Unit 1 (Making Channel Decision) Basics of Marketing Management PDF

GLS UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION BBA (HONS) SEM III UNIT 1 Contents Introduction to channel decision:...........................................

GLS UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION BBA (HONS) SEM III UNIT 1 Contents Introduction to channel decision:..................................................................................... 1 Stages of making channel decisions:..................................................................................... 2 Factors affecting Channel:.................................................................................................. 4 Levels of Distribution Strategy:............................................................................................ 7 Introduction to channel decision: Channel Distribution decisions refer to all decisions that ensure the efficient delivery of goods and services to the end user. Distribution channels are paths that a product goes through, from the manufacturer to the end-user. Channel design decisions involve the strategic selection and effective management of various intermediaries and activities that are involved in the distribution process of a product or service. These intermediaries can include wholesalers, retailers, agents, brokers, and other entities that help in getting the product from the manufacturer to the end consumer. One crucial aspect of channel design is determining the appropriate number of marketing intermediaries to utilize. This decision is significant as it directly impacts the efficiency and effectiveness of the distribution process. The number of intermediarie s chosen can affect factors such as cost, control, reach, and customer experience. Channel design decisions involve selecting and managing intermediaries and activities in the distribution process. The appropriate number of marketing intermediaries to utilize is a crucial aspect of channel design, as it impacts cost, control, reach, and customer experience. Careful consideration of these factors is necessary to design an effective and efficient distribution channel that meets the needs of both the manufacturer and the end consumer. 1 Stages of making channel decisions: Step 1: Analysing Consumer Needs: Analysing consumer needs and desires is a fundamental step in channel design decisions. By comprehensively understanding customers' preferences, expectations, and behaviours, businesses can strategically align their channels to provide a seamless and personalized experience. This customer-centric approach is essential for creating effective and efficient channels that drive positive outcomes and foster long-term customer satisfaction. Step 2: Defining the Channel Flow: Defining the channel flow is an essential aspect of channel design. Channel flow represents the journey that products and services undertake from the producer to the customer. It is crucial to understand that channel flow can be either direct or indirect. Step 3: Setting and coordinating distribution objectives: Setting and coordinating distribution objectives is essential for the success of a business. Channel objectives must be aligned with overall business objectives to ensure a cohesive strategy. Channel objectives, such as increasing sales, reaching new customers, and improving customer service, play a vital role in driving business growth and enhancing customer satisfaction. By aligning these objectives, businesses can effectively leverage their distribution channels to achieve their desired outcomes. Step 4: Identifying Major Alternatives: Identifying major alternatives for distribution channels is a critical step in business strategy. Businesses need to consider various types of intermediaries based on product nature, target market, and distribution strategy. Common types of intermediaries include retailers, wholesalers, distributors, and agents/brokers. The decision on the number of marketing intermediaries depends on factors like product complexity, target market coverage, and distribution efficiency. Options include intensive distribution, exclusive distribution, and selective distribution. Each channel member has specific roles and responsibilities within the distribution process, and producers and intermediaries need to agree on terms, responsibilities, price policies, sale conditions, services, and territorial rights to ensure effective channel management. Step 5: Evaluating the Major Alternatives: 2 Once the primary options have been identified, businesses must assess them based on various factors, including cost, efficiency, market reach, customer satisfaction, and alignment with overall business objectives. This assessment is crucial in determining the most suitable channel design alternative. To ensure a thorough evaluation, it is essential to measure each alternative against economic, control, and adaptive criteria. Economic Criteria: By utilizing this criterion, a company can compare the projected sales, profitability, and costs associated with different alternatives. Control Criteria: When a company employs intermediaries to distribute its products to consumers, it inherently grants these intermediaries some level of control over the product's marketing. However, the extent of control may vary among intermediaries. In general, all else being equal, a company prefers to retain as much control as possible. Adaptive Criteria: Despite the long-term commitments involved in channel selection, a company strives to maintain flexibility within the chosen channel. This flexibility allows for easy adaptation to environmental changes.Therefore, for a channel to be considered a superior alternative, it must excel in terms of economic and control criteria, particularly when long-term commitments are involved. Step 6: Selecting the final channel structure The final step in channel design is to select the final channel structure. The Channel structure should be aligned with business objectives. Channel structure can be direct or indirect. Step 7: Selecting the channel members correct, channel members play a crucial role in the distribution of products and services. They can be categorized as upstream or downstream based on their position in the distribution channel. Upstream channel members are closer to the manufacturer or producer, while downstream channel members are closer to the end consumer. Understanding the roles and relationships of these channel members is essential for effective distribution channel management. Step 8: Implementing and coordinating the channel structure The final step in channel design is to implement and coordinate the channel structure. 3 Factors affecting Channel: 1. Type of customer: Understanding the type of customer, you are selling to is crucial in determining the most effective distribution channel. Consumer preferences and behaviours vary between individual consumers and business customers. For instance, while consumers may prefer to physically inspect products like fruits and vegetables before purchase, business customers may require personalized sales interactions, especially for expensive or customized products. Tailoring your distribution channel to meet the specific needs and preferences of your target customer base is essential for successful sales and customer satisfaction. 2. Type of product: The nature of the product being sold plays a crucial role in determining the most suitable marketing channels. Perishable items, such as fresh tuna for the sushi market, typically require shorter marketing channels to maintain freshness and quality. These products are often transported quickly with minimal intermediaries involved to ensure timely delivery. In contrast, products with longer shelf lives, like canned tuna, can be shipped through slower methods with more intermediaries in the distribution process. Valuable and fragile products also tend to follow shorter marketing channels to preserve their integrity. For instance, automakers prefer to sell cars directly to car dealers rather than through wholesalers to maintain control over the sales process. Similarly, makers of corporate jets often sell directly to corporations that require customization, necessitating a more direct sales approach. Understanding the characteristics of your product, such as perishability, value, and fragility, is essential in selecting the most appropriate marketing channels to effectively reach your target customers and ensure product quality throughout the distribution process. 3. Market : (a) In the consumer market, the presence of a retailer is crucial, whereas in the business market, retailing can be eliminated. (b) In larger market sizes, there are multiple channels available, while in smaller market sizes, direct selling may prove to be profitable. 4 (c) In highly concentrated markets, direct selling is preferred, whereas in widely scattered and diffused markets, there are multiple distribution channels. (d) The size and frequency of customer orders also play a role in determining the appropriate channel. In the sale of food products, both wholesalers and retailers are necessary. Analyzing customers and dealers provides valuable information on their number, type, location, and buying habits. This analysis can also influence the choice of channels. Factors such as the desire for credit, demand for personal service, and the customer's willingness to invest time and effort are all important considerations when selecting a channel. 4. Middle: 1. Preferred consideration will be given to middlemen who are capable of delivering desired marketing services. 2. Middlemen who can offer the highest level of cooperation in promotional services are also prioritized. 3. The channel that generates the highest sales volume at a lower unit cost is given the utmost priority. 5. Company: 1. The size of a company plays a significant role in determining various aspects of its market, including the size of its larger accounts and its ability to establish cooperation with middlemen. Generally, larger companies tend to have shorter distribution channels. 2. The product mix of a company also has an impact on the channel pattern. If a company offers a wide range of products, the distribution channel tends to be shorter. 3. Companies with substantial financial resources may choose not to rely heavily on middlemen and can afford to reduce the levels of distribution. On the other hand, financially weak companies often have to depend on middlemen for their distribution needs. 4. New companies, lacking experience, often heavily rely on middlemen to navigate the complexities of distribution. 5. If a company desires greater control over its distribution channel, it will prefer a shorter channel as it allows for better coordination, communication, and control. 5 6. Heavy advertising and sales promotion efforts can incentivize middlemen to participate in the promotional campaign. In such cases, a longer distribution chain can be more profitable. 7. Ultimately, the quantity and quality of marketing services provided by a company directly influence the choice of distribution channel. 6. Marketing Environment: During a recession or depression, a shorter and cheaper channel is preferred. During prosperity, we have a wider choice of channel alternatives. 7. Competitors: Marketers closely monitor the channels utilized by their rivals. Often, these channels may be advantageous for distributing a company's products. Occasionally, marketers intentionally steer clear of channels used by their competitors. For instance, the company may choose to bypass the retail store channel (which is utilized by rivals) and instead opt for door-to-door sales (where there is no competition). 8. Channel Compensation: This involves cost-benefit analysis. Major elements of distribution cost apart from channel compensation are transportation, warehousing, storage insurance, material handling distribution personnel’s compensation, and interest on inventory carried at different selling points. Distribution Cost Analysis is a fast-growing and perhaps the most rewarding area in marketing cost analysis and control. 6 Levels of Distribution Strategy: Levels of Channels: Because of the wide variety of channel arrangements that exist, it is difficult to generalize the structure of channels across all industries. Different kinds of products have different kinds of distribution channels. By channel level, we mean how many intermediaries are there between the producer and consumer. Distribution channels are usually of two types, namely zero level channel or direct marketing channel and indirect marketing channel. Direct Marketing Channel or Zero Level Channel This type of channel has no intermediaries. In this distribution system, the goods go from the producer directly to the consumer. Companies use their own sales force to reach consumers. They do all the channel functions. A successful direct marketing company is Eureka Forbes, which markets vacuum cleaners in the Indian market. Indirect Marketing Channel These are typical channels in which a third party is involved in the distribution of products and services of a firm. Depending on the distribution intensity, the indirect marketing channels can be classified into following categories. One – Level Channel : In this type of channel there is only one intermediary between producer and consumer. This intermediary may be a retailer or a distributor. 1 Level Channel Producer Retailer Consumer Producer Retailer Consumer If the intermediary is a distributor, this type of channel is used for specially products like washing machines, refrigerators or industrial products. 7 Two – Level Channel: This type of channel has two intermediaries, namely, wholesaler/ distributor and retailer between producer and consumer. 2 Level Channel Producer Wholesaler/ Retailer Consumer Distributor Three–Level Channel: This type of channel has three intermediaries namely distributor, wholesaler, and retailer. This pattern is used for convenience products. 3 Level Channel Producer Distributor Wholesaler Retailer Consumer Four–Level Channel: This type of channel has four intermediaries, namely Agent, Distributor, Wholesaler, and Retailer. This channel is somehow similar to the previous two. This type of channel is used for consumer durable products. In addition to the above – mentioned channels, different types of combinations of channels are also possible. There are no watertight classification channels. The use or selection of a channel also depends upon the type of product under consideration. For a consumer non – durable and perishable product the channel should be short and for consumer durables it can be longer. The industrial products are marketed through zero level or direct marketing models. Agricultural products have longer channels due to the distant and distributed location of consumers. Companies can also select manufacturer representatives and sales branch offices for marketing industrial products and services. So for different products, there can be different kinds of channels. A traditional channel symbolizes forward movement whereas a backward channel covers centers like redemption centers, community groups, trash collection specialists, recycling centers and central processing warehouses. 8 9 10