MARKETING CHANNEL DESIGN DECISIONS
Marketing channel (also termed channels of distribution) design decisions are critical for successful product distribution. Marketing channels consist of intermediaries who contribute to the product distribution process according to consumer demand. They consist of merchant middlemen, agent middlemen, and facilitators. Companies rely on market intermediaries because of their effectiveness in distributing products as well as their capitalization. A company`s chosen channel members develop long-term relationships built on trust, and directly affect the marketing process including price. Marketing channels always have a producer and a final consumer.
Who are merchant middlemen?
Merchant middlemen consist of wholesalers and retailers who actually purchase the product and resell it. Wholesalers buy in large lots and sell in smaller quantities to retailers who in turn sell individual units to the consumer. Wholesalers and retailers assume the risk of ownership in return for a profit markup when selling the merchandise to others.
Who are agent middlemen?
Agent middlemen are sales intermediaries such as brokers, product representatives and sales representatives who seek others to purchase merchandise. They do not actually purchase any merchandise and are compensated on the basis of a percentage of sales and/or salary depending on whether they are independent business people or employees of companies wishing to sell products.
Who are facilitators?
Facilitators are intermediaries who directly assist in the distribution function without taking title to the goods. They consist of a range of organizations including advertising agencies, financial lending organizations, shipping companies, and storage warehouses.
What is channel length?
Channel length describes the number of intermediary levels existing between the producer and the consumer. A direct, or zero, channel is one where there is a direct relationship between the producer and the consumer (e.g., a neighborhood bakery may be considered a direct channel since the retail consumer purchases the finished baked goods directly with no intermediaries). A one-level channel has one intermediary which is usually a retailer (e.g., a regional bakery goods operation utilizes local food stores to distribute the product to the consumer). A two-level channel has two intermediaries to distribute products to the consumer (e.g., a candy manufacturer sells the product to a wholesaler who in turn sells to the retailer). A three-level channel has three intermediaries normally consisting of an agent middleman who sells to a wholesaler who then sells to a retailer.
How are channels developed?
Developing channels of distribution requires many decisions. Channel distribution needs grow and develop as companies grow and markets change. Increased channel utilization increases costs which are passed on to the consumer. The design of channel development begins by studying the buying patterns of the target customers.
What are consumer buying patterns?
Consumer buying patterns affect a channel`s characteristics and are classified in the following ways:
• Units purchased. Different customers have different purchasing needs. Commercial customers normally purchase larger lot sizes than do the household consumer. Channel modifications have to be made to meet these different needs.
• Turnaround times. Some industries, such as fast foods, use rapid turnaround times as an inherent part of the business, while other businesses may have longer turnaround times. Industries having customers needing rapid turnaround times require more direct channels of distribution than those with slower turnaround times.
• Product assortment. Industries, particularly retail, offering large product assortments have a need for deeper channels of distribution in order to provide product variety.
• Services. High levels of services, including repair, delivery, installation and others, require more intensive channel utilization.
How many intermediaries should be used in a channel?
Determining the number of intermediaries will affect the marketing of a product. Longer channels have more intermediaries and higher costs. On the other hand, intermediary expertise may be essential for successfully marketing a particular product. Thus, a manufacturer may try and limit the number of intermediaries in order to contain costs. The tradeoff in having fewer intermediaries is limited distribution.
As manufacturers continue to penetrate markets, greater distribution is desired involving more intermediaries. While this will increase distribution, it will also increase costs while sacrificing some degree of marketing control. This may result in having the product incorrectly positioned.
Finally, not all intermediaries are the same. The marketer wants only those intermediaries who most effectively work with the company to distribute the product.
How do company characteristics affect channel development?
Generally, the companies having the largest array of retail products, particularly product consumables, have the least need for intermediaries. They are well-enough positioned in the market to deal directly with retail outlets. Smaller companies with smaller product lines have a greater need for the market distribution strengths of intermediaries.
How do product characteristics affect channel development?
Products that are perishable, time sensitive (such as fashions), heavy and bulky, or are highly unique in nature (such as those requiring specialized training) generally have short channels of distribution. On the other hand, standardized products often move through several intermediaries in the distribution process.
How are channel alternatives evaluated?
There are several issues in evaluating channel alternatives. One issue is choosing the most economically effective channel alternative. Companies must evaluate channel intermediaries based on those that have the largest level of sales per unit of selling cost. Other issues concern the extent to which marketing management control will be lost by including a sales agency or other sales broker in the marketing channel. A final variable is choosing a channel intermediary that will still allow the producer to maintain maximum marketing flexibility in fast moving markets.
What are the challenges in managing market channel intermediaries?
Several issues are important in channel management.
• Choosing the most effective channel alternatives. Management must determine what the characteristics are the most effective channel intermediaries. Having done this, management must develop strategies for attracting these channel intermediaries to the marketing channel.
• Maximizing channel member effectiveness. Management must motivate channel members to create the most cost-effective market distribution system for the company.
• Evaluating the effectiveness of intermediaries. Management must develop channel member evaluation systems. While seeking the cooperation of channel members, it is still essential to determine what profit standards must be used as the basis for evaluation.