Marketing Channels and 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, marketing channels are sets of interdependent organizations participating in the process of making 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 consumption by the final end user.

Some intermediaries such as wholesalers and retailers buy, take title to, and resell the merchandise; they are called merchants. Others brokers, manufacturers’ representatives, 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 companies,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. 

Channels ofall types play an important role in the success ofa company and affect all other marketing decisions.Marketers should judge them in the context ofthe entire process by which their products are made,distributed,sold,and serviced.We consider all these issues in the following sections. 

The Importance of Channels

A marketing channel system is the particular set of marketing channels a firm employs,and decisions about it are among the most critical ones management faces. In the United States, channel members collectively have earned margins that account for 30 percent to 50 percent of the ultimate selling price. In contrast, advertising typically has accounted for less than 5 percent to 7 percent of the final price.3 Marketing channels also represent a substantial opportunity cost.One of their chief roles is to convert potential buyers into profitable customers. Marketing channels must not just serve markets,they must also make markets.

The channels chosen affect all other marketing decisions. The company’s pricing depends on whether it uses online discounters or high-quality boutiques. Its sales force and advertising decisions depend on how much training and motivation dealers need. In addition, channel decisions include relatively long-term commitments with other firms as well as a set of policies and procedures.When an automaker signs up independent dealers to sell its automobiles,it cannot buy them out the next day and replace them with company-owned outlets. But at the same time, channel choices themselves depend on the company’s marketing strategy with respect to segmentation, targeting,and positioning.Holistic marketers ensure that marketing decisions in all these different areas are made to collectively maximize value.

In managing its intermediaries,the firm must decide how much effort to devote to push versus pull marketing. A push strategy uses the manufacturer’s sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users.A push strategy is particularly appropriate when 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. In a pull strategythe manufacturer uses advertising,promotion,and other forms of communication to persuade consumers to demand the product from intermediaries,thus inducing the intermediaries to order it. Pull strategy is particularly appropriate when there is high brand loyalty and high involvement in the category, when consumers are able to perceive differences between brands, and when they choose the brand before they go to the store.

Top marketing companies such as Coca-Cola, Intel, and Nike skillfully employ both push and pull strategies. A push strategy is more effective when accompanied by a well-designed and well-executed pull strategy that activates consumer demand.On the other hand,without at least some consumer interest,it can be very difficult to gain much channel acceptance and support,and vice versa for that matter. 

Hybrid Channels and Multichannel Marketing 

Today’s successful companies typically employ hybrid channels and multichannel marketing,multiplying the number of“go-to-market”channels in any one market area.Hybrid channelsormultichannel marketing occurs when a single firm uses two or more marketing channels to reach customer segments. HP has used its sales force to sell to large accounts, outbound telemarketing to sell to medium-sized accounts,direct mail with an inbound number to sell to small accounts,retailers to sell to still smaller accounts,and the Internet to sell specialty items.Philips also is a multichannel marketer.

In multichannel marketing,each channel targets a different segment of buyers,or different need states for one buyer, and delivers the right products in the right places in the right way at the least cost. When this doesn’t happen, there can be channel conflict, excessive cost, or insufficient demand. Launched in 1976, Dial-a-Mattress successfully grew for three decades by selling mattresses directly over the phone and,later,the Internet.A major expansion into 50 brick-and-mortar stores in major metro areas was a failure, however. Secondary locations, chosen because management considered prime locations too expensive, could not generate enough customer traffic. The company eventually declared bankruptcy.

On the other hand, when a major catalog and Internet retailer invested significantly in brickand-mortar stores, different results emerged. Customers near the store purchased through the catalog less frequently, but their Internet purchases were unchanged. As it turned out, customers who liked to spend time browsing were happy to either use a catalog or visit the store;those channels were interchangeable.Customers who used the Internet,on the other hand,were more transaction focused and interested in efficiency,so they were less affected by the introduction of stores.Returns and exchanges at the stores were found to increase because of ease and accessibility, but extra purchases made by customers returning or exchanging at the store offset any revenue deficit. 

Companies that manage hybrid channels clearly must make sure their channels work well together and match each target customer’s preferred ways of doing business. Customers expect channel integration,which allows them to:

- Order a product online and pick it up at a convenient retail location 

- Return an online-ordered product to a nearby store of the retailer 

- Receive discounts and promotional offers based on total online and offline purchases