Marketing Channels in the Supply Chain

The Significance of Marketing Channels

The primary purpose of any channel of distribution is to bridge the gap between the producer of a product and its user.

Learning Objectives

Identify the types of institutions that participate in marketing channels, and the three primary functions of these channels

Key Takeaways

Key Points

  • The channel is composed of different institutions that facilitate the transaction and the physical exchange.
  • A channel performs three important functions: transactional, logistical, and facilitating.
  • Service marketers also face the problem of delivering their product in the form and at the place and time their customer demands.

Key Terms

  • wholesale: The sale of products, often in large quantities, to retailers or other merchants.

Functions of a Channel

The primary purpose of any channel of distribution is to bridge the gap between the producer of a product and the user of it, whether the parties are located in the same community or in different countries thousands of miles apart. The channel of distribution is defined as the most efficient and effective manner in which to place a product into the hands of the customer. The channel is composed of different institutions that facilitate the transaction and the physical exchange.

Institutions in channels fall into three categories:

  • The producer of the product: a craftsman, manufacturer, farmer, or other extractive industry producer
  • The user of the product:an individual, household, business buyer, institution, or government
  • Certain middlemen at the wholesale and/or retail level

A channel performs three important functions. Not all channel members perform the same function. The functions are:

  • Transactional functions: buying, selling, and risk assumption
  • Logistical functions: assembly, storage, sorting, and transportation
  • Facilitating functions: post-purchase service and maintenance, financing, information dissemination, and channel coordination or leadership

These functions are necessary for the effective flow of product and title to the customer and payment back to the producer.

Characteristics of a Channel

Certain characteristics are implied in every channel.

First, although you can eliminate or substitute channel institutions, the functions that these institutions perform cannot be eliminated. Typically, if a wholesaler or a retailer is removed from the channel, its function will either shift forward to a retailer or the consumer, or shift backward to a wholesaler or the manufacturer.

For example, a producer of custom hunting knives might decide to sell through direct mail instead of retail outlets. The producer absorbs the sorting, storage, and risk functions; the post office absorbs the transportation function; and the consumer assumes more risk in not being able to touch or try the product before purchase.

Second, all channel institutional members are part of many channel transactions at any given point in time. As a result, the complexity of all transactions may be quite overwhelming. Consider how many different products you purchase in a single year and the vast number of channel mechanisms you use.

Third, the fact that you are able to complete all these transactions to your satisfaction, as well as to the satisfaction of the other channel members, is due to the routinization benefits provided through the channel.

Routinization means that the right products are most always found in places where the consumer expects to find them (such as catalogues or stores), comparisons among products are possible, prices are marked, and methods of payment are available. Routinization aids the producer as well as the consumer, because it tells the producer what to make, when to make it, and how many units to make.

Fourth, there are instances when the best channel arrangement is direct, from the producer to the ultimate user. This is particularly true when available middlemen are incompetent or unavailable, or the producer feels he or she can perform the tasks better. Similarly, it may be important for the producer to maintain direct contact with customers so quick and accurate adjustments can be made.

Direct-to-user channels are common in industrial settings, as are door-to-door selling and catalogue sales. Indirect channels are more typical and result, for the most part, because producers are not able to perform the tasks provided by middlemen.

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ATM Machines: ATM machines are one of the ways banks responded to channel issues.

Finally, although the notion of a channel of distribution may sound unlikely for a service product (such as health care or air travel), service marketers also face the problem of delivering their product in the form and at the place and time demanded by the customer.

Banks have responded by developing bank-by-mail, Automatic Teller Machines (ATMs), and other distribution systems. The medical community provides emergency medical vehicles, outpatient clinics, 24-hour clinics, and home-care providers. Even performing arts employ distribution channels. In all three cases, the industries attempt to meet the special needs of their target markets while differentiating their product from that of their competition. A channel strategy is evident.

Types of Marketing Channels

There are basically 4 types of marketing channels: direct selling; selling through intermediaries; dual distribution; and reverse channels.

Learning Objectives

Define direct selling, indirect channels, dual distribution, and reverse channels

Key Takeaways

Key Points

  • Direct selling is the marketing and selling of products directly to consumers away from a fixed retail location.
  • An intermediary (or go-between) is a third party that offers intermediation services between two trading parties.
  • Dual distribution describes a wide variety of marketing arrangements by which the manufacturer or wholesalers use more than one channel simultaneously to reach the end user.
  • A reverse channel may go from consumer to intermediary to beneficiary.

Key Terms

  • marketing channels: A marketing channel is a set of practices or activities necessary to transfer the ownership of goods, and to move goods, from the point of production to the point of consumption and, as such, which consists of all the institutions and all the marketing activities in the marketing process.
  • intermediaries: An intermediary is a third party that offers an intermediation service between two trading parties.

Introduction

There are basically four types of marketing channels:

  • Direct selling;
  • Selling through intermediaries;
  • Dual distribution; and
  • Reverse channels.

Essentially, a channel might be a retail store, a web site, a mail order catalogue, or direct personal communications by a letter, email or text message. Here’s a bit of information about each one.

Direct Selling

Direct selling is the marketing and selling of products directly to consumers away from a fixed retail location. Peddling is the oldest form of direct selling.

Modern direct selling includes sales made through the party plan, one-on-one demonstrations, personal contact arrangements as well as internet sales.

A textbook definition is: “The direct personal presentation, demonstration, and sale of products and services to consumers, usually in their homes or at their jobs. ”

Industry representative, the World Federation of Direct Selling Associations (WFDSA), reports that its 59 regional member associations accounted for more than US$114 Billion in retail sales in 2007, through the activities of more than 62 million independent sales representatives.

The United States Direct Selling Association (DSA) reported that in 2000, 55% of adult Americans had at some time purchased goods or services from a direct selling representative and 20% reported that they were currently(6%) or had been in the past(14%) a direct selling representative.

According to the WFDSA, consumers benefit from direct selling because of the convenience and service benefits it provides, including personal demonstration and explanation of products, home delivery, and generous satisfaction guarantees. In contrast to franchising, the cost for an individual to start an independent direct selling business is typically very low, with little or no required inventory or cash commitments to begin.

Most direct selling associations, including the Bundesverband Direktvertrieb Deutschland, the direct selling association of Germany, and the WFDSA and DSA require their members to abide by a code of conduct towards a fair partnership both with customers and salespeople. Most national direct selling associations are represented in the World Federation of Direct Selling Associations (WFDSA).

Direct selling is different from direct marketing in that it is about individual sales agents reaching and dealing directly with clients while direct marketing is about business organizations seeking a relationship with their customers without going through an agent/consultant or retail outlet.

Direct selling often, but not always, uses multi-level marketing (a salesperson is paid for selling and for sales made by people they recruit or sponsor) rather than single-level marketing (salesperson is paid only for the sales they make themselves).

Selling Through Intermediaries

A marketing channel where intermediaries such as wholesalers and retailers are utilized to make a product available to the customer is called an indirect channel.

The most indirect channel you can use (Producer/manufacturer –> agent –> wholesaler –> retailer –> consumer) is used when there are many small manufacturers and many small retailers and an agent is used to help coordinate a large supply of the product.

Dual Distribution

Dual distribution describes a wide variety of marketing arrangements by which the manufacturer or wholesalers uses more than one channel simultaneously to reach the end user. They may sell directly to the end users as well as sell to other companies for resale. Using two or more channels to attract the same target market can sometimes lead to channel conflict.

An example of dual distribution is business format franchising, where the franchisors, license the operation of some of its units to franchisees while simultaneously owning and operating some units themselves.

Reverse Channels

 

Three public trash cans that are used for recycling.

Recycling Containers: Recycling is an example of a reverse marketing channel.

If you’ve read about the other three channels, you would have noticed that they have one thing in common — the flow. Each one flows from producer to intermediary (if there is one) to consumer.

Technology, however, has made another flow possible. This one goes in the reverse direction and may go — from consumer to intermediary to beneficiary. Think of making money from the resale of a product or recycling.

There is another distinction between reverse channels and the more traditional ones — the introduction of a beneficiary. In a reverse flow, you won’t find a producer. You’ll only find a User or a Beneficiary.

Selecting Marketing Channels

Strategic selection of marketing channels can impact an organization’s brand, profitability, and overall scale of operations for a given line of products or services.

Learning Objectives

Identify a number of key considerations when selecting marketing channels

Key Takeaways

Key Points

  • Marketing channels represent the relationship between a producer and the user, usually in the form of a strategic alliance such as a retailer.
  • When selecting which marketing channels to pursue, it’s useful to understand an organization’s target users and their preferences. For example, if it is a technology friendly market it’s important to create digital storefronts.
  • Some channels will be more costly than others. Considering the overall margins, desired volume, and opportunity costs can give organizations strong strategic reasons to use or not use some channels.
  • For organizations that rely heavily on brand, it can be important to select corresponding partner channels. For example, a high end fashion item would want to carefully select channels to maintain brand equity.
  • Localization can be enhanced via strategic channel selection. Entering new markets through local retailers can give exposure and localization to a new market.

The Value of Channels

Before selecting which marketing channels are ideal for a given organization, it’s important to understand the underlying role of channels in marketing strategy. Channels influence:

  • The relationship between the producer and the buyers.
  • The firm’s pricing strategy.
  • The overall product strategy through branding, policies, and willingness to stock.

By selecting the optimal channels, organizations create strategic alliances between the firm and the providers. This has a number of implications, including how a user group will perceive the organization’s brand and how they will be treated when interacting with that brand in a given channel situation (such as a retail outlet ). With this in mind, there are a few key considerations organizations will want to keep in mind when selecting channels.

Channel Selection

Consumer Preferences

First and foremost, the consumer’s habits and behaviors determine channel strategy more than anything else. If all of an organization’s consumers love to shop at Walmart, then it may be a smart idea to begin stocking Walmart shelves with products. If consumers have a strong desire to find a given good in a given channel, organizations should strive to make that happen (as long as the opportunity costs down exceed the potential benefits).

Another good example of consumer preferences would be digital storefronts. If a record label manages a few bands, and almost all of those fans are on Spotify, it may be practical to begin using this digital distribution system. If a movie studio knows that the majority of their demographic rents films via iTunes, they may want to create a strategic alliance with Apple.

Cost

Some channels will be more costly than others. Low cost goods function best at low cost retail outlets. Better yet, directly selling eliminates organizations between the user and the producer, and therefore can be even lower cost (albeit, shipping, storing and other logistics must be considered). Wholesalers are willing to buy large shipments of goods, but usually at a significant discount. In many cases, the overall revenue maximizing curve will be a useful tool in determining the optimal volume at the optimal price for a firm to satiate a given market demand.

Brand

Organizations create strategic alliances to build channels for consumers, and these alliances will reflect on the overall branding initiatives of both partners. If an online retailers stocks a certain type of item, users of that online retailer will equate the two brands together. This can have an impact on how those consumers view both companies.

For example, A premium coffee machine manufacturer may not want to be stocked at a discount retailer, as it will lower the brand’s power in the eyes of the consumer. A high end good being sold on a low-cost distribution channel can cannibalize sales and reduce profitability through offering a price point the producer doesn’t believe matches the quality of the produced good.

Localization

In the current global economy, it is also useful to localize and enter new markets through effective marketing channel selections. A producer of household goods, for example, like laundry detergent could just as easily sell their goods in Europe as in the United States. The question for accomplishing this task is which retailers to work with, and how to localize the brand to be recognized and understood by foreign consumers. Strategic channel selection can greatly improve an organization’s ability to accomplish this goal.

A diagram that shows different digital channels - search engines, directories, sites and blogs, content sites, reviews and reco's, social, location-based services, and deals.

Digital Channels: The modern organization is drowning in potential channels from a digital perspective.