Chapter 7

Marketing Channel Strategy and Management

BY Roger A. Kerin and Robert A. Peterson Assoc. Prof. Dr. Teoman Duman Students: Iskra Handukic, Nedzma Begic and Azra Muratovic

What is a marketing channel?

A marketing channel consists of individuals and firms involved in the process of making a product or service available for consumption or use by consumers and industrial users.

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Role of the channel in marketing strategy

● Links a producer to buyers ● Performs sales, advertising, and promotion ● Influences the firm’s pricing strategy ● Affects product strategy through branding policies, willingness to stock and customize offerings, install, maintain, offer credit, etc.

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The Channel-Selection Decision

Fundamental Questions

The marketing manager must answer the following questions:

● Who are potential customers?

● Where do they buy?

● When do they buy?

● How do they buy?

● What do they buy?

- Avon Cosmetics example 7-4

Traditional Marketing Channel Designs

Producer Brokers or Agents Distributors or Wholesalers Retailers or Dealers Ultimate Buyers

The Design of Marketing Channels

INDIRECT DIST.

Use intermediaries to reach target market type location density number of channel levels

vs.

DIRECT DIST.

Contact ultimate buyers directly using its own sales force or distribution outlets using the Internet through a marketing Web site or electronic storefront 7-6

The Design of Marketing Channels

Direct distribution is typically used

when:

● Buyers are easily identifiable ● Personal selling is a major component of the communication mix ● Organization has a wide variety of offerings for the target market ● Sufficient resources are available 7-7

The Design of Marketing Channels

Direct distribution must be considered

when:

● Intermediaries are not available for reaching target markets ● Intermediaries do not possess the capacity to service the requirements of target markets 7-8

The Design of Marketing Channels

Indirect distribution must be considered

when:

● Intermediaries can perform distribution functions more efficiently and less expensively ● Customers are hard to reach directly ● Organization does not have resources to perform distribution function 7-9

The Design of Marketing Channels

Electronic marketing channels employ some form of electronic communication, including the Internet, to make products and services available for consumption or use by consumers and industrial users.

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Representative Electronic Marketing Channels

Amazon.com

Book Publisher

Autobytel.com

Auto Manufacturer

Travelocity.com

Airline

Dell.com

Dell Computers Book Distributor Auto Dealer Amazon.com (Virtual Retailer) Auto-By-Tel (Virtual Broker) Travelocity (Virtual Agent) Ultimate Buyers

The Design of Marketing Channels

Disintermediation is the elimination of traditional intermediaries and direct distribution through electronic marketing channels.

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Channel Selection at the Retail Level

Channel Selection Decisions

1. Which channel and intermediaries will provide the best coverage of the target market?

2. Which channel and intermediaries will best satisfy the buying requirements of the target market?

3. Which channel and intermediaries will be the most profitable?

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Channel Selection at the Retail Level

Target Market Coverage Exclusive Selective Intensive Rolex Faberge Levi’s Sony Wrigley’s Coke

Channel Selection at the Retail Level

Effective Distribution occurs when a limited number of retail outlets account for a significant fraction of the market potential.

Example: A marketer distributes the product through 40% of available outlets, but these outlets account for 80% of the market.

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Channel Selection at the Retail Level

Satisfying Buyer Requirements

● Information ● Convenience ● Variety ● Attendant services 7-16

Channel Selection at the Retail Level

Profitability

●

Margins = Revenues – Channel Costs

●

Channel costs are:

- Distribution costs - Advertising costs - Selling costs 7-17

Channel Selection at Other Levels of Distribution

Types of Wholesaler

● Specialty wholesaler – Limited line of items within a product line ● General-merchandise wholesaler – Wide assortment of products ● General-line wholesaler – Complete assortment of items in a single retailing field Combination 7-18

Dual Distribution

● occurs when an organization distributes its offering through two or more different marketing channels that may or may not compete for similar buyers ● the main consideration is whether it will provide incremental sales revenue or cannibalize existing sales 7-19

Dual Distribution

When is it used

● own brand and private store brand ● distribution to large and small retailers ● multiband strategy ● geographic factors 7-20

Dual Distribution

Example Hallmark

● Sells Hallmark brand cards through Hallmark stores and selected department stores ● Sells Ambassador brand cards through discount drugstore chains 7-21

Multi-Channel Marketing

Multi-channel marketing involves the blending of an electronic marketing channel and a traditional channel in ways that are mutually reinforcing in attracting, retaining, and building relationships with customers.

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Multi-Channel Marketing

Justifications

● An electronic marketing channel can provide incremental revenue (Victoria’s Secret) ● An electronic marketing channel can leverage the presence of a traditional channel (Ethan Allen) ● Multi-channel marketing can satisfy buyer requirements (Clinique division of Estée Lauder) 7-23

Multi-Channel Marketing

Considerations

● Actual incremental revenue or merely cannibalization?

● Incremental cost to launch and sustain an electronic forefront ● Disintermediation – a traditional intermediary member is replaced by electronic storefront 7-24

Satisfying Intermediary Requirements and Trade Relations Intermediary Requirements

● Improvements in product assortments ● Trade discounts ● Fill-rate standards ● Promotional support ● Lead-time requirements ● Product-service exclusivity agreements 7-25

Satisfying Intermediary Requirements and Trade Relations Trade Relations

Channel Conflict arises when one channel member believes another channel member is engaged in behavior that is preventing it from achieving its goals.

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Satisfying Intermediary Requirements and Trade Relations Sources of Channel Conflict

● Channel member bypasses another member and sells or buys direct ● Uneven distribution of profit margins among channel members ● Manufacturer believes channel member is not giving its products adequate attention 7-27

Satisfying Intermediary Requirements and Trade Relations Channel Power

Channel Captain is a channel member that takes on the role of coordinating, directing, and supporting other channel members.

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Satisfying Intermediary Requirements and Trade Relations Forms of Channel Captain Power

● Ability to reward or coerce other members ● Expertness ● Identification with a particular channel member (Referent Power) ● Legitimate right to dictate the behavior of other members 7-29

Channel-Modification Decisions

Reasons

● Shifts in the geographical concentration of buyers ● Inability of existing intermediaries to meet the needs of buyers ● Costs of distribution 7-30

Channel-Modification Decisions

Basic Objectives

1.

Provide the best coverage of the target market sought 2.

Satisfy the buying requirements of the target market 3.

Maximize revenue and minimize cost 7-31

Channel-Modification Decisions

Qualitative Factors

1. Will the change improve the effective coverage of the target markets sought? How?

2. Will the change improve the satisfaction of buyer needs? How?

3. Which marketing functions, if any, must be absorbed in order to make the change?

4. Does the organization have the resources to perform new functions?

5. What effect will the change have on other channel participants?

6. What will be the effect of the change on the achievement of long-range organizational objectives?

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Case Study Analysis: Swisher Mower and Machine Company

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MARKETING PROBLEM DEFINITION

• In early 1996, Wayne Swisher, president and chief executive officer (CEO) of Swisher Mower and Machine Company (SMC) received a certified letter from a major national retail merchandise chain inquiring about a private brand distribution arrangement for SMC line of riding mowers.

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MARKETING PROBLEM DEFINITION

• The national retail merchandise chain expected to make an annual order of approximately 8200 units.

The chain wanted to purchase the mowers at a price 5 percent lower than SMC manufacturer’s list price for its standard model. The chain wanted that the mower be different from SMC Ride King 7-35

COMPANY OVERVIEW

• -Swisher Mower and Machine Company was formed in 1945 by Max Swisher.

• -He received his first patent for a gearbox drive assembly when he was 18-years old, he develop a self-propelled push mower utilizing this drive assembly.

• -He began selling these mowers to neighbors after converting his parent’s garage into small manufacturing operation 7-36

COMPANY OVERVIEW

• SMC produced limited but differentiated products.

SMC’s flagship product, the Ride King, was credited with the first zero-turning-radius riding mower.

• SMC also produced a trail-mower called T-44 with a cutting width of 44 inches.

SMC planed to broaden SMC product line in 1996 by introducing a high-wheel string trimmer product, Trim-Max, a high-wheel, walk-behind product.

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COMPANY OVERVIEW

• About 75% of sales of SMC were made in non-metropolitan areas.

• SMC sold 30% through wholesalers, 25% through direct-to-dealer, 40% as private-label, exports.

and the rest 5% as • It sold the Ride King through wholesalers, who located throughout the country, situated focusing in the southeastern US.

on south farm dealers central and 7-38

INDUSTRY OVERVIEW

• Riding lawn mowers are classified as lawn and garden equipment with two basic configurations, the front engine lawn tractors and rear engine riding mowers.

• However there are some mid engine riding mowers on the market, such as those produced by SMC.

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INDUSTRY OVERVIEW

• Competition in riding lawn mower market was fierce with ten manufacturers comprising major competitors in 1995, while SMC only occupied around 0.3%, based on sales units.

• All these companies made Riding mowers under a nationally branded name and at the same time were engaged in private-label production .

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INDUSTRY OVERVIEW

• Each riding mower manufacturer priced its products at price points.

• The representative retail prices for national and private-label riding mowers typically ranged from $800 to $5,000.

• The manufacturer’s price of Ride King of SMC, $ 650, was quite comparative, compared with industry average .

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CONSUMER ANALYSIS

• National retail merchandise chains 24% • OPE/Farm Equipment & supply stores 22% • Lawn/Garden Stores – 19 % • Discount department stores - 13% • Home centers – 10% • Hardware stores – 2 % • Others – 10% 7-42

COMPETITION POSITIONING

• Ten manufacturers comprised the major competitors in the riding lawn mower market in 1995: American Yard Products, Ariens, Honda, John Deere, Kubota, MTD Inc, Murray of Ohio, Snapper, Toro, and Garden Way/Troy-Bilt. Ariens, Honda, John Deere, Kubota, MTD Inc, Murray of Ohio, Snapper, Toro, and Garden Way/Troy-Bilt 7-43

POSITIVE NEGATIVE

STRENGTHS     

WEAKNESSES

Distinct products High quality, simple design, easy to use and maintain , no significant claim Interchangeable parts Competitive price Personal relationship with dealer, distributors and end-customers One new product on the way (Trim Max)      

Limited range of products Perception on rear and mid engine –not as strong and durable as front engine One man makes all the decision Small business mentality Insufficient attention for promotion and advertising campaign No national distribution network OPPORTUNITIES

   

Limited market coverage (south central, southeastern). Potential expansion to the west New target market include consumer housing, in addition to farms Private labels business may be growing Possibility for automation by technology development in long term (production streamline, cost reduction)

 

THREATS



Many big competitors like Honda, John Deere, American Yard Production etc with stronger financial resources and economic size of capacity Cyclical industry After next year, industry may be down

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ALTERNATIVES AVAILABLE

• Enter distribution Arrangement with Retail Merchandise Chain: • It could be to SMC’s advantage to enter the arrangement because it would provide them the chance to reach consumers they currently do not. 7-45

ALTERNATIVES AVAILABLE

• Continue Current Operations: • By continuing current operations as they are, SMC could avoid the added costs and put the funds toward other expansion possibilities. • However, if SMC rejects this proposal, then they will be missing out on what makes up approximately 70 percent of industry sales.

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SOLUTION

• SMC should sign the proposal with the retail merchandise chain.

• This proposal holds too many opportunities for SMC to let it pass or fall into the hands of another competitor. • The results of accepting the proposal look far better than the alternative.

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Thank you for your attention!

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