Core Concepts of Marketing by John Burnett - HTML preview

CHAPTER 10

CH ANNEL CONCEPTS : DISTRIBUTIN G THE PRODUCT

member relationships may last for years. Despite these deficiencies, this type of channel

structure remains most common, and there are numerous examples of such networks working.

Vertical Marketing Systems

Vertical marketing systems have emerged as a solution to

problems of conventional net-

works. A vertical marketing system (VMS) comes about when a member of the distribu-

tion channel (usually the

assumes a leadership role and attempts to coordinate

the efforts of the channel so that mutually beneficial

can be attained . Three

of

'v'ertical integration are now common.

Administered VMS

The administered

is very close to the conventional network, but differs in that it is

informally guided by goals and programs deveioped by one or a limited number of firms

in the existing channel. This framework is the source of the concept of a channel captain,

in that administrative skills and the power of one individual

be the drivi ng force of

the channel. Often the dominant brands, as in the case of Xerox or Procter & Gamble, are

able to manifest this cooperation.

Through the recognition of a channel leader, the distribution networks function bet-

ter, sales and profits are higher, product exposure improves,

management

tems are initiated, and the coordination of promotional activities becomes a reality. An

administered system is not without its problems. Often, this effort is placed on

shoul-

ders of a single individual. Another drawback is

tendency of polarizing channel mem-

bers. Businesses either become part of the VMS or remain strongly independent. Eventually

these independents may find themselves at a tremendous competitive disadvantage, and may

even be deprived of certain channel benefits .

Contractual VMS

There are instances when channel members wish to formalize their relationship by employ-

ing a contractual agreement, known as a contractual VMS. This provides additional con-

trol, and either explicitly or implicitly spells out the marketing functions to be performed

by all the members of the channel. This is the most popular form of vertical marketing

arrangement.

Corporate VMS

When channel members on different levels are owned and operated by one organization, a

corporate vertical marketing system is said to exist. Such integration can be forward or backward.

manufacturer who

the various intelmediaries in its

network has engaged

in forward integration. A retailer who takes over the wholesaling and manufacturing tasks is backward integrating. This process can entail either the organization's purchasing the institutions , or establishing its own facilities. Although partial forward or backward integration

is most common, total integration is becoming more popular. Iv1anufacturers who have recently

integrated throu gh to the retail level are Dannon "{ogurt, Blue

Cream, and Pep-

peridge Farms. Sears and Safeway stores are two retailers that have successfully integrated

backward. American Hospital Supply Cornoration is an example of a wholesaler that has

integrated both backward and forward.

Horizontal Channel Systems

There are instances where

or more companies are unable to acquire the capital, or don't

have the technical or production know-how, to effectively market their products alone. In

THE CHANNEL MANAGEMENT PROCESS

269

such cases, these companies may establish a temporary or quasi-pelmanent relationship in

order to work with each other, and create the channel mechanism required to reach their

target markets. This arrangement has been labeled a horizontal channel system. For example, two small manufacturers might combine their shipments to common markets in order

to gain full carload transportation rates that each could not obtain separately. Another com-

mon scenario is for a large retailer to buyout several competing small retailers in order to

gain entry into certain markets or with certain customers.

T HE CHANNEL MANAGEMENT PROCESS

Evidence suggests that a channel should be managed just like the product, promotion, and

pricing functions . This channel management process contains five steps.

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 buy-

ers ? Depending upon a host of factors, including the type of product, functions performed

in the channel, and location in the channel, the immediate and ultimate customers may be

identical or they may be quite separate. In both cases, some fundamenta l questions would

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 this

evaluation might determine the other channel institutions we would use to meet these needs.

For example, the buying characteristics of the purchaser of a high-quality VCR might be

as follow s:

1. Purchased only from a well-established, reputable dealer.

2. Purchased only after considerable shopping to compare prices and

characteristics.

3. Purchaser willing to go to some inconvenience (time and distance) to locate the

most acceptable brand.

4. Purchased only after extended conversations involving all interested parties, includ-

ing dealer, users, and purchasers.

5. Purchase may be postponed.

6. Purchased only from a dealer equipped to render 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 discovered

without great difficulty. On the other hand, some are difficult to determine . For example,

certain consumers will not dine at restaurants that serve alcohol; others will patronize only

supermarkets that exhibit definite ethnic characteristics in their merchandising. Nonethe-

less , by careful and imaginative research, most of the critical factors that bear on consumer

buying specifications can be determined.

Knowing the buying specifications of consumers, the channel planner can decide on

the type or types of wholesaler and/or retailer through which a product should be sold . This

requires that a manufacturer contemplating distribution through particular types of retail-

ers become intimately familiar with the precise location and performance characteristics

of those he is considering.

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