Marketing management Chapter 15 doc

These intermediaries constitute a marketing channel also called a trade channel or distribution channel5. A push strategy involves the manufacturer using its sales force and trade promot

PART

DELIVERING VALUE

IN THIS CHAPTER, WE WILL

ADDRESS THE FOLLOWING

QUESTIONS:

1 What is a marketing channel

system and value network?

2 What work do marketing

channels perform?

3 How should channels be

designed?

4 What decisions do companies

face in managing their channels?

5 How should companies integrate channels and manage channel

6 What is the future for

e-commerce?

- : ' ' • • " ' ' • ' ' - ' • - • • r S t e : ? " ^ ' ' 1 ' ' '

CHAPTER 15 DESIGNING AND

MANAGING VALUE NETWORKS AND CHANNELS

Successful value creation needs successful value delivery Holistic marketers are increasingly taking a value n e t w o r k v i e w of t h e i r busi- nesses Instead o f limiting t h e i r focus t o t h e i r i m m e d i a t e suppliers,

d i s t r i b u t o r s , a n d customers, t h e y are examining t h e w h o l e supply chain t h a t links r a w materials, c o m p o n e n t s , a n d m a n u f a c t u r e d

g o o d s a n d shows h o w t h e y m o v e t o w a r d t h e f i n a l c o n s u m e r s Companies are l o o k i n g at their suppliers' suppliers upstream a n d at

t h e i r d i s t r i b u t o r s ' customers d o w n s t r e a m They are l o o k i n g at

cust o m e r s e g m e n cust s a n d h o w c o m p a n y resources can b e s cust b e o r g a nized t o m e e t needs Failure t o coordinate t h e value n e t w o r k p r o p - erly can have dire consequences

-A Blue Light Shop Online kiosk at Kmart

467

iscount chain Km art's rise in the 1970s was characterized by its

blue light specials and famous (or infamous) in-store

announce-ment, "Attention Kmart Shoppers 1 " But suffering from poor

loca-I tions, an unfavorable image, and deteriorating sales, Kmart decided to try to

match Wal-Mart's everyday low prices This move, however, forced the

com-pany to drop the widely distributed Sunday newspaper circulars that

pro-moted sales and drove store traffic Even worse, a terrible replenishment

sys-tem also resulted in numerous hot sellers being out of stock Kmart filed for

Chapter 11 bankruptcy on January 22, 2002, the biggest retailer to have

done so up to that time.' 1

468 PART 6 DELIVERING VALUE '

III Marketing C h a n n e l s a n d Value Networks

Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions These intermediaries constitute a marketing channel (also called a trade channel or distribution channel) Formally, mark-eting channels are sets of interdependent organizations involved in the process of mak-ing a product or service available for use or consumption They are the set of pathways a product or service follows after production, culminating in purchase and use by the final end user.2

Some intermediaries—such as wholesalers and retailers—buy, take title to, and resell

the merchandise; they are called merchants Others—brokers, manufacturers'

representa-tives, sales agents—search for customers and may negotiate on the producer's behalf but

do not take title to the goods; they are called agents Still others—transportation

compa-nies, independent warehouses, banks, advertising agencies—assist in the distribution process but neither take title to goods nor negotiate purchases or sales; they are called

facilitators

The Importance of Channels

A marketing channel system is the particular set of marketing channels employed by a firm Decisions about the marketing channel system are among the most critical facing manage-ment In the United States, channel members collectively earn margins that account for 30

to 50 percent of the ultimate selling price In contrast, advertising typically accounts for less than 5 to 7 percent of the final price.3 Marketing channels also represent a substantial oppor-tunity cost One of the chief roles of marketing channels is to convert potential buyers into

profitable orders Marketing channels must not just serve markets, they must also make

markets.4

The channels chosen affect all other marketing decisions The company's pricing depends on whether it uses mass merchandisers or high-quality boutiques The firm's sales force and advertising decisions depend on how much training and motivation dealers need

In addition, channel decisions involve relatively long-term commitments to other firms as well as a set of policies and procedures When an automaker signs up independent dealers

to sell its automobiles, the automaker cannot buy them out the next day and replace them with company-owned outlets.5

In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing A push strategy involves the manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end users Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item, and product benefits are well understood A pull strategy involves the manufacturer using advertising and promotion to persuade consumers to ask intermediaries for the product, thus inducing the intermediaries

to order it Pull strategy is appropriate when there is high brand loyalty and high ment in the category, when people perceive differences between brands, and when people choose the brand before they go to the store Top marketing companies such as Nike, Intel, and Coca-Cola skillfully employ both push and pull strategies

involve-Companies today must build and manage a continuously evolving value

net-work In this chapter, we consider strategic and tactical issues with marketing

channels and value networks We will examine marketing channel issues from

the perspective of retailers, wholesalers, and physical-distribution agencies in

Chapter 16

DESIGNING A N D MANAGING VALUE NETWORKS A N D CHANNELS CHAPTER 15 469

C h a n n e l D e v e l o p m e n t

A new firm typically starts as a local operation selling in a limited market, using existing

intermediaries The number of such intermediaries is apt to be limited: a few

manufactur-ers' sales agents, a few wholesalers, several established retailers, a few trucking companies,

and a few warehouses Deciding on the best channels might not be a problem; the problem

might be to convince the available intermediaries to handle the firm's line

If the firm is successful, it might branch into new markets and use different channels in

different markets In smaller markets, the firm might sell directly to retailers; in larger

mar-kets, it might sell through distributors In rural areas, it might work with general-goods

mer-chants; in urban areas, with limited-line merchants In one part of the country, it might

grant exclusive franchises; in another, it might sell through all outlets willing to handle the

merchandise In one country it might use international sales agents; in another, it might

partner with a local firm.6 In short, the channel system evolves in response to local

opportu-nities and conditions

This entrepreneur started by developing channels in a small niche and then expanding

slowly into new channels

r- S E A Y U E N T E R P R I S E S I N C

SeaYu is taking a slow and steady approach to channel development for its pioneering product "Petrotech Odor

Eliminator." Designed to eliminate the odors that pets generate—from wet doggy smell to kitty litter box

aroma—Petrotech Odor Eliminator was first sold across the country at small pet specialty retailers and kennels,

through breeders, and animal rescue centers Once it established a reputation in these specialized channels and

gained some publicity, SeaYu signed a contract with the huge PetSmart chain SeaYu's product will first begin

selling only in PetSmart's mail-order catalog and then will be rolled out to its retail locations In the meantime,

customers have given SeaYu feedback that the product not only eliminates pet odors, but is also useful for

clear-ing the air of other annoyclear-ing smells such as bacon cookclear-ing or cigarette smoke SeaYu plans to eventually

broaden distribution into other markets like housewares and the automotive aftermarket.This, in turn, could lead

i to deals with larger discount chains such as Wal-Mart or Target 7

Today's successful companies are also multiplying the number of "go-to-market" or

hybrid channels in any one market area:

s IBM uses its sales force to sell to large accounts, outbound telemarketing to sell to

medium-sized accounts, direct mail with an inbound number for small accounts, retailers to

sell to still smaller accounts, and the Internet to sell specialty items

a Charles Schwab enables its customers to do transactions in its branches, over the phone,

or on the Internet

s Staples markets through its traditional retail channel, a direct-response Internet site,

vir-tual malls, and thousands of links on affiliated sites

Companies that manage hybrid channels must make sure these channels work well

together and match each target customer's preferred ways of doing business Customers

expect channel integration, characterized by the following features:

• The ability to order a product online and pick it up at a convenient retail location,

a The ability to return an online-ordered product to a nearby store of the retailer,

n The right to receive discounts based on total online and offline purchases

"Marketing Memo: Multichannel Shopping Checklist" offers some concrete advice on

chan-nel integration Here's a specific example of a company that has carefully managed its

mul-tiple channels

p REI

What's more frustrating: Buying hiking boots that cripple your feet or trying on the perfect hiking boots only

to find that the store is out of stock in the size or style you want? At Recreational Equipment Inc (REI),

out-door enthusiasts can easily avoid both frustrations In 59 REI stores across the country, customers are

light-ing up gas stoves, pitchlight-ing tents, and snuggllight-ing deep into sleeplight-ing bags If an item is out of stock, all

cus-tomers need do is tap into the store's Internet kiosk to order it from REI's Web site Less Internet savvy

470 PART 6 DELIVERING VALUE

During the 2003 "back-to-school" season, the e-tailing group, an

e-commerce consulting firm in Chicago, sent mystery shoppers to

visit retail locations of 16 e-tailers to test their claims of an integrated

shopping experience in the online/retail returns process Overall, the

study found that 44 percent of in-store returns of merchandise

pur-chased online required a store manager to override the retail system

in order to accept the return In response to this and several other

inadequacies revealed by the study, the e-tailing group created a

"Best of Breed Multi-channel Shopping Checklist" to help marketers

better integrate online and offline channels:

J Train all store associates on processes for online merchandise

returns

i List your company's 800 number on the Web homepage, and

be sure your customer service hours of operation are easily

accessible

Provide an information center that is easy to navigate and includes contact information, FAQs, guarantees, return policies, and tips for first-time customers

Implement a store locator feature that includes store locations, hours, and events

Make store pickup for purchases an option and include real-time inventory levels, where applicable

Post the store's weekly circular online for a more complete tichannel experience

mul-Offer gift certificates that can be redeemed online and offline Send e-mail notifications of the order, shipping, and return credit; include a reminder of the returns process in notifications as well

as a link to your store locator

Suppy all pertinent/compatible information for store return of merchandise on the packing slip or invoice

Source: Excerpted from Hallie Mummert, "Multi-Channel Marketers Earn a ' C + ' on Returns," Target Marketing (October 2003): 158

customers can even get clerks to place the order for them from the checkout counters For its seamless gration of retail store, Web site, Internet kiosks, mail-order catalogs, value-priced outlets, and toll-free order number, REI has been named today's top multichannel marketer by Forrester Research And REI not only gen- erates store-to-internet traffic, it also sends Internet shoppers into its stores If a customer browses REI's site and stops to read an REI "Learn and Share" article on backpacking, the site might highlight an in-store promo

inte-on hiking boots Linking all its channels has produced outstanding results: In a 24-minte-onth period, REI found that dual-channel shoppers spent 114 percent more than single-channel ones and that tri-channel shoppers spent 48 percent more than dual-channel shoppers.8

Different consumers, however, have different needs during the purchase process Nunes and Cespedes argue that in many markets, buyers fall into one of four categories.9

1 Habitual shoppers - Purchase from the same places in the same manner over time

2 High value deal seekers - Know their needs and "channel surf" a great deal before

buy-ing at the lowest possible price

3 Variety-loving shoppers'-Gather information in many channels, take advantage of

high-touch services, and then buy in their favorite channel, regardless of price

4 High-involvement shoppers- Gather information in all channels, make their purchase in

a low-cost channel, but take advantage of customer support from a high-touch channel The same consumer may choose to use different channels for different functions in mak-ing a purchase A consumer may choose to browse through a catalog before visiting a store

or take a test drive at a dealer before ordering a car online

Consumers may seek different types of channels depending on the particular types of goods involved Some consumers are willing to "trade up" to retailers offering higher-end goods such

as TAG Heuer watches or Callaway golf clubs; these same consumers are also willing to "trade down" to discount retailers to buy private-label paper towels, detergent, or vitamins.10

Value N e t w o r k s

A supply chain view of a firm sees markets as destination points and amounts to a linear view

of the flow The company should first think of the target market, however, and then design the supply chain backward from that point This view has been called demand chain planning Northwestern's Don Schultz says: "A demand chain management approach doesn't just push things through the system It emphasizes what solutions consumers are looking for, not what

DESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS CHAPTER 15 471

Sales channel for Bowflex fitness equipment: a print ad with a coupon and

an 800 number for phone calls

products we are trying to sell them." Schultz has suggested that the traditional marketing

"four P's" be replaced by a new acronym, SIVA, which stands for solutions, information, value,

and access."

An even broader view sees a company at the center of a value network—a system of

part-nerships and alliances that a firm creates to source, augment, and deliver its offerings A

value network includes a firm's suppliers and its suppliers' suppliers, and its immediate

cus-tomers and their end cuscus-tomers The value network includes valued relations with others

such as university researchers and government approval agencies

A company needs to orchestrate these parties to enable it to deliver superior value to the

target market Palm, the leading manufacturer of handheld devices, consists of a whole

com-munity of suppliers and assemblers of semiconductor components, plastic cases, LCD

dis-plays, and accessories; of offline and online resellers; and of 275,000 developers who have

created over 21,000 software programs and 100 hardware add-ons for the Palm operating

systems for hand-held computers and smartphones

Demand chain planning yields several insights First, the company can estimate

whether more money is made upstream or downstream, in case it might want to integrate

backward or forward Second, the company is more aware of disturbances anywhere in

the supply chain that might cause costs, prices, or supplies to change suddenly Third,

companies can go online with their business partners to carry on faster and more

accu-rate communications, transactions, and payments to reduce costs, speed up information,

and increase accuracy With the advent of the Internet, companies are forming more

numerous and complex relationships with other firms For example, Ford not only

man-ages numerous supply chains, but also sponsors or transacts on many B2B Web sites and

exchanges as needs arise

(a) Number of Contacts

M x C = 3 x 3 = 9

Managing this value network has required companies to make increasing investments in information technology (IT) and software They have invited such software firms as SAP and

Oracle to design comprehensive enterprise resource planning (ERP) systems to manage cash

flow, manufacturing, human resources, purchasing, and other major functions within a fied framework They hope to break up department silos and carry out core business processes more seamlessly In most cases, however, companies are still a long way from truly comprehensive ERP systems

uni-Marketers, for their part, have traditionally focused on the side of the value network that looks toward the customer In the future, they will increasingly participate in and influence their companies' upstream activities and become network managers, not only product and customer managers

The Role of Marketing C h a n n e l s

How a Distributor Increases Efficiency

Why would a producer delegate some of the selling job to intermediaries? Delegation means relinquishing some control over how and to whom the products are sold Producers do gain several advantages by using intermediaries:

® Many producers lack the financial resources to cany out direct marketing For example,

General Motors sells its cars through more than 8,000 dealer outlets in North America alone Even General Motors would be hard-pressed to raise the cash to buy out its dealers

B Producers who do establish their own channels can often earn a greater return by ing investment in their main business If a company earns a 20 percent rate of return on man-

increas-ufacturing and a 10 percent return on retailing, it does not make sense to do its own retailing

H In some cases direct marketing simply is not feasible The William Wrigley Jr Company

would not find it practical to establish small retail gum shops throughout the world or to sell gum by mail order It would have to sell gum along with many other small products and would end up in the drugstore and grocery store business Wrigley finds it easier to work through the extensive network of privately owned distribution organizations

Intermediaries normally achieve superior efficiency in making goods widely available and accessible to target markets Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own According to Stern and his colleagues:

Intermediaries smooth the flow of goods and services This procedure is sary in order to bridge the discrepancy between the assortment of goods and ser-vices generated by the producer and the assortment demanded by the consumer The discrepancy results from the fact that manufacturers typically produce a large quantity of a limited variety of goods, whereas consumers usually desire only a lim-ited quantity of a wide variety of goods.12

neces-Figure 15.1 shows one major source of cost savings using intermediaries Part (a) shows three producers, each using direct marketing to reach three customers This system requires nine different contacts Part (b) shows the three producers working through one distributor, who contacts the three customers This system requires only six contacts In this way, inter-mediaries reduce the number of contacts and the work

Channel Functions and Flows

A marketing channel performs the work of moving goods from producers to consumers It overcomes the time, place, and possession gaps that separate goods and services from those who need or want them Members of the marketing channel perform a number of key func-tions (see Table 15.1)

Some functions (physical, title, promotion) constitute a forward flow of activity from

the company to the customer; other functions (ordering and payment) constitute a

backward flow from customers to the company Still others (information, negotiation,

finance, and risk taking) occur in both directions Five flows are illustrated in Figure 15.2 for the marketing of forklift trucks If these flows were superimposed in one diagram, the tremendous complexity of even simple marketing channels would be apparent A manu-

facturer selling a physical product and services might require three channels: a sales

DESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS CHAPTER 15 473

• Gather information about potential and current customers, competitors, and other actors and forces in the

marketing environment

• Develop and disseminate persuasive communications to stimulate purchasing

• Reach agreements on price and other terms so that transfer of ownership or possession can be effected

• Place orders with manufacturers

• Acquire the funds to finance inventories at different levels in the marketing channel,

a Assume risks connected with carrying out channel work

• Provide for the successive storage and movement of physical products

B Provide for buyers' payment of their bills through banks and other financial institutions,

a Oversee actual transfer of ownership from one organization or person to another

T A B L E 1 5 1 | Channel Member Functions

channel, a delivery channel, and a service channel To sell its Bovvflex fitness equipment,

the Nautilus Group has used television infomercials, the telephone, and the Internet as

sales channels; UPS ground service as the delivery channel; and local repair people as the

service channel When sales failed to meet goals, Nautilus added retail stores to its sales

channels in 2003 When a competitor infringed on the Bowflex patent by placing an

imi-tation product into retail stores, Nautilus began selling Bovvflex home gyms through the

retail channel

The question is not whether various channel functions need to be performed—they must

be—but rather, who is to perform them All channel functions have three things in common:

They use up scarce resources; they can often be performed better through specialization;

and they can be shifted among channel members When the manufacturer shifts some

func-tions to intermediaries, the producer's costs and prices are lower, but the intermediary must

add a charge to cover its work If the intermediaries are more efficient than the

manufac-turer, prices to consumers should be lower If consumers perform some functions

them-selves, they should enjoy even lower prices

I

F I G 1 5 2 Five Marketing Flows in the Marketing Channel for Forklift Trucks

474 PART 6 DELIVERING VALUE

-Marketing functions, then, are more basic than the institutions that perform them at any given time Changes in channel institutions largely reflect the discovery of more efficient ways to combine or separate the economic functions that provide assortments of goods to target customers

Channel Levels

The producer and the final customer are part of every channel We will use the number of intermediary levels to designate the length of a channel Figure 15.3(a) illustrates several consumer-goods marketing channels of different lengths

A zero-level channel (also called a direct-marketing channel) consists of a turer selling directly to the final customer The major examples are door-to-door sales, home parties, mail order, telemarketing, TV selling, Internet selling, and manufacturer-owned stores Avon sales representatives sell cosmetics door-to-door; Tupperware repre-sentatives sell kitchen goods through home parties; Franklin Mint sells collectibles through mail order; AT&T uses the telephone to prospect for new customers or to sell enhanced services to existing customers; Time-Life sells music and video collections through TV commercials or longer "infomercials"; Red Envelope sells gifts online; and Gateway sells computers and other consumer electronics through its own stores

manufac-"Marketing Insight: M-Commerce Opens Up New Opportunities for Marketers" describes new developments in that area

A one-level channel contains one selling intermediary, such as a retailer A two-level

chan-nel contains two intermediaries In consumer markets, these are typically a wholesaler and

a retailer A three-level channel contains three intermediaries In the meatpacking industry,

wholesalers sell to jobbers, who sell to small retailers In Japan, food distribution may involve

as many as six levels From the producer's point of view, obtaining information about end users and exercising control becomes more difficult as the number of channel levels increases

Figure 15.3(b) shows channels commonly used in industrial marketing An goods manufacturer can use its sales force to sell directly to industrial customers; or it can sell to industrial distributors, who sell to the industrial customers; or it can sell through manufacturer's representatives or its own sales branches directly to industrial customers, or indirectly to industrial customers through industrial distributors Zero-, one-, and two-level marketing channels are quite common

industrial-0-level

(a) Consumer Marketing Channels

1-level 2-level 3-level

Manufacturer Manufacturer Manufacturer

Consumer Consumer

Industrial customer

Industrial customer

Manufacturer

Manufacturer's representative

Industrial customer

3-level Manufacturer

Manufacturer's sales branch

Industrial customer

F I G 1 5 3 j Consumer and Industrial Marketing Channels

DESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS CHAPTER 15 475

FOR MARKETERS

Consumers and businesspeople no longer need to be near a

com-puter to send and receive information All they need is a cellular

phone or personal digital assistant (PDA) While they are on the

move, they can connect with the Internet to check stock prices,

the weather, sports scores; send and receive e-mail messages;

and place online orders A whole field called telematics involves

placing wireless Internet-connected computers in the dashboards

of cars and trucks, and making more home appliances (such

as computers) wireless so that they can be used anywhere in or

near the home Many see a big future in what is now called

m-commerce (m for mobile) Consider the fast growth of

Internet-connected phones

In Japan, millions of teenagers carry DoCoMo phones available

from NTT (Nippon Telephone and Telegraph) They can also use

their phone to order goods Each month, the subscriber receives a

bill from NTT listing the monthly subscriber fee, the usage fee, and

the cost of all the transactions The person can then pay the bill at

the nearest 7-11 store In the United States, Conversagent

(for-merly ActiveBuddy) creates software applications that connect

Instant Messaging users to marketer-created data using

• Using the phone to search for a nearby restaurant that meets the customer's entered criteria

• Watching stock prices while sitting in the restaurant and deciding

to place a purchase order

• Clicking the phone to pay the bill for the meal; the cellular phone replaces the credit card

• Coming home and clicking a combination of keys on the phone to open the door

Some see positive benefits, such as locating people making gency 911 calls or checking on the whereabouts of one's children late at night Others worry about privacy issues What if an employer learns that an employee is being treated for AIDS at a local clinic, or

emer-a wife finds out her husbemer-and is out clubbing? Like so memer-any new nologies, location-based services have potential for good or harm, and ultimately will warrant public scrutiny and regulation

tech-Sources: Douglas Lamont, Conquering the Wireless World: The Age of M-Commerce

Instant Message," Business 2.0, February 2002, pp 98-99

ew York: Wiley, 2001); Marc Weingarten, "The Medium Is the

Channels normally describe a forward movement of products from source to user One

can also talk about reverse-flow channels They are important in the following cases: (1) to

reuse products or containers (such as refillable chemical-carrying drums); (2) to refurbish

products (such as circuit boards or computers) for resale; (3) to recycle products (such as

paper); and (4) to dispose of products and packaging (waste products) Several intermediaries

play a role in reverse-flow channels, including manufacturers' redemption centers,

commu-nity groups, traditional intermediaries such as soft-drink intermediaries, trash-collection

specialists, recycling centers, trash-recycling brokers, and central-processing warehousing.13

H E W L E T T - P A C K A R D

Each month Hewlett-Packard, the world's second-largest computer maker, sends 1.7 million tons of

broken-down and unwanted electronics to meet their end—or their new beginning—at its Roseville, California,

recy-cling center Yet the company, in conjunction with recyrecy-cling partner Noranda Inc., still only recycles less than

1 percent of the hardware it makes Pressured by complaints about how they dispose of products—including

shipping old machines to be broken down in Asian countries with less strict environmental laws—computer

makers have joined with the EPA, environmental groups, and a nonprofit group called Product Stewardship

Institute These groups created the National Electronics Product Stewardship Initiative, but the process of

cre-ating a nationwide recycling standard is incredibly slow Without a system in place, electronics makers like HP

and Dell have launched inventive PR campaigns to spur the public to recycle On Earth Day 2003, at a

Starbucks support center in Seattle and the following day in New York's Grand Central Terminal, HP accepted

computer hardware made by any manufacturer and recycled it at no charge HP also boosted the incentive for

consumers and small businesses to hire HP to recycle old PCs and monitors through its recycle-by-mail

pro-gram, which costs S15 to $46 depending on the size of the equipment.14

476 PART 6 DELIVERING VALUE

A customer operates a Kodak minilab in a retail outlet Minilabs often

appear in retail stores that also have photo processing departments,

like Walgreens and CVS stores

Service Sector Channels

Marketing channels are not limited to the distribution of physical goods Producers of services and ideas also face the problem of making their output available and accessible to target popula-tions Schools develop "educational-dissemination systems" and hospitals develop "health-delivery systems." These institutions must figure out agencies and locations for reaching a population spread out over an area

Marketing channels also keep changing in "person" keting Before 1940, professional comedians could reach audi-ences through vaudeville houses, special events, nightclubs, radio, movies, carnivals, and theaters Vaudeville houses have vanished and been replaced by comedy clubs and cable televi-sion stations Politicians also must choose a mix of channels— mass media, rallies, coffee hours, spot TV ads, direct mail, bill-boards, faxes, e-mail, Web sites—for delivering their messages

mar-to voters.15

As Internet and other technology advance, service industries such as banking, insurance, travel, and stock buying and selling are operating through new channels Kodak offers its customers four different ways to print their digital photos—minilabs in retail outlets, home printers, online services with the Ofoto Web site, and self-service kiosks.16

Reaching the right customers was a key factor in one of the biggest financial services merger ever

C I T I C O R P

Distribution strategy and the blend of different customer segment targets was a stated objective of the $70 billion merger between Citicorp and Travelers Group Citicorp was one of the world's largest banks, while Travelers focused on insurance, mutual funds, and investment banking busi- nesses One of the major stated goals of the merger was the ability of each organization to cross-sell the other's products to its customers and to exploit the two organizations' distribution channels to maximize the penetration of the merged companies' products throughout the world.17

Channel-Design Decisions Designing a marketing channel system involves analyzing customer needs, establishing channel objectives, identifying major channel alternatives, and evaluating major channel alternatives

Analyzing C u s t o m e r s ' Desired Service O u t p u t Levels

In designing the marketing channel, the marketer must understand the service output levels desired by target customers Channels produce five service outputs:

1 Lot size- The number of units the channel permits a typical customer to purchase

on one occasion In buying cars for its fleet, Hertz prefers a channel from which it can buy a large lot size; a household wants a channel that permits buying a lot size

of one

2 Wailing and delivery time - The average time customers of that channel wait for receipt

of the goods Customers increasingly prefer faster and faster delivery channels

3 Spatial convenience -The degree to which the marketing channel makes it easy for

cus-tomers to purchase the product Chevrolet, for example, offers greater spatial

conve- DESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS CHAPTER 15 477

nience than Cadillac, because there are more Chevrolet dealers Chevrolet's greater

mar-ket decentralization helps customers save on transportation and search costs in buying

and repairing an automobile

4 Product variety -The assortment breadth provided by the marketing channel Normally,

customers prefer a greater assortment because more choices increase the chance of

finding what they need

5 Service backup - T h e add-on services (credit, delivery, installation, repairs) provided

by the channel The greater the service backup, the greater the work provided by the

channel.18

The marketing-channel designer knows that providing greater service outputs means

increased channel costs and higher prices for customers Different customers have different

service needs The success of discount stores indicates that many consumers are willing to

accept smaller service outputs if they can save money

Establishing Objectives and Constraints

Channel objectives should be stated in terms of targeted service output levels Under

competitive conditions, channel institutions should arrange their functional tasks to

minimize total channel costs and still provide desired levels of service outputs.19 Usually,

planners can identify several market segments that want different service levels

Effective planning requires determining which market segments to serve and the best

channels for each

Channel objectives vary with product characteristics Perishable products require more

direct marketing Bulky products, such as building materials, require channels that

mini-mize the shipping distance and the amount of handling Nonstandard products, such as

custom-built machinery and specialized business forms, are sold directly by company sales

representatives Products requiring installation or maintenance services, such as heating

and cooling systems, are usually sold and maintained by the company or by franchised

deal-ers Iligh-unit-value products such as generators and turbines are often sold through a

com-pany sales force rather than intermediaries

Channel design must take into account the strengths and weaknesses of different types of

intermediaries For example, manufacturers' reps arc able to contact customers at a low cost

per customer because the total cost is shared by several clients, but the selling effort per

cus-tomer is less intense than if company sales reps did the selling Channel design is also

influ-enced by competitors' channels

Channel design must adapt to the larger environment When economic conditions are

depressed, producers want to move their goods to market using shorter channels and

with-out services that add to the final price of the goods Legal regulations and restrictions also

affect channel design U.S law looks unfavorably on channel arrangements that may tend to

substantially lessen competition or create a monopoly

Companies can choose from a wide variety of channels for reaching customers—from sales

forces to agents, distributors, dealers, direct mail, telemarketing, and the Internet Each

channel has unique strengths as well as weaknesses Sales forces can handle complex

prod-ucts and transactions, but they are expensive The Internet is much less expensive, but it

cannot handle complex products Distributors can create sales, but the company loses direct

contact with customers

The problem is further complicated by the fact that most companies now use a mix of

channels Each channel hopefully reaches a different segment of buyers and delivers the

right products to each at the least cost When this does not happen, there is usually channel

conflict and excessive cost

A channel alternative is described by three elements: the types of available business

inter-mediaries, the number of intermediaries needed, and the terms and responsibilities of each

channel member

TYPES OF INTERMEDIARIES A firm needs to identify the types of intermediaries available

to carry on its channel work

478 PART 6 DELIVERING VALUE •

Innovative marketing channels: Calyx and

Corolla sells flowers through direct

delivery with a print catalog and an

online store

For example, a test-equipment manufacturer developed an audio device for detecting poor mechanical connections in machines with moving parts Company executives felt this product would sell in all industries where electric, combustion, or steam engines were used, such as aviation, automobiles, railroads, food canning, construction, and oil The sales force was small The problem was how to reach these diverse industries effectively The following alternatives were identified:

B Expand the company's direct sales force Assign sales representatives to contact all prospects in an area, or develop separate sales forces for the different industries

a Hire manufacturers' agents in different regions or end-use industries to sell the new equipment

a Find distributors in the different regions or end-use industries that will buy and carry the device Give them exclusive distribution, adequate margins, product training, and promo-tional support

Table 15.2 lists channel alternatives identified by a consumer electronics company that duces cellular car phones

pro-Companies should search for innovative marketing channels Medion sold 600,000 PCs in Europe, mostly via major one- or two-week "burst promotions" at Aldi's supermarkets.20

Columbia House has successfully merchandised music albums through the mail Other ers such as Harry and David and Calyx & Corolla have creatively sold fruit and flowers, respectively, through direct delivery (See "Marketing Insight: How CarMax Is Transforming the Auto Business.")

sell-DESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS CHAPTER 15 479

• The company could sell its car phones to automobile manufacturers to be installed as original equipment

B The company could sell its car phones to auto dealers

• The company could sell its car phones to retail automotive-equipment dealers through a direct sales force

or through distributors

• The company could sell its car phones to car phone specialist dealers through a direct sales force or dealers

• The company could sell its car phones through mail-order catalogs

• The company could sell its car phones through mass merchandisers such as Best Buy or Circuit City

T A B L E 1 5 2 | Channel Alternatives for a Cellular Car Phone Maker

Bank One is letting Avon literally open doors for wider distribution of its credit cards:

BANK O N E C O R P , A V O N P R O D U C T S I N C

A new partnership between Bank One and Avon marks the first time a card issuer has employed another

com-pany's distribution network—Avon representatives—as part of an affinity program to put plastic in more

purses and wallets Several factors are in the partnership's favor First, the Avon reps alone make up a

lucra-tive target market Avon reps get the same rewards as consumers when using the Platinum Visa and they also

reap a $25 credit toward their Avon business account once each approved customer they sign up makes a

purchase If each rep gets just one account holder signed up, that's 600,000 cards right there Avon

repre-sentatives and customers are largely women, and Avon says that women control 81 percent of family

pur-chasing decisions and 85 percent of them manage the household checkbook By partnering with Avon, Bank

For years, buying a used car was considered a dangerous and risky

business; used-car salesmen were stock figures in comedy routines

Then CarMax emerged to change the face of the industry and its

standards Circuit City, a major retailer of electronic products, started

CarMax, the Auto Superstore, in 1993 The first superstore opened in

Richmond, Virginia, where its headquarters are located, and CarMax

is now the nation's leading specialty retailer of used cars; it operates

50 used-car superstores in 24 markets CarMax also operates

12 new-car franchises, which are integrated or co-located with its

used-car superstores

What is so special about CarMax? The company locates its

used-car superstores, each used-carrying around 500 used-cars, on large lots on the

outskirts of a city near a major highway Customers enter an

attrac-tive display room, where a sales associate finds out what kind of car

they want and then escorts them to a computer kiosk Using a touch

screen, the associate retrieves a full listing of the cars in stock that

meet the customer's criteria A color display of each car can be

shown along with the vehicle's features and its fixed selling price The

company has over 15,000 cars in all, nearly every make and model

There is no price negotiation The salesperson, paid a

commis-sion on the number of cars sold rather than their value, has no

incen-tive to push higher-priced cars The customer is informed that CarMax mechanics have carried out a 110-point inspection and made any necessary repairs beforehand Furthermore, a car buyer receives a 5-day money-back guarantee and a 30-day comprehen- sive warranty If the buyer wants financing, the CarMax associate can arrange it in 20 minutes The entire process typically takes less than one hour

The company's niche has to been to focus on the used-car ket Given that today's cars are better and have longer life expectan- cies, many buyers now prefer to save money by buying a used car, and the substantial growth of car leasing has greatly inflated the sup- ply of used cars Banks are more willing to offer low-cost financing for used cars, especially when research revealed that default rates were lower for used-car buyers Finally, dealers have reported earn- ing a higher profit on used cars, up to $100 more than for a new car

CarMax has been very successful in achieving even greater gins: The company's average selling price for a used vehicle is $15,000 and its average profit margin is 13 percent, compared with industry averages of $13,650 and 11 percent, respectively Although the major auto makes experienced a decline in sales and profitability in 2003 with new cars, CarMax experienced sales and revenue growth

mar-Sources: Gregory J Gilligan, "Circuit City's CarMax Superstores Pass $300 Million in Yearly Sales," Knight-Ridder/Tribune Business News, April 5,1997,

p 19; Arlena Sawyers, "CarMax Is Out of the Red, in the Pink," Automotive News, April 16,2001, p 28; Laura Heller, "Circuit City Restructures, Spins Off

480 PART 6 DELIVERING VALUE

One goes directly to the person who holds the purse strings The benefits go two ways, however, since the partnership will spur brand awareness for Avon "Every time someone takes the Avon card out of the wallet,

a it will remind them that we are around," says Avon's senior manager of credit card operations.21

Sometimes a company chooses an unconventional channel because of the difficulty or cost of working with the dominant channel The advantage is that the company will encounter less competition during the initial move into this channel After trying to sell its inexpensive Timex watches through regular jewelry stores, the U.S Time Company placed its watches in fast-growing mass-merchandise outlets Avon chose door-to-door selling because it was not able to break into regular department stores The company made more money than most firms selling through department stores

NUMBER OF INTERMEDIARIES Companies have to decide on the number of aries to use at each channel level Three strategies are available: exclusive distribution, selec-tive distribution, and intensive distribution

intermedi-Exclusive distribution means severely limiting the number of intermediaries It is

used when the producer wants to maintain control over the service level and outputs

offered by the resellers Often it involves exclusive dealing arrangements By granting

exclusive distribution, the producer hopes to obtain more dedicated and knowledgeable selling It requires greater partnership between seller and reseller and is used in the dis-tribution of new automobiles, some major appliances, and some women's apparel brands When the legendary Italian designer label Gucci found its image severely tarnished by overexposure from licensing and discount stores, Gucci decided to end contracts with third-party suppliers, control its distribution, and open its own stores to bring back some

of the luster.22 Exclusive deals between suppliers and retailers are becoming a mainstay for specialists looking for an edge in a business world that is increasingly driven by price.23

s Disney Consumer Products and Mart signed a landmark pact in 2003 giving Mart a six-month exclusive on sales of toys and merchandise from Disney's new Kim Possible franchise

Wal-s When Scholastic Entertainment relaunched its Clifford the Big Red Dog kids' franchise after leaving it neglected for years, the company used exclusive deals with Target and JC Penney to enjoy a comfort zone it wouldn't have had if the product had been launched across several channels

Selective distribution involves the use of more than a few but less than all of the

inter-mediaries who are willing to carry a particular product It is used by established companies and by new companies seeking distributors The company does not have to worry about too many outlets; it can gain adequate market coverage with more control and less cost than intensive distribution Disney is a good example of selective distribution

[ - D I S N E Y

Disney sells its videos through five main channels: Movie rental stores like Blockbuster; the company's etary retail stores, called Disney Stores; retail stores like Best Buy; online retailers likeAmazon.com and Disney's own online Disney Stores; the Disney catalog and other catalog sellers These varied channels afford Disney

propri-• maximum market coverage, and enable the company to offer its videos at a number of price points.24

Intensive distribution consists of the manufacturer placing the goods or services in as

many outlets as possible This strategy is generally used for items such as tobacco products, soap, snack foods, and gum, products for which the consumer requires a great deal of loca-tion convenience

Manufacturers are constantly tempted to move from exclusive or selective distribution

to more intensive distribution to increase coverage and sales This strategy may help in the short term, but often hurts long-term performance Intensive distribution increases prod-uct and service availability but may also result in retailers competing aggressively If price wars ensue, retailer profitability may also decline, potentially dampening retailer interest

in supporting the product It may also harm brand equity, as the Calvin Klein experience illustrates

DESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS CHAPTER 15 481

r- C A L V I N K L E I N

In May 2000, designer Calvin Klein sued Linda Wachner, CEO of Warnaco Group Inc., for selling his jeans to

cut-rate, mass-market outlets without his permission Warnaco, which has the license to make and distribute the

jeans, was accused by Calvin Klein of making lower-quality jeans for these outlets, and therefore hurting his

image The suit was settled out of court in January 2001, and both sides said they "look forward to expanding

jeans wear sales consistent with the image and prestige of Calvin Klein products." Warnaco would limit

distrib-• uting jeans wear products to department and specialty stores

TERMS AND RESPONSIBILITIES OF CHANNEL MEMBERS The producer must determine

the rights and responsibilities of participating channel members Each channel member

must be treated respectfully and given the opportunity to be profitable.25 The main

ele-ments in the "trade-relations mix" are price policies, conditions of sale, territorial rights, and

specific services to be performed by each party

Price policy calls for the producer to establish a price list and schedule of discounts and

allowances that intermediaries see as equitable and sufficient

Conditions of sale refers to payment terms and producer guarantees Most producers

grant cash discounts to distributors for early payment Producers might also provide

distrib-utors a guarantee against defective merchandise or price declines A guarantee against price

declines gives distributors an incentive to buy larger quantities

Distributors' territorial rights define the distributors' territories and the terms under

which the producer will enfranchise other distributors Distributors normally expect to

receive full credit for all sales in their territory, whether or not they did the selling

Mutual services and responsibilities must be carefully spelled out, especially in franchised

and exclusive-agency channels McDonald's provides franchisees with a building,

promo-tional support, a recordkeeping system, training, and general administrative and technical

assistance In turn, franchisees are expected to satisfy company standards regarding

physi-cal facilities, cooperate with new promotional programs, furnish requested information,

and buy supplies from specified vendors

Evaluating t h e M a j o r A l t e r n a t i v e s

Each channel alternative needs to be evaluated against economic, control, and adaptive

criteria

ECONOMIC CRITERIA Each channel alternative will produce a different level of sales and

costs Figure 15.4 shows how six different sales channels stack up in terms of the value added

per sale and the cost per transaction For example, in selling industrial products costing

between $2,000 and $5,000, the cost per transaction has been estimated as $500 (field sales),

FIG. 1 5 4 j

The Value-Adds Versus Costs of Different Channels

Source: Oxford Associates, adapted from

Dr Rowland T Moriarty, Cubex Corp

482 PART 6 DELIVERING VALUE

$200 (distributors), $50 (telesales), and $10 (Internet) Banks claim that in selling retail ing services, the cost per transaction is $2 (teller), $.50 (ATM), and $.10 (Internet) Clearly, sellers would try to replace high-cost channels with low-cost channels when the value added per sale was sufficient The lower-cost channels tend to be low-touch channels This is not important in ordering commodity items, but buyers who are shopping for more complex products may prefer high-touch channels such as salespeople

bank-When sellers discover a convenient lower-cost channel, they try to get their customers

to use it The company may reward customers for switching Many airlines initially gave bonus frequent flier mileage awards when customers booked reservations on line Other companies may raise the fees on customers using their higher-cost channels to get them

to switch Companies that are successful in switching their customers to lower-cost nels, assuming no loss of sales or deterioration in service quality, will gain a channel advantage.26

chan-As an example of an economic analysis of channel choices, consider the following situation:

A North Carolina furniture manufacturer wants to sell its line to retailers on the West Coast The manufacturer is trying to decide between two alternatives: One calls for hiring 10 new sales representatives who would operate out of a sales office

in San Francisco They would receive a base salary plus commissions The other alternative would be to use a San Francisco manufacturers' sales agency that has extensive contacts with retailers The agency has 30 sales representatives, who would receive a commission based on their sales

The first step is to determine whether a company sales force or a sales agency will duce more sales Most marketing managers believe that a company sales force will sell more They concentrate on the company's products; they are better trained to sell those products; they are more aggressive because their future depends on the company's success; and they are more successful because many customers prefer to deal directly with the company However, the sales agency could conceivably sell more First, the agency has 30 representa-tives, not just 10 This sales force might be just as aggressive as a direct sales force, depend-ing on the commission level Some customers prefer dealing with agents who represent sev-eral manufacturers rather than with salespersons from one company; and the agency has extensive contacts and marketplace knowledge, whereas a company sales force would need

pro-to build these from scratch

The next step is to estimate the costs of selling different volumes through each channel The cost schedules are shown in Figure 15.5 The fixed costs of engaging a sales agency are lower than those of establishing a company sales office, but costs rise faster through an agency because sales agents get a larger commission than company salespeople The final step is comparing sales and costs As Figure 15.5 shows, there is one sales level (SB) at which selling costs are the same for the two channels The sales agency is thus the better channel for any sales volume below S15, and the company sales branch is better at any volume above

SB Given this information, it is not surprising that sales agents tend to be used by smaller firms, or by large firms in smaller territories where the volume is low

CONTROL AND ADAPTIVE CRITERIA Using a sales agency poses a control problem A sales agency is an independent firm seeking to maximize its profits Agents may concentrate

on the customers who buy the most, not necessarily those who buy the manufacturer's

F I G 1 5 5 I

Break-even Cost Chart for the Choice

Between a Company Sales Force and a

Manufacturer's Sales Agency

: DESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS CHAPTER 15 483

goods Furthermore, agents might not master the technical details of the company's product

or handle its promotion materials effectively

To develop a channel, members must make some degree of commitment to each other

for a specified period of time Yet these commitments invariably lead to a decrease in the

producer's ability to respond to a changing marketplace In rapidly changing, volatile, or

uncertain product markets, the producer needs channel structures and policies that provide

high adaptability

After a company has chosen a channel alternative, individual intermediaries must be selected,

trained, motivated, and evaluated Channel arrangements must be modified over time

Companies need to select their channel members carefully To customers, the channels are

the company Consider the negative impression customers would get of McDonald's, Shell

Oil, or Mercedes-Benz if one or more of their outlets or dealers consistently appeared dirty,

inefficient, or unpleasant

To facilitate channel member selection, producers should determine what characteristics

distinguish the better intermediaries They should evaluate the number of years in business,

other lines carried, growth and profit record, financial strength, cooperativeness, and

ser-vice reputation If the intermediaries are sales agents, producers should evaluate the

num-ber and character of other lines carried and the size and quality of the sales force If the

intermediaries are department stores that want exclusive distribution, the producer should

evaluate locations, future growth potential, and type of clientele

Training Channel M e m b e r s

Companies need to plan and implement careful training programs for their intermediaries

Fast-growing Culver's restaurants requires its Midwestern franchisees to work 60 hours in

one of the 5 restaurants Culver owns and then work 12-hour days, 6 days a week for 4 months

at headquarters, learning every facet of how Culver operates logistically and financially.27

Microsoft requires third-party service engineers to complete a set of courses and take

certi-fication exams Those who pass are formally recognized as Microsoft Certified Professionals,

and they can use this designation to promote business Others use customer surveys rather

than exams

K Y O C E R A M I T A C O R P O R A T I O N

In 2003, Kyocera Mita America commissioned J.D Power and Associates to develop a program to survey

Kyocera Mita dealers' customers and certify those dealers that met or exceeded national benchmarks for

sales and service customer satisfaction Certification is based on customer satisfaction with an office

equip-ment dealer's product knowledge, expertise in machine operation, ability to advise customers about their

spe-cific needs, and timely delivery of the equipment Additional areas covered by the program are ability to

schedule service appointments in a timely manner, concern for customer needs, and clear explanations of

services performed "The J.D Power and Associates certification recognizes Kyocera Mita Total Solution

Provider dealers for outstanding customer experience, and allows them to differentiate within the dealer

mar-ketplace, helping to contribute to increased customer traffic and higher sales," said Michael Pietrunti, vice

president of marketing at Kyocera Mita America "This certification positions dealers as industry-wide

lead-ers in customer satisfaction."28

M o t i v a t i n g Channel M e m b e r s

A company needs to view its intermediaries in the same way it views its end users It needs

to determine intermediaries' needs and construct a channel positioning such that its

chan-nel offering is tailored to provide superior value to these intermediaries

Being able to stimulate channel members to top performance starts with understanding

their needs and wants The company should provide training programs, market research

programs, and other capability-building programs to improve intermediaries' performance