Chapter 6

Designing the Marketing Channel

Objective 1: 6
Channel Design

Channel Design:

Decisions involving the development of

new marketing channels either where none
had previously existed or to the
modification of existing channels
 6
Channel Design
Distinguishing points of the definition include:

1. A decision made by the marketer

2. The creation or modification of channels
3. The active allocation of distribution tasks in an attempt to
develop an efficient structure
4. The selection of channel members
5. A strategic tool for gaining a differential advantage
Objective 2: 6
Who Engages in Channel Design?

Retailers
Firms Wholesalers

• Producers,
manufacturers, service • Look up the
providers, franchisors • Look both up and channel
down to secure
• Look down the the channel suppliers
channel
toward the market
Objective 3:
6
Channel Design Paradigm
1. Recognize the need for
channel design decision

7. Select 2. Set & coordinate

channel members distribution objectives

6. Choose the “best” 3. Specify

channel structure distribution tasks

5. Evaluate 4. Develop alternative

relevant variables channel structures
Objective 4: 6
When to Make a Channel
Design Decision
• Developing a new product or • Dealing with changes in
product line availability of particular kinds of
• Aiming an existing product at a intermediaries
new market • Opening up new geographic
• Making a major change in some marketing areas
other component of the • Facing the occurrence of major
marketing mix environmental changes
• Establishing a new firm • Meeting the challenge of conflict
• Adapting to changing or other behavioral problems
intermediary policies that may • Reviewing and evaluating
inhibit attainment of distribution
objectives
Objective 5: 6
Distribution Objectives

Setting distribution objectives

requires knowledge of which,
if any, existing objectives
& strategies may impinge
on these distribution objectives.
 The Need for Congruency 6

Firm’s
overall
objectives
&
strategies

General
marketing
objectives &
strategies

Product Pricing Promotion Distribution

marketing marketing marketing marketing
objectives & objectives & objectives & objectives &
strategies strategies strategies strategies
Objective 6: 6
Distribution Tasks

Outlining distribution tasks is specific

and situationally dependent on the firm.

For example: Distribution tasks for a

manufacturer of consumer products
differs from those for products sold
in industrial markets.
=
Distribution tasks are a function of the distribution
objectives and the types of firms involved.
Objective 7: 6
Channel Structure Dimensions

1. Number of
levels in the channel
2. Intensity at the
various levels

Allocation Alternatives

3. Types of
intermediaries
at each level
 6
Number of Levels

• Range from two to five or more

• Number of alternatives is limited to two or three
choices
• Limitations result from the following factors:
– Particular industry practices
– Nature & size of the market
– Availability of intermediaries
 6
Intensity at the Various Levels

Relationship between the intensity of distribution

dimension & number of retail intermediaries used in a
given market area

Intensity Dimension

Intensive Selective Exclusive

Numbers of Intermediaries (retail level)

Many Few One

 6
Types of Intermediaries

• Numerous types
• Manager’s emphasis on types of distribution tasks
performed by these intermediaries
• Watch emerging types
– Electronic online auction firms (eBay)
– Industrial products sold in B2B markets
(Chemdex, Converge.com)
Objective 8: 6

Variables Affecting Channel Structure

Categories of Variables

1. Market Variables
2. Product Variables
3. Company Variables
4. Intermediary Variables
5. Environmental Variables
6. Behavioral Variables
 Market Variables 6

Market Geography Location, geographical size,

& distance from producer

Market Size Number of customers in a

market

Market Density Number of buying units

(consumers or industrial firms)
per unit of land area

Market Behavior Who buys, & how, when, and

where customers buy
 6
Product Variables

Bulk & Weight

Perishability
Unit Value
Degree of Standardization
Technical versus Nontechnical
Newness
 6
Company Variables

Size The range of options is

relative to a firm’s size

Financial The greater the capital, the

Capacity lower the dependence on
intermediaries

Managerial Intermediaries are necessary

Expertise when managerial experience
is lacking

Objectives Marketing & objectives may

& Strategies limit use of intermediaries
 6
Intermediary Variables

Availability Availability of intermediaries

influences channel structure.

Cost Cost is always a consideration in

channel structure.

Services Services that intermediaries

offer are closely related to the
selection of channel members.
 6
Environmental Variables

Competitive
Economic
Sociocultural

The impact of environmental forces is

a common reason for making
channel design decisions.

Technological Legal
 6
Behavioral Variables

Develop congruent roles for channel members.

Be aware of available power bases.

Attend to the influence of behavioral problems

that can distort communications.
Objective 9: 6

Heuristics in Channel Design

Benefit Limitation

Fairly simple prescriptions Mostly useful as rough guide

for channel structure to decision making
Objective 10: 6
Choosing an Optimal
Channel Structure

Why is choosing an optimal channel structure

not possible?

1. Management is incapable of knowing all

possible alternatives.

2. Precise methods for calculating the exact

payoffs associated with each alternative structures
do not exist.

BUT Techniques exist for developing

more exact methods.
Objective 11: 6
Approaches for Choosing
Channel Structure

• “Characteristics of Goods & Parallel Systems” Approach

• Financial Approach
• Transaction Cost Analysis Approach
• Management Science Approaches
• Judgmental-Heuristic Approach
Objective 12:
6
Judgmental-Heuristic Approaches

IF Management’s ability to
make sharp judgments is high

+ Good empirical data on costs

and revenues is available

It’s possible to make highly satisfactory channel-choice

decisions using judgmental-heuristic approaches