Chapter 8

Marketing Channels

● This chapter presents the marketing channel as a means to help the marketer
realize his marketing goals.

The Nature and Functions of Marketing Channels

● The gap between the firm and its customers must be closed by a facilitating tool
called marketing channels.

● Marketing channels are human creations, and they may be designed and
structured to serve the needs of the user.

● A marketing channel may be defined as a set of interdependent organizations

and individuals that facilitate the movement and transfer of ownership of
commodities from the producers to the ultimate users.

Functions of the Marketing Channels

● Marketing channels play an important role in the marketing of goods and

services. Specifically, they perform the following functions:

1. they routinely make decisions and work;

2. they finance the process for moving goods from the producers to the
consumers;

3. they are active participants in the pricing process;

4. they serve as a channel of communication between the producers and the

consumers;

5. they assist in the promotional aspects of marketing; and

6. they minimize the number of transactions in the system.

Routinization of Decisions
- The marketing channel provides the manufacturers with a much reduced number
of people to contact when transactions are made.

Financing
- When manufacturers sell directly to consumers, they may have to reckon with the
financing of the following:

1. sales calls to prospective customers;

2. purchase of selling equipment;

3. construction of display stores;

4. extension of credit to customers; and

5. training of retail salespersons.

Pricing
- The difficulty of pricing one's products is aggravated by lack of direct contact with
consumers, especially if they are scattered throughout a wide area of concern.

Channels of Communication
- The changing requirements of users are oftentimes relayed to the distributor.
Individual buyers, for instance, may inform the retailer that they will be buying
only items with new designs next season. This information will be relayed by the
distributor to the manufacturer. The distributor, in effect, is acting as a channel of
communication.

Assistance in Promotional Activities

- When the distributor attempts to increase his sales by promoting his products, he
is actually complementing the promotional activities of the manufacturer. For
example, a certain retailer gives free items to buyers every time a particular
brand of soap is purchased from his store.

The Role of the Distributor in Improving Economic Efficiency

Minimization of Number of Transactions
- The distributor plays an important role in minimizing the number of transactions
within the system. As shown in Figure 28, the number of transactions is reduced
from 9 to 6 when a distributor is placed between the manufacturers and the
users.

Types of Marketing Channels

● Marketing channels consist of two basic types:

1. consumer channels

Consumer Channels
● Consumer channels are those that are used in the distribution of consumer
goods. As shown in Figure 29, channel A is a direct distribution channel. This is
an arrangement where the producer sells his goods or services directly to the
consumers.

● Channel B is the type where one middleman intervenes between the producer
and the consumer. Recording companies market their CDs and VCDs using this
type of channel. These companies deal with music shops, which directly sell their
products to consumers.

● Channel C is the type of channel where the wholesaler and the retailer provide
linkage between the producer and the consumer. Groceries, cigarettes, cement,
and noodles are examples of products that pass through this type of channel.

● Channel D is that type of channel where an agent, apart from the wholesaler and
the retailer, provides linkage between the producer and the consumer. Examples
of products that pass through this type of channel are candies and canned
goods.

Figure 29: Marketing Channels for Consumer Products

 Figure 30: Marketing Channels for Industrial Products

2. industrial channels

Industrial Channels

Industrial channels are those which are used in the distribution of industrial goods. As
shown in Figure 30, they consist of three types:

1. The manufacturer sells directly to the industrial users. An example is the

manufacturer of trucks and buses in Japan directly selling to bus companies like
Baliwag Transit.

2. The manufacturer assigns industrial distributors which sell directly to

industrial buyers. An example is the spare parts manufacturer who sells to
industrial distributors in Metro Manila who, in turn, sell to jeepney operators.

3. The manufacturer dealing with agents who call on industrial users.

Universities are often times called on by agents who sell books published by
well-known firms.

Selecting a Marketing Channel

● The availability of various channels poses a challenge for the marketer to make
an intelligent decision on which channel is best suited to his firm. In the selection
of a marketing channel, the company is faced with any of the following situations:

1. it may have the option of choosing from among the various channels
existing; or

2. It may not have that option to choose from.

The Channel Selection Process

● Assuming that the manufacturer has the option to choose from among the
various channel options, he may have to adapt the following steps:

1. identification of target customers;

- The identification of target consumers will provide much information to the
manufacturer in deciding which channel is best. If his target consumers
are farmers, for example, then he will have to consider channels that are
located near the farms.

2. determination of consumer buying habits regarding the goods under

consideration;
- Ultimate consumers buy from retailers whom they consider as catering to
their needs. A fine example of channel preferences are demonstrated by
the continuous patronage of sari-sari stores and also the growing
preference for supermarkets.

3. determination of the location of the potential customers;

- Potential customers could be scattered over a wide area or they could be
concentrated in specific areas. In any case, their reach them. location
must be identified so a suitable channel may be used to reach them.

4. listing of channel alternatives;

- After completing the first three steps, a listing of channel selection of best
marketing channel to use. alternatives must be prepared. This will help a
lot in the final selection of best marketing channel to use.

5. evaluation of channel alternatives; and

- The evaluation of the listed alternatives will be made next, followed by the
final selection of the appropriate channel.

6. selection of channel members.

- Experts have developed certain models for effective decision making
which may be useful in selecting the right marketing channel.

Evaluating the Prospective Channel Member

● The list must be trimmed down to the exact number of middlemen required. This
can be achieved through careful and objective evaluation of the prospects.

A set of criteria that may be useful in evaluating a channel is follows:

1. Credit and financial condition of the distributor. A review of the credit

performance and the financial statements will provide a clue as to the desirability
of selecting the prospective distributor.

2. Sales strength. This refers to the sales capacity of the prospective distributor
and is indicated by the quality, the actual number and the technical competence
of the salespeople.

3. Product lines. Determining the types of products carried by the prospective

distributor will reveal whether the sales objectives of the firm can be expected.
4. Reputation. This is a very important requirement in determining the possibility of
profitable relationship.

5. Market coverage. The market covered by the prospective distributor must be the
market coverage desired by the manufacturer.

6. Sales performance. The prospective distributor must be able to show

satisfactory sales performance. This is indicated by sales volume.

7. Management succession. A prospective distributor who has a qualified person

to succeed him in case of a need for replacement is a plus factor in evaluation.

8. Management ability. When the quality of management of a distributorship is

poor, it is not worth considering the prospect.

9. Attitude. If the prospective distributor has the right attitude, the possibility of
long-term success in handling the manufacturer's product is possible. This is
indicated by the distributor's aggressiveness, enthusiasm, and initiative.

10. Size. When the prospective distributor is into large-scale operations, larger sales
volume for the manufacturer's products is possible. Large firms usually employ
more salespeople, have better equipment and offices, personnel, and facilities.

Figure 31: Channel Design Decision Model

Factors that Influence Channel Selection

There are several factors that influence the selection of a channel. They are the
following:

1. the nature of the product;

- The nature of the product will determine which channel of distribution is
best suited. Highly expensive products like ships and airplanes, for
instance, require more direct dealing with users.

2. the nature of the market; and

- The nature of the market is also an important consideration. Buyers of
detergent soaps, for instance, are scattered throughout the country, so the
manufacturer will have to choose a channel that will serve this particular
market.

3. the nature of the company.

- The size of the company and its organizational set-up will also be a factor
in selecting a channel. Large companies can afford to adapt even a
multi-channel approach in its distribution activities.

Distribution Strategies

● Decisions must be made by the firm on how broadly or narrowly its products will
be distributed. This will determine the number of intermediaries that will be
tapped.

Distribution strategies consist of three types:

1. intensive distribution
- Intensive distribution is a strategy that requires the firm to sell its products
through every available outlet in a market where a consumer might
reasonably try to find them. Intensive distribution is applicable to
convenience goods like groceries, cigarettes, and soft drinks.

2. selective distribution
- Selective distribution is sold through only those outlets which will give the
product special attention. This strategy decreases the number of outlets
who will carry the product. Selective distribution is used for purposes like
avoiding making sales to middlemen any of the characteristics as follows:

a. poor credit rating;

b. a reputation for making too many returns or requesting too much

service;

c. place orders that are too small to justify making calls service; and

d. are not in a position to perform satisfactorily.

3. exclusive distribution
- An exclusive distribution agreement is one where the producer grants
exclusive selling rights to a middleman in a certain area. In return, the
middleman is required to carry all the producer's products. Exclusive
distribution is applicable to specialty products or services like automobiles
and expensive watches.

Figure 32: Distribution Strategy and the Number of Outlets

QUESTIONS FOR REVIEW AND DISCUSSION

1. Why are marketing channels important to the firm?

2. How do marketing channels routinize decisions and work?

3. Why are marketing channels said to "minimize the number of transactions"?

4. What is the difference between a consumer channel and an industrial channel?

5. What happens if the wrong marketing channel is chosen by the firm?

6. In selecting the channel, what steps must be undertaken?

7. What factors influence channel selection?

8. What are the types of distribution strategies?

9. What type of distribution strategy is applicable to convenience goods?

10. Why does a producer grants exclusive selling rights to a middleman?