Chapter 7

Marketing Channel Strategy and Management

BY Roger A. Kerin and Robert A.

Peterson

Assoc. Prof. Dr. Teoman Duman

Students: Iskra Handukic, Nedzma Begic and Azra Muratovic

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A marketing channel consists of

individuals and firms involved in the

process of making a product or

service available for consumption or

use by consumers and industrial

users.

What is a marketing channel?

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● Links a producer to buyers

● Performs sales, advertising, and promotion

● Influences the firm’s pricing strategy

● Affects product strategy through branding policies, willingness to stock and customize offerings, install, maintain, offer credit, etc.

Role of the channel in marketing strategy

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The Channel-Selection DecisionFundamental Questions

● Who are potential customers?

● Where do they buy?

● When do they buy?

● How do they buy?

● What do they buy?- Avon Cosmetics example

The marketing manager must answer the following questions:

Traditional Marketing Channel Designs

Producer

Ultimate Buyers

Retailers or Dealers

Distributors or Wholesalers

Brokers or Agents

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The Design of Marketing Channels

Use intermediaries to reach target market

typelocationdensitynumber of channel levels

Contact ultimate buyers directly

using its own sales force or distribution outletsusing the Internet through a marketing Web site or electronic storefront

vs.INDIRECT DIST. DIRECT DIST.

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The Design of Marketing Channels

● Buyers are easily identifiable

● Personal selling is a major component of the communication mix

● Organization has a wide variety of offerings for the target market

● Sufficient resources are available

Direct distribution is typically used when:

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● Intermediaries are not available for reaching target markets● Intermediaries do not possess the capacity to service the requirements of target markets

Direct distribution must be considered when:

The Design of Marketing Channels

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● Intermediaries can perform distribution functions more efficiently and less expensively● Customers are hard to reach directly● Organization does not have resources to perform distribution function

Indirect distribution must be considered when:

The Design of Marketing Channels

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The Design of Marketing Channels

Electronic marketing channels employ some form of electronic communication, including the Internet, to make products and services available for consumption or use by consumers and industrial users.

Ultimate Buyers

Amazon.com Dell.comTravelocity.com

Representative Electronic Marketing Channels

Autobytel.com

Book Publisher

Book Distributor

Amazon.com (Virtual Retailer)

Dell ComputersAirline

Travelocity (Virtual Agent)

Auto Manufacturer

Auto Dealer

Auto-By-Tel (Virtual Broker)

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The Design of Marketing Channels

Disintermediation is the elimination of traditional intermediaries and direct distribution through electronic marketing channels.

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Channel Selection at the Retail LevelChannel Selection Decisions

1. Which channel and intermediaries will provide the best coverage of the target market?

2. Which channel and intermediaries will best satisfy the buying requirements of the target market?

3. Which channel and intermediaries will be the most profitable?

Channel Selection at the Retail LevelTarget Market Coverage

Exclusive IntensiveSelective

Levi’sSony

RolexFaberge

Wrigley’sCoke

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Channel Selection at the Retail Level

Effective Distribution occurs when a limited number of retail outlets account for a significant fraction of the market potential.Example: A marketer distributes the product through 40% of available outlets, but these outlets account for 80% of the market.

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Channel Selection at the Retail LevelSatisfying Buyer Requirements

● Information

● Convenience

● Variety

● Attendant services

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Channel Selection at the Retail LevelProfitability

● Margins = Revenues – Channel Costs

● Channel costs are:

- Distribution costs

- Advertising costs

- Selling costs

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● Specialty wholesaler– Limited line of items within a product line

● General-merchandise wholesaler– Wide assortment of products

● General-line wholesaler– Complete assortment of items in a single

retailing field

Combination

Channel Selection at Other Levels of Distribution

Types of Wholesaler

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● occurs when an organization distributes its offering through two or more different marketing channels that may or may not compete for similar buyers

● the main consideration is whether it will provide incremental sales revenue or cannibalize existing sales

Dual Distribution

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● own brand and private store brand

● distribution to large and small retailers

● multiband strategy

● geographic factors

Dual DistributionWhen is it used

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Hallmark

● Sells Hallmark brand cards through Hallmark stores and selected department stores

● Sells Ambassador brand cards through discount drugstore chains

Dual DistributionExample

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Multi-channel marketing involves the

blending of an electronic marketing

channel and a traditional channel in

ways that are mutually reinforcing in

attracting, retaining, and building

relationships with customers.

Multi-Channel Marketing

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● An electronic marketing channel can provide incremental revenue (Victoria’s Secret)

● An electronic marketing channel can leverage the presence of a traditional channel (Ethan Allen)

● Multi-channel marketing can satisfy buyer requirements (Clinique division of Estée Lauder)

Multi-Channel MarketingJustifications

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Multi-Channel MarketingConsiderations

● Actual incremental revenue or merely cannibalization?

● Incremental cost to launch and sustain an electronic forefront

● Disintermediation – a traditional intermediary member is replaced by electronic storefront

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● Improvements in product assortments

● Trade discounts

● Fill-rate standards

● Promotional support

● Lead-time requirements

● Product-service exclusivity agreements

Satisfying Intermediary Requirements and Trade Relations

Intermediary Requirements

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Satisfying Intermediary Requirements and Trade Relations

Trade Relations

Channel Conflict arises when one

channel member believes another

channel member is engaged in behavior

that is preventing it from achieving its

goals.

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● Channel member bypasses another member and sells or buys direct● Uneven distribution of profit margins among channel members ● Manufacturer believes channel member is not giving its products adequate attention

Satisfying Intermediary Requirements and Trade Relations

Sources of Channel Conflict

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Satisfying Intermediary Requirements and Trade Relations

Channel Power

Channel Captain is a channel member

that takes on the role of coordinating,

directing, and supporting other channel

members.

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● Ability to reward or coerce other members

● Expertness

● Identification with a particular channel member (Referent Power)

● Legitimate right to dictate the behavior of other members

Satisfying Intermediary Requirements and Trade Relations

Forms of Channel Captain Power

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Channel-Modification DecisionsReasons

● Shifts in the geographical concentration of buyers

● Inability of existing intermediaries to meet the needs of buyers

● Costs of distribution

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Channel-Modification DecisionsBasic Objectives

1. Provide the best coverage of the target market sought

2. Satisfy the buying requirements of the target market

3. Maximize revenue and minimize cost

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1. Will the change improve the effective coverage of the target markets sought? How?

2. Will the change improve the satisfaction of buyer needs? How?

3. Which marketing functions, if any, must be absorbed in order to make the change?

4. Does the organization have the resources to perform new functions?

5. What effect will the change have on other channel participants?

6. What will be the effect of the change on the achievement of long-range organizational objectives?

Channel-Modification DecisionsQualitative Factors

Case Study Analysis: Swisher Mower and Machine Company

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MARKETING PROBLEM DEFINITION

• In early 1996, Wayne Swisher, president and chief executive officer (CEO) of Swisher Mower and Machine Company (SMC) received a certified letter from a major national retail merchandise chain inquiring about a private brand distribution arrangement for SMC line of riding mowers.

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MARKETING PROBLEM DEFINITION

• The national retail merchandise chain expected to make an annual order of approximately 8200 units. The chain wanted to purchase the mowers at a price 5 percent lower than SMC manufacturer’s list price for its standard model. The chain wanted that the mower be different from SMC Ride King

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COMPANY OVERVIEW• -Swisher Mower and Machine Company

was formed in 1945 by Max Swisher.• -He received his first patent for a gearbox

drive assembly when he was 18-years old, he develop a self-propelled push mower utilizing this drive assembly.

• -He began selling these mowers to neighbors after converting his parent’s garage into small manufacturing operation

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COMPANY OVERVIEW• SMC produced limited but differentiated

products. SMC’s flagship product, the Ride King, was credited with the first zero-turning-radius riding mower.

• SMC also produced a trail-mower called T-44 with a cutting width of 44 inches. SMC planed to broaden SMC product line in 1996 by introducing a high-wheel string trimmer product, Trim-Max, a high-wheel, walk-behind product.

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COMPANY OVERVIEW• About 75% of sales of SMC were made

in non-metropolitan areas. • SMC sold 30% through wholesalers,

25% through direct-to-dealer, 40% as private-label, and the rest 5% as exports.

• It sold the Ride King through wholesalers, who located throughout the country, focusing on farm dealers situated in the south central and southeastern US.

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INDUSTRY OVERVIEW

• Riding lawn mowers are classified as lawn and garden equipment with two basic configurations, the front-engine lawn tractors and rear engine riding mowers.

• However there are some mid-engine riding mowers on the market, such as those produced by SMC.

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INDUSTRY OVERVIEW

• Competition in riding lawn mower market was fierce with ten manufacturers comprising major competitors in 1995, while SMC only occupied around 0.3%, based on sales units.

• All these companies made Riding mowers under a nationally branded name and at the same time were engaged in private-label production.

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INDUSTRY OVERVIEW

• Each riding mower manufacturer priced its products at price points.

• The representative retail prices for national and private-label riding mowers typically ranged from $800 to $5,000.

• The manufacturer’s price of Ride King of SMC, $ 650, was quite comparative, compared with industry average.

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CONSUMER ANALYSIS

• National retail merchandise chains - 24%

• OPE/Farm Equipment & supply stores - 22%

• Lawn/Garden Stores – 19 %• Discount department stores - 13%• Home centers – 10%• Hardware stores – 2 %• Others – 10%

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COMPETITION POSITIONING

• Ten manufacturers comprised the major competitors in the riding lawn mower market in 1995: American Yard Products, Ariens, Honda, John Deere, Kubota, MTD Inc, Murray of Ohio, Snapper, Toro, and Garden Way/Troy-Bilt. Ariens, Honda, John Deere, Kubota, MTD Inc, Murray of Ohio, Snapper, Toro, and Garden Way/Troy-Bilt

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  POSITIVE NEGATIVE

INTERNAL FACTORS

STRENGTHS

Distinct products High quality, simple design, easy to

use and maintain , no significant

claim Interchangeable parts Competitive price Personal relationship with dealer,

distributors and end-customers One new product on the way (Trim

Max)

WEAKNESSES

Limited range of products Perception on rear and mid engine –not

as strong and durable as front engine One man makes all the decision Small business mentality Insufficient attention for promotion and

advertising campaign No national distribution network

EXTERNAL FACTORS

OPPORTUNITIES

Limited market coverage (south central, southeastern). Potential expansion to the west

New target market include consumer housing, in addition to farms

Private labels business may be growing

Possibility for automation by technology development in long term (production streamline, cost reduction)

THREATS

Many big competitors like Honda, John Deere, American Yard Production etc with stronger financial resources and economic size of capacity

Cyclical industry After next year, industry may be down

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SWOT ANALYSIS

ALTERNATIVES AVAILABLE

• Enter distribution Arrangement with Retail Merchandise Chain:

• It could be to SMC’s advantage to enter the arrangement because it would provide them the chance to reach consumers they currently do not.

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ALTERNATIVES AVAILABLE

• Continue Current Operations: • By continuing current operations as they

are, SMC could avoid the added costs and put the funds toward other expansion possibilities.

• However, if SMC rejects this proposal, then they will be missing out on what makes up approximately 70 percent of industry sales.

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SOLUTION• SMC should sign the proposal with the

retail merchandise chain. • This proposal holds too many

opportunities for SMC to let it pass or fall into the hands of another competitor.

• The results of accepting the proposal look far better than the alternative.

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Thank you for your attention!