9.3 Channel Design

Deciding which channel members to use, how many to use, which functions they should provide, and the type of agreement the channel organizations should have is a difficult decision that may have long term consequences.  This last section on marketing channels covers some of the channel design factors that need to be considered.

Buyer Requirements

The Internet isn’t necessarily the best channel for every product, though everyone tends to want to jump to that alternative. For example, do you want to closely examine the fruits and vegetables you buy to make sure they are ripe enough or not overripe? Then online grocery shopping might not be for you. Clearly, how your customers want to buy products will have an impact on the channel you select. In fact, it should be your prime consideration.

First of all, are you selling to a consumer or a business customer? Generally, these two groups want to be sold to differently. Most consumers are willing to go to a grocery or convenience store to purchase toilet paper. The manager of a hospital trying to replenish its supplies would not. The hospital manager would also be buying a lot more toilet paper than an individual consumer and would expect to be called upon by a distributor, but perhaps only semi-regularly. Thereafter, the manager might want the toilet paper delivered on a regular basis and billed to the hospital via automatic systems. Likewise, when businesses buy expensive products such as machinery and computers or products that have to be customized, they generally expect to be sold to personally via salespeople. And often they expect special payment terms.

Because of these differences, B2B channels tend to be shorter than B2C channels.  ‘Shorter’ means that the channel has less levels.

Which channel member should be chosen?

We discussed the functions channel members perform for the channel. But, they perform functions for the buyer as well.  For example, if the consumer of our product is buying a refrigerator, they may want assistance in choosing the proper model for their needs. In addition, it is likely they will want a payment plan option, delivery, installation, and removal of the old refrigerator.  The manufacturer typically does not perform these functions; the retailer does.  Other things that buyers may ask for different products include gift wrapping, registry services, and rental arrangements, just to name a few. Understanding the needs of the buyer will help to determine which channel members to choose as they have to be able to provide those functions.

The brand name of the retailer is also important to the manufacturer. Choosing a retailer who has the same image, reputation, and target market as the manufacturer is vital to ensuring a consistent message is sent and the strategies of the channel members will complement each other.

Number of locations / purchase opportunities

Firms that choose an intensive distribution strategy try to sell their products in as many outlets as possible. Intensive distribution strategies are often used for convenience offerings—products customers purchase on the spot without much consideration or effort. Soft drinks and candy bars are examples. You see them sold in all kinds of different places.

By contrast, selective distribution involves selling products at select outlets in specific locations. For instance, Sony TVs can be purchased at a number of outlets such as Best Buy, or Walmart, but the same models are generally not sold at all the outlets. The lowest-priced Sony TVs are at Walmart, the better Sony models are more expensive and found in specialty electronics stores. By selling different models with different features and price points at different outlets, a manufacturer can appeal to different target markets. You don’t expect, for example, to find the highest-priced products in Walmart; when you shop there, you are looking for the lower-priced goods.

Exclusive distribution involves selling products through one or very few outlets. Most students often think exclusive means high priced, but that’s not always the case. Exclusive simply means limiting distribution to only one outlet in any area, and can be a strategic decision based on applying the scarcity principle to creating demand. For instance, supermodel Cindy Crawford’s line of furniture is sold exclusively at the furniture company Rooms To Go. Designer Michael Graves has a line of products sold exclusively at Target. To purchase those items you need to go to one of those retailers. In these instances, retailers are teaming up with these brands in order to create a sense of quality based on scarcity, a sense of quality that will not only apply to the brand but to the store.

To control the image of their products and the prices at which they are sold, the makers of upscale products often prefer to distribute their products more exclusively. Expensive perfumes and designer purses are an example. During the economic downturn, the makers of some of these products were disappointed to see retailers had slashed the products’ prices, “cheapening” their prestigious brands.

Even though we have discussed these strategies as for selling in physical locations (brick and mortar stores), they apply to online shopping as well.  How many sites will offer the product? Which type? Which specific site? Will we use an online retailer like Amazon or sell directly through our own exclusive site.  Whether using brick and mortar locations, online, or a combination, it is important to recognize that the choice to distribute intensively, selectively, or exclusively is a strategic decision based on many factors such as the nature of the brand, the types and number of competitors, and the availability of retail choices.

Channel Member Requirements

When choosing channel members, an analysis of potential partners’ strengths and weaknesses should be considered. Every organization has weaknesses but we don’t want everyone in the channel to have the same ones! The goal is to complement each other so one partner’s weakness is another’s strengths.

The potential channel members may have very different profit requirements as well.  This will impact the final price that will be charged to the end user. Each channel member needs to be able to achieve their required profit margin and still have the final price to the end user be competitive and a price the ultimate customer is willing to pay.

Product Requirements

The type of product being sold will also affect the marketing channel choices. Perishable products often have to be sold through shorter marketing channels than products with longer shelf lives. For example, a yellowfin tuna bound for the sushi market will likely be flown overnight to its destination and handled by few intermediaries. By contrast, canned tuna can be shipped by “slow boat” and handled by more intermediaries. Valuable and fragile products also tend to have shorter marketing channels. Automakers generally sell their cars straight to car dealers (retailers) rather than through wholesalers. The makers of corporate jets often sell them straight to corporations, which demand they be customized to certain specifications.

Areas of Concern

Channel Power

Strong channel partners often wield what’s called channel power and are referred to as channel leaders, or channel captains. In the past, big manufacturers like Procter & Gamble and Dell were often channel captains. But that is changing. More often today, big retailers like Walmart and Target are commanding more channel power. They have millions of customers and are bombarded with products wholesalers and manufacturers want them to sell. As a result, these retailers increasingly are able to call the shots. In other words, they get what they want.

This power can come from a number of sources such as economic position, expertise, reputation, and short-term contractual arrangements.  Most conventional channels have a fairly even disbursement of power but some channels will have one member that holds all the cards, so to speak, and can dictate channel decisions.

Channel Conflict

A dispute among channel members is called a channel conflict. Channel conflicts are common. Part of the reason for this is that each channel member has its own goals, which are unlike those of any other channel member. The relationship among them is not unlike the relationship between you and your boss (assuming you have a job). Both of you want to serve your organization’s customers well. However, your goals are different. Your boss might want you to work on the weekend, but you might not want to because you need to study for a Monday test.

All channel members want to have low inventory levels but immediate access to more products. Who should bear the cost of holding the inventory? What if consumers don’t purchase the products? Can they be returned to other channel members, or is the organization in possession of the products responsible for disposing of them? Channel members try to spell out details such as these in their contracts.

No matter how “airtight” their contracts are, there will still be points of contention among channel members. Channel members are constantly asking their partners, “What have you done (or not done) for me lately?” Wholesalers and retailers frequently lament that the manufacturers they work with aren’t doing more to promote their products—for example, distributing coupons for them, running TV ads, and so forth—so they will move off store shelves more quickly. Meanwhile, manufacturers want to know why wholesalers aren’t selling their products faster and why retailers are placing them at the bottom of shelves where they are hard to see. Apple opened its own retail stores around the country, in part because it didn’t like how its products were being displayed and sold in other companies’ stores.

Channel conflicts can also occur when manufacturers sell their products online. When they do, wholesalers and retailers often feel like they are competing for the same customers when they shouldn’t have to. Likewise, manufacturers often feel slighted when retailers dedicate more shelf space to their own store brands. Store brands are products retailers produce themselves or pay manufacturers to produce for them. Dr. Thunder is Walmart’s store-brand equivalent of Dr. Pepper, for example. Because a retailer doesn’t have to promote its store brands to get them on its own shelves like a “regular” manufacturer would, store brands are often priced more cheaply. And some retailers sell their store brands to other retailers, creating competition for manufacturers.

Legal Requirements

Lastly, you don’t want to risk breaking the law or engage in unfair business practices when dealing with your channel partners. An issue channel partners sometimes encounter relates to resale price maintenance agreements. A resale price maintenance agreement is an agreement whereby a producer of a product restricts the price a retailer can charge for it.

The producers of upscale products often want retailers to sign resale price maintenance agreements because they don’t want the retailers to deeply discount their products. Doing so would “cheapen” their brands, producers believe. Producers also contend that resale price maintenance agreements prevent price wars from breaking out among their retailers, which can lead to the deterioration of prices for all of a channel’s members.

Both large companies and small retail outlets have found themselves in court as a result of price maintenance agreements. Although the U.S. Supreme Court hasn’t ruled that all price maintenance agreements are illegal, some states have outlawed them on the grounds that they stifle competition. In some countries, such as the United Kingdom, they are banned altogether. The safest bet for a manufacturer is to provide a “suggested retail price” to its channel partners.

You Try It!



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