Marketing channel strategy for consumer goods

Table of Content

1 Introduction

2 Definition and importance of selecting a marketing channel strategy

3 Direct versus indirect distribution channels

4 Steps in channel strategy selection
4.1 Conventional versus vertical marketing channel
4.1.1 Agency theory or conventional channel
4.1.2 Relationship management or vertical coordination of channels
4.2 Distribution intensity
4.2.1 Intensive distribution
4.2.2 Selective distribution
4.2.3 Exclusive distribution
4.3 Factors influencing the channel decision
4.3.1 Market factor
4.3.2 Producer factor
4.3.3 Product factor

5 Conclusion

List of figures:

Figure 3.1 Channel of distribution for a consumer good

Figure 4.1 Steps in Channel Strategy selection

1 Introduction

This first part of the report is initiated to generally discuss the key concepts of implementing a marketing channel strategy. In terms of the four major elements of a marketing strategy, product, place (or method of distribution), price, and promotion, the selection of a marketing channel affects both place and promotion, because it describes the path that goods or services take in moving from producer to consumer (Scarborough, M & Zimmerer T 1996). Before selecting a channel strategy, management has to first decide upon the types of channel to be used and then determine the desired distribution intensity (Cravens 2000). To get an understanding of the different channel types available, this report will first describe the types, followed by an evaluation of the factors that may influence the choice for one of the channels or the other. The aim of this first part of the report is to provide the basic framework to concentrate on what is important when deciding the marketing channel.

2 Definition and importance of selecting a marketing channel strategy

According to Cravens (2000), a value chain or channel of distribution is a group of vertically aligned organizations that add value to a good or service in moving from basic supplies to finished products to consumer and organizational end-users. Porter’s value chain analysis model elaborates this concept of a firm’s value chain into an even larger stream of activities, which Porter calls a value system (Porter 1980). When a company has to select a new channel strategy for a new product or market entry or aims to improve the existing strategy, a sound understanding of the entire value system is necessary. Thus, the company can find out how and through which activity value is added and which activities have the potential to be streamlined. A reflection on the value system, including the value chain of the company, its suppliers, distributors and customers is necessary to provide a framework for the systematic evaluation of a company’s position and power within a value chain system (Powe 2003).

The channel selection process starts generally by finding and selecting a target market, decisions which frequently are made on the basis of marketing research. With this information the company has to develop a strategy to enter the market and choose an appropriate mode of entry. There are several different market entry modes, which will be further explained in the next paragraph. Since they all have advantages as well as disadvantages, the selection or suitability depends on the company, its resources, its products etc. (Czinkota, 1993, p. 329-331, Johansson, 1997, p. 208 ff, Taylor, C. 2000).

3 Direct versus indirect distribution channels

Any activity involving movements of goods to the point of consumer purchases provides place utility, which is directly affecting the marketing channel of distribution. While some manufacturers and service providers distribute and market directly to consumer, distribution as well as marketing channels typically involve intermediaries who perform specialized functions to add value to the good or service (Scarborough, M & Zimmerer T 1996). Some companies for example prefer to use intermediaries to perform certain buying and selling activities to reduce the number of direct transaction with the end-consumer whereas others want to control their marketing channel, thus using a direct marketing channel (Cravens 2000).

The focus of this paper is rather placed on consumer than industrial goods, thus Figure 3.1 illustrates the four common channels of distribution for consumer goods.

Figure 3.1 Channel of distribution for a consumer good

illustration not visible in this excerpt

Source: Churchill, A & Peter P 1998, Marketing, 2nd ed., Irwin/McGraw-Hill, New York, p.360.

4 Steps in channel strategy selection

According to Cravens (2000), there are three decisions necessary to develop a channel of distribution strategy: (1) determining the type of channel arrangement, (2) deciding the intensity of distribution, and (3) selecting the channel configuration. Figure 4.1.illustrates the steps.

Figure 4.1 Steps in Channel Strategy selection

illustration not visible in this excerpt

Source: Cravens, D 2000, Strategic Marketing, 6th ed., McGraw-Hill, p.309.

4.1 Conventional versus vertical marketing channel

Choosing an intermediary affects the way how customers are reached and how they perceive the value of a product and the company. In delegating the distribution task the manufacturer therefore runs the risk that the distributor will pursue his basic goal in ways that conflict with the manufacturer's broader interests. This interpretation of marketing channel interaction is also known as the agency theory. Agency theory views a distribution channel as a series of separate, discrete contractual relationships (Meffert, 2000).

4.1.1 Agency theory or conventional channel

Agency theory is concerned with the relationships of entities that are connected through the fact that the principal (e.g. manufacturer) delegates work to the agent (that is assigns the responsibility to represent the interests of the principal) (Vermillion L, Lasser W, and Winsor R 2002). Cravens (2000) defines this relationship as the conventional marketing channel, when the relationships between the conventional channel participants are rather informal and the members are not closely coordinated. Agency problems often arise from the conflicting goals, risk preferences, and incentives of the two parties (Gopinath, M & Nyer, P 1999). Because the agent may not share the principal's goals, and because the agent is more familiar with the details of the task, he may have both motive and opportunity to behave in ways that maximize his own utility at the expense of the principal's. For example, the distributor may: (1) stock insufficient inventories of the manufacturer's product, (2) stock and promote competing products, (3) price above or below the preferred range, (4) advertise and promote the product inadequately or inappropriately, (5) train sales personnel improperly, or (6) fail to provide adequate after-sale service (Vermillion L, Lasser W, and Winsor R 2002).

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