MARKETING CHANNEL INTERMEDIARIES: AN OVERVIEW
THE MARKETING CHANNEL
Distribution refers to activities that make products available to customers when and where they want to purchase them. Choosing the channels of distribution to use is a major decision in the development of marketing strategies.
A channel of distribution (also called a marketing channel) is a group of individuals and organizations that direct^ the flow of products from producers to consumers. Providing customers purchasing satisfaction should be the driving force behind all marketing channel activities. Buyer’s needs and behaviour is therefore important concerns of channel members.
Channels of distribution make products available at the right time, in the right place, and in the right quantity by providing such product-enhancing functions as service, transportation, and storage. Although customers do not see the distribution of a product, they value the product availability that channels of distribution make available for them.
MARKETING CHANNEL INTERMEDIARIES
Most, but not all Channels of distribution have marketing intermediaries. A marketing intermediary or middlemen are links between the producer and the consumer. Marketing intermediaries perform the following activities:
Marketing Information: Analyzing information such as sales data; performing or commissioning marketing research studies,
Marketing Management: Establish objectives; planning activities; managing and coordinating financing, personnel channel activities,
Facilitating Exchange: Choosing product assortments that match the needs of buyers.
Promotion: Setting promotional objectives; coordinating advertising, personal selling, sale promotion, publicity, and packaging.
Price: Establishing pricing policies and terms of sales.
Physical Distribution: Managing transportation, warehousing, materials handling, inventory control, and communication.
Types of Intermediaries: There are two major types of marketing Channel intermediaries: Merchants and functional middlemen (agents and brokers). Merchants buy products and resell them, whereas functional middlemen do not take title.
Both retailers and wholesalers are intermediaries. Retailers purchase products for the purpose of reselling them to ultimate consumers. Merchant wholesales purchase and resells products to other wholesalers’ and/ or retailers; Functional wholesalers, such .as agents and brokers, expedite exchanges among producers and resellers and are compensated by fees and commissions. Basically all wholesales are merchant middlemen.
Channel members share certain significant characteristics. Each member has different responsibilities within the overall structure of the distribution system, but mutual profit and success can be attained, when channel members cooperate in delivering products to the market.
TYPES OF MARKETING CHANNELS
. Although distribution decisions need not precede other marketing decision, they do exercise a powerful influence on the rest of the marketing mix. Channel decisions are critical because they determine a product’s market presence and buyer’s accessibility to the product. The strategic significance of these decisions is further heightened by the fact that they entail long-term commitments. For example, it is much easier to change prices or packaging than distribution systems.
Because the marketing Channel most appropriate for one product may be less suitable for another, many different distribution paths (marketing channels) have developed. The links in any Channel, however, are the merchants (including producer) and agents who oversee the movement of product through that Channel, Although there are many various marketing Channels, they can be classified generally as Channels for consumer’s products or Channels for business –business (or industrial products).
Marketing Channels for Consumer Products:
Illustrated in figure 1.1 are several Channels used in the distribution of consumer products. Besides the Channels listed, a manufacturer may use sales branches or sales offices.
Channel A: Describe the direct movement of goods from producer to consumers. A producer that sells its goods directly from factory to end users and ultimate consumers is using direct marketing .Channel.
Fig: 1.1 Typical Marketing Channels for Consumer Products
Channel B: This channel moves goods from producers to retailers and then to consumers. It is the frequent choice of large retailers. Because they can buy in small quantity from a manufacturer. For instance, retailers selling clothing, stereos and many other items purchase directly from producers. Automobilies are also commonly sold through this type of marketing Channel.
Channel C: A long-standing distribution channel, especially for consumers moves from the producers to wholesaler then to Retailers, and finally to Consumers. It is a very practical option for a producer that sells to hundreds of thousands of consumers through thousands of Retailers. A single producer finds it hard to do business directly with thousand of Retailers. Such manufacturers of convenience goods sell their products to wholesalers, who then sell to Retailers, who in turn do business with individual consumers.
Channel D: This is a distribution Channel through which consumer goods pass to agents to wholesalers to retailers and then to consumers. It is frequently used for products intended for mass distribution, such as processed foods (e.g. crackers). The food processor may hire an agent (or a food broker) to sell the crackers to wholesalers. The wholesalers then sell the crackers to supermarkets, and then to other retail outlets.
Contrary to popular opinion, a long Channel may be most efficient distribution Channel to consumer goods. When several Channel intermediaries are available to form specialized functions, and costs may be lower than if Channel member is responsible for all the functions.
Marketing Channels for Business-to-Business (Industrial) Products.
Illustrated below are four of the most common Channels for business-to-business (industrial) products. As with consumer products, manufacturers of business-to-business products sometimes work with more than one level of wholesalers.
Typical Marketing Channels for Business-to-Business Products
Channel E: Illustrates the direct Channel for business-to-business (Industrial) product. In contrast to consumer products, many industrial products especially expensive equipment, such as steam generator, aircraft, computers etc. are sold directly to the buyers. For example, Being Aircraft Company sells its jets directly to corporate buyers (Companies, air lines). The direct Channel is most feasible for many manufacturers of industrial products because they have fewer customers, and those customers are often clustered geographically. Buyers of complex industrial products also can receive technical assistance from the manufacturer more easily in a direct Channel.
Channel F: If a particular type of business-to-business products is aimed at a large number of customers, the manufacturer may use this marketing Channel that includes business-to-business distributors, merchants who take title to product. For example, forklifts, building materials, industrial dies, air-condition equipment are frequently channeled through business-to-business distributors.
Channel G: Producer to agents to business-to-business distributors is often the choice when a manufacturer without a marketing department needs a marketing information, when a company is too small to field its own sales force, or when a firm wants to introduce a new product or enter a new market without using its own sales people. This channel is suitable for industrial operating supplies (e.g raw materials).
Channel H: Is a variation of channel G, where goods move from producer to agents to distributors then to business-to-business buyers. A manufacturer without a sales force may rely on this Channel if products are in small quantities or if they must be resupplied frequently therefore need access to decentralized inventories. For example, Japanese manufacturers of electronic components serving small producers or dealers in Nigeria.
Multiple Marketing Channels:
To reach diverse target markets a manufacturer may use several marketing Channel involving a different group of intermediaries. For example, a manufacturer turns to multiple Channels when the same product is directed to both consumers. For example when a manufacturer of tomato paste markets its product for household use the tomato paste may be sold to supermarkets through wholesaler or, in some cases, directly to the retailers; On the other hand, the tomato paste going to restaurants or institutions follows a different distribution Channel.
In some instances, a producer may prefer dual distribution – the use of two or more marketing Channels for distributing the same products to the same target market. For example a manufacturer of breakfast cereals may sell its cereals directly to large retail grocery chains and to good wholesalers that, will in turn, sell them to Retailers. Dual distribution can cause dissatisfaction among channel members. For example, wholesalers and small retailers that compete with large retail chains that make direct purchases from manufacturers may be dissatisfied with one another.
Justification of Marketing Channel Intermediaries
Even if producers and buyers are located in the same city, there is cost associated with their exchanges. As the figure 3 shows, if four buyers purchase the product of four producers, sixteen transactions are required. If one intermediary serves both producers and buyers, the number of transaction can be reduced to eight. Intermediary become specialists in facilitating exchanges. They provide variable assistance because of their access to and control over important resources for the proper functioning of the marketing channel.
Nevertheless, the press, consumers, public officials, and other marketers freely use wholesalers; wholesalers are accused of being inefficient and parasitic. Consumers wish to make the distribution Channel as short as possible, assuming that the fewer the intermediaries, the lower the price. Because suggestions to eliminate wholesalers come from both ends of the marketing Channel, wholesalers are compelled to perform only those marketing activities that are truly desired. To survive, they must be more efficient and more service-oriented than alternative marketing institutions.
Critics who suggest that eliminating wholesalers prices for consumer do not recognize that this would not eliminate the need for those services, and consumers would still have to find them. In addition, all producers would have to deal directly with retailer or consumers, meaning that every producer would have to keep various records and hire enough personnel to deal with every customer. Even in a direct Channel, customers might end up paying more for products because prices would reflect the cost of inefficient producer’s operations. Instead of a few contacts with brokers, gents, retailing organization, and various merchant wholesalers, manufacturers would face thousands of expensive contacts with a shipments to smaller retailers. Such an operation would be highly inefficient, and its cost would be passed on to consumers, wholesalers are more efficient and less expensive, not only for manufactures, but for customers as well.
FUNCTIONS OF MARKETING CHANNEL INTERMEDIARIES
A marketing Channel network helps overcome two major distribution problems: Discrepancies in quantity and discrepancies in assortment. Consider a firm that manufacture shoe. The company specializes in the goods it can produce most efficiently, leather footwear. To make shoes the most economical way possible, the producer turns thousand pairs of shoes. Few persons, however, want to buy a thousand pairs of shoes. Thus the quantity of shoes that the company can produce efficiently is more than the average customers wants, this is called a discrepancy of quantity.
An assortment is a combination of products put together to provide benefits. A consumer creates and holds on assortment, and the set of products made available to customers is an organization’s assortment. Most customers it want a broad assortment of products. For example, in addition to shoes, a customer wants to buy shirts, ties, belts and socks, and related accessories. Yet the shoe manufacturer has a narrow assortment because he makes only shoes. There is discrepancy in assortments because a consumer wants a broad assortment, but an individual manufacture producer a narrow assortment.
Quantity and assortment discrepancies are resolved through the “sorting activities” of intermediaries in the marketing Channel, sorting activities are functions that allow Channel members to divide role and separate tasks. Sorting activities may be grouped into four main tasks: sorting out, accumulation, allocation, and assorting of products.
Sorting Out: Sorting out is the first step in developing assortment and it involves is separating conglomerates of heterogeneous products into relatively uniform, homogeneous groups based -on product characteristics such as size, shape, weight, or color, sorting out is especially common in the marketing of agricultural products and other raw materials which are wide in size, grade, and quantity and would be largely unusable in many indifferent mass. Sorting our follows a predetermined standard. The sorter must know many classifications to use the criteria for each classification.
Accumulation: Accumulation is the development of a bank or inventory of homogeneous products that have similar production or demand requirements. Farmers who grow relatively small quantities of vegetables, for example, transport their sorted vegetables to central collection center, where they are accumulated in large lots for movement into the next level of the channel. Combining many small groups of similar products into target groups serve several purpose. Products move through subsequent marketing. Channels more economically in large quantities because transportation t are lower for bulk loads. In addition, accumulation gives buyers a steady supply of products in large volumes.
Allocation: Allocation is the breaking down of large homogeneous inventories into smaller lots. This process, which addresses discrepancies in quantity, enables wholesalers to buy efficiently in truckloads and then apportion products by cases to other Channel member. The Wholesaler may divide a single truckload among several Retailers.
Assorting: Assorting is the process of combining ducts into collections or assortments that buyers want to have available in one place. Assorting eliminates discrepancies in assortment by grouping products in ways that satisfy buyers. The same Wholesaler supplying Retailers with a particular firm’s product may also buy complimentary goods from competing producers so that Retailers can choose from a wide assortment of similar products.
Buyers want an assortment of products at one location because of some task they want to perform and some problem they want to. be solved. A buyer looking for a variety of products, all serving different purposes, requires a broad assortment from which to choose; a buyer with more precise needs or interests will seek not a narrower, but deeper, product assortment.
Assorting is especially important to Retailers, and they strive to create assortment of goods to consumers.
INTEGRATION OF MARKETING CHANNEL FUNCTIONS
Marketing Channel functions may be transferred between intermediaries and producers and even consumers. Channel members can either combine or control most activities or pass them on to another channel members. The Channel members cannot eliminate the channel functions, unless buyers themselves perform the functions, and they will pay for the labour and resources needed for the functions to be performed. The statement that “you can eliminate middlemen but you cannot eliminate their functions” is acceptable principle of marketing.
Many marketing Channel are determined by consensus, as Producers and intermediaries coordinate their effort for mutual benefit. Some marketing Channels, however, are organized and controlled by a single leader, who can be a producer, a Wholesaler, or a Retailer, ending in the industry. The channel leader may establish channel policies and coordinate the development of the marketing mix.
The various links or stages of the channel may be combined under the management of a channel leader either horizontally or vertically. Integration may stabilize supply, reduce costs, and increase coordination of channel members.
Vertical Channel Integration
Combining- two or more stages of the channel under one management is vertical channel integration. One member of a marketing channel may purchase the operations of another member or simply perform the functions of the other members, eliminating the need for the intermediary as a special entity. Totally vertical integration encompasses all functions from production to ultimate buyers; For example, oil companies that own oil wells, its pipelines, refineries, terminals and fuel stations.
Whereas members of conventional marketing channels work independently and seldom cooperate, participants in vertical channel integration coordinate their efforts to reach a desired target market. This approach enables channel members to regard other members as extensions of their own operations. A vertically integrated channel is often more effective against competitors, and the sharing of information and responsibilities. At one end the manufacturer might provide advertising and training assistance, and the Retailer at the other end would buy the manufacturer’s products in quantity and actively promote them.
In the past, integration has been successfully institutionalized in marketing channels; this is called vertical marketing system. “A vertical marketing system’1 (VMS) is a marketing channel in which a single channel member coordinates or manages channel activities to achieve efficiency, low-cost distribution aimed at satisfying target market customers. Because efforts of individual channel members are coordinated in the VMS, marketing activities in be coordinated for maximum effectiveness and economy, without duplication of services. Vertical marketing systems are also competitive.
Most vertical marketing systems today take one of the three forms: corporate, administered, and contractual. The corporate VMS combines all stages of marketing channel, from producers to consumers, under a single ownership. Such companies operate corporate-owned production facilities and retail stores.
In an “administered VMS” channel members are independent, but a high level of inter-organizational management is achieved by informal coordination. Members of an administered VMS may agree, for example, to adopt uniform and ordering procedures and to cooperate in promotional activities. Although individual channel members maintain their autonomy, as in conventional marketing channels, one member dominates the administered VMS Under “a contractual VMS”, the most popular type of vertical marketing system is inter-organizational relationships, which are formalized through contracts. Channel members are bound by legal agreements that spell out each member’s rights and obligations (e.g. franchise organizations).
Below is a contrast of a conventional marketing channel with a vertical marketing system, which consolidates marketing functions and institutions.
Horizontal Channel Integration
Combining institutions at the same level of operation under one management constitutes horizontal channel integration. An organization may integrate horizontally by merging with other organizations at the same level in a marketing channel. For example, the owner of a retailing firm might buy and combine several other existing retailing establishments. Horizontal sufficient sales revenue to integrate vertically as well.
Although horizontal integration permits efficiencies and economies of scale in purchasing, marketing research, advertising, and specialized personnel, it is not always the most effective method of improving distribution. Flexibility, difficulties in coordination, and the need for additional marketing research and large-scale planning. Unless distribution functions can be performed more efficiently under unified management than under the previously separate managements, horizontal integration will not reduce costs or improve the competitive position of the integrated firm.
INTENSITY OF MARKETING COVERAGE.
Characteristics of the product and the target market determine the kind of coverage a product should get – that is, the number and kinds of outlets in which it is sold. To achieve the desired intensity of marketing coverage, distribution must pond to the behaviour patterns of buyers. Consumers products can be divided into three categories – convenience goods, shopping goods, and especially good – according to how consumers make purchases. In considering products for purchase, consumers take into account the replacement rate, product adjustment (services), duration of consumption, time required to find the product, and similar factors. Three major levels of market coverage are put into consideration. They are intensive, selective, and exclusive distribution.
In intensive distribution, all available outlets are used for distributing a product. Intensive distribution is appropriate for convenience products such as bread, chewing gum, beer, and newspapers. To consumers, availability means a store located nearby and with minimum time necessary to search the product at the store. Sales may have a direct relationship to availability. The successful sale of products such as bread and milk at service stations has shown that the availability of these products is more important than the nature of the outlet. Convenience products have a high replacement rate and require almost no service. They meet these demands, intensive distribution is necessary, and multiple channels may be used to sell through all possible outlets.
Producers of consumer-packaged goods rely on intensive distribution. Infact, intensive distribution is one of the Lever Brother and Cadbury’s key strengths. It is fairly easy for these companies to formulate marketing strategies for many of their products (soaps, sweets, detergents, foods etc) because customer’s wants availability provided quickly and intensively.
In selective distribution, only some available outlets in an area are chosen to distribute a product. Selective distribution is appropriate for shopping goods. Durable goods such as typewriters, and electrical appliances usually fall into this category. Such products are more expensive convenience goods. Consumers are willing to spend greater searching time in retail outlets to compare prices, designs styles, and other features.
Selective distribution is desirable when a special such as customer’s service – is important. Shopping s require differentiation at the point of purchase. To motivate retailers to provide adequate presale service, e distribution and company owned stores are often used. Many industrial products are sold on a selective basis maintain a certain degree of control over the distribution process. For example, agricultural herbicides are distributed a selective basis because dealers must offer services to buyers, such as instructions on how to apply the herbicides safely or having the option of having the dealer apply the herbicide. Yamaha out board engines for dealers is another example on a selective basis sell.
In exclusive distribution, only one outlet is used in a relatively large geographic area. Exclusive distribution is suitable for products that are purchased rather infrequently, consumed over a long period of time, or require service or information to fit them to the buyer’s needs. Exclusive distribution is not appropriate for convenience goods and many shopping goods. It is used often as an incentive to sellers when only a limited market is available for products. Exclusive distribution affords a company lighter image control because the type of distributors and retailers that distribute the products are closely monitored. A producer that uses exclusive distribution generally expects a dealer to be very cooperative with respect to carrying a complete inventory, sending personnel for sales and service training, participating in promotional programmes, and providing excellent customers services. Some products may be appropriate for exclusive distribution when they are first introduced, but as competitions enter the market and the product moves through its life cycle, other types of market coverage and distribution channels often become necessary.