Structure of marketing channels - Marketing Management

The marketing channel has two basic aspects:

  1. the placement of intermediary types of channel in relation to each other i.e. the order in which they occur;
  2. the number of different intermediary levels or stages in the channel i.e. how many different separate types of intermediary are involved, so types of intermediary and number of levels determine the structure of a marketing channel.

Marketing Channels Structure

There are several types of channel structure, dependent on the type of goods. An example of a structure for consumer goods such as food and clothing. This figure is based on three assumptions:

  1. The channel consists of complete organizations.
  2. Manufacturers’ agents and selling agents are included with the merchants even though they do not take title to the goods.
  3. Physical movement follows exactly the movement of ownership.

We must understand the underlying reasons for the emergence of channel structures. Four logical steps can be identified:

  1. The efficiency of the process can be increased via an intermediary.
  2. Channel intermediaries arise to adjust the discrepancy of assortments through the performance of the sorting processes.
  3. Marketing agencies remain together in channel arrangements to provide the routine of transactions.
  4. Channels exist to facilitate deliveries and to avoid inventory stock-outs.

Rationale for intermediaries

As numbers of transactions increase, the need for intermediaries becomes greater. The marketing channel is a ‘canal’ which contains the physical flow of products. Because of the complex array of intermediaries operating within a channel, which may be involved in one or all aspects of channel function, the channel may also be visualized as a chain-link arrangement where each intermediary unit is effectively a link.

Manufacturers are dependent on the effectiveness of their intermediaries if their channels of distribution are to meet their marketing goals. Intermediaries of a channel specialize in more than one function. Their inclusion primarily depends on their superior efficiency in the performance of basic marketing tasks. Such intermediaries, through their experience, specialization, contacts and scale of operation, offer other channel members more than they can achieve on their own. However, this type of specialization leads to some important behavioural concepts.

Position and role

Each channel member chooses a position or location in the channel. ‘Role’ refers to the functions and degree of performance expected of the firm filling a position. Channel intermediaries perform the distribution function at a lower unit cost than the manufacturer who is the intermediary most distanced from the consumer, and they balance the production efficiencies of the supplier to the purchasing needs of the customer.

Another reason is to break down large volumes into smaller quantities, termed ‘breaking bulk’, e.g. a furniture retailer places an order for 100 tables, but the individual buys only one. When we consider the selling process, the number of intermediaries can reduce the number of transactions contained within the selling process.That there are four manufacturers and ten retailers who buy goods from each manufacturer. Here the number of contact lines amounts to 40 (i.e. 4 _ 10). If all four manufacturers sell to 10 retailers through one intermediary, the number of contacts is reduced to 14 (i.e. 4 _ 10). The number of contacts increases as the number of intermediaries increases, e.g. when the number of wholesalers is increased to 2, contacts will increase from 14 to 28 (i.e. [4 _ 2] _ [10 _ 2]). Thus, greater numbers of intermediaries result in diminishing returns per contact.

A typical example of structure for consumer goods

typical example of structure for consumer goods

The economics of intermediary systems

The economics of intermediary systems

Assortment and sorting

In addition to increasing the efficiency of transactions, intermediaries smooth the flow of goods and services by creating what economists refer to as ‘possession’, ‘place’ and ‘time’ utilities. This smoothing requires that intermediaries perform a sorting function to overcome the discrepancy that arises between goods produced by manufacturers and goods demanded by the consumer. In addition, intermediaries bring together a range of similar or related items into a large stock, thus facilitating the buying process. A supermarket will buy in thousands of lines to provide shoppers with choice, and a builders’ merchant will provide everything from sand and gravel to light fittings that the builder can use. In this way, intermediaries play an important role in facilitating the flow of products from the manufacturer to the consumer.

Routine transactions

The cost of distribution can be minimized if transactions are routinized. In effect, through routinization, a sequence of marketing agencies is able to hang together in a channel arrangement or structure. A good example is automatic ordering, whereby the cost of placing orders is reduced when retail inventory levels reach the necessary re-order point.

Searching

Buyers and sellers are often engaged in similar activities within the marketplace. There is a degree of uncertainty if manufacturers are unsure of customer wants and needs, and consumers are not always sure what they will find. In this respect, marketing channels facilitate the searching process in two ways:

  1. Wholesale and retail institutions are organized by different product groups; for example, fashion, hardware, grocery.
  2. Many products are widely available from wide ranging locations

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