

Pipeline Air Internet

Marketing Logistics and Supply Chain Management

Inventory Management
• Just-in-time: Delivery systems
• RFID: Knowing exact product location

• Smart shelves: Placing orders

automatically
Marketing Logistics and Supply Chain Management

Logistics Information Management

Logistics information management is the management of the flow of

information, including customer orders, billing, inventory levels, and
customer data

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chain