Marketing channel

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.^[1] A marketing channel is a useful tool for management,^[2] and is crucial to creating an effective and well-planned marketing strategy.^[3]

Another less known form of the marketing channel is the Dual Distribution^[4] 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.^[4]

Roles of marketing channel in marketing strategies

• 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.

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.^[5] 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^[6] 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.^[5] 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

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.^[5] 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.

Channel Marketing

Brands involved in selling through marketing channels (also commonly known as distribution channels) have relationships with the channel partners (local resellers, retailers, field agents, etc.) that sell their products or services to the end customer. Brands that aim to maximize sales through channel partners provide them with advertising and promotional support that is pre-configured and often subsidized by the brand.

Coordinated Channel Marketing - Brands carry out online and offline advertising on behalf of channel partners to aid them in generating sales of their branded products. Those online and offline marketing initiatives are can either be isolated or coordinated to inform one another.^[7]

An example of this is an apple orchard: Apple orchard > Transport > Processing factory > Packaging > Final product to be sold > Apple pie eaten

An alternative term is distribution channel or 'route-to-market'. It is a 'path' or 'pipeline' through which goods and services flow in one direction (from vendor to the consumer), and the payments generated by them flow in the opposite direction (from consumer to the vendor). A marketing channel can be as short as being direct from the vendor to the consumer or may include several inter-connected (usually independent but mutually dependent) intermediaries such as wholesalers, distributors, agents, retailers. Each intermediary receives the item at one pricing point and moves it to the next higher pricing point until it reaches the final buyer.

Marketing Channels can be long term or short term.

Armstrong, G. (2009). Marketing: an introduction ([European ed.). Harlow, England: Financial Times Prentice Hall.

Short term channels are influenced by market factors such as: business users, geographically concentrated, extensive technical knowledge and regular servicing required, and large orders. Short term product are influenced by factors such as: perishable, complex, and expensive. Short term producer factors include whether the manufacturer has adequate resources to perform channel functions, Broad product line, and channel control is important. Short term competitive factors include: manufacturing feels satisfied with marketing intermediaries' performance in promoting products.

Long term market factors include consumers, geographically dispersed, little technical knowledge and regular servicing is not required, and small orders. Product factors for long term marketing channels are: durable, standardized, and inexpensive. Producer factors are manufacturer lacks adequate resources to perform channel functions, limited product line, and channel control not important. The competitive factors are: manufacturer feels dissatisfied with marketing intermediaries' performance in promoting products

Armstrong, G. (2009). Marketing: an introduction ([European ed.). Harlow, England: Financial Times Prentice Hall.

Marketing Channels Add Value

Factors that can affect customers' perceptions of a product or service offering include:

• The consumer services offered: information or advice, the attitude of sales personnel and the availability of a credit.
• The convenience of the outlet in terms of opening times and locations.
• The depth and assortment of an offered stock.

All these factors above are provided and controlled by the middleman (intermediaries) and are critical in adding value to the basic product.^[8]

Types of Middlemen

There are a number of different types of middlemen acting in marketing channels. There are important differences between the most common intermediaries:

• Agents

Agents do not take ownership or physical possession of the products they represent. They act on a producer's behalf and take a commission on any sales they negotiate with a third party.

• Producers' agents

Producers' agents tend to work for a bigger amount of different producers and with non-competitive or complementary products in a specific geographic area. They are normally involved in delivering the sales function.

• Sales agents

Sales agents usually deal with one producer and have to deliver a full range of marketing activities for this concrete client (e.g. creating distribution, pricing and promotional policies). These agents are commonly used by small companies with limited resources or by producers that are moving into an unknown market, especially which is located overseas (here: the sales agent can provide essential local knowledge).

• Brokers

Brokers strive to bring potential buyers and sellers together by negotiating specific contracts. They are supposed to not have a long-term relationship. Brokers, like agents, do not take ownership, nor do they physically handle the product and they act on a commission basis.

• Wholesalers

Wholesalers, on the contrary, take title to the goods they handle and are involved in the physical distribution of those products. They sell mostly to other middlemen or directly to industrial, commercial or institutional customers rather than individual consumers. There are two types of wholesalers: full service wholesalers and limited service wholesalers. The first ones offer a broad range of marketing activities for their suppliers and customers (purchasing, sales, warehousing and transportation of goods). The latter ones cut out non-essential services and as a result are able to offer cost savings to customers.

• Retailers

Retailers sell goods and services directly to the end consumer. Retailers take title to the goods they stock which.^[8]

Channel Design

Channel design is the dynamic process of developing new channels where none existing and modifying existing channels. The business marketer usually deals with modification of existing channels, although new products and customer segments may require entirely new channels. Channel design is best conceptualized as a series of stages that the business marketing manager must complete to be sure that all important channel dimensions have been evaluated. The result of the process is to specify the structure that provides the highest probability of achieving the firm’s objectives. Channel structure refers to the underlying framework: the number of channel levels, the number and types of intermediaries and the linkages among channel members.

Stage 1: Channel Objectives

Business firms formulate their marketing strategies to appeal to selected market segments, to earn targeted level of profits, to maintain or increase sales and market share growth rates, and to achieve all this within specified resource constraints. It is the reason, why whether the business marketer is designing a totally new channel or redesigning the existing one, the first step of channel design is to comprehend fully the marketing goals and to formulate corresponding objectives.

Stage 2: Channel Design Constraints

Frequently, the manager has little flexibility in the selection of channel structures because of trade, competitive, company and environmental factors. The variety of constraining factors is almost limitless. The most relevant to the business marketer are the following:

• Availability of Good Intermediaries

Competitors often “lock up” the better intermediaries; Established intermediaries are not always receptive to new products.

• Traditional Channel Patterns

Established patterns of distribution are difficult to violate; Large customers may demand direct sales.

• Product Characteristic

Technical complexity dictates direct distribution; Extensive repair requirement may call for local distributors to service the product line.

• Company Financial Resources

Capital requirements often preclude direct distribution

• Competitive Strategies

Direct service by competitors may force all firms to sell direct.

• Geographic Dispersion of Customers

A widely dispersed market of small customers often requires low-cost representation afforded by intermediaries.

Stage 3: Pervasive Channel Tasks

The business marketing manager must creatively structure the tasks necessary to meet customer requirements and company goals rather than merely accepting existing channel structures or traditional distribution patterns. Increasing manufacturer power may diminish the distributor’s role in the channel as the manufacturer assumes more channel activities; the distributor’s share of profits and revenues could be reduced accordingly.

Stage 4: Channel Alternatives

There are four primary issues in specification of channel alternatives:

1. The number of levels in the channel (that is, the degree of “directness” ^{[lower-alpha 1]} ).
2. The types of intermediaries to use.
3. The number of channel intermediaries at each level of the channel.
4. The number of channels to use.

The decisions made for each are predicated on the objectives, constraints, and activities previously analyzed.

Stage 5: Channel Selection

Most channel design decisions are only slight modifications of the channel structure in response to changing markets, expanding geographic coverage, new customer requirements, or new products. Selection of the appropriate modification in channel structure may be fairly straightforward; in fact, the range of choices may be quite limited. A useful approach to evaluating channel options is provided by Louis Stern and Frederick Sturdivant. The focus on their approach is to create an “ideal” channel system that fully addresses customer needs; once this system is specified, it is compared with the “feasible” channel system created on the basis of management objectives and constraints. The crucial element is to compare both systems on the basis of customer service performance, structure and costs. Channel selection is facilitated by looking at “gaps” that may exist between the systems-existing, ideal, and feasible. One of three conclusions could emerge:

1. All three systems resemble each other. In this case, the existing system is about as good as it can be.
2. Existing and feasible systems are similar, but differ from the ideal. Management constraints and objectives may be causing the gap.
3. All three systems are different. If the feasible system lies between the ideal and existing system can be changed without sacrificing management goals.

The channel decision maker must consider qualitative as well as quantitative factors. Given two channels with similar economic performance , the critical factor may be the degree to control the business marketer can exercise over the channel.^[9]

Channel Administration

Selection of channel members

The process of searching for and choosing intermediaries is an ongoing process due to the fact that they tend to leave the channel from time to time, basing on different circumstances: market's changes, problem within their businesses, etc. Thus the process of choosing intermediaries should be very well managed in order not to reduce the cost of search to the minimum. The most important step to be made in order to fulfill the goal is to secure good intermediaries. The list of probable intermediaries can be reduced to a few by getting the information about the candidates from different sources: current partners, salespeople, potential and actual clients or through databases and professional communities. Nevertheless it should be remembered that the process of choosing the intermediaries is not a one-way street at all, thus the company should bother about its reputation if it wants to have the opportunity to choose the best intermediaries.

Motivating Channel Members

If the company wants to built strong and beneficial relationships within its marketing channels, the company's strategies should be tied up to the capabilities and aims of its distributors, representatives, suppliers. The company's managers should constantly remind themselves that the intermediaries are independent and profit-oriented and thus as soon as they are not satisfied with the current state of affairs they will leave the marketing channel. The manufacturer should seek support from its intermediaries and the quality of that support depends on the motivational techniques used:

• A Partnership.

The motivation of the channel members starts with the realization that every relationship within the channel is a partnership. The communication can be improved by product training, recognition programs, consultations with the manufacturer's representatives and informational meetings where the plans and strategies will be discussed in details. The goal of joining the plans and strategy should be prioritized.

• Dealer Advisory Councils.

In order to enhance the performance of the channel, the manufacturer has to improve the information flow among channel's participants. This can be made by setting down periodical council's meetings among the representatives which aim will be to review distribution policies, provide advice on marketing strategy and supply industry intelligence.

• Margins and Commission.

As long as the main aim of the marketing channel's participants is to get profits, the issue of setting the commission policies is of a high importance. The main information to consider when making decisions upon this matter are the current state of the market, the average margin, the industry standards and the policies of the main rivals. Also the compensation policies should reflect the main tasks which the intermediaries perform. For instance, if one's risks when distributing are higher than average or one adds value to the goods, the manufacturer will have to compensate these.

• Building Trust.

To be competitive, business marketers have to build effective networks and collaborations within channels, and successful cooperation exists only when the partners trust each other. Due to this reason, the manufacturer has several possibilities to make itself more trustful as a partner: supply representatives with more benefits and resources which are superior to that the competitors can offer, set up the alliance with the intermediaries with similar corporate values, sharing all information (forecasts, data, etc) and do not take advantage of the partners.^[9]

References

Notes