Marketing Management and International Trade

Lesson 18. MARKETING CHANNELS

Module 5. Elements of marketing mix – III. place

Lesson 18

MARKETING CHANNELS

18.1 Introduction

Most of the production organization does not sell their products directly to the Consumers. They take help of other middlemen/agencies (Intermediaries). They are called as marketing channels. These marketing intermediaries comprise of sole selling agents, marketers, wholesalers, distributors, stockiest, semi wholesalers, retailers brokers/ commission agents, franchise dealers, authorized representative jobbers.

Based upon the role performed by these intermediaries they are classified into following types.

(i) Merchants: They buy, take title to and resell the products. For example, wholesalers, and retailers.

(ii) Agents: They search for customers, negotiate on behalf of producer and do not take title to goods. For example brokers, sales agents.

(iii)Facilitators: They do not take title of goods, does not negotiate purchase or sale. They only assist in distribution process. For example transportation companies, independent warehouses, financial institution, advertising agencies.

18.2 Functions of Marketing Channels/Channel Members

1. Collect information pertaining to current or potential consumers, competitors and others important variables of marketing environment.
2. Create and transmit persuasive communications to increase sale.
3. Negotiate transfer deals among channel members.
4. Put purchase orders to suppliers/producers.
5. Make financial arrangement to hold inventories.
6. Bear risk of distribution work.
7. Arrange for storage and transport of physical goods.
8. Arrange for payment to parties.
9. Conduct overall supervision to affect transfer of goods.
10. Undertake stock holding and sub distribution.
11. Undertake presale, sale and after sale service.
12. Helps in sales promotion.
13. Act as a change agent by transferring technology to end users.
14. Keep necessary records / documents.
15. Provide feedback, market intelligence and credit to channel member.
16. Facilities introduction of new product in market.
17. Maintain liaison.

18.3 Marketing Flows in Channels

The various functions associated with market channel are must and it is necessary that each function is carried out by at least one of the channel members. All channel members do not specialize in all type of market flows. Certain channel members only specialize in specific flows as indicated below.

18.4 Channel Levels

Channel levels are categorized based upon number of intermediaries from manufacturer to consumer. The commonly used channel levels are shown below.

Fig. 18.1 Levels of channels

Channels generally denote the movement of product from manufacturer to users in forward direction. There are also reverse flow channels which take back products or packaging materials with following objectives. (a) To again use the same containers (b) To recycle products as in the case papers. (c) To dispose of waste products. Reverse flow channels are useful from environment point of views as they try to reduce damaging effect of some non degradable waste products. A diagrammatic view of reverse flow channel is shown below.

Fig. 18.2 Reverse flows

18.5 Important Channel Participants

Manufacturers, wholesalers are acting as important channel participant. They are described below.

18.5.1 Manufacturers

Those who produce the product are referred to as manufacturers.

18.5.2 Wholesalers

They sell to retailers, other merchants, industrial users, commercial users, institutional users. They do not sell in large quantities to final consumers. Wholesalers can be classified into merchant wholesalers, agents and manufacturer’s sales and branch office. Merchant Wholesalers take ownership and associated risk. Based upon number of functions carried out by the merchant wholesaler, they are categorized as full function (jobber) or limited function merchant wholesaler. Full function wholesaler carryout almost all or most of the marketing functions. Limited function Wholesalers carry out only some of the functions. Agent Wholesalers do not take ownership and rarely take possession of the products. Agents are further classified as manufacturer’s agents, brokers, commission merchants, selling agents and auction companies. Manufacture agents are independent firm which are mostly used in place of manufacturer’s own sales force. They generally handle variety of non – competing products of different manufacturers. Brokers are the middlemen engaged in establishing contacts between sellers and buyers and used primarily in real estate business. Commission merchants obtain goods on consignment basis and sell them on commission basis. They are used in instances where consumers are somewhat least concerned with producer’s identity. For example agricultural produce. Selling agents are the persons who do not take title of the goods but they generally engaged in producer’s entire product line. They generally set the price, Terms of sales and do engage in promotional activities. Auction companies bring buyers and sellers at a common place and actively negotiate the sale of those products. They are generally used in automobile sales.

18.5.3 Branch and sales office of producers

These are physical facilities away and separate from the manufacturing units. Sales branches keep inventory whereas sales offices do not keep inventory.

18.6 New Developments

Traditional marketing channels comprise of different levels based upon number of intermediaries. Apart from this traditional type, now-a-days following new developments have also taken place.

18.6.1 Vertical marketing systems (VMS)

In a traditional distribution channel, all the channel members are independent. All the members try to maximize their own profit at the cost of overall profit of a whole system. As the members are independent, no one has control over others. In vertical marketing system (VMS) one channel member owns the other and the producer, wholesaler, retailer as a channel members work in a unified system. The channel captain posses power so that all other channel members co-operate to perform functions of sales, delivery and service. VMC are of following types.

18.6.1.1 Corporate VMS

This involves successive stage of production and distribution under one ownership. For example, many petroleum product companies not only owns production but also have their own retail outlets.

18.6.1.2 Administered VMS

It involves co-ordination of successive stages of production and distribution through size and power of one of the members. The production organization with strong brands are able to manage such a VMS by obtaining co-operation of other channel members.

18.6.1.3 Contractual VMS

In this system, dependent organization possessing different production and distribution join and come together in a contractual agreement so as to manage distribution.

18.6.2 Horizontal marketing system (HMS)

In this system two or more production organization joins to exploit a new marketing opportunity. Individually each organization does not possess sufficient knowhow and expertise to produce and sell the product alone.

18.6.3 Multi channel marketing

This is a system in which one organization uses two or more channel to sell same consumer segments. It is done to obtain more distribution efficiency. It is very crucial to manage channel conflicts in this system.

18.7 Channel Design Decisions

In order to make the product available to the consumer it is necessary to design an effective and efficient channel for smooth flow of products from producer to consumer. Channel design decisions involve the following four aspects.

18.7.1 Analyzing desired service output level of consumers

Each channel has following five service outputs

a) Lot size

This refers to the number of units which consumers can purchase on a single purchase transaction. In general for household purchases, consumer prefers a channel which allows to purchase a single unit. In business / organizational purchase, more units are purchased in a single occasion.

b) Waiting and delivery time

This is the average time, the consumer has to wait to obtain the products / services after placing the order. Consumers prefer those channels which have less average waiting and delivery time.

c) Spatial convenience

The degree to which the channel helps to make purchase. Consumers prefer to have speedier and easier purchase.

d) Product variety

It refers to number of different products of same or related category offered by the organization. Consumers prefer more variety. Most of the two wheeler companies in India now have large number of different vehicles for consumers.

e) Service backup

The consumer prefer greater service backup in terms of speedy and easy delivery installation. Providing credit facility and after sales service including repairs, extended warranty period.

18.7.2 Deciding objectives

Channel objectives are dependent on type of product. For perishable product, short channel is required. A bulky product requires longer channel. For customized product, direct marketing is the best option. The organizations should aim at minimum channel cost without affecting product availability. In general, the channel objectives might be to make the product available in the target market in cost effective and economic distribution and to have smooth and speedy transfer of goods and information from producer to consumers.

18.7.3 Identification and evaluation of important channel alternatives

It is possible to sale a product by many different alternative channels. The organization has to choose channels. The organization has to choose appropriate channel considering cost and type of product. The different intermediaries available to the organization to act as a channel member are: company’s own sales force, middleman, agent / broker, wholesaler, Retailer, distributor, dealer, merchants, and value added resellers, carrying and forwarding agents. A company can use adequate number of intermediaries to make the product available to consumers. Based upon number of intermediaries used, the channel can be categorized as intensive, selective or exclusive distribution. In exclusive distribution, only one outlet is kept. In selective distribution, the product is made available through few carefully selected outlets in a selected market area. In intensive distribution the product is made available in large number of appropriate places.

After selecting the type and number of intermediaries, they should be evaluated on following three criteria

a) Economic

Cost of Channel member for making product available to final consumer.

b) Control

The level of control that can be affected by organization on channel members.

c) Adaptability

The responsiveness of channel member to dynamic marketing environment.

18.8 Channel Conflict and its Resolution

There are chances of eruption of channel conflict among different channel members for business related reasons. A vertical channel conflict occurs between different levels within same channel. For example conflict between producer and distributor regarding commission. Horizontal conflict occurs between members of the same level in the channel. For example dealers indulging in conflict about geographical territory. A multichannel conflict occurs between two or more channels through which producer sells their products in the same market.

Conflicts are also desirable to some extent and hence instead of eliminating conflicts all together, it is desirable to manage them by adopting super ordinate goals, exchange of persons, joint membership in trade associations, co-operation, through diplomatic means, mediation, arbitration and finally by adopting legal recourse.