Everything you need to know about marketing channels. Marketing channels are the ways that goods and services are made available for use by the consumers.
All goods go through channels of distribution, and marketing depends on the way goods are distributed. The route that the product takes on its way from production to the consumer is important because a marketer must decide which route or channel is best for his particular product.
A marketing channel is the series of interdependent marketing institutions that facilitate transfer of title to a product as it moves from producer to ultimate consumer or industrial user.
The title may be transferred directly, as and when the commodity is bought or sold outright, or indirectly, as and when the transaction is negotiated through a functional middleman such as an agent or broker who does not take credit to it.
1. What are Marketing Channels? 2. Rationale behind Using Marketing Channels 3. Functions 4. Factors Determining the Length of the Channel 5. Types 6. Importance
7. Marketing Channel Design 8. Factors Influencing Design and Selection 9. Channels for Consumer Goods, Industrial Goods and Services 10. Marketing Channel Decisions and Dynamics 11. Conflict.
Marketing Channels: Functions, Types, Importance, Conflict and Other Details
- What are Marketing Channels?
- Rationale behind Using Marketing Channels
- Functions of Marketing Channels
- Factors Determining the Length of the Channel
- Types of Marketing Channels
- Importance of Marketing Channels
- Marketing Channel Design
- Factors Influencing Design and Selection of Marketing Channels
- Channels for Consumer Goods, Industrial Goods and Services
- Marketing Channel Decisions and Dynamics
- Conflict in Marketing Channels
Marketing Channels – What are Marketing Channels?
A marketing channel consists of individuals and firms involved in the process of making a product or service available for use or consumption by consumers or industrial users.
Marketing channels are the ways that goods and services are made available for use by the consumers. All goods go through channels of distribution, and marketing depends on the way goods are distributed. The route that the product takes on its way from production to the consumer is important because a marketer must decide which route or channel is best for his particular product.
Stern & El-Ansary define marketing channels as – “sets of independent organisations involved in the process of making a product or service available for use or consumption.”
A marketing channel is the series of interdependent marketing institutions that facilitate transfer of title to a product as it moves from producer to ultimate consumer or industrial user. The title may be transferred directly, as and when the commodity is bought or sold outright, or indirectly, as and when the transaction is negotiated through a functional middleman such as an agent or broker who does not take credit to it.
Channels create utility, improve exchange efficiency and help match supply and demand. They bring suppliers and buyers together. Each channel system has a different potential for creating sales and producing costs. The chosen channel will significantly affect and be affected by the rest of the marketing mix. A channel’s vertical dimension (length) is determined by the number of types of participants in the channel. There are no intermediaries in the most direct channel (a zero-level channel).
This gives producers greater control over their products distribution. Intermediaries stand between the producers and final buyers in indirect channels. A channel’s horizontal dimension (width) is determined by the number of participants of any one type on the same level in the channel. The situation varies considerably from one line of goods to another. Many manufacturers find it necessary to use more than one kind of channel for the same market.
For example, Automative tyres. The industry’s output which is sold for OEM is distributed direct from tyre factories to manufacturers. Tyres for replacement for cars on the road are sold mainly through retailers. Some manufacturers have different products that require separate distribution channels. Finally, some manufacturers find it feasible to use different channels in different parts of the country.
The channel objectives are conditioned by the particular characteristics of customers, products, middlemen, competitors and environment. The firm has to select particular firms to work with or find business firms willing to work with it. It has to periodically evaluate the performance of individual channel members against their own past sales and other channel members’ sales.
Marketing Channels – Rationale behind Using Marketing Channels
i. Many organisations lack the resources (financial as well as other resources), to carry out direct marketing and reach out to their many customers without the help of any intermediary. For this purpose, marketing channels are used to take the products from the manufacturing organisations to the final consumers.
ii. For many smaller products, direct marketing may not be feasible considering that exclusive retail outlets for small products may not work, and having to stock other products might end up in having just another grocery or food outlet which would not serve the purpose. Setting up exclusive retail stores for marketing of small products like chocolates would not be a feasible idea.
iii. Given the lower return on investments in the retail business, organisations would be better off investing their money in their main business rather than taking up retailing or other channel functions.
As such, the use of intermediaries is mainly to make the goods available and accessible to target markets. Intermediaries, because of their specialisation, experience, and scale of operations, are able to achieve more than what the organisation can in terms of reaching to the target markets.
Marketing Channels – 9 Important Functions (With Channels Level)
A marketing channel mainly performs the task of moving goods from the producers or manufacturers to the final users. The channel is instrumental in overcoming the gaps between the producers and consumers in terms of time, place and possession or ownership.
The functions of the distribution channels are:
a. Information – The marketing channels perform the task of collecting and disseminating of marketing information about customers, competitors as well as potential customers and other market forces.
b. Promotion – Persuasive communication is disseminated through the channels to the customers. The channels also often help in the design of these communication messages.
c. Negotiation – The channel members are the ones who negotiate with other channel members and customers to facilitate the transfer of ownership.
d. Financing – The marketing channels work towards the acquisition and allocation of funds required to finance inventories at different levels of the marketing channels.
e. Risk taking – The channel members assume the risk for carrying out the channel work.
f. Physical possession – The channel members also take the responsibility of storage of goods during the successive stages to the final consumers.
g. Ordering – This function is with regards to the communication of channel members regarding the intention to purchase.
h. Payment – The channel members also assume responsibility for the buyers honouring their payments to the sellers through banks and other financial instruments.
i. Title – The channel members facilitate actual transfer of ownership from one organisation or person to the other.
The Fig. 3.1 shows one major source of cost savings affected by using intermediaries/ distributors. The Fig. 3.1 (a) depicts three producers, each using direct marketing to reach three consumers. This system requires eight different contacts. On the other hand we can see in Fig. 3.1 (b) three producers contacting three consumers through one distributor. This requires six contacts. In this way we can see that intermediaries reduce the work of the producers.
A channel comprises several intermediaries. Each intermediary moves the product one step further towards the final consumer, and as such, each intermediary forms a level of the channel. The producer/manufacturer and the final consumer form a part of the channel and are at both ends of the channel.
There are channels with different number of levels:
a. A zero level channel – As the name suggests, in this type of a channel, there are no intermediaries or zero level of intermediaries. Here, the manufacturer sells directly to the customer. This is also known as a direct marketing channel. Examples of this type of channel include door-to-door sales, mail order, telemarketing, TV selling, and manufacturer-owned stores.
b. One level channel – This type of a channel comprises of only one selling intermediary such as a retailer.
c. Two level channel – This type of channel is mostly seen in the consumer goods markets. Here, there are two intermediaries in between the manufacturer and the final consumers; typically a wholesaler and a retailer.
d. Three level channel – This type of channel consists of three levels of intermediaries in between the manufacturer and the final consumer.
e. More than three levels – In some cases, one can observe longer marketing channels, that is, channels that have more than three intermediaries.
f. Channels used in consumer and industrial products – The producer and the consumer are a part of every channel.
g. Channel of distribution for services – Generally services differ from physical goods in the sense that they are intangible and hence distribution of services poses special challenges. There are only two common channels used for services.
Marketing Channels – 5 Factors Determining the Length of the Channel: Size of the Market, Order Lot Size, Service Requirements, Product Variety and Type of Product
When deciding the length of the channel there are several factors that need to be taken into consideration.
1. Size of the market – For a market that is large, use of indirect channels proves to be more economical. More the spread of the market, more expensive it becomes to serve the market directly.
2. Order lot size – If the average order lot size is smaller, transportation costs increase. Here the indirect channel is more economical.
3. Service requirements – A shorter channel is more useful when the level of service requirement is high.
4. Product variety – When the product variety sought by customers is high, selling through indirect channels is advisable.
5. Type of the product – Depending upon the nature of the product, the length of the channel needs to be decided. A product that is perishable in nature would need a shorter channel.
Marketing Channels – Classification: Conventional and Integrated Channels
A channel of distribution is an organized network or system of institutions or agencies, which, in combination, perform all the activities required to link the producers and final users.
Trade channels are classified as conventional and non-conventional with further divisions.
The classification of channels are described below:
1. Conventional Channel:
i. Direct Channels:
Manufacturers Customers- This is the shortest and simplest choice as goods move directly from the source of manufacture to the ultimate user. For example, vacuum cleaner, water cooler, etc. The sales are affected through the company sales force.
Direct channels of distribution can take the following forms:
a. Direct selling or salesmanship. Example- Eureka Forbes, Zenith computers.
b. Vending machines. Example- Pepsi and Coke
c. Manufacturers retail shop. Example- Bata, Titan, Reebok.
d. Factory outlets – small outlet just outside their factory- export factory outlet.
e. Direct mail order business. Example- teleshopping network, Proactive acne kit, etc.
ii. Indirect Channels of Distribution:
a) Manufacturers – Retailers – Customers:
This option consists of only one intermediary. It is short and simple. This is a popular in case of consumer durables such as textiles, readymade garments, etc. Example: – Bata, Corona etc.
b) Manufacturers – Wholesalers – Retailers – Consumers:
Here, two intermediaries exist. This is the most popular choice and is used by both small and big companies alike. This is ideal for consumer non-durables. Example- Biscuits and chocolates, soaps, shampoos, Parle-g etc.
c) Manufacturers – Agent – Wholesaler – Retailer – Consumer:
This is the longest indirect channel available to a firm. The agent middlemen may be commission agents, export merchants who manage trade on behalf of the manufacturer. Companies’ with multiple product portfolio and producing consumer non-durables with national and international market resort to this channel.
d) Manufacturers – Wholesaler – Consumer:
Here, retailers do not exist. This works well for institutional consumers such as colleges, hospitals, schools clubs, government agencies, business houses, religious institutions etc. This can be adopted in case of consumer durables and consumer non-durables.
2. Integrated Channels:
i. Vertical Channels:
These are professionally managed and centrally programmed networks that are established to achieve operating economies and maximum market impact. Hence, they are bound to be capital intensive; they are designed to achieve technical, managerial and promotional economies through integration, coordination and synchronization of marketing flows from the point of production to the point of final consumption.
a) Administered Channel:
This is developed in such a manner that the co-ordination of marketing activities is achieved by using the programs of one or few firms. An example of this type of system could include a large retailer such as Wal-Mart dictating conditions to smaller product makers, such as producers of a generic type of laundry detergent.
b) Contractual Channel:
Here, independent channel components integrate on contractual lines to attain economies of scale and maximize the market impact. For Example Javed Habib give franchise of his flagship brand HABIB on contractual basis.
c) Corporate Channel:
Here, channel components are owned and operated by the same organisation. Although it provides full control, this comes with a huge investment. An example of a corporate vertical marketing system would be a company such as Apple, which has its own retail stores as well as designing and creating the products to be sold in those retail stores.
ii. Horizontal Channels:
Here, two or more companies join hands to exploit a marketing opportunity. This may be achieved by themselves or by creating an independent unit, for example, Sugar Syndicate of India, Associated Cement Company, etc. The factors motivating horizontal integration are rapidly changing markets, racing competition, swift pace of technology, excess capacity, seasonal and cyclical changes in consumer demand and the risks involved in accepting financial risks single-handedly.
Marketing Channels – Importance
A marketing channel system decisions affects the other marketing decisions also, and therefore are among the most critical decisions. Channel choices themselves depend on the company’s marketing strategy with respect to segmentation, targeting, and positioning. Marketing channels must not just see markets but they must also make markets as one of the chief roles of marketing channels is to convert potential buyers into profitable customers.
In addition channel decisions include relatively long-term commitments with other firms as well as a set of policies and procedures. Marketers in the present dynamic market should adopt the holistic perspective and ensure that marketing decisions in all these different areas are made to collectively maximize value.
In managing the intermediaries, the firm must also decide on the emphasis given to the ‘push’ versus ‘pull’ marketing strategy. A ‘push’ strategy uses the manufacturer’s sales force, trade promotional money, or other means to induce intermediaries to carry, promote, and sell the product to end-users.
This strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item, and product benefits are well understood. While, in the ‘pull’ strategy the manufacturer uses advertising, promotion, and other forms of communication to persuade consumers to demand the product from intermediaries, thereby, induce the intermediaries to order it.
‘Pull’ strategy is appropriate when there is high brand loyalty and high involvement in the category, when consumers are able to perceive differences between brands, and when they choose the brand before they go to the store.
Marketing activities directed towards the channel as part of ‘push’ strategy are more effective when accompanied by a well-designed and well-executed ‘pull’ strategy that activates consumer demand. On the other hand, without at least some consumer interest, it can be very difficult to gain much channel acceptance and support.
Marketing Channels – Design
The channel system of an organisation evolves in response to local opportunities and conditions. In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing. In a push strategy, the manufacturer uses its sales force and trade promotion strategy to induce intermediaries to promote and sell the product to end-users, whereas, in a pull strategy the manufacturer uses advertising and promotion to induce consumers to ask intermediaries for the product, thus creating a pull from the intermediaries to the manufacturer for the product.
In designing the marketing channel, the marketer must analyse customers’ desired service output levels (lot size, waiting time, convenience, product variety, service backup).
They should also establish channel objectives and constraints based on:
a. Product characteristics
b. Strength and weakness of intermediaries
c. Influences of competitors’ channel
d. Broader environmental changes
Major Channel Alternatives:
Companies can choose from a wide variety of channels for reaching customers – from sales forces to agents, distributors, dealers, direct mail, etc. Most companies now use a mix of channels where each channel reaches a different segment of buyers and delivers the right products to each at the least cost.
Number of Intermediaries:
Companies have to decide on the number of intermediaries to use at each channel level.
Three strategies are available:
(a) Exclusive distribution – Here the distributor has an exclusive relation with the producer and is not allowed to keep competitors’ products and brands. It is used when the producer wants to severely limit the number of intermediaries and wants to maintain control over the service levels and outputs offered by the resellers. For example, automobiles.
(b) Selective distribution – Here the distributors can keep products of very few limited producers and generally of one category of products such as home appliances. This strategy is used by established companies and by new companies seeking distribution.
(c) Intensive distribution – This consists of the manufacturer placing the goods or services in as many outlets as possible while the distributors are also handling many competitors’ products and brands. Convenience goods such as salt, sugar, cookies, etc., are good examples of products suitable for this type of distribution.
Evaluation of the Channel Alternatives:
Each channel alternative can be evaluated against the following criteria:
i. Economic Criteria – Each alternative channel design will result in different levels of sales and cost as shown in Figure 10.3.
For level of sales below X1 (as shown in the figure above) provider’s sales agency will have economic advantage over their own sales force. But when the level of sales increases above the level X1, the company’s sales force will be more economical.
ii. Control and Adaptive Criteria – The channel alternatives are evaluated in terms of companies having better control and more adaptable channels.
Marketing Channels – 5 Factors that Influence the Design and Selection of Marketing Channels: Nature of the Product, Buyer Behaviour, Environment and a Few Others
Channel design refers to deciding on the type of distribution channel as well as the number of levels in the channel. Channel selection refers to selecting individual channel members.
The following factors influence the design and selection of marketing channels:
1. Nature of the product
2. Buyer behavior
Factor # 1. Nature of the Product:
Usually, perishable products have a short channel. This does not mean that perishables can be sold only in areas close to the place of production. Roses from Kashmir fly to London every day, and milk from Haryana comes to Delhi in refrigerated vans every day.
Goods that have a high unit price and a high margin are delivered directly by the manufacturers. For instance, bulky industrial goods are moved directly by the manufacturers. On the other hand, frequently used and ‘low margin’ items like cigarettes have a long chain of middlemen before they reach the ultimate consumers.
Aspinwall has given a color classification to products, based on their rating on five factors, which greatly helps us in deciding on the length of the channel for different product categories.
Take the example of a pain reliever like Aspirin. Though people are not going to consume it on a regular basis like a cigarette, (i.e., the replacement rate is low), the search time will have to be low as also the time of consumption. Thus, it is a red good which needs a very extensive distribution network. A product like Bul-worker, which is distributed through mail-order, comes closer to being a yellow good.
The factors responsible for the success of mail-order distribution, or remote selling as it is sometimes called, are – (i) minimized perceived risk, and (ii) a smooth transit.
Factor # 2. Buyer Behavior:
Service support required by buyers may vary from product to product and market to market. The services expected can be home delivery, availability of all products under one roof, credit facilities, short lead-time, i.e. the time between placing the order and receipt of the product, help during installation of the product, and after-sales service.
The choice and design of a marketing channel have to take into account such service requirements. The requirements of institutional buyers are very different from individual buyers. That is why manufacturers of consumer durables, like fans and refrigerators, use sales representatives for institutional buyers and a dealer network for individual buyers. Earlier, fast food chains had emerged to suit the changing life-styles of certain sections of people in society.
According to psychological theory, a consumer goes through a chain of stages while making a purchase. Drive is a basic instinct. If a person goes without water for four hours, he will have an urge or drive arising out of the thirst to search for a goal which will reduce the intensity of the drive. Cues to reach the goal may be situational (available at that point of time and place) or in memory (residing in memory).
The sign-board of a soft drink may be a cue for the person driven by thirst. The cue gives him the idea that the soft drink (goal) will quench his thirst. He will try that brand of soft drink, and, if he is satisfied, he will use the same brand of soft drink every time he gets thirsty. On the other hand, if he does not get the desired result on the first trial itself, he will look for alternative cues and try some other brand of drink or some other method of quenching thirst.
The two important lessons that this model teaches us are as follows:
i. Channel selection should be such that the search time gets reduced.
ii. Cues must be made stronger.
That is why the distribution objective of Coca-Cola Company used to be, ‘Putting the bottle at the arm’s length of desire’.
For making the cues stronger, the emphasis is usually on advertising through the media. However, the choice of location for retail outlets, point of purchase displays and advertisements can make the cues stronger. These are the situational cues and are very effective for products bought on an impulse rather than as well-thought out choices. In order to be heard inside a factory, one will have to shout louder than the noise-level of the machines.
Similarly, in order to be seen or heard by the consumers in the market-place, the cue should be stronger than that of competitors. Also, what is promised by the cue must be present in the product, or else it will lead to dissatisfaction in the consumer. If satisfied, the consumer starts behaving like the proverbial Povlov’s dog and reaches the stage of automatic response behavior. And unless a specific and stronger incentive is offered by a competitor, she remains loyal.
Factor # 3. Environment:
Many environmental factors such as technology, economy conditions and government regulations affect the choice of distribution channels.
Improved transportation facilities have helped many companies to avoid or reduce a number of intermediaries. Vending machines are used in the developed countries to sell a number of products. Recent advancements in the field of electronics is bringing a lot of changes in the way business is conducted. A consumer sitting in front of his computer terminal can connect himself to a specialty store and place orders.
He can even see through his video monitor the size, shape, color, etc., of products from different angles and then place an order. There is no need for currency notes and coins in this method. Once the customer places an order with a store, his bank account gets debited and the same amount gets credited to the stores’ account. The Japanese have the ‘just in time’ inventory system by which they have cut down tremendously on inventory holding.
Production technology is moving in the direction of ‘flexible automation’ where different models can be produced on the same assembly line with a very little cost of changeover and in a very short time. These developments, and improved transportation facilities, add to the possibility of producing items to suit individual requirements at moderate costs.
The general economic condition of a country also affects distribution. During a period of inflation, cost reduction becomes a paramount task and a company may have to phase out C-class markets (i.e., markets having a very low sales volume).
The government has restrictions on the distribution of a number of products, like coal, paper, fertilizer and sugar. One has to take into account government regulations while deciding on the marketing channels. Sales tax variations from state to state may have been taken into consideration while deciding on retail outlets or showrooms for certain products for which the tax variation is large. For example, a sizeable sale of cars for Tamil Nadu takes place in Pondicherry due to sales tax concessions available there.
Factor # 4. Competition:
It is worthwhile to see what the competitors do before designing a distribution system. Copying the competitor’s game plan may be the easiest thing to do. While middlemen can also be won over to carry a company’s product line if the company is willing to pay more commission than its competitors, the power might shift to the channel.
Sometimes, it may be worthwhile to deviate from what competitors do. When Vicks cough drops were distributed through chemists’ shops, Warner Hindustan launched another form of lozenges called Halls, and distributed it through all categories of retail outlets, down to cigarette vendors on railway platforms. This strategy of distribution, coupled with the packaging (similar to the twist-wrapped style for hard-boiled sweets) contributed to the success of Halls.
Factor # 5. Organization:
If companies want better control, they can go for direct distribution. Big companies like Brooke Bond and Bata have direct distribution facilities. But, in such cases, problems such as the distribution staff forming unions, increase in the cost of maintaining infrastructure, and wage rise, might hamper the organization. A small organization may not be able to afford direct distribution, and it may be better to give that job to some other big company or sole-selling agent.
On the other hand, there are small companies which cater to small regions, like Ponvandu Soap, and prefer to have direct distribution to retail outlets for two reasons – (i) their overheads will be less, and (ii) they can use direct distribution as a strategic tool to get competitive advantage. In the case of a very small operator, e.g., someone making and selling pickles, the person concerned will distribute the product herself in order to avoid extra cost, and also do the job of the smart-talking saleswoman.
However, most companies prefer distribution through middlemen as against direct distribution, to economize on costs. These companies also spend heavily on advertising and use the ‘market pull’ strategy.
Deciding on the marketing channel is among the most complex and challenging tasks facing a firm. Each firm usually confronts a number of alternate ways to reach the market. They vary from direct selling, to using one or more intermediaries. Most firms follow a multi-channel approach to meet the requirements of the different segments of the market.
After the basic design of the channel is determined, the firm faces the task of effective channel management. Once the task of selecting dealers/firms to work with is over, it has to motivate channel members through trade commissions, incentives and supervision. It has to further periodically evaluate the performance of individual channel members against their own past sales, the sales of other channel members, and, possibly, sales targets.
Because markets and the marketing environment are continually changing, the firm must be prepared to make channel revisions: individual members may be dropped or added, channels in specific markets may be modified, and, sometimes, the whole channel system may be redesigned.
Marketing Channels – For Consumer Goods, Industrial Goods and Services (With Examples)
Consumer goods category includes huge array of products. Fast Moving Consumer Goods (FMCG), consumer durables, convenient goods, etc. are included in this category.
Channel length can vary from zero to n in case of consumer goods. Generally more lengthy channels are observed for these products. Retailers are found only in consumer goods channels. Consumer goods channels take many forms.
Various channel patterns are discussed below:
1. Manufacturer – Consumer – Zero Level
For example, cosmetics, farm products like fresh fruits, vegetables, encyclopaedia, many innovative products through home shopping, etc.
2. (a) Manufacturer – Dealer – Consumer – 1 Level
For example, automobiles.
(b) Manufacturer – Franchisee – Consumer – 1 Level
For example, food products, garments, clothing, etc.
(c) Manufacturer – Manufacturers’ Agents – Consumers – 1 Level
For example, personal Computer.
(d) Manufacturer – Large retailer/consumer cooperatives – Consumer – 1 Level
For products such as groceries, ready to eat and ready to cook food products, etc. For example, Grahak Peth, Apana Bazar, etc.
3. (a) Manufacturers – Agents or Brokers – Retailer – Consumer – 2 Levels
For example, farm products like food grains, fruits, vegetables, etc.
(b) Manufacturers – Wholesaler – Retailer – Consumer – 2 Levels
For example, FMCG, hardware parts, drugs, etc.
4. (a) Manufacturer – C&F Agent – Stockist – Retailer-Consumers – 3 Levels
For example, medicine.
5. (a) Manufacturer – C&F Agent – Redistribution Stockist – Retailer – Consumer – 4 Levels
For example, HLL products.
In Japan, food distribution may involve as many as six levels.
Considering nature of industrial goods and the purchase procedure, generally shorter channels (upto length 1) are used. Mostly direct channel, i.e., zero level is used. In case of industrial goods, every customer may have different specifications or need some changes in the standard specifications, i.e., there is a need of customization of the product. Hence manufacturers send their sales personnel who can also clarify customers’ technical queries and freeze the product specifications.
Intermediaries need to have technically sound sales force to explain and sell these complex products effectively. Hence, zero level or direct channel is more preferred. Industrial market is made up of a smaller number of relatively large buyers compared to consumer market and the buyers are not scattered over a wide area rather they are concentrated. Hence intermediaries are not much useful. However, small manufacturers can take help of agents to sell in geographically dispersed markets.
Following channel patterns are possible:
1. Manufacturer – Consumer – zero Level
For example, complex technical products, large capital equipments, etc.
2. Manufacturer – Agents – Consumer – 1 Level
For example, industrial tools, Personal Computers, etc.
3. Manufacturer – Wholesaler — Consumer – 1 Level
For example, industrial supply houses trading fairly standardized industrial goods like lathe machine, grinding machines, electrical supplies, etc.
Producers of services also need to think about distributing, i.e., making their services available to their customers. Thus the concept of marketing channels is not restricted to the physical goods only. However, they are not concerned about transportation, warehousing, inventory, etc. like the intermediaries for tangible goods and thus have limited role. Marketing channels can make the services “available” and “accessible” to the target customers.
Because of the features like intangibility, perishability, inseparability, distribution of services becomes critical. Generally shorter channels are observed. Mostly direct channel, i.e. zero level is used. Most services are sold directly from provider to the consumer or industrial buyer. However, some service providers may take help of agents who can provide the information to the customers, book the orders, and collect the payment on behalf of the service providers.
In any case channel length does not exceed 1 level. Some big and reputed service providers train the individuals to perform a service and franchise their services, e.g., employment Agencies, Travel Agencies, etc.
Marketing Channels – Decisions and Dynamics
Designing the marketing channels is a task in which the manufacturer has to take into consideration several factors. An organisation needs to take into consideration what is desirable while not losing focus on what is feasible, affordable and available.
After having selected the channel alternative, it is time for the organisation to select individual channel members and motivate and evaluate them, and modify the channel arrangements over a period of time to provide better service to the end users.
a. Selection of Channel Members:
While selecting channel members, it is essential for the organisation to first establish the characteristics that it seeks in these members. The characteristics could be with regards to the number of years the channel members have been in business, their growth and profit record, their market reputation, and their capabilities to handle the product.
b. Motivating Channel Members:
To motivate channel members to perform, the organisation must ensure that they help the intermediaries with the training of the personnel, supervision and encouragement. They also need to be incentivised and rewarded from time to time for performances that exceed set targets.
c. Evaluating Channel Members:
The organisation must periodically evaluate the performance of the channel members against set parameters like the attainment of sales targets, the average inventory levels maintained, the delivery time to customers, and co-operation in promotional and other business aspects.
d. Modifying Channel Arrangements:
To meet the ever-changing conditions in the marketplace, the channel arrangements would require modifications over a period of time. Modifications become necessary when the channel is not working as planned or anticipated, when newer channels emerge, or even when the product passes through progressive stages in its life cycle.
Distribution channels are also constantly evolving with time. They keep changing with regards to their structures, functions, and their business arenas. Given this, there is also a greater possibility of channel competition and conflict. We will look at the changing channel dynamics with regards to the recent channel developments like the Vertical, Horizontal and Multi-channel Marketing Systems.
Types of Channels:
1. A Vertical Marketing System (VMS):
A Vertical Marketing System (VMS) comprises of the manufacturer, wholesaler and retailer, all acting as a unified system as against the conventional marketing channel system in which each of the channel members are a separate entity. Here, one channel member either owns the others, or franchises them, or exercises enough control over the other members to ensure the functioning as one unified system.
There are three types of VMS:
ii. Administered, and
i. Corporate VMS looks at having the successive stages of manufacturing and distribution under a single ownership.
ii. Administered VMS looks at the co-ordination of the successive stages of manufacturing and distribution through the power of one of the channel members who exercises control over the others.
iii. Contractual VMS involves independent organisations at different stages of manufacturing and distribution and integrates their efforts on a contractual basis to obtain more economies of scale than would be possible for them to do individually.
There are three types of Contractual VMS:
a. Wholesaler sponsored voluntary chains – Here, wholesalers organise voluntary chains of independent retailers who help them compete with the larger chains.
b. Retailer Co-operatives – In this case, the retailers come together to take up the task of wholesaling or even manufacturing in some cases.
c. Franchise Organisations – Franchisers might also link the successive stages in the manufacturing and distribution process.
2. Horizontal Marketing System:
This is another marketing System emerging in which two or more unrelated organisations come together and pool their resources to exploit a marketing opportunity. This coming together may be on a temporary or permanent basis. Also, there is a mutual benefit to both organisations, which they are otherwise not likely to achieve. This is also called as symbiotic marketing.
3. Multi-Channel Marketing System:
Gone are the days when organisations sold to a single target market through a single channel. Given the complex nature of multiple segments that are tapped, multi-channel marketing has become the order of the day. Multi-channel marketing occurs when a single organisation uses two or more marketing channels to reach the same or more than one market segment.
Marketing Channel – Conflict
A channel is a type of social system in which each member is expected to fulfil certain roles and perform certain functions. In carrying out their specialised roles and functions, channel members may cooperate, conflict and compete with one another. Conflicts can be functional or dysfunctional. Vertical Marketing Systems (VMS) represent a major step towards resolving dysfunctional conflict.
In contrast to a traditional channel that focuses mainly on the independence of channel members, a VMS focuses on their interdependence. A Horizontal Marketing System (HMS) involves cooperation between two or more organisations on the same level of distribution to accomplish a common goal.
Marketing channels involve a number of channel intermediaries, and this is always likely to result in a conflict of interests.
1. Channel Conflicts:
Vertical channel conflicts exist when there is conflict between different levels within the same channel. For example, when automobile manufacturers try to enforce policies on their dealers, it leads to a conflict.
2. Horizontal Channel Conflicts:
Horizontal channel conflicts exist when there is conflict between the members at the same level within the channel. An example of this type of conflict is one auto dealer having a conflict with another auto dealer.
3. Multi-Channel Conflict:
Multi-channel conflict exists when the manufacturer establishes two or more channels that are competing with each other in selling to the same market. An example of this type of conflict is if an organisation appoints two agents for the same territory.
Causes of Conflict:
Some of the major reasons for conflict are:
i. Goal Incompatibility:
When there is a goal incompatibility issue between the manufacturer and the channel member, it can give rise to a channel conflict. For example, if the manufacturers prefer to have lower prices and larger volumes whereas the dealers want higher prices and medium volumes, it can lead to a conflict.
ii. Unclear Role and Rights:
A conflict may arise on account of unclear roles and rights. For example, if an organisation sells to customers that are within the territory of the agents, this can lead to a conflict.
iii. Differences in Perception:
Differences in perception about the market requirements and their responses may lead to conflict. An example of differences in perception is when the manufacturer is hoping for higher sales and expects the channel member to carry higher inventory, while the channel member perceives the market conditions to be otherwise.
iv. Greater Dependence:
Conflicts might arise if the channel member is highly dependent on the manufacturer. For example, if the channel member is an exclusive dealer, he may have to comply with all the manufacturer’s terms, even if he does not want to.