Designing Marketing Channels

1. Part 2: Developing the Marketing Channel Designing Marketing Channels

2. Channel Design • Who engages in channel design • Channel design paradigm • When to make a channel design • Distribution objectives • Distribution tasks • Channel structure decisions • Variables affecting channel structure • Heuristics in channel design • Choosing an optimal channel structure

3. Channel Design 1 Channel Design:Decisions involving the development of new marketing channels either where none had previously existed or to the modification of existing channels

4. Channel Design Distinguishing points of the definition include: • A decision made by the marketer • The creation or modification of channels • The active allocation of distribution tasks in an attempt to develop an efficient structure • The selection of channel members • A strategic tool for gaining a differential advantage

5. Who Engages in Channel Design? 2 Firms Wholesalers Retailers • Producers, manufacturers, service providers, franchisors • Look down the channel toward the market • Look both up and down the channel • Look up the channel to secure suppliers

6. Channel Design Paradigm 3 Recognize the need for channel design decision 7. Select channel members 2. Set & coordinate distribution objectives 6. Choose the “best” channel structure 3. Specify distribution tasks 5. Evaluate relevant variables 4. Develop alternative channel structures

7. When to Make a ChannelDesign Decision 4 • Developing a new product or product line • Aiming an existing product at a new market • Making a major change in some other component of the marketing mix • Establishing a new firm • Adapting to changing intermediary policies that may inhibit attainment of distribution objectives

8. When to Make a ChannelDesign Decision • Dealing with changes in availability of particular kinds of intermediaries • Opening up new geographic marketing areas • Facing the occurrence of major environmental changes • Meeting the challenge of conflict or other behavioral problems • Reviewing and evaluating

9. Distribution Objectives 5 Setting distribution objectives requires knowledge of which, if any, existing objectives & strategies may impinge on these distribution objectives.

10. The Need for Congruency Firm’s overall objectives & strategies General marketing objectives & strategies Product marketing objectives & strategies Pricing marketing objectives & strategies Promotion marketing objectives & strategies Distribution marketing objectives & strategies

11. Distribution Tasks 6 Outlining distribution tasks is specific and situationally dependent on the firm. For example: Distribution tasks for a manufacturer of consumer products differs from those for products sold in industrial markets. = Distribution tasks are a function of the distribution objectives and the types of firms involved.

12. Channel Structure Dimensions 7 1. Number of levels in the channel 2. Intensity at the various levels Allocation Alternatives 3. Types of intermediaries at each level

13. Number of Levels • Range from two to five or more • Number of alternatives is limited to two or three choices • Limitations result from the following factors: • Particular industry practices • Nature & size of the market • Availability of intermediaries

14. Intensity at the Various Levels Relationship between the intensity of distribution dimension & number of retail intermediaries used in a given market area. Intensity Dimension Intensive Selective Exclusive Numbers of Intermediaries (retail level) Many Few One

15. Types of Intermediaries • Numerous types • Manager’s emphasis on types of distribution tasks performed by these intermediaries • Watch emerging types • Electronic online auction firms (eBay) • Industrial products sold in B2B markets (Chemdex, Converge.com)

16. Variables Affecting Channel Structure 8 Categories of Variables • Market Variables • Product Variables • Company Variables • Intermediary Variables • Environmental Variables • Behavioral Vari

17. Market Variables Market Geography Location, geographical size, & distance from producer Market Size Number of customers in a market Market Density Number of buying units (consumers or industrial firms) per unit of land area Market Behavior Who buys, & how, when, and where customers buy

18. Product Variables Bulk & Weight Perishability Unit Value Degree of Standardization Technical versus Nontechnical Newness

19. Company Variables Size The range of options is relative to a firm’s size Financial The greater the capital, the Capacity lower the dependence on intermediaries Managerial Intermediaries are necessary Expertise when managerial experience is lacking Objectives Marketing & objectives may & Strategies limit use of intermediaries

20. Intermediary Variables Availability Availability of intermediaries influences channel structure. Cost Cost is always a consideration in channel structure. Services Services that intermediaries offer are closely related to the selection of channel members.

21. Environmental Variables The impact of environmental forces is a common reason for making channel design decisions. Economic Forces Competitive Forces Legal Forces Technological Forces Sociocultural Forces

22. Behavioral Variables Develop congruent roles for channel members. Be aware of available power bases Attend to the influence of behavioral problems that can distort communications.

23. Heuristics in Channel Design 9 Benefit Fairly simple prescriptions for channel structure Limitation Mostly useful as rough guide to decision making

24. Choosing an Optimal Channel Structure 10 • Why is choosing an optimal channel structure • not possible? • Management is incapable of knowing all possible alternatives. 2. Precise methods for calculating the exact payoffs associated with each alternative structures do not exist. BUT Techniques exist for developing more exact methods.

25. Approaches for Choosing Channel Structure • “Characteristics of Goods & Parallel Systems” Approach • Financial Approach • Transaction Cost Analysis Approach • Management Science Approaches • Judgmental-Heuristic Approach

26. Judgmental-Heuristic Approaches Management’s ability to make sharp judgments is high IF + Good empirical data on costs and revenues is available It’s possible to make highly satisfactory channel-choice decisions using judgmental-heuristic approaches

27. Discussion Question #1 Best Buy Co., the largest consumer electronics retailer in the world, is famous for its giant 40,000 square-foot “big-box” stores. This channel has served Best Buy well over the years as consumers wandered through the giant product displays in the cavernous stores, and competitors such as Circuit City were literally driven out of business by Best Buy’s dominant stores. But by the end of the first decade of the Twenty-first century, Best Buy made a channel design decision that focused on adding a retail channel consisting of much smaller 3,000 square-foot stores to its large-store channel. The new smaller stores will be located in shopping malls as well as in urban downtown venues. Best Buy designed this new small-store channel structure mainly to do a better job of reaching the still-growing market for mobile phones, especially smartphones. These smaller stores will sell almost one hundred different phones as well as the services of nine carriers. Do you think Best Buy’s channel design decision is a good one? What other channel design options might Best Buy have pursued to accomplish its distribution objective?

28. Discussion Question #2 Vending machines have existed as a mechanical channel for distributing a variety of products for many decades. Traditionally the typical products found in vending machines were soft drinks, candy, cigarettes, and snack foods. But in recent years the variety of products sold through vending machine channels has broadened dramatically. Consumers can now buy digital cameras, DVDs, iPods, baby diapers, and in Germany, even solid gold bars for which the price charged changes every two minutes with the ups and downs of the price of gold. From a channel design standpoint, what do you see as the key variables to consider in determining whether vending machines could be a feasible channel choice for any given product of your choice?

29. Discussion Question #4 Marketing channels should be designed to make products and services conveniently available to customers, how, when, and where they want them. This is exactly what several franchises such as Cousins Submarines Inc., Tasti D-Lite LLC frozen yogurt, and Toppers Pizza Inc. intend to do by changing their channel structures to include mobile channels consisting of fully equipped trucks and vans that can bring many of the products sold in their bricks and mortar stores right to customers where they work and play. How will potential customers know when and where these truck and van mini-restaurants will appear? Simple customers can track the whereabouts of the vendors by going to Facebook, Twitter, and FourSquare. Do you think this type of mobile channel is just a novelty in fast-food channels or does it have the potential to be a major force for change in the channel structure of fast-food and other product and service distribution channels?