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Establishing Objectives and Constraints

Marketers should state their channel objectives in terms of the service output levels they want to provide and the associated cost and support levels. Under competitive conditions, channel members should arrange their functional tasks to minimize costs and still provide desired levels of service. Usually, planners can identify several market segments based on desired service and choose the best channels for each.

Channel objectives vary with product characteristics. Bulky products, such as building materials, require channels that minimize shipping distance and handling. Products requiring installation or maintenance services, such as heating and cooling systems, are usually sold and maintained by the company or franchised dealers. High-unit-value products such as turbines are often sold through a company sales force rather than intermediaries. Legal regulations and restrictions also affect channel design.

Identifying Major Channel Alternatives

Each channel—from sales forces to agents, distributors, dealers, direct mail, telemarketing, and the Internet—has unique strengths and weaknesses. Channel alternatives differ in three ways: the types of intermediaries, the number needed, and the terms and responsibilities of each.

Types of Intermediaries Some intermediaries—such as wholesalers and retailers—buy, take title to, and resell the merchandise; they are called merchants. Agents—such as brokers, manufacturers’ representatives, and sales agents—search for customers and may negotiate on the producer’s behalf but do not take title to the goods. Facilitators—transportation companies, independent warehouses, banks, advertising agencies—assist in the distribution process but neither take title nor negotiate purchases or sales. Sometimes a company chooses a new or an unconventional channel because of the difficulty, cost, or ineffectiveness of working with the dominant channel. For instance, Netflix is quickly moving away from the revolutionary channel that brought it much success—renting DVDs by mail—to capitalize on a new one: streaming entertainment online.17

Number of Intermediaries Three strategies based on the number of intermediaries are exclusive, selective, and intensive distribution. Exclusive distribution severely limits the number of intermediaries, appropriate when the producer wants more knowledgeable, dedicated resellers. This often includes exclusive dealing arrangements, especially in markets increasingly driven by price. Selective distribution relies on only some of the intermediaries willing to carry a particular product. The company can gain adequate market coverage with more control and less cost than intensive distribution. Intensive distribution places the goods or services in as many outlets as possible, a good strategy for snack foods, soft drinks, newspapers, and gum—products consumers buy frequently or in a variety of locations.

Terms and Responsibilities of Channel Members The main elements 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 are payment terms and producer guarantees. Most producers grant cash discounts to distributors for early payment. They might also offer a guarantee against defective merchandise or price declines, creating an incentive to buy larger quantities. Distributors’ territorial rights define the distributors’ territories and the terms under which the producer will enfranchise other distributors. Mutual services and responsibilities must be carefully spelled out, especially in franchised and exclusive-agency channels.

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