The Nature and Importance of Marketing Channels

Few producers sell their goods directly to the final users. Instead, most use intermediaries to bring their products to market. They try to forge a marketing channel (or distribution channel)—a set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user.²

A company's channel decisions directly affect every other marketing decision. The company's pricing depends on whether it works with national discount chains, uses high-quality specialty stores, or sells directly to consumers via the Web. The firm's sales force and communications decisions depend on how much persuasion, training, motivation, and support its channel partners need. Whether a company develops or acquires certain new products may depend on how well those products fit the capabilities of its channel members.

Companies often pay too little attention to their distribution channels, however, sometimes with damaging results. In contrast, many companies have used imaginative distribution systems to gain a competitive advantage. The creative and imposing distribution system of FedEx made it a leader in the transportation industry. Dell Computer revolutionized its industry by selling personal computers directly to consumers rather than through retail stores. And Charles Schwab & Company pioneered the delivery of financial services via the Internet.

FedEx's creative and imposing distribution system made it a leader in the small-package delivery industry.

Distribution channel decisions often involve long-term commitments to other firms. For example, companies such as Ford, IBM, or McDonald's can easily change their advertising, pricing, or promotion programs. They can scrap old products and introduce new ones as market tastes demand. But when they set up distribution channels through contracts with franchisees, independent dealers, or large retailers, they cannot readily replace these channels with company-owned stores or Web sites if conditions change. Therefore, management must design its channels carefully, with an eye on tomorrow's likely selling environment as well as today's.

Why do producers give some of the selling job to channel partners? After all, doing so means giving up some control over how and to whom the products are sold. The use of intermediaries results from their greater efficiency in making goods available to target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own.

Figure 13.1 shows how using intermediaries can provide economies. Figure 13.1A shows three manufacturers, each using direct marketing to reach three customers. This system requires nine different contacts. Figure 13.1B shows the three manufacturers working through one distributor, which contacts the three customers. This system requires only six contacts. In this way, intermediaries reduce the amount of work that must be done by both producers and consumers.

From the economic system's point of view, the role of marketing intermediaries is to transform the assortments of products made by producers into the assortments wanted by consumers. Producers make narrow assortments of products in large quantities, but consumers want broad assortments of products in small quantities. In the marketing channels, intermediaries buy large quantities from many producers and break them down into the smaller quantities and broader assortments wanted by consumers. Thus, intermediaries play an important role in matching supply and demand.

ACTIVE FIGURE 13.1	How a marketing intermediary reduces the number of channel transactions

In making products and services available to consumers, channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them. Members of the marketing channel perform many key functions. Some help to complete transactions:

•	Information: Gathering and distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange.

•	Promotion: Developing and spreading persuasive communications about an offer.

•	Contact: Finding and communicating with prospective buyers.

•	Matching: Shaping and fitting the offer to the buyer's needs, including activities such as manufacturing, grading, assembling, and packaging.

•	Negotiation: Reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred.

Others help to fulfill the completed transactions:

•	Physical distribution: Transporting and storing goods.

•	Financing: Acquiring and using funds to cover the costs of the channel work.

•	Risk taking: Assuming the risks of carrying out the channel work.

The question is not whether these functions need to be performed—they must be—but rather who will perform them. To the extent that the manufacturer performs these functions, its costs go up and its prices have to be higher. When some of these functions are shifted to intermediaries, the producer's costs and prices may be lower, but the intermediaries must charge more to cover the costs of their work. In dividing the work of the channel, the various functions should be assigned to the channel members who can add the most value for the cost.

Companies can design their distribution channels to make products and services available to customers in different ways. Each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer is a channel level. Because the producer and the final consumer both perform some work, they are part of every channel.

The number of intermediary levels indicates the length of a channel. Figure 13.2A shows several consumer distribution channels of different lengths. Channel 1, called a direct marketing channel, has no intermediary levels; the company sells directly to consumers. For example, Avon, Amway, and Tupperware sell their products door-to-door, through home and office sales parties, and on the Web; L.L. Bean sells clothing direct through mail catalogs, by telephone, and online; and a university sells education on its campus or through distance learning. The remaining channels in Figure 13.2A are indirect marketing channels, containing one or more intermediaries.

Figure 13.2B shows some common business distribution channels. The business marketer can use its own sales force to sell directly to business customers. Or it can sell to various types of intermediaries, who in turn sell to these customers. Consumer and business marketing channels with even more levels are sometimes found, but less often. From the producer's point of view, a greater number of levels means less control and greater channel complexity. Moreover, all of the institutions in the channel are connected by several types of flows. These include the physical flow of products, the flow of ownership, the payment flow, the information flow, and the promotion flow. These flows can make even channels with only one or a few levels very complex.

FIGURE 13.2	Consumer and business marketing channels