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Chapter 13:
Distribution Channels
All roads lead to Rome
Chapter Objectives
• Describe the nature of distribution channels
• Understand the different marketing intermediaries and the benefits they offers.
• Know how to use the Internet as a distribution channel
• Discuss channel behavior and organization
• Illustrate the channel management decisions of selecting, motivating and evaluating channel members.
• Identify factors to consider when choosing a business location.
Distribution Channel
What is a Distribution Channel?
• A set of organizations (intermediaries) involved in the
process of making a product or service available for use
or consumption by the consumer or business user.
• Used to move the customer towards the product
• Selling through wholesalers and retailers usually is
much more efficient and cost effective than direct sales.
Distribution Channel Functions
• Information: gathering and distributing marketing research and intelligence information about the marketing environment.
• 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 such activities as manufacturing, grading, assembling, and packaging.
InformationInformation
PromotionPromotion
ContactContact
MatchingMatching
NegotiationNegotiation
PhysicalPhysical
Gathering and distributing marketing research about the environment
Gathering and distributing marketing research about the environment
Developing and spreading persuasive communications about an offer
Developing and spreading persuasive communications about an offer
Finding and communicating with prospective buyers
Finding and communicating with prospective buyers
Shaping and fitting the offer to the buyer’s needShaping and fitting the offer to the buyer’s need
Agreeing on price and terms of the offer so ownership or possession can be transferred
Agreeing on price and terms of the offer so ownership or possession can be transferred
Distribution: transporting and storing goodsDistribution: transporting and storing goods
FinancingFinancing Acquiring and using funds to cover the costs of channel work
Acquiring and using funds to cover the costs of channel work
Distribution Key Functions Channel
Risk TakingRisk Taking Assuming financial risks such as the inability to sell inventory at full margin
Assuming financial risks such as the inability to sell inventory at full margin
Distribution Channel Functions
WholesalerWholesaler JobberJobber RetailerRetailer ConsumerConsumer
ConsumerConsumer
RetailerRetailer ConsumerConsumer
ProducerProducer
0-level channel
WholesalerWholesaler RetailerRetailer ConsumerConsumer ProducerProducer
2-level channel
ProducerProducer
3-level channel
1-level channel
ProducerProducer
Channel Level - Each Layer of Marketing Intermediaries that Perform Some Work in Bringing the Product and its Ownership Closer to the Final Buyer.
Number of Channel Levels
Travel AgentsTravel AgentsTour WholesalersTour Wholesalers
ConciergesConcierges Specialists: Brokers & Junket Reps
Specialists: Brokers & Junket Reps
InternetInternet Hotel RepresentativesHotel Representatives
Consortia & Reservations Systems
Consortia & Reservations Systems
Global Distribution Systems
Global Distribution Systems
National, State, and Local Tour Agencies
National, State, and Local Tour Agencies
Marketing Intermediaries
Travel Agents (TA’s)• 31,000 TA in the U.S.A. (1999)
• Decreasing due to Internet and less commission
• Commission: Airlines 5 %, hotels 10%, cruises 15%
• TA’s use toll- free numbers, CRS or GDS* when making reservation for hotels
• Companies are a major source of travel bookings.
Marketing Intermediaries
* Mostly used
Supplier Wholesaler Travel agent
Tour Packages
Usually Air travel + lodging
may include [ meals + entertainment + ground transportation + sightseeing tours + special entrance fees]
Tour Wholesalers A company that operates as an intermediary between the travel product supplier and the retail travel agent in the marketplace. (Tour operators often operate as wholesalers.)
Marketing Intermediaries
Tour Wholesalers• Usually targeted at the leisure market• Retail TA’s sell wholesalers’ tour packages.• They get discounts from airlines or hotels• Break even point is usually achieved at 85 % of sale. • USTOA requires $100,000 indemnity bond.• Usually resort hotels are dependent on tour wholesalers • Almost all major airlines have vacation packages
promoted through brochures and their web sites.
Marketing Intermediaries
• Specialists: Tour Brokers, Motivational Houses and Junket Reps.
• Tour brokersTour brokers sell motor coach tours. Trips to college and sporting events, tours built around Mardi Gras.
• Motivational housesMotivational houses provide incentive travel to companies offered to their employees.
• Junket repsJunket reps maintain lists of casino gamblers. Junket reps get a commission based on the amount the casino earns from the players.
Marketing Intermediaries
Hotel Representatives• HR sell hotel rooms and services in a distant market
area and receive a straight commission, a commission plus a salary, or a combination of both.
National, State, and Local Tourist Agencies (CVB’s)• Supply information and promote an area, a state or
country.• Usually they deal with conferences, exhibits or
conventions
Marketing Intermediaries
Consortia and Reservation Systems• A consortium is a group of hospitality organizations that is
allied for the mutual benefit of its members (Leading Hotels of the World, Supranational, Utell, Tulip).
• Reservation systems provide a central reservation services for hotels.
• Hotel Chain Reservation Systems vs. Independent Reservation Systems
Marketing Intermediaries
Global Distribution Systems• GDSs were originally developed by the airlines in 1960s• GDS’s are computerized reservation systems• GDS connects many CRS of different hospitality companies.• Major GDS’s: Sabre, Worldspan, Galileo, Amadeus.• Amadeus-largest in Europe and Latin America (155,000 TA)• Galileo connects TA’s to 500 airlines, 40 Rent a Car
companies, 47,000 hotels, 370 tour operators.• Worldspan web site: TA’s can book airlines, rental cars, and
shows and make restaurant reservations all from one site.
Marketing Intermediaries
Internet• Became an effective distribution channel.• In 2003, Internet sales reached $ 25.2 billion (10% of the
total travel business market). • Total hotel sales over internet $5 billion• Marriott takes 10,000 reservation a day.• Southwest airlines over a billion dollars through its web site.• Restaurants on-line ordering–Pizza Hut, and Domino pizza.• Expedia: Over 7 million visitors a month• Advantages-24 hours, color picture, video tour, accessible
anywhere, print hard copy, low cost,
Marketing IntermediariesTravelocity
Expedia
Priceline
Channel Behavior & Organization
• A channel will be most effective when all members cooperate to attain overall channel goals and satisfy the target market.• Channel conflict occurs when channel members are
disagree over goals and roles• Conflict occurs at two level:
• Horizontal Conflict occurs among firms at the same level of the channel, i.e retailer to retailer.
• Vertical Conflict occurs between different levels of the same channel, i.e. wholesaler to retailer.
• For the of a channel each member’s role must be specified and conflict must be managed.
Verticalmarketingchannel
Manufacturer
Retailer
Conventionalmarketingchannel
Consumer
Manufacturer
Consumer
Retailer
Wholesaler
Wh
ole
sale
r
Conventional Distribution Channel vs. Vertical Marketing Systems
CorporateCommon Ownership at Different
Levels of the Channel
ContractualContractual Agreements Among
Channel Members
AdministeredLeadership is Assumed by One or
a Few Dominant Members
Degree of Direct Control
Channel Organization Types of Vertical Marketing Systems
•The franchisor permits the franchise to use its trademark, name and advertising.•In U.S.A. 700,000 franchise ~about $ 850 billion salesFranchised hotels account ~ 65 percent of room supply.
Starting a new business: 20 percent chance for survivalBuying an existing business: a 70 percent chance for survivalBuying a franchise: a 90 percent chance for survival
Vertical Marketing System
Franchising
Hotel franchises:
Choice hotels, Holiday Inns, Sheraton Inns, Hilton inns
Restaurant franchises:
Mc Donalds, Burger King, KFC, Pizza Hut, T.G.I. Franchises
Advantages Disadvantages Franchisor
1. Capital for growth2. Faster growth3. Additional management4. Additional income
1. Lower potential profits2. Controlling service quality3. Controlling firm image
Franchisee
1. Lower risk2. Established brand name3. Successful business plan4. Expert assistance
1. Franchisee fees2. Lack of freedom3. Controlled by franchisor
Vertical Marketing System
Franchising
• Another form of contractual agreement• Allow two or more organizations to benefit from each
other’s strengths.• 7-Eleven sells Dunkin Donuts in 2,000 of its stores• Embassy suites has Red Lobster restaurants located in
its hotels.• Chain fast-food operations are located in convenience
stores.• Airline alliances: SAS-Continental, Delta-Korean Airlines
Vertical Marketing System Alliances
Trade for preferred relationship with global
networks
Trade for preferred relationship with global
networks
Gain preferred access to each other’s local
customer base
Gain preferred access to each other’s local
customer base
Pool policy expertise,
costs, and capabilities
Pool policy expertise,
costs, and capabilities
Implement consumer-oriented,
commercially driven operations and
services
Implement consumer-oriented,
commercially driven operations and
services
c
Vertical Marketing System Alliances
Horizontal Marketing Systems
• Horizontal Marketing Systems: Two or more companies at one level who join to follow a new marketing opportunity.• Seaworld offers tickets at a discount to an automobile club.• In return, Seaworld gains access to several hundred
thousand automobile club members• Multi-channel Marketing Systems: Single firms that set up
two or more marketing channels to reach one or more customer segments.• McDonald’s sells its products through independent
franchises, but owns more than one-fourth of its outlets.
• Customer needs• Victoria House in Belize
• Attracting channel members• A small chain hotel be advised to choose one travel
agency chain or work in key cities that are likely to generate business.
• Evaluating major channel alternatives1. Economic criteria
MGM hotel; Tour Operators vs. Travel Agencies.2. Control criteria
Franchise control/quality control
Selecting Channel Members
• E-mail [email protected] • For reservations use the e-mail Reservation Form • Call us toll free from US or Canada 1-888-535-8832 / 1-800-948-3770
• Three secrets of successful retailing: “Location! Location! Location!” • Location depends on the firm’s marketing strategy.• There are four steps in choosing a location.• 1. Understanding the marketing strategy and target
market of the company.• Downtowns, freeways, near airports,
• 2. Regional analysis involves the selection of geographic market areas. A firm needs to make sure that a region has sufficient and stable demand to support the firm, today and in the future.
The Business Location
• 3. Choosing the area within the region: Demographic, psychographic characteristics and competition are factors to consider.
• 4. In choosing the individual site, business will consider several factors: • Compatible businesses, Competition, Potential
demand generators, • Residential communities, profile of prospective
customers, shopping centers.• Accessibility, traffic, speed of traffic, visibility,
The Business Location