Channel Strategy Decisions

Factors Affecting Channel Choice

Channel choice involves understanding the ultimate user and how they prefer to purchase merchandise.

Learning Objectives

Discuss the various factors that affect channel choice

Key Takeaways

Key Points

  • Channel choice begins with two questions: to whom shall we sell this merchandise immediately? And, who are our ultimate users and buyers?
  • There is a need to know what the customer needs, where they buy, when they buy, why they buy from certain outlets, and how they buy.
  • Often, the exchange requirements of manufacturers – e.g., infrequent visits, large order requirements, and stringent credit terms – are the opposite of those desired by retailers.
  • Channel objectives are based on the requirements of the purchasers and users, the overall marketing strategy, and the long-run goals of the corporation.
  • The channel manager must be very specific in describing channel tasks, and must define how these tasks will change depending upon the situation.

Key Terms

  • wholesaler: a person or company that sells goods wholesale is a middleman that buys its merchandise from a third party supplier and resells the merchandise to retail businesses or the end consumer. A wholesaler normally does not sell to other wholesalers.

Factors Affecting Channel Choice

Whether a firm be a one person operation or one that employs thousands of people and generates billions in sales, all are in business to serve the needs of markets. In order to do this, these firms must be assured that their products are distributed to their intended markets. Most producing and manufacturing firms are not in a favorable position to perform all the tasks that would be necessary to distribute their products directly to their final user markets. In many instances, it is the expertise and availability of other channel institutions that make it possible for a producer/manufacturer to even participate in a particular market. Other channel members can be useful to the producer in designing the product, packaging it, pricing it, promoting it, and distributing it through the most effective channels.

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Channel Choice: Managers have many factors to consider when choosing a product distribution channel.

Channel choice begins with two questions: to whom shall we sell this merchandise immediately? And, who are our ultimate users and buyers? The immediate and ultimate customers may be identical or quite separate, depending on the type of product, functions performed in the channel, and location in the channel. There is a need to know what the customer needs, where they buy, when they buy, why they buy from certain outlets, and how they buy. It is best that we first identify the traits of the ultimate user, since the results of this evaluation might determine the other channel institutions we would use to meet these needs. For example, the buying characteristics of the purchaser of a high-end electronics device might be as follows:

  1. Purchased only from a well-established, reputable dealer.
  2. Purchased only after considerable shopping to compare prices and merchandise characteristics.
  3. Purchaser willing to go to some inconvenience (time and distance) to locate the most acceptable brand.
  4. Purchased only after extended conversations involving all interested parties – including dealer, users, and purchasers.
  5. Purchase may be postponed.
  6. Purchased only from a dealer equipped to render prompt and reasonable product service.

Knowing the buying specifications of consumers, the channel planner can decide on the type or types of wholesaler and/or retailer through which a product should be sold. This requires that a manufacturer contemplating distribution through particular types of retailers become intimately familiar with the precise location and performance characteristics of those being considered.

In much the same way that buying specifications of ultimate users are determined, the manufacturers must also discover buying specifications of resellers. Of particular importance is the question, “from whom do my retail outlets prefer to buy? ” The answer to this question determines the type of wholesaler – if any – that the manufacturer should use. Although many retailers prefer to buy directly from the manufacturers, this is not always the case. Often, the exchange requirements of manufacturers – e.g., infrequent visits, large order requirements, and stringent credit terms – are the opposite of those desired by retailers. Such retailers would rather buy from local distributors who have lenient credit terms and offer a wide assortment of merchandise.

Channel choice is also greatly influenced by channel objectives. Channel objectives are based on the requirements of the purchasers and users, the overall marketing strategy, and the long-run goals of the corporation. In cases when a company is just getting started, or an older company is trying to carve out a new market niche, the channel objectives may be the dominant force on channel choice. The following areas encompass the major categories of channel objectives:

  1. Growth in sales – by reaching new markets and/or increasing sales in existing markets.
  2. Maintenance or improvement of market share – educate or assist channel components in their efforts to increase the amount of product they handle.
  3. Achieve a pattern of distribution – structure the channel in order to achieve certain time, place, and form utilities.
  4. Create an efficient channel – improve channel performance by modifying various flow mechanisms.

After the distribution objectives are set, it is appropriate to determine the specific distribution tasks or functions to be performed in that channel system. The channel manager must be very specific in describing the tasks, and must define how these tasks will change depending upon the situation. An ability to do this requires the channel manager to evaluate all phases of the distribution network. Tasks must be identified fully, and costs must be assigned to these tasks.

Distribution Intensity

Marketing channel intensity takes into account both the variance and number of channels an organization may use to deliver goods and services to consumers.

Learning Objectives

Differentiate between different distribution intensity strategies, incorporating the modern digital storefronts into this consideration

Key Takeaways

Key Points

  • Organizations must understand the competitive environment of the industry, particularly how to use a variety of marketing channels to get their products in front of their core target market at the right time and place.
  • Distribution intensity plays a significant role in marketing channel strategy. Firms can opt for intensive, selective, and exclusive strategies.
  • Intensive distribution focuses on delivering a firm’s goods to as many storefronts as possible and maximizing the amount of sales to pursue scale economies.
  • Selective distribution focuses on utilizing fewer channels to maintain a higher level of strategic control, but still pursues high volume within those select channels.
  • Exclusive distribution works off the idea that scarcity can add value. High fashion and other luxury goods focus on being hard to find through limited channels and low volume of production.
  • Technology has had a significant impact on marketing channel strategy. Influential digital storefronts are key strategic partners in the modern economy.

Key Terms

  • marketing channel: The way in which a firm sells goods and services to a potential consumer, either directly or through a strategic partner.

Channel Distribution Intensity

As organizations develop their marketing channel strategies, an important question arises regarding distribution intensity. There is some freedom in most industries for a firm to determine which channels they will use, and how much volume each channel will receive. Weighing the pros and cons of various channels, both in terms of the number of channels and the volume within each channel, can have a significant strategic impact on a firm’s position in a market.

Generally speaking, there are three ways to frame the distribution intensity decision:

Intensive

This is the highest in both number of channels and volume within each channel. An intensive distribution approach will take advantage of as many sales outlets, distributors, and direct selling opportunities the organization can identify and justify (at a given volume). This is common for goods such as soda, snacks, household items, and other common low cost goods. In short, many channels and high volume.

Selective

Selective distribution focuses on narrowing down the number of channels within the distribution strategy, but not the overall volume of goods sold through those channels. This strategy focuses on fewer channels yet retains a desire for higher volumes to capture scale economies in production. Common channels in these circumstances are channels where the firm can maintain strategic control of how the products are sold, at what price, and in which regions.

Exclusive

Finally, some firms opt for a low volume approach with very few channels selected. This is ideal for differentiated organizations with a strong brand and a desire for scarcity. If everyone had the same high fashion item, it would no longer be a high fashion item. If everyone on the road had a beautiful, unique sports car, much of the allure and justification for a high price point would be gone. Exclusive distribution strategies work best for firms that focus on low volume, high margin sales.

Technology and Channels

Technology has disrupted some of the logic behind these channel decisions, as digital storefronts have grown to be highly influential, easily accessible to global markets, and substantially cheaper than retail space. As the rise of digital purchasing continues, and the cost of shipping decreases, globalization will drive organizations more and more towards channel strategies that optimize online exposure.

Considering the vastness of the internet, however, being found by consumers who are not yet aware of your product becomes difficult. This creates an interesting relationship, similar to the retail relationship in traditional channel marketing, whereas certain digital storefronts are highly valuable strategic partners. Amazon, for example, sells a huge number of brands on their website. Being highly rated and promoted on Amazon will greatly increase the efficacy of that particular channel. Understanding how online marketplaces work, and how to build a presence in this new digital age, is a critical skill set for a strategic marketeer looking at channel strategy.

A diagram that shows marketing channel strategies in a B2B organization. 1.) design product experience, functionality, packaging, and price; 2.) create awareness, position product, design customer engagement and decision-making experience; 3.) sell the product, design small format and face-to-face engagement experience; and 4.) keep customer engaged, seed repeat business, and make the customer a reference.

B2B Marketing Roles: This diagram shows marketing channel strategies within a B2B organization. Marketing channels represent one avenue among many in the field of marketing and sales.

Distribution Centers vs. Direct Store Delivery

Depending on customer needs, marketing channel strategies can utilize distribution centers or move products directly to a store.

Learning Objectives

Describe the different functions performed by wholesalers in channel distributions

Key Takeaways

Key Points

  • Types of retailers include department stores, chain stores, discount houses, franchises, and non-store retailers. Stores vary in size, in the kinds of services that are provided, in the assortment of merchandise they carry, and in many other respects.
  • In order to decide on the types of retailers to include in its marketing channel, a firm must first understand the buying specifications of its consumers and the retailers themselves.
  • Wholesaling includes all activities required to market goods and services to businesses, institutions, or industrial users. Wholesalers can provide warehousing, inventory control and order processing, transportation, information, and selling functions.
  • Wholesalers can provide warehousing, inventory control and order processing, transportation, information, and selling functions.

Key Terms

  • department store: a large shop containing many different areas, each of which deals in different goods or services
  • marketing channel: Sets of interdependent organizations involved in the process of making a product or service available for use or consumption, as well as providing a payment mechanism for the provider.
  • franchise: The authorization granted by a company to sell or distribute its goods or services in a certain area.

Distribution Centers Versus Direct Store Delivery

Depending on the product being sold and ultimate end user, companies can choose a marketing channel strategy that involves utilizing distribution centers (wholesalers) or moving their products directly to a store, or retailer. There are advantages and disadvantages to both and several different types of each.

Retailers

Stores vary in size, in the kinds of services that are provided, in the assortment of merchandise they carry, and in many other respects. Most stores are small and have weekly sales of only a few hundred dollars. A few are extremely large, having sales of $500,000 or more on a single day. An example of a large retailer would be Wal-Mart shown here

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Retailers: Walmart is one of the largest and most successful retailers in history.

There are many different kinds of retailers, including:

  • Department Stores – Department stores are characterized by their very wide product mixes. That is, they carry many different types of merchandise that may include hardware, clothing, and appliances.
  • Chain Stores – Chain stores are able to buy a wide variety of merchandise in large quantity discounts. The discounts substantially lower their cost compared to costs of single unit retailers. As a result, they can set retail prices that are lower than those of their small competitors, and thereby increase their share of the market. Furthermore, chains are able to attract many customers because of their convenient locations, made possible by their financial resources and expertise in selecting locations.
  • Discount Houses – Discount houses are characterized by an emphasis on price as their main sales appeal. Merchandise assortments are generally broad, including both hard and soft goods, but assortments are typically limited to the most popular items, colors, and sizes.
  • Franchises – Over the years, large chain store retailers have posed a serious competitive threat to small storeowners. Franchising has come about in response to this trend.
  • Non-store Retailing – Non-store retailing describes sales made to ultimate consumers outside of a traditional retail store setting. In total, non-store retailing accounts for a relatively small percentage of total retail sales, but it is growing and very important with certain types of merchandise, such as life insurance, cigarettes, magazines, books, CDs, and clothing. Online vendors, such as Amazon, or a good example of non-store retailers. Vending machines are another type of non-store retailing. This method of retailing is an efficient way to provide continuous service. It is particularly useful with convenience goods.

In order to decide on the types of retailers to include in its marketing channel, a firm must first understand the buying specifications of its consumers. The firm must also understand the buying specifications of the retailers themselves. Although some retailers prefer to buy directly from the manufacturer, others would rather buy from local distributors who have lenient credit terms and offer a wide array of merchandise.

Wholesalers

Wholesaling includes all activities required to market goods and services to businesses, institutions, or industrial users who are motivated to buy for resale or to produce and market other products and services. The vast majority of all goods produced in an advanced economy have wholesaling involved in their marketing. This includes manufacturers who operate sales offices to perform wholesale functions and retailers who operate warehouses or otherwise engage in wholesale activities. Wholesale volume is greater than that of retail because it includes sales to industrial users as well as merchandise sold to retailers for resale.

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Wholesalers: An example of a wholesaler is Optimum Sleep, which sells furniture wholesale.

Wholesalers perform a number of useful functions within the channel of distributions. These may include all or some combination of the following:

  1. Warehousing – the receiving, storage, packaging, and the like necessary to maintain a stock of goods for the customers they service.
  2. Inventory Control and Order Processing – keeping track of the physical inven­tory, managing its composition and level, and processing transactions to insure a smooth flow of merchandise from producers to buyers and payment back to the producers.
  3. Transportation – arranging the physical movement of merchandise.
  4. Information – supplying information about markets to producers and information about products and suppliers to buyers.
  5. Selling – personal contact with buyers to sell products and service.

By providing this linkage, wholesalers assist both the producer and the buyer. From the buyer’s perspective, the wholesaler typically brings together a wide assortment of products and lessens the need to deal directly with a large number or producers. The wholesaler assists the producer by making products more accessible to buyers. It provides the producer with wide market coverage information about local market trends in an efficient manner.