The Five Steps in the Channel Management Process
The channel management process contains five steps:
- Analyze the Consumer
- Establish the Channel Objectives
- Specify Distribution Tasks
- Evaluate and Select Among Channel Alternatives
- Evaluate Channel Member Performance
1. Analyze the Consumer
We begin the process of channel management by answering two questions. First, to whom shall we sell this merchandise immediately? Second, who are our ultimate users and buyers? The immediate and ultimate customers may be identical or they may be quite separate. In both cases, certain basic questions apply: There is a need to know what the customer needs, where they buy, when they buy, why they buy from certain outlets, and how they buy.
It is best that we first identify the traits of the ultimate user, since the results of that evaluation might determine the other channel institutions we would use to meet those needs.
What might the buying characteristics of the purchaser of a high-quality curved TV be? After identifying the traits of the ultimate user you might the following characteristics:
- purchased only from a well-established, reputable dealer
- purchased only after considerable research to compare prices and merchandise characteristics
- purchase may be postponed
- purchased only from a dealer equipped to provide prompt and reasonable product service
These buying specifications illustrate the kinds of requirements that the manufacturer must discover. In most cases, purchase specifications are fairly obvious and can be determined without great difficulty. In others, though, they can be difficult to determine. For example, some consumers will only dine at restaurants that serve menu items that meet particular dietary needs; others will only patronize supermarkets that demonstrate social responsibility in their sourcing and packaging. Still, through careful and imaginative research, most of the critical factors related to consumer buying specifications can be figured out.
Once the consumer’s buying specifications are known, the channel planner can decide on the type or types of wholesaler or retailer through which a product should be sold. This means that a manufacturer contemplating distribution through particular types of retailers must become intimately familiar with the precise location and performance characteristics of those he is considering.
In much the same way that buying specifications of ultimate users are determined, the manufacturers must also discover buying specifications for resellers. Of particular importance is the question “From whom do my retail outlets prefer to buy?” The answer to this question determines the types of wholesalers (if any) that the manufacturer should use. Although many retailers prefer to buy directly from the manufacturers, this is not always the case. Often, the exchange requirements of manufacturers (e.g., infrequent visit, large order requirements, and stringent credit terms) are the opposite of those desired by retailers. Such retailers would rather buy from local distributors who have lenient credit terms and offer a wide assortment of merchandise.
2. Establish the Channel Objectives
Once customer needs are specified, the marketer can decide what the channel must achieve, which can be captured in the channel objectives. Channel objectives are based on customer requirements, the marketing strategy, and the company strategy and objectives. However, in cases where a company is just getting started, or an older company is trying to carve out a new market niche, the channel objectives may be the dominant objectives. For example, a small manufacturer wants to expand outside the local market. An immediate obstacle is the limited shelf space available to this manufacturer. The addition of a new product to the shelves generally means that space previously assigned to competitive products must be obtained. Without this exposure, the product is doomed.
Channel Objectives: The Major Categories
As one would expect, there is wide diversity of channel objectives. The following areas encompass the major categories:
- Growth in sales by reaching new markets and/or increasing sales in existing markets.
- Maintenance or improvement of market share
- Achieve a pattern of distribution by a certain time, place, and form
- Reduce costs or increase profits by creating an efficient channel
3. Specify Distribution Tasks
After the distribution objectives are set, it is appropriate to determine the specific distribution tasks (functions) to be performed in that channel system. The channel manager must be very specific in describing the tasks and also detail how these tasks will change depending upon the situation.
An example of this is how a manufacturer might delineate the following tasks as necessary to profitably reach the target market:
- Provide delivery within 48 hours after order placement
- Offer adequate storage space
- Provide credit to other intermediaries
- Facilitate a product return network
- Provide readily available inventory (quantity and type)
4. Evaluate and Select Among Channel Alternatives
Determining the specific channel tasks is a prerequisite of the evaluation and selection process. There are four considerations for channel alternatives: number of levels, intensity at the various levels, types of intermediaries at each level, and application of selection criteria to channel alternatives. In addition, it is important to decide who will be in charge of the selected channels.
Number of Levels
Channels can range in levels from two to several (five is typical). The two-level channel (producer to consumer) is a direct channel. The number of levels in a particular industry might be the same for all the companies simply because of tradition. In other industries, this dimension is more flexible and subject to rapid change.
Intensity at Each Level
Once the number of levels has been decided, the channel manager needs to determine the actual number of channel components involved at each level. How many retailers in a particular market should be included in the distribution network? How many wholesalers?
The intensity decision is extremely critical, because it is an important part of the firm’s overall marketing strategy. Companies such as Starbucks and Hershey’s have achieved high levels of success through their intensive distribution strategy.
Types of Intermediaries and Application of Selection Criteria
As we discussed, there are several types of intermediaries that operate in a particular channel system. The objective is to identify several possible alternative channel structures, and evaluate these alternatives with respect to some set of criteria such as company factors, environmental trends, reputation of the reseller, and experience of the reseller.
Who Should Lead?
Regardless of the channel framework selected, channels usually perform better if someone is in charge, providing some level of leadership. Essentially, the purpose of this leadership is to coordinate the goals and efforts of channel institutions. The level of leadership can range from very passive to quite active—verging on dictatorial. The style may range from very negative, based on fear and punishment, to very positive, based on encouragement and reward. In a given situation, any of these leadership styles may prove effective.
Under which conditions should the manufacturers lead? The wholesaler? The retailer? While the answer is contingent upon many factors, in general, the manufacturer should lead if control of the product (merchandising, repair) is critical and if the design and redesign of the channel is best done by the manufacturer. The wholesaler should lead where the manufacturers and retailers have remained small in size, large in number, relatively scattered geographically, are financially weak, and lack marketing expertise. The retailer should lead when product development and demand stimulation are relatively unimportant and when personal attention to the customer is important.
5. Evaluating Channel Member Performance
The need to evaluate the performance level of the channel members is just as important as the evaluation of the other marketing functions. Clearly, the marketing mix is quite interdependent, and the failure of one component can cause the failure of the whole. There is one important difference, though: the channel member is dealing with independent business firms, rather than employees and activities under its control, these firms may be reluctant to change their practices.
Sales is the most popular performance criterion used in channel evaluation. Other possible performance criteria are maintenance of adequate inventory, selling capabilities, attitudes of channel intermediaries toward the product, competition from other intermediaries and from other product lines carried by the manufacturer’s own channel members.
Correcting or Modifying the Channel
As a result of the evaluation process, or because of other factors such as new competition, technology, or market potential, changes may need to be made in the channel structure. Because channel relationships tend to be long-term, and the channel decision has such a pervasive impact on the business, any change should be carefully evaluated. Later in this module we will discuss service outputs and their role in measuring and modifying channel performance.
“Module 12: Place: Distribution Channels-Optimizing Channels” from Principles of Marketing by Lumen Learning is licensed under a Creative Commons Attribution license.