Designing

And Managing
Integrated
Marketing
Channels
Learning Objectives

1. What is a marketing channel system and

value network?
2. What work do marketing channels
perform?
3. How should channels be designed?
4. What decisions do companies face in
managing their channels?
5. How should companies integrate channels?
Learning Objectives

6. What are the key channel issues in e-

commerce?
7. What are the key channel issues in m-
commerce?
8. How should companies manage channel
conflict?
Marketing Channels
and Value Networks
Marketing channels
◦ Sets of interdependent
organizations participating in the
process of making a product or
service available for use or
consumption
◦ Intermediaries: merchants, agents,
and facilitators
Marketing Channels
and Value Networks
Most producers do not sell their goods directly to the final users; between them stands a set of
intermediaries performing a variety of functions.

These intermediaries constitute a marketing channel (also called a trade channel or distribution
channel). Some intermediaries—such as wholesalers and retailers—buy, take title to, and resell
the merchandise; they are called merchants.

Others—brokers, manufacturers’ representatives, sales agents—search for customers and may

negotiate on the producer’s behalf but do not take title to the goods; they are called agents.

Still others— transportation companies, independent warehouses, banks, advertising agencies

—assist in the distribution process but neither take title to goods nor negotiate purchases or
sales; they are called facilitators.
Marketing Channels
and Value Networks
A marketing channel system
◦ The particular set of marketing channels a firm employs
◦ Push vs. pull strategy
Marketing Channels
and Value Networks
One of the chief roles of marketing channels is to convert potential buyers into profitable
customers.

Marketing channels must not just serve markets, they must also make them.

In managing its intermediaries, the firm must decide how much effort to devote to push and to
pull marketing.

A push strategy uses the manufacturer’s sales force, trade promotion money, or other means to
induce intermediaries to carry, promote, and sell the product to end users.

In a pull strategy the manufacturer uses advertising, promotion, and other forms of
communication to persuade consumers to demand the product from intermediaries, thus
inducing the intermediaries to order it.
Marketing Channels
and Value Networks
Multichannel marketing
◦ Using two or more marketing
channels to reach customer
segments in one market area
◦ Omnichannel marketing
◦ Integrated marketing channel
system
Marketing Channels
and Value Networks
Each channel can target a different segment of buyers, or different need states for one buyer,
to deliver the right products in the right places in the right way at the least cost.

When this doesn’t happen, channel conflict, excessive cost, or insufficient demand can result.

Research has shown that multichannel customers can be more valuable to marketers.

Most companies today have adopted multichannel marketing.

Marketing Channels
and Value Networks
Companies are increasingly employing digital distribution strategies, selling directly online to
customers or through e-merchants who have their own Web sites.

In doing so, these companies are seeking to achieve omnichannel marketing, in which
multiple channels work seamlessly together and match each target customer’s preferred
ways of doing business, delivering the right product information and customer service
regardless of whether customers are online, in the store, or on the phone.

An integrated marketing channel system is one in which the strategies and tactics of selling
through one channel reflect the strategies and tactics of selling through one or more other
channels.
Marketing Channels
and Value Networks
Value network
– A system of partnerships and alliances that a firm creates to source, augment, and
deliver its offerings
– Demand chain planning
Marketing Channels
and Value Networks
A value network includes a firm’s suppliers and its suppliers’ suppliers and its immediate
customers and their end customers. It also incorporates valued relationships with others such
as university researchers and government approval agencies.

A supply chain view of a firm sees markets as destination points and amounts to a linear view
of the flow of ingredients and components through the production process to their ultimate
sale to customers. The company should first think of the target market, however, and then
design the supply chain backward from that point. This strategy has been called demand
chain planning.
Marketing Channels
and Value Networks
The digital channels
revolution
◦ Customer support in
store/online/phone
◦ Check online for product availability at
local stores
◦ Order product online to pick up at
store
◦ Return a product purchased online to
a nearby store
Marketing Channels
and Value Networks
The digital revolution is profoundly transforming distribution strategies. With customers—both
individuals and businesses—becoming more comfortable buying online and the use of smart
phones exploding, traditional brick-and-mortar channel strategies are being modified or even
replaced.

Customers want the advantages both of digital—vast product selection, abundant product
information, helpful customer reviews and tips—and of physical stores—highly personalized
service, detailed physical examination of products, an overall event and experience.
The Role of Marketing Channels
A marketing channel performs the work of moving goods from producers to consumers.

It overcomes the time, place, and possession gaps that separate goods and services from
those who need or want them.

Members of the marketing channel perform a number of key functions

The Role of
Marketing Channels
Marketing Flows
Members of the marketing channel perform a number of key functions.

Some of these functions (storage and movement, title, and communications) constitute a
forward flow of activity from the company to the customer;

Ordering and payment constitute a backward flow from customers to the company.

Still others (information, negotiation, finance, and risk taking) occur in both directions.

Five flows are illustrated in Figure.If these flows were superimposed in one diagram, we
would see the tremendous complexity of even simple marketing channels.
Marketing Flows
The Role of
Marketing Channels
Channel levels
◦ Zero-level channel (direct)
◦ One/two/three-level channels (intermediaries)
◦ Reverse-flow channels

Service sector channels

Channel Levels
A zero-level channel, also called a direct marketing channel, consists of a manufacturer
selling directly to the final customer.
◦ The major examples are mail order, online selling, TV selling, telemarketing, door-to-door sales,
home parties, and manufacturer-owned stores.

A one-level channel contains one selling intermediary, such as a retailer.

A two-level channel contains two intermediaries, typically a wholesaler and a retailer,

A three-level channel contains three.

Consumer/Industrial Marketing Channels
Channel Levels
Channels normally describe a forward movement of products from source to user, but
reverse-flow channels are also important
1. to reuse products or containers (such as refillable chemical-carrying drums),
2. to refurbish products for resale (such as circuit boards or computers),
3. to recycle products, and
4. to dispose of products and packaging.

Reverse-flow intermediaries include manufacturers’ redemption centers, community

groups, trash-collection specialists, recycling centers, trash-recycling brokers, and central
processing warehousing.
Channel Levels
Many of the most successful new banks, insurance and travel companies, and stock
brokerages have emerged with strictly or largely online operations, such as Ally banking,
Esurance insurance, Expedia travel, and E*TRADE investments.

Marketing channels also keep changing for “person marketing.”

Nonprofit service organizations such as schools develop education-dissemination systems

and hospitals develop health-delivery systems. These institutions must figure out agencies
and locations for reaching a far-flung population.
Channel-Design Decisions
Consumers may choose the channels they prefer based on price, product assortment, and
convenience as well as their own shopping goals (economic, social, or experiential).

Channel segmentation exists, and marketers must be aware that different consumers have
different needs during the purchase process.
Channel-Design Decisions
Analyzing customer needs and wants

 Desired lot size

 Waiting and delivery time
 Spatial convenience
 Product variety
 Service backup
 Channel-Design Decisions
Channels produce five service outputs:

1.Desired lot size—The number of units the channel permits a typical customer to purchase on one occasion.

2. Waiting and delivery time—The average time customers wait for receipt of goods. Customers increasingly
prefer faster delivery channels.

3. Spatial convenience—The degree to which the marketing channel makes it easy for customers to purchase
the product.

4. Product variety—The assortment provided by the marketing channel. Normally, customers prefer a greater
assortment because more choices increase the chance of finding what they need, though too many choices can
sometimes create a negative effect.

5. Service backup—Add-on services (credit, delivery, installation, repairs) provided by the channel. The more
service backup, the greater the benefit provided by the channel.
Channel-Design Decisions
Establishing objectives and constraints
◦ Marketers should state their channel objectives in terms
of the service output levels they want to provide and
the associated cost and support levels.
◦ Channel objectives vary with product characteristics.
◦ Marketers must adapt their channel objectives to the
larger environment.
◦ When economic conditions are depressed, producers want to
move goods to market using shorter channels and without
services that add to the final price.
◦ Legal regulations and restrictions also affect channel
design.
Channel-Design Decisions
Identifying major channel alternatives

Types of intermediaries

Number of
intermediaries

Terms/responsibilities
of channel members
Identifying major channel alternatives

Each channel—from sales forces to agents, distributors, dealers, direct mail, telemarketing,
and the Internet—has unique strengths and weaknesses.

Channel alternatives differ in three ways:

1. the types of intermediaries,
2. the number needed, and
3. the terms and responsibilities of each.
Identifying major channel
alternatives
Number of intermediaries
◦ Exclusive distribution
◦ Selective distribution
◦ Intensive distribution
Identifying major channel
alternatives
Number of intermediaries
◦ Exclusive distribution severely limits the number of intermediaries.
◦ Selective distribution relies on only some of the intermediaries
willing to carry a particular product. Whether established or new,
the company does not need to worry about having too many
outlets; it can gain adequate market coverage with more control
and less cost than intensive distribution.
◦ Intensive distribution places the goods or services in as many
outlets as possible.
Identifying Major Channel
Alternatives
Terms and responsibilities of channel
members

 Price policy
 Conditions of sale
 Distributors’ territorial rights
 Mutual services and responsibilities
Terms and responsibilities of channel members

Price policy calls for the producer to establish a price list and schedule of discounts and
allowances that intermediaries see as equitable and sufficient.

Conditions of sale refers to payment terms and producer guarantees. Most producers grant
cash discounts to distributors for early payment. They might also offer a guarantee against
defective merchandise or price declines, creating an incentive to buy larger quantities.

Distributors’ territorial rights define the distributors’ territories and the terms under which the
producer will enfranchise other distributors. Distributors normally expect to receive full credit
for all sales in their territory, whether or not they did the selling.

Mutual services and responsibilities must be carefully spelled out, especially in franchised
and exclusive agency channels.
Channel-Design Decisions

Evaluating major channel alternatives

◦ Economic criteria
◦ Control and adaptive criteria
Evaluating major channel alternatives

Economic Criteria.
◦ Each channel alternative needs to be evaluated against economic, control, and adaptive criteria.
◦ Every channel member will produce a different level of sales and costs. Figure shows how six different sales
channels stack up in terms of the value added per sale and the cost per transaction.

Control and Adaptive Criteria

◦ Using a sales agency can pose a control problem.
◦ Agents may concentrate on the customers who buy the most, not necessarily those who buy the manufacturer’s
goods.
◦ They might not master the technical details of the company’s product or handle its promotion materials effectively.
◦ To develop a channel, members must commit to each other for a specified period of time.
◦ Yet these commitments invariably reduce the producer’s ability to respond to change and uncertainty.
◦ The producer needs channel structures and policies that provide high adaptability.
Channel-Management Decisions
Selecting Training
channel channel
members members

Global Evaluating
channel channel
consideratio members
ns
Channel Modifying
modification channel
decisions design
Channel-Management Decisions
To customers, the channels are the company. To facilitate channel member
selection, producers should determine what characteristics distinguish the better
intermediaries—number of years in business, other lines carried, growth and profit
record, financial strength, cooperativeness, and service reputation.

Carefully implemented training, market research, and other capability-building

programs can motivate and improve intermediaries’ performance.

The company must constantly communicate that intermediaries are crucial partners
in a joint effort to satisfy end users of the product.
Channel-Management Decisions
Producers must periodically evaluate intermediaries’ performance against such standards as
sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged
and lost goods, and cooperation in promotional and training programs.

No channel strategy remains effective over the whole product life cycle.
◦ In competitive markets with low entry barriers, the optimal channel structure will inevitably change over
time.
◦ Channel Evolution: A new firm typically starts as a local operation selling in a fairly circumscribed market,
using a few existing intermediaries. Identifying the best channels might not be a problem; the problem is
often to convince the available intermediaries to handle the firm’s line.
◦ In short, the channel system evolves as a function of local opportunities and conditions, emerging
threats and opportunities, and company resources and capabilities.
Channel Integration and Systems
Conventional marketing channel
Vertical marketing systems
Horizontal marketing systems
Channel Integration and Systems
A conventional marketing channel consists of an independent producer, wholesaler(s), and
retailer(s).

Each is a separate business seeking to maximize its own profits, even if this goal reduces
profit for the system as a whole.

No channel member has complete or substantial control over other members.

Channel Integration and Systems
A vertical marketing system (VMS), by contrast, includes the producer, wholesaler(s), and retailer(s)
acting as a unified system.
◦ One channel member, the channel captain, sometimes called a channel steward, owns or franchises the
others or has so much power that they all cooperate.
◦ Stewards accomplish channel coordination without issuing commands or directives by persuading channel
partners to act in the best interest of all.

Another channel development is the horizontal marketing system, in which two or more unrelated
companies put together resources or programs to exploit an emerging marketing opportunity.
◦ Each company lacks the capital, know-how, production, or marketing resources to venture alone, or it is afraid
of the risk.
◦ The companies might work together on a temporary or permanent basis or create a joint venture company.
Vertical
Marketing Systems
Corporate VMS

Administered VMS

Contractual VMS
Vertical Marketing Systems
A corporate VMS combines successive stages of production and distribution under single
ownership.

An administered VMS coordinates successive stages of production and distribution through

the size and power of one of the members.
◦ Manufacturers of dominant brands can secure strong trade cooperation and support from resellers.
◦ The most advanced supply-distributor arrangement for administered VMSs relies on distribution
programming, which builds a planned, professionally managed, vertical marketing system that meets
the needs of both manufacturer and distributors.
Vertical Marketing Systems
A contractual VMS consists of independent firms at different levels of production and
distribution integrating their programs on a contractual basis to obtain more economies or
sales impact than they could achieve alone.
E-Commerce
Marketing Practices
E-commerce
◦ Uses a Web site to transact or facilitate the sale of
products and services online.
◦ Pure-click vs. brick-and-click companies
M-Commerce
Marketing Practices
Mobile channels and media can keep consumers as connected and interacting
with a brand as they choose
◦ Advertising and promotion
◦ Geofencing

Privacy issues
M-Commerce
Consumers are fundamentally changing the way they shop in stores, increasingly using a cell
phone to text a friend or relative about a product while shopping in stores.

Fifty percent of all Google searches are done on mobile phones. Companies are trying to
give their customers more control over their shopping experiences by bringing Web
technologies into the store, especially via mobile apps.

Marketers are using a number of new and traditional practices in m-marketing.

◦ Understanding how consumers want to use their smart phones is critical to understanding the role of
advertising. Given the small screen and fleeting attention paid, fulfilling advertising’s traditional role of
informing and persuading is more challenging for m-commerce marketers.
◦ Consumers often use their smart phones to find deals or capitalize on them: the redemption rate for
mobile coupons (10 percent) far exceeds that of paper coupons (1 percent).
M-Commerce
The idea of geofencing is to target customers with a mobile promotion when they are within a
defined geographical space, typically near or in a store.

The local-based service requires just an app and GPS coordinates, but consumers have to
opt in.

The fact that a company can pinpoint a customer’s or employee’s location with GPS
technology raises privacy issues.

Like so many new technologies, such location-based services have potential for good and
harm and will ultimately warrant public scrutiny and regulation.
Conflict, Cooperation,
and Competition
Channel conflict
◦ Generated when one channel member’s actions prevent another channel member from achieving its
goal

Channel coordination
◦ Occurs when channel members are brought together to advance the goals of the channel instead of
their own potentially incompatible goals
Conflict, Cooperation,
and Competition
Causes of channel conflict

 Goal incompatibility
 Unclear roles and rights
 Differences in perception
 Intermediaries’ dependence on
manufacturer
Causes of channel conflict

Goal incompatibility.
◦ The manufacturer may want to achieve rapid market penetration through a low-price policy.
◦ Dealers, in contrast, may prefer to work with high margins and pursue short-run profitability.

Unclear roles and rights.

◦ HP may sell laptops to large accounts through its own sales force, but its licensed dealers may also be trying to sell to large accounts.
◦ Territory boundaries and credit for sales often produce conflict.

Differences in perception.
◦ The manufacturer may be optimistic about the short-term economic outlook and want dealers to carry higher inventory, while the dealers
may be pessimistic.
◦ In the beverage category, it is not uncommon for disputes to arise between manufacturers and their distributors about the optimal
advertising strategy.

Intermediaries’ dependence on the manufacturer.

◦ The fortunes of exclusive dealers, such as auto dealers, are profoundly affected by the manufacturer’s product and pricing decisions.
◦ This situation creates a high potential for conflict.
Conflict, Cooperation,
and Competition
Conflict, Cooperation,
and Competition
Strategic Justification In some cases, a convincing strategic justification that they serve distinctive segments
and do not compete as much as they might think can reduce potential for conflict among channel members.

Dual Compensation Dual compensation pays existing channels for sales made through new channels.

Superordinate Goals Channel members can come to an agreement on the fundamental or superordinate
goal they are jointly seeking, whether it is survival, market share, high quality, or customer satisfaction.

Employee Exchange A useful step is to exchange persons between two or more channel levels. Thus
participants can grow to appreciate each other’s point of view.
Conflict, Cooperation,
and Competition
Joint Memberships Similarly, marketers can encourage joint memberships in trade associations.

Co-optation is an effort by one organization to win the support of the leaders of another by including them in
advisory councils, boards of directors, and the like.

Diplomacy, Mediation, and Arbitration When conflict is chronic or acute, the parties may need to resort to stronger
means. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the
conflict. Mediation relies on a neutral third party skilled in conciliating the two parties’ interests. In arbitration, two
parties agree to present their arguments to one or more arbitrators and accept their decision.

Legal Recourse If nothing else proves effective, a channel partner may choose to file a lawsuit.
Conflict, Cooperation,
and Competition
Dilution and cannibalization
◦ Marketers must be careful not to dilute their brands through inappropriate
channels

Legal and ethical issues in channel relations

◦ Exclusive dealing/territories, tying agreements, and dealers’ rights
Conflict, Cooperation,
and Competition
Calvin Klein and Tommy Hilfiger both took a hit when they sold too many of their products in discount
channels.
◦ Given the lengths to which they go to pamper customers in their stores—with doormen, glasses of champagne,
and extravagant surroundings—luxury brands have had to work hard to provide a high-quality digital experience.

We saw earlier that in exclusive distribution, only certain outlets are allowed to carry a seller’s products,
and that requiring these dealers not to handle competitors’ products is called exclusive dealing.

Exclusive arrangements are legal as long as they do not substantially lessen competition or tend to
create a monopoly and as long as both parties enter into them voluntarily.

Exclusive dealing often includes exclusive territorial agreements.

◦ The producer may agree not to sell to other dealers in a given area (which is perfectly legal), or the buyer may
agree to sell only in its own territory (which has become a major legal issue).
Conflict, Cooperation,
and Competition
Producers of a strong brand sometimes sell it to dealers only if they will take some or all of
the rest of the line.

This practice is called full-line forcing.

Producers are free to select their dealers, but their right to terminate them is somewhat
restricted.

In general, sellers can drop dealers “for cause,” but not if, for example, a dealer refuses to
cooperate in a doubtful legal arrangement, such as exclusive dealing or tying agreements.