Chap. 15Designing and Managing

Integrated Marketing Channels

Raymund C. PiñonMarketing Management V57

Prof. Bong De Ungria

Outline 6th Task of Marketing – Delivering Customer Value

Marketing channels: definition, importance, examples

Functions of marketing channels

Flows and levels of marketing channels

Value networks – a broader view of customer value delivery

How to design marketing channels

Challenges in managing channels

Integrated marketing channels – a new development

Channel conflicts and how they are managed

Key issues with e-commerce

Recall: Marketing is…

A system of profitably creating, DELIVERING and communicating superior VALUE to satisfy customers’ needs, wants and demands better than competition.

To achieve this, the 6th Task of Marketing is…

1. Developing marketing strategies and plans

2. Capturing marketing insights and performance

3. Connecting with customers

4. Building strong brands

5. Shaping the marketing offer

6. Delivering and communicating value

7. Creating successful long-term growth

1st some definitions

Marketing Channels, Trade Channels, Distribution Channels A set of interdependent organizations involved in the process of making products or

services available for use or consumption

A set of pathways a product or service follows after production, culminating in purchase and use by the final end-user

Intermediaries performing a variety of functions

Value-delivery network A company’s supply chain and how it partners with specific suppliers and distributors

to make products and bring them to markets

Value-delivery system All the expectancies the customers will have on the way to obtaining and using the

offering

Value networks A system of partnerships and alliances that a firm creates to source, augment and

deliver its offerings

Examples of Intermediaries

Merchants Wholesalers and Retailers Buy, take title to goods, resell

Agents Brokers, manufacturers’ representatives, sales agents Look for customers, negotiate for producer, don’t take title

to goods

Facilitators Transportation companies, warehouses banks, advertising

agencies Assist in the distribution process but don’t take title to

goods nor negotiate on purchases or sales

Why are Channels Important?Channel functions and flows

Gather marketing information

Develop and disseminate persuasive communications

Reach agreement on prices and terms to effect transfer of ownership or possession of goods

Place order with manufacturers

Acquire funds to finance inventory

Assume risks for carrying out channel functions

Provide for storage and movement of physical products

Provide for buyers’ payment of bills through banks

Oversee actual transfer of ownership of goods

Convert potential buyers into profitable customers

Why are Channels Important?Marketing channel system

Choice of particular set of marketing channels a firm employs is critical They account for 30% to 50% of SRP They can convert potential buyers to profitable customers Channel decisions affect all other marketing decisions

Pricing Sales force and advertising decisions Involve long-term commitments with other firms

as well as a set of policies and procedures Channel decisions must align with overall strategy

So (again) Step #1 is…Understanding Customer NeedsConsumers choose where to buy based on:

Price

Product assortment

Convenience

Personal shopping goals

Marketers using different channels must be aware that different consumers have different needs

during the buying process

There are 5 marketing flows in a marketing channel

SuppliersTransporters, Warehouses

Manufacturer Dealers Transporters CustomersTransporters, Warehouses

Suppliers

Suppliers

Suppliers

Suppliers Manufacturer

Manufacturer

Manufacturer

Manufacturer

Banks

Transporters, Warehouses,

Banks

Transporters, Banks

Transporters, Warehouses,

BanksDealers Customers

Customers

Customers

Customers

Banks BanksDealers

Advertisingagencies

Advertisingagencies

Dealers

Dealers

Physical Flow

Title Flow

Payment Flow

Information Flow

Promotions Flow

Channel Levels (Paths)There are different levels of marketing channels in consumer and industrial markets

Manufacturer ManufacturerManufacturer Manufacturer Manufacturer Manufacturer

Wholesaler Wholesaler Manufacturer’sRepresentative

Industrialdistributor

Jobber

Retailer Retailer Retailer

Manufacturer Manufacturer

Manufacturer’sSales Branch

Industrialcustomers

Industrialcustomers

Industrialcustomers

IndustrialcustomersConsumer Consumer Consumer Consumer

0-level 1-level 2-level 3-level 0-level 1-level 2-level 3-level

Consumer Marketing Channels Industrial Marketing Channels

A broader view of delivering customer value: Value NetworksPartnerships created to source, augment & deliver offerings

From a linear view -> Supply Chain See markets as destinations

To a customer-centric view -> Demand Chain Planning Emphasize what customers are looking for instead of what we are selling SIVA 4-Ps

Solutions Product Information Promotions Value Price Access Placement

To a broad view of customer value delivery -> Value Networks Seeing the company at the center of a value network Include suppliers, suppliers’ suppliers, immediate customers and their end customers A company needs to orchestrate these parties in order to deliver superior value to the

target market Managing value chains require increased investments in IT and software

SCM SAP, Oracle ERP CRM

Channel Design DecisionsWhat are key issues in designing channels?

1. Analyzing customer needs

2. Establishing channel objectives

3. Evaluating major channel alternatives

In Channel Design, Step #1 is…Analyze customers’ desired service output level

There are 5 channel service outputs

Lot size – customers prefer lot size of one

Waiting and delivery time – fast delivery channels

Spatial convenience – ease of purchase

Product variety – greater assortment

Service back-up – credit, delivery, service, repair, training, consulting

Note: increased service output = increased channel costs, and increased prices to consumers. Some customers are willing to accept smaller service outputs if they could save on costs

Channel Design Decision Step #2 is…Establishing channel objectives and constraints

State channel target service output level

Arrange channel tasks to minimize total channel costs and provide desired service level output

Choose market segments to serve and best channels for each

In entering new markets, observe what competitors are doing

Adapt channel objectives to larger environmental context E.g. During depression – use shorter channels to maintain price E.g. Note legal constraints – vs. monopoly

Channel Design DecisionsIn establishing channel objectives and constraints

Vary objectives to suit product characteristics

For perishables – direct marketing

For bulky (building materials) – minimize shipping distance and amount of handling

Nonstandard products (custom-built machinery) – sales force

Products needing installation or maintenance (heating or

cooling systems) – sales force or franchised dealers

High-unit value products (generators of turbines) – sales force

In Channel Design Decision, Step #3 is…Identifying and evaluating major channel alternatives

Channel Advantages Disadvantages

Sales Force or owned branches

Can handle complex products and transactions

Too expensive

Internet, telemarketing

Less expensive Not effective with complex products

Distributors Can create sales Customer contact by company is lost

Manufacturer’s representatives

Able to contact customers at low cost per customer because several clients share costs

Selling effort per customer is less intense than if company reps did the selling

Choose a mix of channels that reach different segments of buyers and delivers the right products at the least cost

In Evaluating Channels Consider 3 elements of channel alternatives

1. What types of business intermediaries are available?

2. How many intermediaries are needed? Exclusive distribution – limited number of intermediaries

Maintain control of service levels and outputs offered by intermediaries

Selective distribution – few but less than all Gain adequate market coverage, more control, less cost

Intensive distribution

Places its products in as many outlets as possible

3. What are the terms, and what are the responsibilities of each channel members?

In Channel Design Evaluate major channel alternatives using…

Economic criteria

Control criteria

Adaptive criteria

Economic criteria in channel evaluationEach channel alternative will generate different levels of sales and costs

low high

Val

ue-

Ad

ded

of

Sal

es

Cost per Transaction

Internet

Telemarketing

Retail Stores

Distributors

Value-Added

partners

Salesforce

low

high

Direct marketing channels

“Indirect” channels

Direct saleschannels

Try to align customers and channels to maximize demand at the lowest overall cost

Channel Design DecisionsControl and adaptive criteria in evaluation

Using sales agency poses control problems for you They are independent firms seeking to maximize profits They concentrate on customers who buy They may not master technical details of product or handle

promotions effectively

In rapidly changing, volatile, or uncertain product markets, producers need channel structures and policies that provide high adaptability

Channel Management DecisionsAfter choosing a channel system, the company must:

1. Select individual channel members

2. Train and motivate channel members

3. Evaluate individual channel members

4. Modify channel design and arrangements

over time

Channel Management DecisionsAfter choosing a channel system, the company must:

1. Set criteria for selection of channel members Number of years in business Other lines carried Growth and profit records Financial strength Cooperativeness Service reputation Size and quality of sales force Location Type of clientele Future growth potential

Channel Management DecisionsAfter choosing a channel system, the company must:

2. Train and motivate channel members

Understand intermediaries’ needs and wants Construct a channel positioning Implement capacity-building programs

Training Market research

Exercise channel power to compel action

Channel Management DecisionsAfter choosing a channel system, the company must:

2. Train and motivate channel members Types of power to elicit cooperation

Coercive power Threaten to withdraw a resource or terminate a relationship

Reward power Higher margins, deals, premiums, cooperative advertising

allowances, display allowances, sales contest, bonuses

Legitimate power Use contract agreements to force compliance

Expert power Posses special knowledge the intermediary values

Referent power Intermediary feels proud to be associated with producer

Channel Management DecisionsIn motivating channel members

2. Forge long-term partnerships by clarifying expectations Market coverage Inventory levels Marketing development Account solicitation Technical advise and services Marketing information

Channel Management DecisionsIn motivating channel members

2. Streamline supply chain and cut costs:ECR – Efficient Consumer Response practices help organize relationship in 3 areas:

Demand-side management

Stimulate demand with joint sales and marketing activities

Supply-side management

Focus on logistics and supply chain activities to optimize supply

Enablers and integrators

Use IT and process improvement tools to support joint activities

Channel Management DecisionsAfter choosing a channel system, the company must:

3. Evaluate individual channel members on… Sales quota achievement Average inventory levels Customer delivery time Treatment of damaged

and lost goods Cooperation in training

and promotions programs

Note: underperformers need to be counseled, retrained, motivated or terminated

Channel Management DecisionsAfter choosing a channel system, the company must:

4. Modify channel design and arrangements over time when: Channel is not working as planned

Consumer buying patterns change

Market expands

New competition arises

Innovative distribution channels emerge

Product moves into later stages of PLC

Note: change may mean adding or dropping individual channel members, adding or dropping market channels, or developing totally new ways to sell goods

In managing channels, how much effort to devote to push or pull?

Push strategy for low-involvement, impulse products Use sales force, trade promo to induce

intermediaries to carry, promote and sell products to end-users

Pull strategy For high-involvement, differentiated offers Use advertising, consumer promotions

and other forms of communication to persuade consumers to demand the product from intermediaries

Channel Integration and SystemsSome of the recent developments in channels

Vertical Marketing Systems

Corporate VMS Administered VMS Contractual VMS New competition in retailing

Horizontal Marketing Systems

Integrating Multi-channel Marketing Systems

Channel Integration and SystemsSome of the recent developments in channels

Vertical Marketing Systems

Producer, wholesaler(s) and retailer(s) acting as a unified system

Channel captain owns others or franchises them or has so much power that they all cooperate

Strong channel members’ attempts to control channel behavior and eliminate conflict

Achieve economies of scale via size, bargaining power, and elimination of duplicate services

Provides extensive exchange of information

Channel Integration and SystemsSome of the recent developments in channels

New competition in retailing Is no longer between independent business units

but between

whole systems of centrally-planned networks (Corporate, administered, and contractual)

competing against one another

to achieve the best economies and customer response

Channel Integration and SystemsSome of the recent developments in channels

Horizontal Marketing Systems

Two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity

Each company lacks capital, know-how, production or marketing resources to venture alone or is afraid of the risks

Arrangements may be temporary, permanent or result in joint-venture company

Channel Integration and SystemsSome of the recent developments in channels

Integrating Multi-channel Marketing Systems

Multi-channel marketing

A company uses two or more channels to reach one or more customer segments

Integrated marketing channel system

Strategies and tactics of selling through one channel reflects the strategies and tactics of selling through other channels

Channel Integration and Systems3 benefits of multi-channel marketing systems

Increased market coverage Customers can shop for company

products in more places Multi-channel shoppers are

more profitable customers

Lower channel cost Selling by phone is cheaper than selling

by personal visit to small customers

More customized selling Adding a technical sales force to

sell more complex products

Channel Integration and SystemsDisadvantages of multi-channel marketing systems Channel conflicts

Channels competing for same customer

New channels independent and makescooperation difficult

Problems with control

Execution of merchandizing and promotions programs

Market coverage and frequency of visits to customers

Inventory levels

Handling of customer complaints, returns and damaged goods

Allocation of effort to other principals served by intermediaries

In Channel ArchitectureDetermine which channels should perform which functions

Better

Information

Disseminate

information

Reach price

agreement

Pace orders

Acquire funds for

inventories

Assume risks

Facilitate product

storage & movement

Facilitate payment

Oversee ownership

terms

Internet

National account management

Direct sales

Tele-marketing

Direct mail

Retail stores

Distributors

Dealers and value-added resellers

Advertising

Ven

do

r

Cu

sto

mer

Demand-generation Tasks

Mar

keti

ng

ch

ann

els

an

d

Met

ho

ds

Multi-channel architecture optimizes coverage, customization and control, while minimizing costs and conflict

Conflict, Cooperation and CompetitionCauses of channel conflicts

Goal incompatibility Low-price market penetration strategy vs.

high-margin, short-run profitability

Unclear roles and rights Territorial boundaries Sales crediting

Differences in perception Optimistic vs. pessimistic views on business prospects Differences in perception about advertising strategy

Intermediaries’ dependence on the manufacturer Exclusive dealers are at the mercy of manufacturers’

product and pricing policies

Conflict, Cooperation and CompetitionManagement of channel conflicts

As companies add channels to grow sales, they risk creating channel conflicts

Too much conflict is dysfunctional

The challenge is not to eliminate conflicts but to manage them through

Adoption of super-ordinate goals – agree on goals they jointly seek

Exchange of employees – e.g. between manufacturer and dealer

Joint membership in trade associations – manufacturers and marketers

Co-optation – include leaders in boards, advisory councils

Diplomacy, mediation, or arbitration – conflict resolution methods

Legal recourse

E-Commerce Marketing PracticesSome definitions

E-business Use of electronic means and platforms to conduct a company’s

business

E-commerce Company or site offers to transact or facilitate the selling of

products and services online

E-purchasing Purchase of goods, services and information from online sources

E-marketing Efforts to inform buyers, communicate, promote and sell

company products and services over the internet

E-Commerce Marketing PracticesSome advantages

Provides convenient, informative and personalized experiences for different types of customers

Allows online retailers to sell low-volume products to niche markets at lesser or no cost in maintaining retail floor space, staff, and inventory

E-Commerce Marketing Practices3 Aspects of online transactions in retailing competition

Customer interaction with the Website

Delivery of the product

Ability to address problems when they occur

E-Commerce Marketing Practices2 Types of Online Competitors

Pure-Click Companies Launched a website without previous existence as a company

Search engines ISPs Commerce sites – amazon.com, buy.com

sell all types of products and services – books, music, toys, stocks, clothes, insurance, financial services

Transaction sites Content sites Enabler sites

Brick-and-Click Companies Existing companies that have added an online site for information

or e-commerce

E-Commerce Marketing PracticesIssues of using online channels for Brick-and-Click and how to handle them

Potential channel conflict with retailers, brokers, agents and branch outlets

How to sell both to intermediaries and online?

Offer different brands or products online

Offer off-line partners higher commissions to offset negative impact on sales

Take orders on the web but have retailers deliver and collect payment

M-Commerce

Wireless internet-connectivity to do business Location-based services

Summary of Top 10 Concepts 6th Task of Marketing – Delivering Customer Value

Marketing channels: definition, importance, examples

Functions of marketing channels

Flows and levels of marketing channels

Value networks – a broader view of customer value delivery

How to design marketing channels

Challenges in managing channels

Integrated marketing channels – a new development

Channel conflicts and how they are managed

Key issues with e-commerce