Designing the Marketing Channel

Sriram D

Adapted from the instructor guide provided for Text Book - Marketing Channels by Bert Rosenbloom Instructional Design inputs by Ms Suman Rao

Rewind
Factors to consider for determining closeness of channel relationship

Your thoughts
Critical factors to be considered while designing marketing channels
Situation: Daimler Motors India is launching a new truck Bharat Benz. It wants to establish marketing channels. What are the critical factors involved while designing the channel?

Session Objective
This session will enable students to:
Understand the key factors and processes associated with channel design. Appreciate the three dimensions of channel structure Understand the six variables that affect channel design Understand decision heuristics of channel design

Channel Design
Channel Design - Decisions involving the development of new marketing channels where none existed before, or, modify existing channels.
Decision faced by marketer. Management takes a proactive view Setting up a network from scratch or modifying a network

Who engages in Channel Design?

Firms

Wholesalers

Retailers

Producers, manufacturers, service providers, franchisors.

Look both up and down the channel

Look up the channel to secure suppliers

Look down the channel towards the market

Channel Design Paradigm

Recognizing the need for channel design decision

Setting and coordinating distribution objectives

Specifying the distribution tasks

Developing alternate channel structures

Evaluating the variables affecting channel structure

Choosing the best structure

Selecting the channel members

1. Need for channel design decision

Developing a new product or product line Aiming an existing product at a new market Making a major change in some other component of the marketing mix Establishing a new firm Adapting to changing intermediary policies that may inhibit attainment of distribution objectives Dealing with changes in availability of particular kinds of intermediaries Opening up new geographic marketing areas Facing the occurrence of major environmental changes Meeting the challenge of conflict or other behavioral problems Reviewing and evaluating

2. Setting Distribution Objective

Setting distribution objectives requires knowledge of which, if any, existing objectives & strategies may impinge on these distribution objectives. Three tasks to be performed
Become familiar with objectives & strategies (marketing mix as well as firm) Set distribution objectives & state them explicitly Check if distribution objectives are congruent with marketing & other general objectives of the firm

3. Specifying distribution tasks

Gather information on target market Promote product availability Maintain inventory Compile information about product Provide hands-on try out of product Sell against competitive products Process & Fill specific customer orders Transport the product Arrange credit Provide warranty / after sales service Establish product return provisions

4. Provide Channel Structure Dimensions

1. Number of levels in the channel

2. Intensity at the various levels

Allocation Alternatives
3. Types of intermediaries at each level

Limitations result from the following factors: Particular industry practices Nature & size of the market Availability of intermediaries

5. Evaluating Variables
Six factors
Market Variables Product Variables Company Variables Intermediary Variables Environmental Variables Behavioural Variables

Market & Product variables

Market Geography Location, geographical size & distance from producer Number of customers in a market Number of buying units / unit of land area (consumers or industrial firms) Who buys, & how, when, and where customers buy Bulk & Weight Perishability Unit Value Degree of Standardization Technical versus Nontechnical Newness

Market Size Market Density

Market Behavior

Market

Product

Company & Intermediary variables

Size
Financial Capacity Managerial Expertise Objectives & Strategies

The range of options is relative to a firms size

The greater the capital, lower the dependence on channel

Intermediaries are necessary when managerial experience is lacking Marketing & objectives may limit use of intermediaries

Company Availability Cost Services

Intermediary Availability of intermediaries influences channel Cost is always a consideration in channel structure Services that intermediaries offer are closely related to Channel

Environmental & Behavioural variables

Economic Sociocultural Competitive The impact of environmental forces is a common reason for making channel design decisions.

Technological

Legal

Environmental Develop congruent roles for channel members.

Be aware of available power bases. Attend to the influence of behavioral problems that can distort communications.

Behavioural

6. Choosing the best Channel

Why is choosing an optimal channel structure not possible?

1. Management is incapable of knowing all possible alternatives.

2. Precise methods for calculating the exact payoffs associated with each alternative structures do not exist.

BUT

Techniques exist for developing more exact methods.

6. Choosing the best Channel

Various decision making tools
Characteristics of Goods & Parallel Systems Approach (Aspinwells Theory) Financial Approach (Lamberts Theory) Transaction Cost Approach (Williamsons Theory) Management Sciences Approach Judgemental Heuristics Approach

Judgemental Heuristics Approach

Benefit
Limitation

Fairly simple prescriptions for channel structure

Mostly useful as rough guide to decision making

Judgemental Heuristics Approach

IF
Managements ability to make sharp judgments is high

+
Good empirical data on costs and revenues is available

Its possible to make highly satisfactory channel-choice decisions using judgmental-heuristic approaches

Judgemental Heuristics Approaches

Straight Qualitative Method Weighted Factor Score Method Distribution Costing Approach
Revenue / Expense
Monthly turnover Rs million)
Capital (Rs million)

Retail Outlet
200 KL of sale Rs 10 million
10 (Debt 75%)

Automobile Showroom
120 cars Rs 60 million
100 (Debt 70%)

Working Capital (Rs million) Gross Earnings (Rs million)

Expenses (Rs million) Net Earnings (Rs million) Break Even Volume ROI

1.80 0.16
0.19 (0.03) 233 KL -

5.00 2.90
2.35 0.55 118 cars 6.6%

Recap
Three strategic factors in developing alternative channel structure Six variables affecting channel structure Relationship between Intensity & no. of Intermediaries
Number of levels Intensity Type of Intermediary Intensive ~ Many Selective ~ Some Exclusive ~ Few

Market, Product, Company, Intermediary, Environment, Behavioural