Channel Design Decisions
The most important task in channel management is the design of an effective and efficient channel for the smooth flow of products, titles, payments, and information and promotion programs. A systematic approach should be followed for designing distribution channels by analyzing the demands of customers. This is because there may be different kinds of requirements for different market segments.
The end-user analysis helps in identifying an optimum flow; removing all bottlenecks and developing desired customer value. The company should also evaluate its existing channel alternatives for sales, delivery, and service to customers in terms of efficiency and effectiveness.
Table of Contents
- 1 Channel Design Decisions
- Analyse Customer’s Desired Service Output Level
- Establishing Objectives and Constraints
- Identification of Major Channel Alternatives
- Evaluating Major Channel Alternatives
This analysis should be done in relation to the company’s objectives and positioning decisions about its products and services. A constraint analysis should be conducted to identify limits, which have to be built into any proposed channel structure.
These include evaluation of customer loyalty level, sales target of the company, etc. Once these evaluations are over, the company can identify the gaps, which exist and then plan for the ideal channel design by evaluating possible channel alternatives.
In the case of a new business, as the organization increases its scope of distribution, the distribution channel design evolves in response to market demands and the coverage strategy decided by the firm.
In a local market, the company prefers self-distribution through a company-owned sales force or through a few intermediaries; but as the business grows the company covers new geographical territories and decides to follow different types of distribution channels with varying levels.
So an ideal channel system evolves in response to the evolving demands and decisions on product market coverage.
Analyse Customer’s Desired Service Output Level
It is a difficult task to analyze the customer’s service output level because of two reasons, viz. the expectations of each segment will vary from one another and second, the product-market situation will vary for each of the market segments.
The marketer needs to understand the service output levels desired by the target customers. Each of the channels produces five different kinds of service output levels.
The first service output issue is the lot size that the channel permits a customer to purchase on every occasion. Many wholesalers buy larger lots whereas, in retail buying, the customer prefers single unit lot size. The second service output level is the average waiting time of the customer.
It is the time that the customer has to wait to receive the desired product from the channel. In the past, customers had to wait for more than six months for getting a Bajaj Scooter. Today’s customer has no patience and would like to buy products through faster delivery channels.
The degree to which the channel facilitates customers to purchase the product is called ‘spatial convenience’. Today it is easy to buy a Hero Honda motorcycle as they have a wider distributor channel covering many suburban centers.
The number of products in each product line and the variety of sub-brands available in the marketing channel help the customers prefer a channel with larger assortments. Customers will prefer channels, which provide them with multiple services like financing and credit, faster delivery, installation, repair, and maintenance. The greater the service backup; the higher the chance of preference for the channel by consumers.
Establishing Objectives and Constraints
After analyzing the service output level expectation of consumers, the next task is to establish the objectives and constraints. The channel objectives should be explained in terms of desired service output expectations from each of the channel members. The channel members should be evaluated on the basis of the cost structure of maintaining the channel.
A channel with low cost is always preferred. The marketing manager can find out each market segment available and service expectations in each segment before deciding which segment to serve and then deciding which channel will best serve the segment. The objectives of channel design are heavily dependent upon marketing and corporate objectives.
The broad objectives include:
- Availability of product in the target market
- Smooth movement of the product from the producer to the customer
- Cost-effective and economic distribution
- Information communication from the producer to the consumer
Channel objectives will vary depending on the nature and characteristics of the product. For a consumer perishable, the channel has to be short and inventorying function. They need more direct marketing compared to bulky and heavy products, which need longer distribution channels.
For non-standardized and customized products, the company prefers to have a direct marketing network than indirect distribution. The marketing manager should take into consideration the strengths and weaknesses of different types of intermediaries in providing desired service output levels. The channel so designed should adapt to the larger environment.
When the overall economy is passing through a recession, companies will prefer shorter channels. The channel design objectives should pass through the existing legal and ethical practices followed in the country of operation.
Identification of Major Channel Alternatives
Once the desired service output level is decided and the objectives and constraints of designing the channels are decided, the marketing manager should identify alternative channels. As we have mentioned earlier channels are of three types namely sales, delivery, and service channels.
While evaluating channel alternatives, there are three issues to be addressed viz. the overall business environment, types and number of intermediaries needed, and the terms and responsibilities of each channel member.
Types of Intermediaries
The marketing manager should identify different types of intermediaries to carry out its channel work. A list of common types of intermediaries is as follows:
- Company Sales Force: Company uses its own sales force for direct marketing. The manager can assign sales quotas for each territory and sell products directly to consumers.
- Middlemen: Middlemen refer to just about anybody acting as an intermediary between the producer and the consumer.
- Agent or Broker: Intermediaries with legal authority to market goods and services and to perform other functions on behalf of the producer are called agents or brokers. Agents generally work for producers continuously, whereas brokers may be employed for just any deal.
In some cases, agents sell to another intermediary such as industrial distributors. In addition, an agent or broker can work for the buyer rather than the seller. This situation is becoming more common in the real estate business.
- Wholesaler: Wholesalers are organizations that buy from producers and sell to retailers and organizational customers. Wholesalers primarily deal in bulk and will ordinarily sell to the retailer or other intermediaries.
- Retailer: As the last link in many marketing channels, retailers sell directly to final customers. They purchase goods from wholesalers or in some cases directly from the producer.
- Distributor: Distributor is a general term applied to a variety of intermediaries. These individuals and firms perform several functions, including inventory management, personal selling, and financing.
The basic difference between an agent and a distributor is that while agents work on a commission basis, distributors deal on their own accounts. Distributors are more common in organizational markets, although wholesalers also occasionally act as distributors.
- Dealer: Another general term that can apply to just about any intermediary is the dealer. Basically the same type of intermediary acts as a distributor. Although some people distinguish dealers as those intermediaries who sell only to final customers, not to other intermediaries.
- Value-Added Resellers (VARs): They are intermediaries that buy the basic product from producers and add value to it or depending on the nature of the product modify it, and then resell it to final customers.
- Merchants: They are intermediaries that assume ownership of the goods they sell to customers or other intermediaries. Merchants usually take physical possession of the goods they sell.
- Carrying and Forwarding Agents (C&F): They are people and organizations that assist the flow of products and information to market channels, including banking and insurance functions. Assistance is required in services like transportation and storage (C&F Agent), risk coverage (insurance), and financial services.
Number of Intermediaries
The marketing manager should decide how many intermediaries he should use for distributing his products. The decision on a number of intermediaries should largely depend on the distribution strategy followed by the firm.
After a producer has selected the type of channel that makes the most sense for his products, the next step is to determine the level of distribution intensity, which specifies the number of marketing intermediaries that will carry the products. Depending on a firm’s product, objectives, and customers, the levels of intensity may differ from case to case.
Distribution intensity is frequently modified as a product progress through its life cycle. There are three kinds of distribution strategies namely exclusive distribution, selective distribution, and intensive distribution.
- Intensive Distribution: A channel strategy that seeks to make products available in as many appropriate places as possible. This strategy is used for fast-moving consumer goods and products, which are in high and frequent demand, like food items and daily-use personal care product categories.
- Selective Distribution: A channel strategy that limits the availability of products to a few carefully selected outlets in a given market area. This kind of distribution strategy is followed by established brands and new-to-the-market products.
The company prefers to make the product available at selected outlets and promote it with adequate marketing resources and more control of the market.
- Exclusive Distribution: An extreme case of selective distribution in which only one outlet in a market territory is allowed to carry a product or a product line. This is a case when the company wants to maintain control over the market and channel. In many instances, such arrangements are exclusive in nature and companies do not allow the intermediaries to carry competitor’s product(s).
Terms and Responsibilities of Channel Members
The next task is to determine the rights and responsibilities of participating channel members. It is the duty of the marketing manager to see that the channel members become profitable. The marketing manager should take care of the pricing policy, territorial rights, conditions of sales, credit, and specification of services to be undertaken by each member of the channel.
The pricing issue demands setting up of list price, schedule of discounts, and decision on equitable and sufficient compensation patterns. Conditions of sale refer to payment patterns and guarantees of the producer.
Many companies provide cash discounts to intermediaries; provide replacements for defective products and price decline guarantees to motivate the channel members to procure more of the goods. The producer also guarantees territorial rights in the form of exclusive distribution to a few of the channel members.
Mutual services and responsibilities include issues related to brand and store promotion; marketing research and information collection. The producer needs to develop a channel promotion and development model for motivating channel members to commit to higher sales.
Evaluating Major Channel Alternatives
Once the list of alternative channels is selected, the marketing manager should evaluate each channel alternative to arrive at a final decision. The channels should be evaluated on the basis of three criteria, namely economic criteria, control criteria, and adaptive criteria.
Each channel member can optimize his output levels in terms of sales and services and hence, achieve a different kind of economy of scale. The marketing manager needs to decide whether a company-owned sales force or an intermediary channel will be economically more sensible for the firm to pursue.
The first level of choice is between the zero-level channel called direct marketing and alternative channel levels. The next decision is to estimate the cost involved in selling a certain number of units in each of the channels and finally, the marketing manager should compare the sales and costs involved in each of the alternative channels to arrive at the most economical channel.
However, the economic criteria alone should not be used for the evaluation of alternative channels. The marketing manager should also see how much control he can exert over the channel. Large malls are economical but the level of control that manufacturers can have on the large retailers is minimum. A small-time retailer, alternatively, may concentrate on maximizing his assortment traffic rather than selling a company’s brand.
The market structure changes between economies and also affects the adaptability of firms to the evolving marketing environment. Hence, marketing managers should look at the scope of adaptability of the channels before arriving at a decision.
The channel members should make a commitment to the product for a certain period of time and should support the product when the marketing conditions change for the product. Hence, the adaptability criteria should be used for the evaluation of alternative channels.