CHAPTER 12:

MARKETING CHANNELS:
DELIVERING CUSTOMER
VALUE

Chapter 12
 2

NETFLIX: Finding the Future by Abandoning the

Past
• Time and again, Netflix has Netflix’s innovative distribution
innovated its way to the top in the strategy: From DVDs by mail to Watch
distribution of video entertainment. Instantly to streaming on almost any
But to stay atop its boiling, roiling device and creating original content,
industry, Netflix must keep the Netflix has led the howling pack by
distribution innovation pedal to the doing what it does best—revolutionize
metal. distribution. What’s next?
 3

Learning Objectives
12.1 Explain why companies use marketing channels and
discuss the functions these channels perform.
12.2 Discuss how channel members interact and how they
organize to perform the work of the channel.
12.3 Identify the major channel alternatives open to a
company.
12.4 Explain how companies select, motivate, and
evaluate channel members.
12.5 Discuss the nature and importance of marketing
logistics and integrated supply chain management.
Supply Chains and the
Value Delivery Network
• Producing and making products available to buyers requires building
relationships not only with customers but also with key suppliers and
resellers in the company’s supply chain.

• This supply chain consists of upstream and downstream partners.

• Upstream partners are firms that supply raw materials,

components, parts, information, finances, and expertise needed to create
a product or service.

• Downstream partners include the marketing channels or distribution

channels that look toward the customer, including retailers and
wholesalers.
Supply Chains and Value Delivery
Networks
The term supply chain may be too limited; a better term
would be demand chain because it suggests a sense-and
respond view of the market.

Supply chain “make and sell” view includes the firm’s raw
materials, productive inputs, and factory capacity.

Demand chain “sense and respond” view suggests that

planning starts with the needs of the target customer.
Value Delivery Network
Value delivery network is
composed of the company,
suppliers, distributors, and
ultimately customers who
partner with each other to
improve the performance of
the entire system.
In making and marketing its many
models, Honda manages a huge network
of people within Honda plus thousands
of suppliers and dealers outside the
company who work together to bring
value to final customers
Marketing Channels
(Distribution Channels)
• Set of interdependent organizations that help make a
product or service available for use or consumption by the
consumer or business users.

• Marketing channel decisions:

→ Affect other marketing decisions, such as pricing or
product design
→ Can lead to competitive advantage
How Channel Members Add Value
• Why do producers give some of the selling job to channel
partners? After all, doing so means giving up some control over
how and to whom they sell their products.

• The use of intermediaries results from their greater efficiency in

making goods available to target markets

• Through their contacts, experience, specialization, and

scale of operation, intermediaries usually offer the firm more
than it can achieve on its own.
How Adding a Distributor Reduces the
Number of Channel Transactions
Key Functions Performed by Channel
Members
• They transform the assortments of products made by producers into the
assortments wanted by consumers. Producers make narrow
assortments of products in large quantities, but consumers want broad
assortments of products in small quantities.
 Marketing channel members buy large quantities from many
producers and break them down into the smaller quantities and
broader assortments desired by consumers.

• Channel members add value by bridging the major time, place, and
possession gaps that separate goods and services from those who use
them.
Key Functions Performed by Channel
Members
• Members of the marketing channel perform many key functions:

Some help to complete Others help to fulfill the

transactions: completed transactions:
• Information • Physical distribution
• Promotion • Financing
• Contact • Risk taking
• Matching
• Negotiation
• Information: Gathering and distributing marketing research and intelligence
information about actors and forces in the marketing environment needed
for planning and aiding exchange.

• Promotion: Developing and spreading persuasive communications about

an offer.

• Contact: Finding and communicating with prospective buyers.

• Matching: Shaping and fitting the offer to the buyer’s needs, including
activities such as manufacturing, grading, assembling, and packaging.

• Negotiation: Reaching an agreement on price and other terms of the offer

so that ownership or possession can be transferred.

• Physical distribution: Transporting and storing goods.

• Financing: Acquiring and using funds to cover the costs of the channel
work.
Number of Channel Levels
Channel level

• A layer of intermediaries that performs some work in

bringing the product and its ownership closer to the
final buyer

Direct marketing channel

• A marketing channel that has no intermediary levels

Indirect marketing channel

• A marketing channel containing one or more

intermediary levels
Customer and Business Marketing
Channels
All the institutions in the channel are connected by several types
of flows. These flows can make even channels with only one or
a few levels very complex.

Channel members are connected by several types of flows:

• Physical flow of products
• Flow of ownership
• Payment flow
• Information flow
• Promotion flow
Channel Behavior and Organization
• Marketing channels consist of firms that have partnered for
their common good with each member playing a specialized
role.

• The channel will be most effective when:

o Each member is assigned tasks it can do best
o All members cooperate to attain overall channel goals

• The success of individual channel members depends on the

overall channel’s success.
Channel Conflict
• Disagreements among marketing channel
members on goals, roles, and rewards—
who should do what and for what rewards.

• Horizontal conflict occurs among firms at

the same level of the channel (e.g.,
between different dealers of the same
brand) In recent years, Burger King has had
a steady stream of conflicts with its
franchised dealers over everything
• Vertical conflict occurs between different
from advertising content to the price
levels of the same channel (e.g., between of its cheeseburgers
a brand and its franchisee).
Comparison of Conventional Distribution
Channel with Vertical Marketing System
Conventional distribution
channel
• A channel consisting of one or more independent
producers, wholesalers, and retailers, each separate
business seeking to maximize its own profits, perhaps
even at the expense of profits for the system as a
whole.

• No channel member has much control over the other

members.

• Lack of leadership and power, often resulting in

damaging conflict and poor performance.
Vertical marketing system
(VMS)
• A channel structure in which producers,
wholesalers, and retailers act as a unified system.

• One channel member owns the others, has

contracts with them, or has so much power that
they all cooperate.

• The VMS can be dominated by the producer, the

wholesaler, or the retailer.
Types of Vertical Marketing Systems

Corporate VMS
• A vertical marketing system that combines successive stages of
production and distribution under single ownership—channel
leadership is established through common/single ownership.

Contractual VMS
• A vertical marketing system in which independent firms at different
levels of production and distribution join together through contracts.

Administered VMS
• A vertical marketing system that coordinates successive stages of
production and distribution through the size and power of one of the
parties.
Franchising Systems
• A contractual vertical marketing
system in which a channel member,
called a franchisor, links several
stages in the production-distribution
process.

Almost every kind of business

has been franchised—from
motels and fast-food restaurants
to cleaning and handyman
companies
Horizontal Marketing Systems
• Two or more companies at one
level join together to follow a
new marketing opportunity.

• By working together, companies

can combine their financial,
production, or marketing
resources to accomplish more
than any one company could
alone.
Multichannel Distribution System
Multichannel Distribution Systems
• A single firm sets up two or more marketing channels to reach
one or more customer segments.

• With each new channel, the company:

expands its sales and market coverage

gains opportunities to tailor its products and services to the

specific needs of diverse customer segments.

• But such multichannel systems are harder to control, and they

can generate conflict as more channels compete for customers
and sales.
Disintermediation

Disintermediation is the cutting

out of marketing channel
intermediaries by producers or
the displacement of traditional
resellers by new intermediaries.

For example, online music

download services such as
iTunes and Amazon MP3 have
pretty much put traditional
music-store retailers out of
business.
Marketing Channel Design
• Designing effective
marketing channels by
analyzing consumer
needs, setting channel
objectives, identifying
major alternatives, and
evaluating those
alternatives.
Meeting customers’ channel service
needs: A local hardware store
probably provides more personalized
service, a more convenient location,
and less hassle than a huge Home
Depot. But it may also charge higher
prices
Channel Design Decisions
Analyzing consumer needs
o Find out what target consumers want from the channel
o Identify market segments
o Determine the best channels to use
o Minimize the cost of meeting customer service requirements

Setting channel objectives

o Determine targeted levels of customer service
o Balance consumer needs against costs and customer price
preferences
Channel Design Decisions
Identifying major alternatives:

• Types of intermediaries refers to channel members available to carry

out channel work. Most companies face many channel member
choices.

• Number of marketing intermediaries: Intensive, exclusive, and

selective distribution

• Responsibilities of channel members: Price policies, conditions of

sale, territory rights and specific services to be performed
Number of Marketing Intermediaries
Intensive distribution

• Stocking the product in as many outlets as possible.

Exclusive distribution

• Giving a limited number of dealers the exclusive right to

distribute the company’s products in their territories.

Selective distribution

• The use of more than one but fewer than all of the
intermediaries who are willing to carry the company’s
products.
Channel Design Decisions
• Evaluating the major alternatives involves comparing each alternative
to economic criteria, control issues and adaptive criteria.

• Using economic criteria, a company compares the likely sales,

costs, and profitability of different channel alternatives.

• The company must also consider control issues. Other things being
equal, the company prefers to keep as much control as possible.

• Finally, the company must apply adaptability criteria. Channels

often involve long-term commitments, yet the company wants to keep
the channel flexible so that it can adapt to environmental changes.
Designing International Channels
• Channel systems can vary from country to country. Each country has
its own unique distribution system.

• Distribution systems can have many layers and a large number of

intermediaries.

• Distribution systems in developing countries may be scattered or

inefficient.

• Customs and government regulation can restrict distribution in global

markets.

• Marketers must be able to adapt channel strategies to structures

within each country.
International Channel Differences

In low-income neighborhoods in Brazil, where

consumers have limited access to supermarkets,
Nestlé supplements its distribution with thousands of
self-employed salespeople who sell Nestlé products
door to door.
Channel Management Decisions

Selecting Managing Motivating Evaluating

channel channel channel channel
members members members members
 Public Policy and Distribution
Decisions
Exclusive distribution is when the producer gives only a limited number
of dealers the exclusive right to distribute its products in their territories.

Exclusive dealing is when the seller requires that the exclusive

distribution sellers not handle competitor’s products.

Exclusive territorial agreements are where producer or seller limit

territory.

Tying agreements are agreements where the dealer must take most or
all of the line.
 Marketing Logistics
Marketing logistics (physical
distribution) involves planning,
implementing, and controlling the
physical flow of goods, services,
and related information from points
of origin to points of consumption
to meet consumer requirements at
a profit.

In short, it involves getting the right

product to the right customer in
the right place at the right time.
12-46
Supply Chain Management

Marketing logistics involves entire supply chain management.

• Outbound logistics (moving products from the factory to resellers and

ultimately to customers)
• Inbound logistics (moving products and materials from suppliers to the factory)
• Reverse logistics (reusing, recycling, refurbishing, or disposing of broken,
unwanted, or excess products returned by consumers or resellers).
Marketing Logistics and Supply Chain
Management
• Supply chain management involves managing upstream and
downstream value-added flows of materials, final goods, and related
information among suppliers, the company, resellers, and final
consumers.

• Goals of the logistics system:

• Deliver a targeted level of customer service at the least cost

• Major logistics functions:

• Warehousing
• Inventory management
• Transportation
• Logistics information management
Marketing Logistics and Supply Chain
Management

Integrated logistics management

is the recognition that providing
customer service and trimming
distribution costs requires
teamwork internally and externally.