Channel Design Decisions

by Sree Rama Rao on February 11, 2008

Designing a marketing channel system involves analyzing customer needs, establishing channel objectives, identifying major channel alternatives, and evaluating major channel alternatives.

Analyzing Customers’ desired service output levels:

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

(a) Lot size – The number of units the channels permits 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.
(b) Waiting and delivery time – The average time customers of that channel wait for receipt of the goods. Customers increasingly prefer faster and faster delivery channels.
(c) Spatial convenience – The degree to which the marketing channel makes it easy for customers to purchase the product. Chevrolet, for example, offers greater spatial convenience than Cadillac, because there are more Chevrolet dealers. Chevrolet’s greater market decentralization helps customers save on transportation and search costs in buying ad repairing an automobile.
(d) 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.
(e) Service backup – the add-on services (credit, delivery, installation, repairs) provided by the channel. The greater the service backup, the greater the work provided by the channel.

The marketing channel designer knows that providing greater service outputs means increased channel costs and higher process for customers. Different customers have different service needs. The success of discount stores indicates that many customers 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. Usually, planners can identify several market segments that want different service levels. Effective planning requires determining which 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 minimize 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 dealers. High-unit-value products such as generators and turbines are often sold through a company sales force rather than intermediaries.

Channel design must take into account the strengths and weaknesses of different types of intermediaries. For example, manufacturers’ reps are able to contact customers at a low cost per customers because the total cost is shared by several clients, but the selling effort per customer is less intense than if company sales reps did the selling. Channel design is also influenced by competitors’ channels. Channel design must adapt to the larger environment. When economic conditions are depressed, producers want their goods to market using shorter channels and without services that add to the final price of the goods. Legal regulations and restrictions also affect channel design. US law looks unfavorably on channel arrangement that may tend to substantially lessen competition or create a monopoly.

Identifying Major Channel Alternatives:

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 products and transactions, but they are expensive. The internet is much less expensive, but it cannot handle complex product. 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 intermediaries, the number of intermediaries needed, and the terms and responsibilities of each channel member.





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