Notes

CASE STUDY

Supply Chain Success: Dell Computers

Michael Dell the man behind Dell Computers started in 1984

with the exceptional idea of selling PCs through a mail-order approach.
It offered customers a customised configuration. The approach enabled
Dell to cut down the price of a computer by saving on the margins of
distributors and retailers. Also, this approach enabled Dell to deliver PCs
at short notice.

Dell upgraded its supply chain by making small changes in the

path a computer earlier used to travel to reach the customer. The web was
used to offer online visibility of components, configurations, costs and
delivery. Customers could choose from various options and arrive at a
configuration that suited them.

Once the order was received the computer was built using just in
time (JIT) manufacturing. This resulted in many benefits like lower costs
and quick deliveries. There was no need of maintaining higher inventories.
Dell positioned its warehouses at locations close to their factories so
that components could be easily and swiftly called for. Dell started their
innovation process by taking the customers views on various aspects of
the deal.

Dell did well because of its competitive strategies like

identifying and taking advantage of opportunities that existed but
was still untouched. They made the customers the focal point of their ac-
tivities and tried to provide the best service to them. They maintained the
quality of their products so that so that the customers achieved two ad-
vantages: a customised computer and a high performing machine at that.

Dell was also successful because it created an IT-based

manufacturing system along the entire supply chain. It used the web,
computerised manufacturing systems, EDI, videoconferencing, electronic
procurement, intranets, Decision Support System (DSS) and a web-based
call centre.

69
Notes
As part of the company’s continual efforts to improve its supply
chain process, recently, Dell positioned a supply chain tool named
‘i2’ ‘TradeMatrix’ to forecast global views on product demand and
materials requirements and to improve factory scheduling and inventory
management. Dell suppliers and Supply Logistics Centres (SLCs) were
able to view short and long-term materials requirements in each Dell
factory globally due to these new supply chain tools.

Optimising delivery and inventory use in Dell factories was one

of the primary goals of i2 implementation. The i2 implementation. The i2
solution thus has increased the efficiency of Dell, which has already been
a leader in innovation in SCM.

Source:: Anurag Saxena and Kaaushik Sircar (2008), Logistics & Supply Chain
Management.

CASE STUDY

Supply Chain Success: Mumbai Dabbawalas

The Dabbawalas of Mumbai are unique case in logistics. Neatly

stacked dabbas (tiffins or lunch boxes) are a common sight at most of
the rail way stations, late every morning in Mumbai, India. A man is
who is illiterate or semi-literate delivers hot lunch at the doorstep of the
subscriber. It is an error-free and there are virtually no mismatches.

The Mumbai Tiffin Box Suppliers Association is a 38-year-old

organization with 4,500 members and a huge, loyalty customer base. Their
customer base include office goers, students, shopkeepers, etc. Instead of
carrying their own lunch at an early hour in the morning, they prefer to
subscribe this dabba service.

For a small fee, the dabbawala picks up the freshly packed lunch
form the subscribers house and deliver it to his/her office at lunch time.
Once lunch is over, the empty dabba is again collected by the dabbawala.
This is done with the help of Mumbai’s extremely efficient railway system
called th Mumbai locals.

70
 Notes
There are special trains known as dabbawala specials. The dabbas
change many hands and are loaded and offloaded in many trains befor
their final delivery.

There is a scientific method of putting an identification mark on

each dabba. Each dabba lid is marked a particular code. The code format
is ‘DBOF’ where D denotes the dabbawala’s number (assigned by the
association), BO is a combination indicating the building/office and F is
the floor number of that building where the tiffin box has to be delivered.

The lid is also marked with a number denoting the railway station
where the box has to be off-loaded, followed by an alphabet indicating the
station where it is to be picked up. Can you imagine what the fee for all of
this is? The service charges vary between ` 150 (US$3) to ` 300 (US$6) per
month, depending on the customer’s location and the distance covered.

This service was started by a Parsi banker when he enjoyed a carrier

to fetch his lunch every afternoon. The idea caught on and this inspired
many unemployed people to become dabba carriers. Soon, each dabbawala
had a handful of customers. To ensure that each carrier worked only in
a particular district and didn’t interfere with other dabbawalas, a union
called the ‘Mumbai Tiffin Box Carriers Association’ was formed in 1968.

Today, there are more than 5000 semi-literate dabbawallas who

transport 1,75,000 boxes in a 3-hour period, traversing 25 km using public
transportation, involving multiple transfer points. In 1998, Forbes Global
magazine conducted an analysis of the service and gave the dabbawalas a
six sigma efficiency rating.

****

71
72
 Notes

UNIT - II

Unit Structure

Lesson 2.1 - Managing the Marketing Channel

Lesson 2.2 - Channel Members
Lesson 2.3 - Channel Flows
Lesson 2.4 - Product Issues in Channel Management

Lesson 2.1 - Managing the Marketing Channel

Learning Objectives

After reading this lesson you will be able to

➢  Understand how to manage the marketing channel

➢  Indentify various channel intermediaries
➢  Indentify various methods to motivate channel members
➢  Know channel arrangements modification
➢  Understand channel conflicts and managing channel conflicts

Managing the Marketing Channel

Sales channels (being the conduits by which we distribute our

products to the end-user) come in many shapes—from direct, to the web,
to the traditional retail environment. And, we’re just doing whatever we
can to get any business from any of them! But is that the most efficient and
effective approach?

That’s where Channel Management comes in. Channel management,

as a process by which a company creates formalized programs for selling
and servicing customers within a specific channel, can really impact your

73
Notes
business—and in a positive way! To get started, first segment your channels
by like characteristics (their needs, buying patterns, success factors, etc.)
and then customize a channel management program that includes:

1. Goals. Define the specific goals you have for each channel segment.
Consider your goals for the channel as whole as well as individual
accounts. And, remember to consider your goals for both acquisition
and retention.

2. Policies. Construct well-defined polices for administering

the accounts within this channel. Be sure to keep the unique
characteristics of each segment in mind when defining policies for
account set up, order management, product fulfillment, etc.

3. Products. Identify which products in your offering are most suited

for each segment and create appropriate messaging. Also, determine
where your upsell opportunities lie.

4. Sales/Marketing Programs. Design support programs for your

channel that meet their needs, not what your idea of their needs are.
To do this, you should start by asking your customers within this
segment, “how can we best support you in the selling and marketing
of our products?” That being said, the standard considerations are
product training, co-op advertising, seasonal promotions, and
merchandising. Again, this is not a one-size fits all, so be diligent
about addressing this segment’s SPECIFIC needs in these areas.

Defining a channel management strategy for each segment allows

you to be more effective within each segment, while gaining efficiency
at the same time. Still, maintaining brand consistency across all channel
segments is critical to your long-term success. So find a good balance
between customization and brand consistency and you’ll be on your way
to successful channel management.

Channel Intermediaries

Channels of Distribution are Essential for Getting Products to

Consumers

Most companies would encounter administrative and logistical

problems in trying to deliver their goods and services to each of their end-

74
 Notes
consumers. Instead, companies more often than not use intermediaries to
distribute their products. This chapter aims to develop an understanding
of the “place” element of the marketing mix and the role of intermediaries
in marketing channels. Approaches to designing a channel of distribution
and issues in the management and control of intermediaries are discussed.

Definition of a Channel Intermediary

A marketing channel has been defined as “a system of relationships

existing among businesses that participate in the process of buying
and selling products and services”. Channel intermediaries are those
organisations which facilitate the distribution of goods to the ultimate
customer. The complex roles of intermediaries may include taking
physical ownership of products, collecting payment, and offering after-
sales service.

Marketing channel management refers to the choice and control

of these intermediaries. As more and more tasks are passed onto
intermediaries, the producing company starts to lose control and power
over its products and how they are sold. A key part of channel management
therefore involves the recognition that networks of intermediaries
represent social systems as well as economic ones.

The Role of Intermediaries in a Value Chain

The generic Value Chain of an organisation describes the activities

involved in the manufacture, marketing and delivery of a product or
service by the firm.

In order to decide whether a firm should undertake its own

distribution direct to consumers or whether it would be more efficient and
effective to use intermediaries, it is necessary to understand the functions
of these intermediaries. Consumers often want only a limited quantity of
a wide range of goods, goods that are conveniently made available under
one roof (i.e. in a retail supermarket). Intermediaries can help overcome
this discrepancy of assortment by reducing dramatically the number of
contacts required between suppliers and the end customers

In many cases, intermediaries can have superior knowledge of a

target market compared to manufacturers. Retailers can therefore add

75
Notes
value to the producer’s goods by tailoring their offerings more closely to
the specific requirements of consumers.
Intermediaries help to overcome two types of gap:

A location gap occurs due to the geographic separation of producers

➢ 
and the consumers of their goods.

A time gap takes place between when consumers want to actually

➢ 
purchase products and when manufactures produce them (e.g.
manufacturers may prefer to produce on Monday to Friday, but
consumers may prefer to buy at weekends). Intermediaries help to
reconcile this gap.

Types of Intermediary

A variety of types of intermediary can participate in the value

chain. Wholesalers and retailers take title to products, typically building
up stocks and thereby assuming risk. Other intermediaries such as agents
and brokers do not take title to goods. Instead they arrange exchanges
between buyers and sellers and in return receive commissions or fees.

A number of different types of retailer may be identified:

Ddepartment stores, e.g. Debenhams.

➢➢ 
Supermarkets, e.g. Reliance.
➢➢ 
Discount sheds or “category killers”, e.g. Toys ’R’ Us
➢➢ 
Speciality shops, e.g. clothing (Next), music (HMV),
➢➢ 
Convenience or “c” stores, e.g. 7-Eleven
➢➢ 
Markets and cash and carry warehouses, e.g. Makro.
➢➢ 
Catalogue showrooms, e.g. Argos.
➢➢ 

Multiples are usually defined as retailers with over ten outlets.

They have tended to grow at the expense of independent retailers, but
have also eroded the market share of the cooperatives. Retailers have their
own set of strategic choices. Location is usually the most critical issue
since it is central to attracting the right kind of customer in sufficient
volume to make trade viable. Retailers are using increasingly sophisticated
geo-demographic methods to determine the optimum locations for their
outlets. Strategic decisions need to be made about what product assortment

76
 Notes
to provide and market segments should be served. As East (1997) has
pointed out, retailers spend large sums of money in attracting customers,
but despite offering factors such as value, choice, friendly service and
quality, the main reason cited by supermarket users for patronage is close
location.

Designing a Channel of Distribution

Channel objectives will be determined by the organisation’s

positioning strategy. The “place” element of the marketing mix must be
consistent with the remaining marketing tools used by the marketing
manager to gain a sustainable competitive advantage.

Three options can be identified

Intensive distribution. Generally used for FMCGs and other

➢➢ 
relatively low-priced or impulse purchases.

E xclusive distribution. Here, distribution may be limited to a small

➢➢ 
number of intermediaries who gain better margins and exclusivity.

Selective distribution. This represents a compromise between

➢➢ 
intensive and selective distribution. The manufacturer is looking
for adequate market coverage, but still hopes to select supportive
dealers.

There are a number of key influences on channel selection strategies:

➢  Buyer behaviour (what do customers expect inn terms of location

and assortment etc.?),
➢  Producer’s needs, (an important constraint is the resources that are
available to the manufacturer to bring the product to market. Some
companies will lack the finances to recruit and reward a salesforce
and so will use a wholesaler instead.
➢  Product type (e.g. fresh produce that is highly perishable requires
fairly short channels)
➢  Competition (e.g. if competitors have exclusive deals with certain
intermediaries, then the support of other channel members with
similar marketplace penetration may be sought)

77
Notes
A systematic process for design of a channel is important. An
“end-user” analysis will result in the creation of an “ideal” channel
system which offers a multi-channel format catering for the service level
demands of each customer segment. This should be evaluated in terms of
the company’s objectives and its positioning relative to the competition. A
constraints analysis is needed to identify limits which have to be built into
any proposed channel structure.

Managers can choose from among three generic marketing channels:

Direct marketing. This involves reaching customers via

➢ 
communications media such as telesales, mailshots, catalogues or
advertisements with tear-off reply slips
Salesforce. Here a company might build its own team of salespeople,
➢ 
or perhaps hire an
➢  Independent contract sales force.
Channel intermediary. This alternative is the chief concerned of
➢ 
this chapter.

In general, these channels are shorter than those for consumer goods.

In the case of services, it is not possible to “own” a service and

their delivery cannot be easily separated from the service provider. These
factors, and the inability to hold an “inventory” of unsold services, means
that the role of channel intermediary can be very different for services
compared to goods. Companies in both consumer and business-to-
business markets use a variety of channels to distribute their products.

Motivating Intermediaries

It is frequently necessary to motivate channel members. This is

so because of the differing needs of intermediaries and producers: these
needs do not necessarily coincide (e.g., a manufacturer may seek exclusive
distribution of its products at high prices, whereas a retailer may be
pursuing a strategy of market penetration through budget pricing of a
wide range of goods). The situation is further complicated by the fact that
intermediaries and producers often have different perceptions about their
own roles in the supply chain.

78
 Notes
Doyle suggests two levels of motivator: promotional and
partnership. Promotional channel motivators are usually short-term
inducements to support the supplier’s goods (e.g. trade discounts for large
order volumes or providing point-of-sale display materials). Partnership
motivators, on the other hand, seek to build a longer-term relationship
between suppliers and channel participants (e.g. through sharing of market
research information and providing training to a distributor’s sales staff).

Evaluation and Control of Intermediaries

Evaluation of channel performance is necessary to decide which

intermediaries to retain and which to motivate, or even, where necessary,
to discard. Criteria for evaluation are obviously similar to those used in
the initial selection decision (see above). Once the relationship between
organisations has been established, criteria can include: the sales volume
and value of the producer’s goods that are generated through the
intermediary’s outlets, the profitability of servicing that intermediary,
the stock levels the intermediary is prepared to hold, the quality of
customer service offered, feedback provided about the marketplace and
the intermediary’s attitude to inter-channel co-operation. However, the
scope for evaluation may be severely limited if power lies with the channel
member rather than the producer.

Power in Marketing Channels

Using power ultimately means getting other channel members to

do something they might otherwise not have done. Since members are
inter-dependent, the potential for using power lies with all channel par-
ticipants. Usually, however, a channel leader emerges. This organisation
can derive its power from a number of sources, both economic and non-
economic.

If power is used in a manner believed to be unfair by one or more

channel members, then conflict may arise. Conflict need not necessarily
be destructive, since it can encourage managers to question the status
quo and find ways of improving their distribution systems. Sometimes,
however, strategies employed by firms can create unstable, adversarial
relationships between producers and intermediaries.

79
Notes
A strong focus should be placed by marketing departments on
relationship management with channel participants. A possible way
forward for manufacturers is Category Management. This is described
by Harlow (1995) as “joint strategic planning with retailers to build total
category sales and profit for mutual benefit” and is based on the fact that
the retailer wishes to maximise the profits from an overall category rather
than from a specific brand.

A category is seen as a group of products all satisfying the same

consumer need, e.g. toothpaste as opposed to, say, Crest. Category
management is an advance on the “push” policies of trade marketing (i.e.
to the retailer) and provides “pull” by sharing the ownership of brand
strategy with the intermediary.

Partnerships between producers and intermediaries are also

evident in the Efficient Consumer Response (ECR) initiative. ECR
involves members of the total supply chain working together to respond
to customers’ purchasing patterns, thereby ensuring the right products
are delivered to store shelves on time.

Franchising Systems

In a franchise system a seller (the franchisor) gives an intermediary

(the franchisee) specific services (such as marketing support) and rights to
market the seller’s product or service within an agreed territory. In return,
the franchisee agrees to follow certain procedures and not to buy from
unauthorised sellers.

The franchisor also typically offers assistance in management

and staff training, merchandising and operating systems. This support
is usually provided in exchange for a specified fee or royalties on sales
from the franchisee. Examples of businesses which are predominantly
franchised include McDonald’s, Body Shop, Benetton etc.

Motivating Channel Members

Constant training, supervision & encouragement. Producers can

draw on the following types of power to elicit cooperation:

80
 Notes
Coercive power. Manufacturer threatens to withdraw a resource
➢ 
or terminate a relationship if intermediaries fail to cooperate.
Produces resentment.

Reward power. Manufacturer offers intermediaries extra benefits

➢ 
for performing specific acts.

Legitimate power. Manufacturer requests a behavior that is

➢ 
warranted by the contract.

Expert power. Manufacturer has special knowledge that the

➢ 
intermediaries value.

Referent power. Intermediaries are proud to be identified with the

➢ 
manufacturer.

➢  A customer asks a retailer, who stocks your pen, for another brand
called ‘Bad Pens’. The retailer recommends and offers your pen as
superior.

➢  A retailer actively solicits business for you by asking customers

buying other products to come and have a look at the exquisite
‘Grand Pen’.

➢  This retailer is obviously very motivated. ‘Mindshare’, as it is

called in the USA, has to do with how important your product
is in the distributor’s mind relative to the other lines they carry.
Winning the battle for the distributor’s share of mind can be more
important than many other marketing strategies. It applies in
industrial markets and consumer markets where intermediaries
play important roles in the distribution channel.

➢  In reality, maintaining continually high levels of motivation among

intermediaries presents a challenge. It requires a reasonable quality
product, creative promotions, product training, joint visits between
producer and distributor, co-operative advertising, merchandising
and display.

➢  Most of these apply to agents as much as distributors and retailers.

➢ 
Keeping the intermediary stimulated is important. Positive
motivators, like sales contests are preferred to negative motivators
like sanctions such as reduced discounts and the threat of
terminating the relationship.

81
Notes
➢  A positive reward works better than a negative punishment. Ideally
there should be a shared sense of responsibility - a partnership - a
strategic partnership. The supplier and intermediary are there to
help each other. Vertical Marketing Systems are a good example.

➢  Clear communications, covering sales goals, review meetings, re-

porting procedures, marketing strategy, training, market infor-
mation required, suggestions for improvements, all help. Regular
contact through visits, review meetings, dinners, competitions,
newsletters, thank you letters, congratulatory awards all help to
keep everyone working closely together.

➢  These are all non-financial incentives which provide a form of

psychic income as opposed to financial income. That’s not to say
that financial incentives aren’t useful motivators, it just means that
there are other motivations there too. In fact the money spent on
financial incentives is often spent more effectively when the sales
person is rewarded with a plaque, a gold pen or a holiday in the
Bahamas rather than just the cash which tends to get soaked up and
lost in a sea of ordinary household daily expenditure.

➢  Non cash rewards appeal to the higher levels of Maslow’s Hierarchy

of Needs - belonging, esteem and self actualization.

➢  Despite this, conflict can occur when too many distributors are
appointed within close proximity of each other, or the producer
engages in a multiple channel strategy of direct marketing as well
as marketing through intermediaries.

➢  Carefully motivating distributors is vital if goods are to flow

smoothly through the channel and reach satisfied customers.

Modifying Channel Arrangements

Periodic modification to meet new conditions in the marketplace.

Modification is necessary when:

➢  Distribution channel is not working as planned.

➢  Consumer buying patterns change.
➢  Market expands.
➢  New competition arises.

82
 Notes
➢  Innovative channels emerge.
➢  Product moves into later stages in the product life cycle.

3 levels of channel adaptation can be distinguished:

1. Adding or dropping individual channel members.

2. Adding or dropping particular mkt channels.
3. Developing a totally new way to sell goods in all markets.

Conventional Marketing Channel

➢  Comprises an independent producer, wholesaler(s) & retailer(s).

➢  Each is a separate entity.
➢  No channel member has complete or substantial control over the
other members.

Roles of Individual Firms in the Channel

Insiders. Members of the dominant channel.

➢ 
Strivers. Firms seeking to become insiders.
➢ 
Complementers. Not part of the dominant channel
➢ 
Transients. Outside the dominant channel & do not seek
➢ 
membership. Short-run expectations.
Outside innovators. Real challengers & disrupters of the dominant
➢ 
channels.

Channel Cooperation, Conflict & Competition

Types of Conflict & Competition

Vertical channel conflict exists when there is conflict between

➢ 
different levels within the same channel.

Horizontal channel conflict exists when there is conflict between

➢ 
members at the same level within the channel.

83
Notes
Multichannel conflict exists when the manufacturer has established
➢ 
two or more channels that compete with each other in selling to the
same mkt.

Causes of Channel Conflict

➢  Goal incompatibility
➢  Unclear roles & rights
➢  Differences in perception
➢  Intermediaries’ great dependence on the manufacturer

Managing Channel Conflict

➢  Some channel conflict can be constructive. It can lead to more

dynamic adaptation to a changing environment. But too much is
dysfunctional.
➢  Perhaps the most important mechanism is the adoption of super
ordinate goals. Working closely together might help them eliminate
or neutralize the threat.
➢  Exchange of persons between two or more channel levels is useful.
➢  Cooptation is an effort by one organization to win support of the
leaders of another organization by including them in advisory
councils, boards of directors, etc.
➢  Encouraging joint membership in & between trade associations.

****

84
 Notes

Lesson 2.2 - Channel Members

Learning Objectives

After reading this lesson you will be able to

➢  Understand benefits offered to channel members

➢  Identify and understand evaluating channel members and their
performance
➢  Understand the criteria for channel member evaluation
➢  Understand various issues in channels
➢  Understand channel conflicts and to overcome them

Benefits Offered by Channel Members

When choosing a distribution strategy a marketer must determine

what value a channel member adds to the firm’s products. Remember,
as we discussed in the Product Decisions tutorial, customers assess a
product’s value by looking at many factors including those that surround
the product (i.e., augmented product). Several surrounding features can
be directly influenced by channel members, such as customer service,
delivery, and availability. Consequently, for the marketer selecting a
channel partner involves a value analysis in the same way customers make
purchase decisions. That is, the marketer must assess the benefits received
from utilizing a channel partner versus the cost incurred for using the
services. These benefits include:

➢  Cost Savings in Specialization – Members of the distribution

channel are specialists in what they do and can often perform
tasks better and at lower cost than companies who do not have
distribution experience. Marketers attempting to handle too many
aspects of distribution may end up exhausting company resources
as they learn how to distribute, resulting in the company being “a
jack of all trades but master of none.”

85
Notes
➢  Reduce Exchange Time – Not only are channel members able to
reduce distribution costs by being experienced at what they do, they
often perform their job more rapidly resulting in faster product
delivery. For instance, consider what would happen if a grocery
store received direct shipment from EVERY manufacturer that
sells products in the store. This delivery system would be chaotic
as hundreds of trucks line up each day to make deliveries, many of
which would consist of only a few boxes. On a busy day a truck may
sit for hours waiting for space so they can unload their products.
Instead, a better distribution scheme may have the grocery store
purchasing its supplies from a grocery wholesaler that has its own
warehouse for handling simultaneous shipments from a large
number of suppliers. The wholesaler will distributes to the store
in the quantities the store needs, on a schedule that works for the
store, and often in a single truck, all of which speeds up the time it
takes to get the product on the store’s shelves.

➢  Customers Want to Conveniently Shop for Variety – Marketers

have to understand what customers want in their shopping
experience. Referring back to our grocery store example, consider a
world without grocery stores and instead each marketer of grocery
products sells through their own stores. As it is now, shopping is
time consuming, but consider what would happen if customers had
to visit multiple retailers each week to satisfy their grocery needs.
Hence, resellers within the channel of distribution serve two very
important needs: 1) they give customers the products they want
by purchasing from many suppliers (termed accumulating and
assortment services), and 2) they make it convenient to purchase
by making products available in single location.

➢  Resellers Sell Smaller Quantities – Not only do resellers allow

customers to purchase products from a variety of suppliers, they
also allow customers to purchase in quantities that work for them.
Suppliers though like to ship products they produce in large
quantities since this is more cost effective than shipping smaller
amounts. For instance, consider what it costs to drive a truck a long
distance. In terms of operational expenses for the truck (e.g., fuel,
truck driver’s cost) let’s assume it costs ` 1,000 to go from point A
to point B. Yet in most cases, with the exception of a little decrease
in fuel efficiency, it does not cost that much more to drive the

86
 Notes
truck whether it is filled with 1000 boxes containing the product
or whether it only has 100 boxes. But when transportation costs
are considered on a per product basis (` 1 per box vs. ` 10 per box)
the cost is much less for a full truck. The ability of intermediaries
to purchase large quantities but to resell them in smaller quantities
(referred to as bulk breaking) not only makes these products
available to those wanting smaller quantities but the reseller is able
to pass along to their customers a significant portion of the cost
savings gained by purchasing in large volume.

➢  Create Sales – Resellers are at the front line when it comes to creating
demand for the marketer’s product. In some cases resellers perform
an active selling role using persuasive techniques to encourage
customers to purchase a marketer’s product. In other cases they
encourage sales of the product through their own advertising
efforts and using other promotional means such as special product
displays.

➢  Offer Financial Support – Resellers often provide programs that

enable customers to more easily purchase products by offering
financial programs that ease payment requirements. These programs
include allowing customers to: purchase on credit; purchase using
a payment plan; delay the start of payments; and allowing trade-in
or exchange options.

➢  Provide Information – Companies utilizing resellers for selling

their products depend on distributors to provide information that
can help improve the product. High-level intermediaries may offer
their suppliers real-time access to sales data including information
showing how products are selling by such characteristics as
geographic location, type of customer, and product location (e.g.,
where located within a store, where found on a website). If high-
level information is not available, marketers can often count on
resellers to provide feedback as to how customers are responding
to products. This feedback can occur either through surveys or
interviews with reseller’s employees or by requesting the reseller
allow the marketer to survey customers.

87
Notes
Evaluating Potential Channel Members

Once a pool of potential channel members has been identified, it

is necessary to determine whether they would be suitable. The first step
in the evaluation process is to identify appropriate evaluation criteria.
These criteria will reflect the distribution objectives and tasks set by
the manufacturer earlier in the channel design process. Some typical
evaluation criteria include:

➢  Credit worthiness and financial condition

➢  Sales strength - quality, skill and number of sales people
➢ 
Product lines - competitive products, compatible products,
complementary products, quality of lines carried
➢  Reputation and image
➢  Markets served - geographic coverage, target markets, market
contacts
➢  Sales performance - volume, profitability, call conversion rate
➢  Management succession - longevity and continuity of the firm
➢  Management ability - managing the business and the sales force
➢  Attitude - enthusiasm, motivation, initiative
➢  Size - larger intermediaries are normally preferredCosts of Utilizing
Channel Members

Loss of Revenue – Resellers are not likely to offer services to a

marketer unless they see financial gain in doing so. They obtain payment
for their services as either direct payment (e.g., marketer pays for shipping
costs) or, in the case of resellers, by charging their customers more than
what they paid the marketer for acquiring the product (termed markup).

For the latter, marketers have a good idea of what the final customer
will pay for their product which means the marketer must charge less
when selling the product to resellers. In these situations marketers are not
reaping the full sale price by using resellers, which they may be able to do
if they sold directly to the customer.

➢  Loss of Communication Control – Marketers not only give up

revenue when using resellers, they may also give up control of
the message being conveyed to customers. If the reseller engages

88
 Notes
in communication activities, such as personal selling in order to
get customers to purchase the product, the marketer is no longer
controlling what is being said about the product. This can lead
to miscommunication problems with customers, especially if
the reseller embellishes the benefits the product provides to the
customer. While marketers can influence what is being said by
training reseller’s salespeople, they lack ultimate control of the
message.

➢  Loss of Product Importance – Once a product is out of the

marketer’s hands the -importance of that product is left up to
channel members. If there are pressing issues in the channel, such
as transportation problems, or if a competitor is using promotional
incentives in an effort to push their product through resellers, the
marketer’s product may not get the attention the marketer feels it
should receive.

Evaluating Channel Member Performance

1. Degree of manufacturer control

2. Relative importance of channel member
3. Nature of the product
4. Number of channel members involved

Criteria for Evaluation

➢  Sales performance
➢  Inventory maintenance
➢  Selling capabilities
➢  How competitive product lines and competitors are handled
➢  Attitudes
➢  General growth prospects
➢  Other

Channel Arrangements

The distribution channel consists of many parties each seeking

to meet their own business objectives. Clearly for the channel to work

89
Notes
well, relationships between channel members must be strong with each
member understanding and trusting others on whom they depend for
product distribution to flow smoothly.

For instance, a small sporting goods retailer that purchases

products from a wholesaler trusts the wholesaler to deliver required items
on-time in order to meet customer demand, while the wholesaler counts
on the retailer to place regular orders and to make on-time payments.

Relationships in a channel are in large part a function of the

arrangement that occurs between the members. These arrangements can
be divided in two main categories:

1. Independent Channel Arrangements

2. Dependent Channel Arrangement

Channel Arrangements: Independent

Under this arrangement a channel member negotiates deals with

others that do not result in binding relationships. In other words, a channel
member is free to make whatever arrangements they feel is in their best
interest. This so-called “conventional” distribution arrangement often
leads to significant conflict as individual members decide what is best for
them and not necessarily for the entire channel.

On the other hand, an independent channel arrangement is less

restrictive than dependent arrangements and makes it easier for a channel
members to move away from relationships they feel are not working to
their benefit.

Channel Arrangements: Dependent

Under this arrangement a channel member feels tied to one or more

members of the distribution channel. Sometimes referred to as “vertical
marketing systems” this approach makes it more difficult for an individual
member to make changes to how products are distributed. However, the
dependent approach provides much more stability and consistency since
members are united in their goals. The dependent channel arrangement
can be broken down into three types:

90
 Notes
Corporate – Under this arrangement a supplier operates its own
➢ 
distribution system in a manner that produces an integrated
channel. This occurs most frequently in the retail industry where
a supplier operates a chain of retail stores. Starbucks is a company
that does this. They import and process coffee and then sell it under
their own brand name in their own stores. It should be mentioned
that Starbucks also distributes their products in other ways, such as
through grocery stores and mail order. As we will see in more detail
later, Starbucks is using a multi-channel structure to market their
products.

Contractual – Under this arrangement a legal document obligates

➢ 
members to agree on how a product is distributed. Often times the
agreement specifically spells out which activities each member is
permitted to perform or not perform. This type of arrangement can
occur in several formats including:

Wholesaler-sponsored – where a wholesaler brings together and

➢ 
manages many independent retailers including having the retailers
use the same name

Retailer-sponsored – this format also brings together retailers but

➢ 
the retailers are responsible for managing the relationship

Franchised – where a central organization controls nearly all

➢ 
activities of other members

Administrative – In certain channel arrangements a single

➢ 
member may dominate the decisions that occur within the channel.
These situations occur when one channel member has achieved a
significant power position. This most likely occurs if a manufacturer
has significant power due to brands in strong demand by target
markets (e.g., Procter &Gamble) or if a retailer has significant
power due to size and market coverage (e.g., Wal-Mart). In most
cases the arrangement is understood to occur and is not bound
by legal or financial arrangements. (More discussion on channel
power can be found below.)

Issues in Establishing Distribution Channels

Like most marketing decisions, a great deal of research and thought

must go into determining how to carry out distribution activities in a way

91
Notes
that meets a marketer’s objectives. The marketer must consider many
factors when establishing a distribution system. Some factors are directly
related to marketing decisions while others are affected by relationships
that exist with members of the channel.

Next we examine the key factors to consider when designing a

distribution strategy. We group these into two main categories:

1. Marketing Decision Issues

2. Channel Relationship Issues

In turn, each of these categories contains several topics of concern

to marketers.

Level of Distribution Coverage

As we will see the marketer must take into consideration many

factors when choosing the right level of distribution coverage. However,
all marketers should understand that distribution creates costs to the
organization. Some of these expenses can be passed along to customers
(e.g., shipping costs) but others cannot (e.g., need for additional salespeople
to handle more distributors). Thus, the process for determining the right
level of distribution coverage often comes down to an analysis of the
benefits (e.g., more sales) versus the cost associated with gain the benefits.

Additionally, it is worth noting that for the most part distribution

coverage decisions are of most concern to consumer products companies,
though there are many industrial products that also must decide how
much coverage to give their products.

There are three main levels of distribution coverage - mass

coverage, selective and exclusive.

Mass Coverage - The mass coverage (also known as intensive

➢ 
distribution) strategy attempts to distribute products widely in
nearly all locations in which that type of product is sold. This level
of distribution is only feasible for relatively low priced products that
appeal to very large target markets (e.g., see consumer convenience
products). A product such as Coca-Cola is a classic example since

92
 Notes
it is available in a wide variety of locations including grocery stores,
convenience stores, vending machines, hotels and many, many
more. With such a large number of locations selling the product
the cost of distribution is extremely high and must be offset with
very high sales volume.

Selective Coverage - Under selective coverage the marketer

➢ 
deliberately seeks to limit the locations in which this type of product
is sold. To the non-marketer it may seem strange for a marketer
to not want to distribute their product in every possible location.
However, the logic of this strategy is tied to the size and nature
of the product’s target market. Products with selective coverage
appeal to smaller, more focused target markets (e.g., see consumer
shopping products) compared to the size of target markets for
mass marketed products. Consequently, because the market size is
smaller, the number of locations needed to support the distribution
of the product is fewer.

Exclusive Coverage - Some high-end products target very narrow

➢ 
markets that have a relatively small number of customers. These
customers are often characterized as “discriminating” in their taste
for products and seek to satisfy some of their needs with high-
quality, though expensive products. Additionally, many buyers of
high-end products require a high level of customer service from the
channel member from whom they purchase. These characteristics
of the target market may lead the marketer to sell their products
through a very select or exclusive group of resellers. Another type
of exclusive distribution may not involve high-end products but
rather products only available in selected locations such as compa-
ny-owned stores. While these products may or may not be higher
priced compared to competitive products, the fact these are only
available in company outlets give exclusivity to the distribution.

We conclude this section by noting that while the three distribution

coverage options just discussed serve as a useful guide for envisioning
how distribution intensity works, the advent of the Internet has brought
into question the effectiveness of these schemes.

For all intents and purposes all products available for purchase
over the Internet are distributed in the same way - mass coverage. So a

93
Notes
better way to look at the three levels is to consider these as options for
distribution coverage of products that are physically purchased by a
customer (i.e., walk-in to purchase).

Relationship Issues in Channels

Since channel members must be convinced to handle a marketer’s

product it makes sense to consider channel partner’s needs in the same
way the marketer considers the final user’s needs. However, the needs of
channel members are much different than those of the final customer. As
we noted in the

Delivery – Resellers want the product delivered on-time and in

good condition in order to meet customer demand and avoid inventory
out-of-stocks.

Profit Margin – Resellers are in business to make money so a key

➢ 
factor in their decision to handle a product is how much money
they will make on each product sold. They expect that the difference
(i.e., margin) between their cost for acquiring the product from
a supplier and the price they charge to sell the product to their
customers will be sufficient to meet their profit objectives.

Other Incentives – Besides profit margin, resellers may want other

➢ 
incentives to entice them especially if they are required to give extra
effort selling the product. These incentives may be in the form of
additional free products or even bonuses (e.g., bonus, free trips) for
achieving sales goals.

Packaging – Resellers want to handle products as easily as possible

➢ 
and want their suppliers to ship and sell products in packages that
fit within their system. For example, products may need to be a
certain size or design in order to fit on a store’s shelf, or the shipping
package must fit within the reseller’s warehouse or receiving dock
space. Also, many resellers are now requiring marketers to consider
adding identification tags to products (e.g., RFID tags) to allow for
easier inventory tracking when the product is received and also
when it is sold.

94
 Notes
Training – Some products require the reseller to have strong
➢ 
knowledge of the product including demonstrating the product to
customers. Marketers must consider offering training to resellers
to insure the reseller has the knowledge to present the product
accurately.

Promotional Help – Resellers often seek additional help from the

➢ 
product supplier to promote the product to customers. Such help
may come in the form of funding for advertisements, point-of-
purchase product materials, or in-store demonstrations.

We will continue our discussion of distribution decision in the next

tutorial as we discuss in greater detail the reseller network – retailers and
wholesalers - and the processes involved in physically handling product
flow through the channel.

A good distribution strategy takes into account not only marketing

decisions, but also considers how relationships within the channel of
distribution can impact the marketer’s product. In this section we examine
three such issues:

Channel Power

A channel can be made up of many parties each adding value to the

product purchased by customers. However, some parties within the chan-
nel may carry greater weight than others. In marketing terms this is called
channel power, which refers to the influence one party within a channel
has over other channel members.

When power is exerted by a channel member they are often in the

position to make demands of others. For instance, they may demand bet-
ter financial terms (e.g., will only buy if prices are lowered, will only sell if
price is higher) or demand other members perform certain tasks (e.g., do
more marketing to customers, perform more product services). Channel
power can be seen in several ways:

Backend or Product Power – Occurs when a product manufacturer

➢ 
or service provider markets a brand that has a high level of customer
demand. The marketer of the brand is often in a power position

95
Notes
since other channel members have little choice but to carry the
brand or risk losing customers.
Middle or Wholesale Power – Occurs when an intermediary, such
➢ 
as a wholesaler, services a large number of smaller retailers with
products obtained from a large number of manufacturers. In this
situation the wholesaler can exert power since the small retailers
are often not in the position to purchase products cost-effectively
and in as much variety as what is offered by the wholesaler.

Front or Retailer Power – As the name suggests, the power in this

➢ 
situation rests with the retailer who can command major concessions
from their suppliers. This type of power is most prevalent when the
retailer commands a significant percentage of sales in the market
they serve and others in the channel are dependent on the sales
generated by the retailer.

Channel Conflict

In an effort to increase product sales, marketers are often attracted

by the notion that sales can grow if the marketer expands distribution
by adding additional resellers. Such decisions must be handled carefully,
however, so that existing dealers do not feel threatened by the new
distributors who they may feel are encroaching on their customers and
siphoning potential business.

For marketers, channel strategy designed to expand product

distribution may in fact do the opposite if existing members feel there is a
conflict in the decisions made by the marketer. If existing members sense
a conflict and feel the marketer is not sensitive to their needs they may
choose to stop handling the marketer’s products.

Need for Long-Term Commitments

Channel decisions have long-term consequences for marketers

since efforts to establish new relationships can take an extensive period
of time while ending existing relationships can prove difficult. For
instance, Company A, a marketer of kitchen cabinets that wants to
change distribution strategy, may decide to stop selling their product line
through industrial supply companies that distribute cabinets to building

96
 Notes
contractors and instead sell through large retail home centers. If in the
future Company A decides to once again enter the industrial supply market
they may run into resistance since supply companies may have replaced
Company A’s product line with other products and, given what happened
to the previous relationship, may be reluctant to deal with Company A.

As another example of problems with long-term commitments,

building contractors may be comfortable purchasing kitchen cabinets
from industrial suppliers. If Company A decides to change their reseller
network they may find it difficult to regain the building contractor customer
base, who may continue to purchase from the industrial suppliers but are
now purchasing products from Company A’s competitors. In this case,
Company A may have to give serious thought to whether breaking their
long-term relationship with industrial suppliers is in the company’s best
interest.

Vertical Marketing Systems

97
Notes
A vertical marketing system (VMS) is a distribution channel
structure in which producers, wholesalers, and retailers act as a unified
system. One channel member owns the others, has contracts with them,
or has so much power that they all cooperate.

A conventional distribution channel consists of one or more

independent producers, wholesalers, and retailers. A vertical marketing
system, on the other hand, provides a way to resolve the channel conflict
that can occur in a conventional distribution channel where channel
members are separate businesses seeking to maximize their own profits—
even at the expense sometimes of the system as a whole.

A conventional marketing channel versus a vertical marketing system

The VMS can be dominated by the producer, wholesaler, or retailer.

There are three major types of vertical marketing systems: corporate,
contractual, and administered.

Types of VMS

1. Corporate VMS Combines successive stages of production &

distribution under single ownership. (Sears).
2. Administered VMS Coordinates successive stages of production &
distribution through the size & power of one of members (Kodak,
Gillete, P&G)
3. Contractual VMS
a. Wholesaler-sponsored voluntary chains
b. Retailer cooperatives
c. Franchise organizations

A corporate VMS is a vertical marketing system that combines

successive stages of production and distribution under single ownership—
channel leadership is established through common ownership. A little-
known Italian eyewear maker, Luxottica, sells its many famous eyewear
brands—including Giorgio, Armani, Yves Saint Laurent, and Ray-Ban—
through the world’s largest optical chain, LensCrafters, which it also owns.

98
 Notes
A contractual VMS is a vertical marketing system in which
independent firms at different levels of production and distribution join
together through contracts to obtain more economies or sales impact
than they could achieve alone. Coordination and conflict management
are attained through contractual agreements among channel members.

The franchise organization is the most common type of contractual

relationship. There are three types of franchises: manufacturer-sponsored
retailer franchise system (Ford Motor Co.), manufacturer-sponsored
wholesaler franchise system (Coca-Cola bottlers), and service-firm-
sponsored retailer franchise system (McDonald’s).

The fact that most consumers cannot tell the difference between
contractual and corporate VMSs shows how successfully the contractual
organizations compete with corporate chains.

An administered VMS is a vertical marketing system that

coordinates successive stages of production and distribution, not through
common ownership or contractual ties, but through the size and power of
one of the parties. Manufacturers of a top brand can obtain strong trade
cooperation and support from resellers (P&G). Large retailers such as
Wal-Mart can exert strong influence on the manufacturers that supply
the products they sell.

1. Producer, wholesaler(s) & retailer(s) act as a unified system.

2. They all cooperate.
3. Can be dominated by any of the three members of the system.
4. It arose as a result of strong channel members’ attempts to control
channel behaviour & eliminate the conflict that results when
independent channel members pursue their own objectives.
5. Has become the dominant mode of distribution
6. Independent firms at different levels of production & distribution
integrating their programs on a contractual basis to obtain more
economies &/or sales impact than they could achieve alone.

99
Notes
Horizontal Marketing Systems

Two or more unrelated companies put together resources or

programs to exploit an emerging marketing opportunity.

Multichannel Marketing Systems

A single firm uses two or more marketing channels to reach one or

more customer segments. By adding more channels, companies can gain
3 important benefits: increased mkt coverage, lower channel cost, more
customized selling.

Benefits of Intermediaries

If selling directly from the manufacturer to the consumer was

always the most efficient methodology for doing business, the need for
channels of distribution would be obviated. Intermediaries, however,
provide several benefits to both manufacturers and consumers: improved
efficiency, a better assortment of products, reutilization of transactions,
and easier searching for goods as well as customers.

The improved efficiency that results from adding intermediaries

in the channels of distribution can easily be grasped with the help of a
few examples. Take five manufacturers and 20 retailers, for instance.
If each manufacturer sells directly to each retailer, there are 100 contact
lines—one line from each manufacturer to each retailer. The complexity
of this distribution arrangement can be reduced by adding wholesalers
as intermediaries between manufacturers and retailers.

If a single wholesaler serves as the intermediary, the number of contacts

is reduced from 100 to 25: five contact lines between the manufacturers and
the wholesaler, and 20 contact lines between the wholesaler and the retailers.
Reducing the number of necessary contacts brings more efficiency into
the distribution system by eliminating duplicate efforts in ordering,
processing, shipping, etc.

In terms of efficiency there is an effect of diminishing returns as

more intermediaries are added to the channels of distribution. If, in the
example above, there were three wholesalers instead of only one, the num-

100
 Notes
ber of essential contacts increases to 75: 15 contacts between five manu-
facturers and three wholesalers, plus 60 contacts between three whole-
salers and 20 retailers. Of course this example assumes that each retailer
would order from each wholesaler and that each manufacturer would
supply each wholesaler. In fact geographic and other constraints typically
eliminate some lines of contact, making the channels of distribution more
efficient.

Intermediaries provide a second benefit by bridging the gap

between the assortment of goods and services generated by producers
and those in demand from consumers. Manufacturers typically produce
large quantities of a few similar products, while consumers want small
quantities of many different products.

In order to smooth the flow of goods and services, intermediaries

perform such functions as sorting, accumulation, allocation, and creating
assortments. In sorting, intermediaries take a supply of different items and
sort them into similar groupings, as exemplified by graded agricultural
products.

Accumulation means that intermediaries bring together items from

a number of different sources to create a larger supply for their customers.
Intermediaries allocate products by breaking down a homogeneous
supply into smaller units for resale. Finally, they build up an assortment
of products to give their customers a wider selection.

A third benefit provided by intermediaries is that they help

reduce the cost of distribution by making transactions routine. Exchange
relationships can be standardized in terms of lot size, frequency of delivery
and payment, and communications. Seller and buyer no longer have to
bargain over every transaction. As transactions become more routine, the
costs associated with those transactions are reduced.

The use of intermediaries also aids the search processes of both

buyers and sellers. Producers are searching to determine their customers’
needs, while customers are searching for certain products and services.
A degree of uncertainty in both search processes can be reduced by
using channels of distribution. For example, consumers are more likely
to find what they are looking for when they shop at wholesale or retail

101
Notes
institutions organized by separate lines of trade, such as grocery, hard-
ware, and clothing stores. In addition, producers can make some of their
commonly used products more widely available by placing them in many
different retail outlets, so that consumers are more likely to find them at
the right time.

****

102
 Notes

Lesson 2.3 - Channel Flows

Learning Objectives

After reading this lesson you will be able to

➢  Understand how to select channel members

➢  Understand how to secure channel members and evaluation of
channel members
➢  Define and understand the Retail co-operatives and Franchise
system
➢  Understand the concept of vertical management system

What Flows Through the Channels

Members of channels of distribution typically buy, sell, and transfer

title to goods. There are, however, many other flows between channel
members in addition to physical possession and ownership of goods.
These include promotion flows, negotiation flows, financing, assuming
risk, ordering, and payment. In some cases the flow is in one direction,
from the manufacturer to the consumer.

Physical possession, ownership, and promotion flow in one

direction through the channels of distribution from the manufacturer
to the consumer. In other cases there is a two-way flow. Negotiation,
financing, and the assumption of risk flow in both directions between the
manufacturer and the consumer. Ordering and payment are channel flows
that go in one direction from the consumer to the manufacturer.

There are also a number of support functions that help channel

members perform their distribution tasks. Transportation, storage,
insurance, financing, and advertising are tasks that can be performed
by facilitating agencies that may or may not be considered part of the
marketing channel. From a channel management point of view, it may be

103
Notes
more effective to consider only those institutions and agencies that are
involved in the transfer of title as channel members. The other agencies
involved in supporting tasks can then be described as an ancillary or support
structure. The rationale for separating these two types of organizations is
that they each require different types of management decisions and have
different levels of involvement in channel membership.

Effective management of the channels of distribution involves

forging better relationships among channel members. With respect to
the task of distribution, all of the channel members are interdependent.
Relationships between channel members can be influenced by how the
channels are structured. Improved performance of the overall distribution
system is achieved through managing such variables as channel structure
and channel flows.

Procedure for Selecting Channels for Small Business

Given the importance of distribution channels—along with the

limited resources generally available to small businesses—it is particularly
important for entrepreneurs to make a careful assessment of their channel
alternatives. In evaluating possible channels, it may be helpful first to
analyze the distribution channels used by competitors.

This analysis may reveal that using the same channels would
provide the best option, or it may show that choosing an alternative channel
structure would give the small business a competitive advantage. Other
factors to consider include the company’s pricing strategy and internal
resources. As a general rule, as the number of intermediaries included in a
channel increase, producers lose a greater percentage of their control over
the product and pay more to compensate each participating channel level.
At the same time, however, more intermediaries can also provide greater
market coverage.

Among the many channels a small business owner can choose

from are: direct sales (which provides the advantage of direct contact with
the consumer); original equipment manufacturer (OEM) sales (in which
a small business’s product is sold to another company that incorporates
it into a finished product); manufacturer’s representatives (salespeople
operating out of agencies that handle an assortment of complimentary

104
 Notes
products); wholesalers (which generally buy goods in large quantities,
warehouse them, then break them down into smaller shipments for
their customers—usually retailers); brokers (who act as intermediaries
between producers and wholesalers or retailers); retailers (which include
independent stores as well as regional and national chains); and direct
mail. Ideally, the distribution channels selected by a small business owner
should be close to the desired market, able to provide necessary services
to buyers, able to handle local advertising and promotion, experienced
in selling compatible product lines, solid financially, cooperative, and
reputable.

Since many small businesses lack the resources to hire, train, and
supervise their own sales forces, sales agents and brokers are a common
distribution channel. Many small businesses consign their output to an
agent, who might sell it to various wholesalers, one large distributor, or a
number of retail outlets.

In this way, an agent might provide the small business with access
to channels it would not otherwise have had. Moreover, since most agents
work on a commission basis, the cost of sales drops when the level of sales
drops, which provides small businesses with some measure of protection
against economic downturns. When selecting an agent, an entrepreneur
should look for one who has experience with desired channels as well as
with closely related—but not competitive—products.

Other channel alternatives can also offer benefits to small

businesses. For example, by warehousing goods, wholesalers can reduce
the amount of storage space needed by small manufacturers. They can
also provide national distribution that might otherwise be out of reach for
an entrepreneur. Selling directly to retailers can be a challenge for small
business owners.

Independent retailers tend to be the easiest market for entrepreneurs

to penetrate. The merchandise buyers for independent retailers are most
likely to get their supplies from local distributors, can order new items on
the spot, and can make adjustments to inventory themselves.

Likewise, buyers for small groups of retail stores also tend to hold
decision-making power, and they are able to try out new items by writing

105
Notes
small orders. However, these buyers are more likely to seek discounts,
advertising allowances, and return guarantees.

Medium-sized retail chains often do their buying through a

central office. In order to convince the chain to carry a new product,
an entrepreneur must usually make a formal sales presentation with
brochures and samples. Once an item makes it onto the shelf, it is required
to produce a certain amount of revenue to justify the space it occupies, or
else it will be dropped in favor of a more profitable item.

National retail chains, too, handle their merchandise buying out

of centralized offices and are unlikely to see entrepreneurs making cold
sales calls. Instead, they usually request a complete marketing program,
with anticipated returns, before they will consider carrying a new product.
Once an item becomes successful, however, these larger chains often
establish direct computer links with producers for replenishment.

Securing Channel Members

Unless the manufacturer has a product and a reputation that sells

itself, then they may need to use some type of inducement or incentive
to attract desired channel members. The main aim is to communicate to
the prospective channel member that the manufacturer will provide them
with good support and that the partnership will be mutually beneficial.
Specific inducements that will attract channel members include:

➢  A quality, profitable product line

➢ 
Promotional support - advertising, cooperative advertising,
promotional allowances, promotional materials
➢  Management support and assistance - training, financial analysis,
market analysis, business planning etc.
➢  Fair dealing policies and good relationship - cooperation, fairness,
trust and goodwill.

Developing a marketing channel comprised of quality intermediaries

and characterized by good relationships is critical to distribution success.

106
 Notes
Evaluating Channel Performance

The producer must continuously evaluate each channel member’s

performance against standards such as sales quotas, average inventory
levels, customer delivery time, and treatment of damaged and lost goods.
Cooperation in company promotion and training programs, and service
to the customer, Intermediaries having excellent performance should
be recognized and rewarded by the company. Intermediaries having
unsatisfactory performance should be helped, if not possible, replaced.

While channel efficiency emphasizes controlling costs incurred by

intermediaries while performing channel functions, channel productivity
is concerned with maximizing outputs for a given level of inputs. Channel
effectiveness deals with the intermediary’s proficiency in satisfying cus-
tomer needs and channel equity measures the distribution of accessibility
of the channel among customers.

While performance at a macro- level is evaluated through societal

contributions of intermediaries, a micro- level evaluation involves assessing
the performance of individual intermediaries in terms of achieving the
manufacturer’s objectives of goal attainment, integration, adaptation and
pattern maintenance. The performance of intermediaries is measured on
three scales, namely facet, global and composite scales.

In addition to an intermediary’s performance in meeting supplier

aims, his or her channel profitability that is concerned with his or her
financial performance is also evaluated. Thus, the success of a channel and
its efficiency are determined by the efficiency of channel intermediaries
in delivering goods and services to customers and the quality of services
offered in the process. An effective distribution channel can provide
channel services demanded by customers and extend its capacity within
the constraints of the market environment.

A company may, from time to time, set new qualification for its
intermediaries and trim the weaker ones. For example, when IBM first
introduced its PS/2 personal computers, it re-evaluated its dealers and
allowed only the best ones to carry the new models.

107
Notes
Each IBM dealer had to submit a business plan, send a sales and
service employee to IBM training classes and meet new sales quotas. Only
about two-thirds of IBM’s 2.200 dealers qualified to carry the PS/2 models,

Finally, manufacturers need to be attentive to their channel

members. Treating channel members lightly may result in loss of their
cooperation or may even invite legal problems.

Beat plan: This plan is generated for the various product categories
i.e. diary dry,diary wet, Dhara and ice cream. A weekly schedule is prepared
for various marketsand the retailers the turnover for each of the product is
calculated for the wholesaledealers.
Cumulative performance: The performance of the dealers is
averaged out over aperiod of three years where a comparison is made of
the present performance vis-à-vis the previous ones.

Target versus achievement: The performance and the targets are

compared andtherefore the gaps are identified which help in evaluating
the WD and planning for the next year as well. This is done for each of the
product category.

Other Criterion

a) Details of the bank guaranty

b) Photographs of the offices
c) Details of the WD salesmen and the product lines he deals in
d) The computerisation facility available
e) The storage space
f) Refrigeration facility with photograph
g) Details of the delivery vehicle with photograph
h) Summary of the monthly potential sales of markets
i) Summary of the product wise monthly sales potential of institutions

Retail Cooperatives

Retailers who cut costs by purchasing collectively an organization

for the collective purchase and sale of goods by a group who share profits
or benefits. Retail cooperatives were the first offshoot of the cooperative

108
 Notes
movement and profits were originally shared among members through
dividend payments proportionate to a member’s purchases.

The Co-operative Retailing System (CRS) began in 1928 when

locally owned retail co-operatives worked together to form provincial
wholesales in order to expand their buying power. These co-operative
wholesales in the four western provinces, along with Consumers’ Co-
operative Refineries Limited (CCRL), in Regina, joined together to form
Federated Co-operatives Limited (FCL).

Today, approximately 240 retail co-operatives own FCL, which

provides central wholesaling, manufacturing and administrative services
to its member-owners. Combined sales of more than $6.9 billion in
2010 make retail co-ops among the largest providers of retail goods and
agricultural inputs in Western Canada.

Retail Co-Operatives Serve Canadian Communities

Retail co-operatives serve more than 500 communities and more

than 1.5 million active co-op members across Western Canada. They
employ more than 16,000 people and provide their members with a variety
of goods and services, including:

➢  Petroleum
➢  Food
➢  General merchandise
➢  Soft goods
➢  Building materials
➢  Crop supplies
➢  Feed

Co-Ops are Committed to their Communities

In addition to returning cash to their members, retail co-ops are

continually demonstrating their commitment to, and confidence in, their
communities by improving their facilities.

109
Notes
These facilities include:

➢  Food stores
➢  Agro centres
➢  Home centres
➢  Bulk petroleum/cardlock facilities
➢  Gas bar/convenience store/car wash complexes

Last year, retail co-ops spent approximately $150 million on new

facilities and upgrading or expanding existing facilities. Over the last ten
years, retail co-ops have spent in excess of $1 billion on similar projects.

Retail Cooperatives

Retail cooperatives sell consumer goods to members and non-

members. Members enjoy discounts, patronage refunds, or both. Patronage
refunds are a percentage of the total amount of money a member has spent
on purchases over a specific period of time.

Retail cooperatives also offer control. Because the members elect

representatives to the board of directors and can participate in general
membership meetings, consumers control the operation and policies of
the cooperative.

Franchise Systems

What is a franchise? A franchise is a right granted to an individual

or group to market a company’s goods or services within a certain territory
or location. Some examples of today’s popular franchises are McDonald’s,
Subway, Domino’s Pizza, and the UPS Store.

There are many different types of franchises. Many people

associate only fast food businesses with franchising. In fact, there are
over 120 different types of franchise businesses available today, including
automotive, cleaning & maintenance, health & fitness, financial services,
and pet-related franchises, just to name a few.

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 Notes
How Franchising Works

If you are thinking about buying into a franchise system, it is

important that you understand exactly how franchising works, what fees
are involved, and what is expected of you from the franchise company.

An individual who purchases and runs a franchise is called a

“franchisee.” The franchisee purchases a franchise from the “franchisor.”
The franchisee must follow certain rules and guidelines already established
by the franchisor, and in most cases the franchisee must pay an ongoing
franchise royalty fee, as well as an up-front, one-time franchise fee to the
franchisor.

Franchising has become one of the most popular ways of doing

business in today’s marketplace. In most states you cannot drive three
blocks without seeing a nationally recognized franchise company.

Advantages of Buying a Franchise

There are many advantages to buying a franchise. Some of these

advantages are:

Corporate image - The corporate image and brand awareness of

➢ 
the company is already established. Consumers are always more
comfortable purchasing items from a familiar name or company
they trust.
Training - The franchisor usually provides extensive training and
➢ 
support to the franchise owner.
Savings in time - Since the franchise company already has the
➢ 
business model in place you can focus on running a successful
business.

There is a reason why franchising has been around for decades. It

is a great way for individuals to own and operate their own business. If you
are thinking about buying a franchise, do your homework, research the
company, and you should consult with a franchise consultant or franchise
attorney before making a final commitment.

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Notes
Corporate Vertical Marketing System

Corporate Vertical Marketing System - a system of distribution

channel organization in which the orderly flow of products from producer
to end-user is controlled by common ownership of the different levels of
the system.

Corporate

➢  A corporate vertical marketing system involves the ownership of all

levels of the production or distribution chain by a single company.
An example of a corporate vertical marketing system would be a
company such as Apple, which has its own retail stores as well as
designing and creating the products to be sold in those retail stores.

“Cooperative marketing” can mean many things to many people

depending upon your background. I like to ask people if they are using
the word “cooperative” as a noun or an adjective. In the context of this
fact sheet, we will be exploring “cooperative” as both a noun referring to
a legal business structure and as an adjective to describe the agreement of
people to cooperate with each other related to marketing efforts.

Benefits of Cooperative Marketing

Economies of Scale

There are economies of scale that can be obtained from the collective
effort of joining forces and marketing as a group. It would be cheaper for
beef producers to come together and assemble a semi-load of feeder calves
for shipping to Kansas than it would be for each individual to get their
calves to Kansas. When you are buying supplies, a consolidated order that
contains pallets or bulk orders is cheaper than individually buying a small
amount of supplies.

Bargaining Power

A group effort can combine available supply of product or

consolidate services offered that allow bargaining power for the group. If
you have 2 bushels of tomatoes, you have little power to negotiate a price
with a retailer, but if as a group you have 140 bushels of tomatoes, you can
bargain for a better price because of the quantity that can be supplied by

112
 Notes
the group. This bargain force can be used to gain additional economies of
scale with bulk purchasing arrangements.

Flow of Product

Retail markets require some consistency in flow of product to

their establishments. As an individual with 12 doe goats, you can in no
way guarantee more than 2 kid goats per month for the year. Retailers are
looking for a business that can provide them a set amount of product on a
daily, weekly, or monthly basis. If you get together with 20 other producers
and as a group you have 240 doe goats, you could guarantee up to 40 kid
goats per month to the retailer. You will now have their attention and be
able to negotiate a price that the group needs for the kid goats.

Preserving Markets

Many markets are looking to reduce the costs of obtaining products

or services. These markets are looking at buying their products or services
but dealing with less people and having the same amount of product to sell
through their establishments. If you are trying to market your 10 finished
hogs to a processor and the cooperative down the road has members with
120 hogs ready for slaughter, the buyer will stop at the cooperative to make
his purchase.

He can obtain 120 hogs in one contact versus the contact with 12
producers your size to end up with the same end result. A cooperative
marketing arrangement will preserve many of the markets you use for
the future as businesses move to cutting costs associated with procuring
products and services.

Access to Professional Assistance/Expertise (Hire Support)

Many producers can benefit from professional services in marketing

and sales of their products. If you are an apple producer, you are probably
in the business because you are good at producing apples, but you have to
sell them to make any profit. If marketing and sales are not your “cup of
tea,” you are a member of the majority of today’s agricultural producers.

113
Notes
If you join a cooperative marketing group that hired a marketing
manager and all you had to do was raise a top quality apple for the person
to market, your life would be much easier. You individually could not
afford to hire that marketing manager, but as a group of 15 orchard owners
you can consolidate your product and finances to increase the price you
will receive for your product.

Maintaining more of the Retail Dollar

This benefit has been addressed in several of the previous

discussions, but increasing the financial income for your operation is
a huge driver in the reason to participate in a cooperative marketing
effort. This can be achieved through reducing costs of supplies by bulk
purchasing or increasing the income by tapping new markets, keeping
existing markets or negotiating a higher price in new and existing markets.

Challenges of Cooperative Marketing

Agreeing on One Common Mission

The first step in moving towards a cooperative marketing

arrangement is to make sure all individuals are on the same page. This is
achieved by making sure that all members are onboard to operate for the
same purpose. Most of the time, this is not present among the members,
even though most groups or steering committee members think that they
all want the same end result. Again, a facilitator can help the group move
through this process, because a common vision is essential for moving any
further on the marketing venture.

Trust and Sharing of Information

Many agricultural producers have operated individually for years

and are skeptical about the idea of a cooperative marketing venture. There
is a time and process for building a sense of trust among the members and
generating an open sharing of information in relation to the cooperative
marketing venture.

This trust must occur among members to keep members loyal

and make the effort function successfully in the future. You are going
into business with all members of the effort and if you have trust issues,

114
 Notes
why would you ever agree to run a business with these people? This is a
major roadblock for many groups but some facilitated discussions can be
held with professionals who are experienced in dealing with the human
components of cooperative marketing organizations.

Group Dynamics (Democratic Group Decision Making and Costs)

The group dynamic aspect of an organization depends somewhat

on the size of the organization. A large cooperative marketing effort
would have a board of directors that govern the long-range planning and
decision making for the cooperative, but in a case where the group only
consists of 20 or 25 members all members might participate in making
decisions.

Most understand that a democratic process for making decisions

ensures that the members are involved and their opinions are addressed,
but the fact is that this process can take more time to reach the end goal
of a decision. Some organizations operate on a basis that consensus has to
be reached by all for the decisions to go forward. This is different than a
democratic majority vote system and can take much more time for plans
to move forward.

Lack of Commitment From Members

Members can become disloyal members in the blink of an eye. This

behavior exhibits why it is important that members “buy into” the vision
for the group, have a developed trust for all members, and understand the
need for sharing information and managing the group dynamics in the
cooperative marketing organization.

This issue is sometimes addressed by signing a marketing agreement

or contract with the organization that outlines the repercussions that will
occur should you, as a member, breach your contract/agreement with the
organization. If you are not agreeable to signing the agreement, then I
contend that one of the three above challenges has not been resolved for
you as a member.

Take a step back, readdress the situation, and let members know
what your hesitations are before signing an agreement to market through

115
Notes
the organization. This is necessary for the success of the organization.
Human nature tells us that a member will sell outside the organization if
he or she can make a dollar more. A large majority of producers would
choose to market only with the organization when it can benefit the
member.

****

116
 Notes

Lesson 2.4 - Product Issues in Channel Management

Learning Objectives

After reading this lesson you will be able to

➢  Understand product issues in channel management

➢  Understand the concept of product life cycle and product planning
➢  Indentify pricing issues in channel management
➢  Understand the concept of push and pull strategies

Product Issues in Channel Management

A key question is whether the producer has the resources to

perform the functions of the channel? For example a producer may not
have the resources to recruit, train and equip a sales team. If so, the only
option may be to use agents and/or other distributors.

The nature of the product often dictates the distribution options

available especially if the product requires special handling. For instance,
companies selling delicate or fragile products, such as flowers, look for
shipping arrangements that are different than those sought for companies
selling extremely tough or durable products, such as steel beams.

Producers may also feel that they do not possess the customer-
based skills to distribute their products. Many channel intermediaries
focus heavily on the customer interface as a way of creating competitive
advantage and cementing the relationship with their supplying producers.

Another factor is the extent to which producers want to maintain

control over how, to whom and at what price a product is sold. If a
manufacturer sells via a retailer, they effective lose control over the final
consumer price, since the retailer sets the price and any relevant discounts
or promotional offers.

117
 Product Strategy

Similarly, there is no guarantee for a producer that their product/(s) are actually
been stocked by the retailer. Direct distribution gives a producer much more control over
these issues

New Product Development Design

118
 Notes
Three major areas of product management

➢  New product planning and development

➢  The product life cycle
➢  Strategic product management

New Product Planning in Channel Management

➢  Encouraging channel member input into new product planning

➢  Fostering channel member acceptance of new products
➢  Fitting the new product into channel member assortments
➢  Educating channel members about new products

12 Steps for New Product Development

The following steps briefly summarize the major dimensions of

new product development.

1. Clarify the Organization’s Goals and the Strategic Role of New Product
Development for Competitive Advantage

New product development can play a variety of roles in defining

corporate strategy to gain competitive advantage. This variability
makes the process of new product development subject to the emerging
organizational issues of the day. In general, a long-run, focused, and
ongoing strategic commitment to attractive market opportunities should
define the role of new product development. New product development
should be integrated into an organizations strategy and significantly
contribute to its perpetual renewal.

2. Build Flexibility to Cope with and Mediate Environmental Turbulence

Turbulent global business environments are the source of new

product opportunities and problems for an organization. Consequently,
the critical factors defining the organization s market environment for new
products must be scanned on a regular basis. In particular, the effects of
technology that reduce the life cycles of a firm’s products and services must
be carefully monitored. For example, the effects of changing information

119
Notes
technology will continue to alter the way organizations innovate, design,
manufacture, and market new products, as well as the way consumers and
other stakeholders respond to those products. They may even redefine
markets from traditional channel-dependent institutions to direct,
interactive exchanges between buyers and sellers. Consumers may dial up
a manufacturers electronic catalog, send in specifications, and receive a
customized product (from flexible manufacturing processes) through an
express delivery service in days.

3. Anticipate Market Acceptance of New Products

The crux of new product development is identifying the unmet

needs of potential buyers and other key market stakeholders as the
basis for defining market opportunities and translating them into core
new product concepts. Potential buyers who are affected by turbulent
global environments respond largely to their own needs and problems.
Identifying the needs of potential buyers and segmenting markets
according to those needs is a challenging prospect, but one that enhances
new product acceptance.

It requires a variety of research approaches that should bring the

innovating organization as close to potential buyers as possible. In fact,
for many situations, new product development should be viewed as an
interactive relationship between the innovating organization and potential
buyers (and other key stakeholders) to jointly define and develop the new
product. The best way to anticipate market response for a new product
is to jointly create it with potential buyers, then estimate when and how
many consumers might enter the market to buy.

4. Prepare the Organization for the Change Needed to Develop New

Products on a Regular Basis

The new product development paradox suggests that organizations

respond to the demands of a new product in ways that often create
organizational resistance and slow development time. To overcome this
resistance, strong leadership, good management, cross-functional teams,
and new product champions are crucial. Although the prescription for
success may be clear, implementation can be difficult. How does the
interruption of organizational processes by new products affect individual

120
 Notes
career patterns? What are the incentive systems that will motivate highly
qualified individuals to join high-risk new product development teams?
Where in the organization should the new product development team be
located—internally or externally?

5. Operationalize an Ongoing Process of New Product Development

How the organization decides to respond to environmental forces,

organizational resistance, and market stakeholder needs defines its new
product development process. This process has been observed to be
sequential, overlapping, holistic, or chaotic. However, because business
situations vary, each organization should craft a process that enables it to:

(1) Maintain a strategic focus,

(2) Remain flexible to cope with varying degrees of environmental
turbulence,
(3) Interact with the market to anticipate and/or overcome friction in
formulating the new product,
(4) Integrate organizational efforts and resource commitments to
motivate the process through cross-functional new product
development teams, and
(5) Commit to new product development as an ongoing process of
organizational renewal.

The process should encompass different levels of product concept

refinement (ideas, concepts, prototypes, products, and launch programs)
and critical management activities (diagnosis, search, design, evaluation,
decision making, implementation, and monitoring).

6. Build a New Product Decision Support System

Viewing new product development as an ongoing organizational

process re-’ quires a decision support system to provide timely information.
Key elements are identifying new product decision problems, modeling
those problems, establishing a data base of the important variables
and relations in the model, collecting and analyzing the data through
marketing research methods, and using optimization procedures to find
the best decision. The design and implementation of new product decision

121
Notes
support systems should be linked to an organization wide system to build
a useful historical database, yet provide a capability for off-line analysis
to support rapid retrieval and manipulation of data. Further, the role
of decision-maker judgment in data collection and modeling activities
should be integrated into the new product decision support system, albeit
with care and scrutiny in order to continually learn from its use.

7. Estimate the New Product Market Opportunity

The objective of market opportunity forecasting is to clarify the

nature of a market opportunity and to estimate its market potential and
market penetration. To accomplish this objective, a model of critical
factors that drive the new product opportunity should be formulated,
data should be collected to operationalize the model, and the resulting
forecasts should be updated throughout development. Estimates of year-
to-year growth, possibly obtained from a data base of analogical diffusion
models, are critical for rapidly deciding the value of a new product idea.

Unfortunately, the procedures for quickly screening new product

ideas with such information rely heavily on judgment. Future research on
expert systems and industry-based product analogy data bases may help
to improve the speed and reliability of market opportunity forecasting.

In addition, the use of enhanced scenarios employing advanced

multimedia technology to further define a core concept in the context of
rapidly shifting environments is a promising way to better understand the
possible evolution of and response to new products.

8. Formulate a Sales Forecasting Process that Captures Market Response

to New Product Alternatives

In developing models for any of the forecasting processes, but

especially sales forecasting, several guidelines should be considered:

➢  Develop a system of conceptual models that includes relevant

variables.
➢  Develop a managerial decision model that is simple, intuitive, and
logical; if after very careful study it is not understood, revise it or
don’t use it.

122
 Notes
➢  To the extent possible, develop rigorous submodels of selected
variables in the spreadsheet model to improve estimation and link
decisions to market response.
➢  Use a variety of data sources (market studies, expert judgment,
secondary data) and methods (such as perceptual mapping,
positioning, conjoint analysis of preferences and simulations) to
operationalize the models and submodels.
➢  Submit the model to sensitivity tests with different values and check
for robustness (for example, using the “what-if” tool on computer
spreadsheets).
➢  Check assumptions carefully.
➢  Use multiple, different, and independent approaches and reconcile
estimates when they are divergent.
➢  Formulate alternative scenarios using variation in the values and
assumptions of the model—and consider contingencies.

9. Establish a Financial Forecasting Capability that Provides a New

Product Control Chart

Combining market opportunity and sales forecasts with estimates

of new product costs, investments, risks, and development cycle time
provides a financial control capability that can be summarized in a control
chart. The format of this control chart should be agreed upon by the new
product team at the outset of the project and followed thereafter.

It should include the key measures of performance that guide the

pre-launch development and post-launch tracking of the new product.
Continual updating of all major forecasting processes to reflect changes
in the shape of the new product and in the organization and market
environment is the basis for realizing a capacity for control throughout
new product development.

10. Consider Test Marketing as a First Step to Implementation

Prior to launching a new product, it is strongly recommended that a

market entry strategy and launch marketing program be orchestrated and
tested. This process should involve the use of simulated, controlled, and/

123
Notes
or conventional test marketing to evaluate, decide, and refine the product
and its launch program. Designing and implementing test marketing
approaches should consider the nature of the implementation problems,
the new product, its importance to the organization, and the amount of
uncertainty in the market environment. In some cases, test marketing
can be bypassed in favor of immediate market entry. This approach can
succeed with careful attention to tracking the new product launch and
modifying accordingly.

11. Develop a Market Entry Approach that Capitalizes on the Current

Market Situation and Complements the Strategic Role of the New
Product

Market entry for new products is highly situational—being first does

not always pay. The market entry approach should reflect environmental,
organizational, and market factors (potential buyers, competitors, trade,
stakeholders) that define the situation. A market entry approach should
be based on the timing, scale, and resonance of the launch marketing
program. Using market opportunity, sales, and financial forecasts can
provide input to an approach for modeling market entry decisions. In
particular, launch timing is critical when cycle time and/or competitive
factors can make a difference in performance. Recognizing time as a key
variable, and making it the focus of a special decision model, may be the
best way to handle this market entry decision.

12. Launch and Track New Product Programs to Implement Needed

Modifications for Success

Once a new product is launched, the use of various data collection

procedures and forecasting models to track performance, modify, and
otherwise control the new product can lead to product and program
improvements or to a comfortable decision to terminate the product.
One issue related to how much effort an organization is willing to invest
in post-launch tracking is problem diagnosis. Quick fixes and program
changes that are based on impressions of market problems rather than
diagnosis can lead to a products early demise or the extension of mediocre
performance. Finding early launch marketing problems may lead not only
to quick modifications, but also to the next-generation new product.

124
 Experience has shown that although it will not be used often,
diagnosis can be helpful in all pre- and post-launch circumstances, even in
a postmortem sense. The ultimate value of new product development may
be the learning it makes possible—learning how to adjust the marketing
program to consumer needs; learning how to educate the potential buyer
on the benefits of the new product; learning why the product won’t
succeed in the market and why it should be abandoned now; learning that
complete withdrawal is not necessary, but that a next-generation product
can overcome the diagnosed difficulties; and, perhaps most importantly,
learning to have the patience to learn

Product Strategies

Product Life Cycle in Channel Management

A new product progresses through a sequence of stages from

introduction to growth, maturity, and decline. This sequence is known
as the product life cycle and is associated with changes in the marketing
situation, thus impacting the marketing strategy and the marketing mix.

The product revenue and profits can be plotted as a function of the

life-cycle stages as shown in the graph below:

125
Notes
Introduction Stage

In the introduction stage, the firm seeks to build product awareness

and develop a market for the product. The impact on the marketing mix
is as follows:

Product branding and quality level is established, and intellectual

➢ 
property protection such as patents and trademarks are obtained.
Pricing may be low penetration pricing to build market share
➢ 
rapidly, or high skim pricing to recover development costs.
Distribution is selective until consumers show acceptance of the
➢ 
product.
Promotion is aimed at innovators and early adopters. Marketing
➢ 
communications seeks to build product awareness and to educate
potential consumers about the product.

Growth Stage

In the growth stage, the firm seeks to build brand preference and
increase market share.

Product quality is maintained and additional features and support

➢ 
services may be added.
Pricing is maintained as the firm enjoys increasing demand with
➢ 
little competition.
➢ 
Distribution channels are added as demand increases and
customers accept the product.
Promotion is aimed at a broader audience.
➢ 

Maturity Stage

At maturity, the strong growth in sales diminishes. Competition

may appear with similar products. The primary objective at this point is
to defend market share while maximizing profit.

Product features may be enhanced to differentiate the product

➢ 
from that of competitors.

126
 Pricing may be lower because of the new competition.
➢ 
Distribution becomes more intensive and incentives may be
➢ 
offered to encourage preference over competing products.
Promotion emphasizes product differentiation.
➢ 

Decline Stage

As sales decline, the firm has several options:

➢  Maintain the product, possibly rejuvenating it by adding new

features and finding new uses.
➢  Harvest the product - reduce costs and continue to offer it, possibly
to a loyal niche segment.
➢  Discontinue the product, liquidating remaining inventory or selling
it to another firm that is willing to continue the product.

Product life cycle and supply chain design

The level of collaboration in a supply chain is closely associated with

127
Notes
the product clock-speed. The collaboration spectrum on the left-hand side
in Figure indicates, on one end, virtual companies in that they outsource
much of their business activities through the market place. At the other end
of the spectrum, vertical integration companies manage almost everything
in-house from raw material production to the distribution channel and
to the final users. In the middle of the collaborative spectrum is strategic
alliances and joint venture. At this level, companies share benefits, risks,
and responsibilities. A number of supply chain models are introduced in
the following section.

The marketing mix decisions in the decline phase will depend on

the selected strategy. For example, the product may be changed if it is
being rejuvenated, or left unchanged if it is being harvested or liquidated.
The price may be maintained if the product is harvested, or reduced
drastically if liquidated.

➢  Introductory stage: Ensure that a sufficient member of channel

members are available for adequate market coverage.

➢  Growth stage: Reinforce the adequacy of channel member coverage

and monitor the effects of competitive products on channel member
support

➢  Maturity stage: Motivate channel members to mitigate competitive

impacts and investigate possibility for changes in channel structure

➢  Decline stage: Phase out marginal channel members and investigate

impact of product deletion on channel members

Strategic product management and channel management

➢  Product differentiation
➢  Product positioning
➢  Product line extension/contraction
➢  Trading up/ trading down
➢  Product brand strategy
➢  Product service strategy

128
 Notes
Product Differentiation
Significance

Offered under different brands by competing firms, products

fulfilling the same need typically do not have identical features. The
differentiation of goods along key features and minor details is an
important strategy for firms to defend their price from levelling down to
the bottom part of the price spectrum.

Within firms, product differentiation is the way multi-product

firms build their own supplied products’ range. At market level, differ-
entiation is the way through which the quality of goods is improved over
time thanks to innovation. Launching new goods with entirely new per-
formances is a radical change, often leading to changes in market shares
and industry structures. In an evolutionary sense, differentiation is a
strategy to adapt to a moving environment and its social groups.

Three Elements of Product Differentiation

Being unique in the marketplace provides distinct advantages. In

fact, if you do not provide something unique, your business will be severely
challenged. So, what are the three elements of product differentiation?

1. Convenience (or timing)

2. Customization.
3. Cost Recovery

Convenience

People don’t want to wait these days. In order to differentiate

your product from your competitors’, consider how you can deliver your
goods and services precisely when they are needed. Often, this means
being faster than your competitor — but not always! If I order drapes as
part of a renovation project, for example, I don’t necessarily want them
immediately. I may not need them for six weeks. If I get them too soon,
they might get damaged waiting to be hung.

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Notes
However, I do want them when the time is right for me. The
company that can deliever what I need when I need it will certainly be
better positioned to earn my continued business.

Customization

When I order those drapes, I don’t want just any old size or
pattern. They need to fit perfectly to my windows, and I want them in the
style and color pattern that goes best in my house. Customization is an
element of product differentiation that cannot be over-emphasized. The
more you know about your customers’ needs — and the better you do in
serving those needs to your customers’ satisfaction — the stronger your
competitive position will be in the market.

Service-based businesses are particularly capable of customization.

Even with a product-based business, there are still techniques

available for individualizing your firm, such as customizing your billings,
or special packaging for your best customers. Product customization
is a rapidly growing field for clothing, footwear (ex. sports shoes in
school colors), backpacks in the color you want, cosmetics, automobiles,
motorcycles, etc.

Cost Recovery

Cost recovery does not mean paying the cheapest price. It does
mean gaining the highest leverage per dollar spent. Often, in fact, it makes
more sense to spend a little more to obtain a product or service that most
closely aligns with your needs and brings satisfaction. Too frequently, «I
got it cheap» is the consolation prize when you end up with something
that really doesn’t properly serve your needs

(a) Vertical Differentiation

Vertical differentiation occurs in a market where the several goods

that are present can be ordered according to their objective quality from
the highest to the lowest. It’s possible to say in this case that one good is
“better” than another.

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 Notes
Vertical differentiation can be obtained:

1. Along one decisive feature;

2. Along a few features, each of which has a wide possible range of
(continuous or discrete) values;
3. Across a large number of features, each of which has only a presence/
absence “flag”.

In the second and third cases, it is possible to find out a product

that is better than another one according to one criteria but worse than it
in respect to another feature.

Vertical differentiation is a property of the supplied goods but,

as it is maybe needless to say, the perceived difference in quality by
different consumer will play a crucial role in the purchase decisions.
When evaluating a real market, a good starting point is a top-down grid
of interpretation, we shall present first in 3 segments.

Class Price Crucial feature

Low Low The price is low, the product simply works

Use of the good is comfortable. Most people use

Middle Middle
it. Mass market brand.

Quality, exclusivity, durability (= low life-long

High High
price),

To this basic classification, one should add two intermediate classes:

Class Price Crucial feature

Middle-low Low The cheapest nation-wide brand

Middle-high Middle The cheapest product of high quality

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Notes
Two extreme classes should finally be added:

Class Price Crucial feature

It usually does not work, it does not

Extremely low Very Low
last, and it has important defects

Exclusivity, non practical, status

Extremely High Very high
symbol

In this way, you can vertically position different brands and product
versions, also using clues from advertising campaigns.

If you compare widely different goods fulfilling the same (highly-

relevant) need, you may distinguish at the extreme of your spectrum
necessity goods and at the other luxury goods. In other cases, what makes
this difference is, instead, the nature of the need fulfilled.

As a general rule, better products have a higher price, both be-

cause of higher production costs (more noble materials, longer produc-
tion, more selective tests for throughput,...) and bigger expected advan-
tages for clients, partly reflected in higher margins.

Thus, the quality-price relationship is typically upwards sloped.

This means that consumers without their own opinion nor the capability
of directly judging quality may rely on the price to infer quality. They will
prefer to pay a higher price because they expect quality to be better.

This important flaw in knowledge and information processing

capability - an instance of bounded rationality - can be purposefully
exploited by the seller, with the result that not all highly priced products
are of good quality.

Through this mechanism, the demand curve - that in the

neoclassical model - is always downward sloped, can instead turn out to
be in the opposite direction, with higher sales for versions having higher
prices.

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 Notes
(b) Horizontal Differentiation

When products are different according to features that can’t be

ordered in an objective way, a horizontal differentiation emerges in the
market.

Horizontal differentiation can be linked to differentiation in

colours (different colour version for the same good), in styles (e.g. modern
/ antique), in tastes.

A typical example is the ice-cream offered in different tastes.

Chocolate is not “better” than lemon.

This does not prevent specific consumers to have a stable preference

for one or the other version, since you should always distinguish what
belongs to the supply structure and what is due to consumers’ subjectivity.
Some consumers would prefer lemon to chocolate, others the opposite,
but this relates to them, not to the product line structure.

It is quite common that, in horizontal differentiation, the supplier

of many versions decide a unique price for all of them. Chocolate ice-
creams cost as much as lemon ones.

Another example of horizontal differentiation is represented by

films: each film is different from the others, while the price of entry to cinema
is always the same. This example shows that the internal organization of
the differentiation space can be structured around “genres” and several
similarity measures can be taken (e.g. two films having in common the
film-maker, an actor, etc.), without being linear and continuous (nor too
precise!).

When consumers don’t have strong stable preferences, a rule of

behaviour can be to change often the chosen good, looking for variety
itself. An example is when you go to a fast food and ask for what you
haven’t eaten the previous time. Fashion waves often emerge in
horizontally-differentiated markets with imitation behaviours among
consumers and specific styles going “in” and “out”. However, more in
general, horizontal differentiated versions may not be ordered along axes,
but merely juxtaposed.

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Notes
(c) Mixed Differentiation

Certain complex markets are characterised both by horizontal

and vertical differentiation. For instance, apparel, garments and shoes
have an amazingly rich combination of shapes, colours, materials,
complementarities, seasonal and territorial specificities, appropriateness
to social events, relative distance to ideals promoted by media, stylists
and the showbusiness. The quality of the materials can often be seen as
a vertical differentiation but some other elements are clearly horizontal,
like shapes.

In such an environment, consumers can develop fairly different

styles of comparision, with some spending large amount of time getting
exposed and evaluating versions, talking with others and sharing judgments,
while others drastically reducing the difficulty of the comparision through
repurchase of very classical items.

(d) Determinants

How a product rates according to different measures of quality or

taste depends on both its physical and immaterial characteristics. The
raw material from which it has been built, the share of high/low quality
ingredients / components, its engineered design, its production process
are typical determinants of product specificity, whose complexity might
be reduced by consumers looking at its brand.

Producers can deliberately choose to share certain “standards”

(i.e. not to differentiate along those features) in order to offer a critical
mass of users for complementary devices as well as to pool consumer
experience, reducing the difficulty of use the product. The lawmakers can
encourage or mandate such behaviours, also in the interest of competition
along other axes (e.g. price).

An important selective role of the width of the product

differentiation available to final consumers is played by retailers (and
distribution channels in general). If inventory and storage costs are high,
retailers might try to limit this range that instead grows exponentially in
the case of particularly low inventory and storage costs (as it happens with
many e-commerce sites). More in general, the width of offer (number of

134
 Notes
varieties on sales) depend on the strategies of category management at
retailers (embedded in “formats” but with some degree of freedom inside).

Impact on Other Variables

Differentiated versions of a good can have widely different costs of

production. Upstream, they may be produced using different raw materi-
als and semi-manufactured parts, thus referring to diverse suppliers and
their relative market power. Import of exotic substances can be the effect
of the attempt to introduce new goods on the market (think for instance
to cosmetics).

Downstream, the supply of different and better goods allows for

deeper fulfillment of consumption needs, for production processes at
higher productivity as well as for the opening of export opportunities to
other countries.

For the firms introducing the new version of the product, the
expected results are mainly improvements of profits (thanks to lower
elasticity of consumption to price and higher mark-up on costs), sales,
and market shares.

Retailers usually love premium products. The advantage of

credibly sustain a higher price over competitors can in fact translate into
larger margins to retailers per each unit sold. If the retailers think that the
consumer will buy one unit for that class of products, it will select for its
shelves products that maximise the absolute margin it gets. Conversely,
a cheap product can have an enemy in the distribution channel, as they
feel to suffer reduced margins from sales because of “cannibalisation” of
existing brands.

For the consumer, product differentiation can increase the

satisfaction from her/his consumption, as the product better fit her/his
needs, conditions of use and special purposes. At the same time, (s)he will
be confronted with a wider spectrum of prices. Test whether how much
quality is expensive by playing this business game.

When faced with the burgeoning choice spectrum at supermarket

premises among product varieties of the same category, the consumer

135
Notes
can react with several rules of selection; retailers take them into account
to assure profits and profitability, as you can experiment with this
spreadsheet.

At the same time, product differentiation can lead to the exploration

of the product space by un-loyal customers, who use the repurchase
occasions to try new versions.

Consumers skills in evaluating goods across versions and prices

are nurtured by a sufficiently rich environment of social interaction and
product differentiation. In particular, in contrast to neoclassical claims
that “preferences are given”, tastes evolve over time due to experiences
(both personal and indirect, e.g. by looking at others).

Personal experience can be a process leading to getting to like

certain previously unacceptable versions, as the following instruction by
the producer of a high cocoa percentage chocolate.

Another important dimension of consumer behaviour that is

influenced by the width of product differentiation is the time length of
search for the purchase, that can be increased if differentiation is wider
and opaque (e.g. requires visits to many points-of-sale, hidden features,
etc.).

Long-Term Trends

The ever growing product differentiation process due to new

emergent firms/countries and the innovation efforts of incumbents has
encountered in the last decades some form of brake due to the pressure of
globalized, standardized homogeneous goods with a dominant design.

Behaviour During the Industry Life-Cycle

High product differentiation with radically different proposals is

typical of the early stage of an infant industry, until a dominant design will
replace technically imperfect or simply unlucky models.

Afterwards, when the industry reaches the maturity stage with few
main competitors, differentiation re-emerge (often due to minor external

136
 Notes
changes) as an attempt to soften price competition and to reach new
niches of consumers.

Policies

Most experimentation with product differentiation is spontaneous

in the market economy. However, there may be specific features of
products that touch the public interest. For instance the safety of product
can be forced to be high by the policymaker, to avoid cheap and dangerous
versions be offered to customers.

For the transition to a low-carbon economy, standards of energy

efficiency might also be imposed by the policymaker. More in general, to
get technologically and socially close substitutes to brown products is
the goal of an innovative economic policy for climate change mitigation,
underlining that green products risk often to be considered inferior to
polluting ones under certain axes of differentiation, so their sales be still
confined to a niche of green consumers. In this case a mere tax on CO2
emissions, raising the price of brown products, would not be enough for
large majorities of consumers to shift towards the green substitutes.

Product Positioning

Product positioning is closely related to market segment focus.

Product positioning involves creating a unique, consistent, and recognized
customer perception about a firm’s offering and image. A product or
service may be positioned on the basis of an attitude or benefit, use or
application, user, class, price, or level of quality. It targets a product for
specific market segments and product needs at specific prices. The same
product can be positioned in many different ways.

The illustration below shows an example taken from Philip Kotler’s

book, Marketing Management published by Prentice Hall. This two-
dimensional perception map shows how Kotler analyses the positioning of
an instant breakfast drink relative to variables of the price of the product
and speed of preparation. Another common framework for product
positioning is taken from a series of questions. You can position a product
using a positioning statement that answers these important questions:

137
Notes
➢  For whom is the product designed?
➢  What kind of product is it?
➢  What is the single most important benefit it offers?
➢  What is its most important competitor?
➢  How is your product different from that competitor?
➢  What is the significant customer benefit of that difference?

For example, the following are positioning statements used by Palo

Alto Software to focus marketing for two new products introduced in late
1994:

➢➢ 
Business Plan Pro For the businessperson who is starting a new
company, launching new products or seeking funding or partners,
Business Plan Pro is software that produces professional business
plans quickly and easily. Unlike (deleted), Business Plan Pro is a
stand-alone product, and requires no other programs to buy or
learn.
Product Positioning

➢➢ 
Marketing Plan Pro For business owners and managers who
oversee their company’s marketing programs, Marketing Plan Pro
is software that creates and helps manage professional marketing
plans. Unlike our most aggressive competitor, Marketing Plan Pro
provides a system for scheduling and tracking the entire marketing
process from plan to action.

Some positioning strategies will work better than others. The best
positioning plays to your company’s strengths and the product’s strengths,
and away from weaknesses. Position your product to reach the buyers
whose profiles most closely match needs you serve, in the channels you
can reach, at the prices you set.

Product Line Extension/Contraction

A product line extension is the use of an established product’s

brand name for a new item in the same product category.

138
 Notes
Line Extensions occur when a company introduces additional items
in the same product category under the same brand name such as new
flavors, forms, colors, added ingredients, package sizes. This is as opposed
to brand extension which is a new product in a totally different product
category.Line extension occurs when the company lengthens its product
line beyond its current range. The company can extend its product line
down-market stretch, up-market stretch, or both ways.

Down-Market Stretch

A company positioned in the middle market may want to introduce

a lower-priced line for any of the three reasons:

1. The company may notice strong growth opportunities as mass

retailers such as Wal-Mart, Best Buy, and others attract a growing
number of shoppers who want value-priced goods.

2. The company may wish to tie up lower-end competitors who might

otherwise try to move up-market. If the company has been attacked
by a low-end competitor, it often decides to counterattack by
entering the low end of the market.

3. The company may find that the middle market is stagnating or

declining.

Up-Market Stretch

Companies may wish to enter the high end of the market for
more growth, higher margins, or simply to position themselves as full-
line manufacturers. Many markets have spawned surprising upscale
segments: Starbucks in coffee, Haagen-Dazs in ice cream and Evian in
bottled water. Leading Japanese auto companies have each introduced an
upscale automobile: Toyota’s Lexus, Nissan’s Infiniti, and Honda’s Acura.

Two-Way Stretch

Companies serving the middle market might decide to stretch

their line in both directions. Texas Instruments (TI) introduced its first
calculators in the medium-price-medium-quality end of the market.
Gradually, it added calculators at the lower end taking the share from

139
Notes
Bowmar, and at the higher end to compete with Hewlett-Packard. This
two-way stretch won Texas Instruments (TI) an early market leadership
in the hand-calculator market.

Trading Up/ Trading Down

Introduction of more expensive products than the original line is

“trading up”. Introduction of cheaper products than the original line is
“trading down.” Both may give an imbalance between the new and old
lines but for different reasons.

Trading Up

When trading up, the biggest hurdle to overcome is the gaining of

acceptance for a higher-priced product identified with a low-price-line
image. Watchmakers like Timex, and certain camera manufacturers have
tried unsuccessfully to penetrate the higher-priced end of their markets.
Sometimes higher-priced products are introduced mainly to pull up the
prestige of the lower-priced goods.

Trading Down

When trading down, sales of the new product often are not great
enough to offset reduced sales of the original higher-priced line. Mustang
cut heavily into Fairlane sales but fortunately obtained enough volume to
overcome the loss, plus contributing more total profits. Few new products
manage to accomplish this.

Product Brand Strategy

Brand Strategy

Successfully out-branding your competitors is a continuous battle

for the hearts and minds of your customers. The proposition your brand
strategy makes must be very compelling, attractive and unique among
competitive offerings. The proposition must also be consistently reinforced
throughout all phases of an organization, from senior executives to
customer service, research and development, business development and
even your business partners.

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 Notes
What entails a comprehensive and effective “Brand Strategy
process?” That’s a much longer answer than what we have space for here,
plus it varies from industry to industry, but here are some very basic
guidelines about what makes a good Brand Strategy.
Brand Strategy—what’s the big deal?

Brand Strategy is nothing new. Yet, the expectations consumers

have for a product or service they buy is stronger than it’s ever been. This
is why companies interested in long-term success must create the most
promising, targeted brand experience possible.

Whether you know it or not, you already have a brand, and your
customers are having a “brand experience” when they interact with you,
whether it be with your products and services or the people in your
company. In order to craft this “brand experience” in a calculated way
that is beneficial for your company, you must have a strong understanding
about what exactly a brand is.

Brand is the Alpha and Omega

In other words, brand is the totality of your company and its business.

“A brand is the sum of the good, the bad, the ugly and the off-
strategy,” says Scott White, one of the nation’s leading branding consultants
and a valued expert companies like Sun Life Financial and Franklin Sports
rely on. “It is your best and worst product. It is your best and worst
employee. It is communicated through award-winning advertising as well
as those ads that somehow slipped through the approval cracks and sank
anything riding on them.

It is your on-hold music and the demeanor of the receptionist

who puts that valued client or prospect on hold. It is the carefully crafted
comments by a CEO as well as negative buzz by the water cooler or in
chat rooms on the Internet. Brand is expressed through written, audio and
visual content. It is interpreted through emotional filters every human
being has—where anything can happen. Ultimately, you can’t control
your brand. You can only hope to guide it.”

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The Road to Branding Success

Building on the inherent values of a brand should be the core of

any branding strategy. If they’re not clear, get a good grip on them first.
Is the brand about honesty or integrity? Quality? How about excellent
communication and customer satisfaction?

Knowledge of a company’s values, at least in a literal context, is

typically an internal matter; yet, those values become evident to everyone
in contact with the company, from customers and prospective customers to
business-to-business relationships and employee relations. Consistency is
the key here. If members of the organization aren’t accurately representing
the values of the brand, steps must be taken to rectify the chink in the
armor. And unlike a brand’s key business proposition, values should
never change even though the landscape in which the company operates
and even its products may.

Winning Brand Strategies Starts with Top-Notch Research

With values set, a brand proposition is ready to be established.

Objective and comprehensive branding research are the keys here. At a
minimum, both must be done to establish clarity on the brand’s strengths
and weaknesses, the target audience and the competition. If possible,
branding research should also be done on the brand’s industry, its history,
the status of the market and possibilities for future expansion.

Your Target Customer will Determine your Success

If it’s only possible to do one body of brand research, discover as

much as possible about your target customer. Find out who they are and
what their needs and desires are. Make it your mission to get as detailed
information as possible on their age, gender, income, shopping habits
(online and off) and anything else of relevance you can determine. If
you’re targeting a business market, these criteria will differ, depending
on the industry. Understanding your target market and what they want is
key to developing a winning brand. Knowing these things should also give
you an idea for what communication medium and content would work to
engage your market.

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 Notes
Other research you might want to do is find out what your
competitors’ offerings are like. How do your offerings stack up? What
can a customer get from your product that they can’t get from anyone
else? Find out these things, and you have the seeds for a winning branding
strategy, not to mention great fodder for an ad campaign.

What does your Brand Promise?

The brand statement, often called the brand promise or proposition,

is a derivative of branding research. It states the benefit of buying and
using your company’s products or services. For clothing, it could be about
style or comfort. For a car, it could be about safety or reliability. Whatever
it is, it must be clear, engaging and presented in a context relevant to the
customer. One example of an effective brand promise is that of BMW’s.
It’s stated right in the company’s tagline: The Ultimate Driving Machine.

Your Promise Should be Golden

If your company’s products and service don’t live up to their brand

promise, new customers will become lost customers and loyal customers
might leave, too. Simply put, your deliverable, whatever that is, must
follow through on the promise—in fact, it would be best if it actually over-
delivered.

Your Promise Should be Unexpected, but Welcome

Don’t reuse something a competitor has already promised even if it

works for your product or service, and don’t be vague in trying to position
your company favorably against your competitors (such as saying you’re
“the best pizza in town.”). Be specific because specific is exponentially
more memorable. Besides, people expect you to be good. Otherwise, they
wouldn’t give you their business.

Hearts and Minds First, Wallets Later

Creating a positive emotional association in your market for

your product or service is key. It can create want and desire by the mere
mention of your brand, product or service name. Needless to say, that’s

143
Notes
powerful. For instance, the mere mention of Ben & Jerry’s conjures up
images of numerous unique premium ice cream flavors and with the
anticipation for your favorite (in my case, Cherry Garcia). Such positive
emotional associations are built over time through good branding practice
and a time-tested relationship between you and your customer based on
intrigue, trust, understanding and support.

To create a brand promise that creates such emotional connections,

it should be:

1. Grounded in the brand’s core values

2. Clearly relevant and engaging to your target market
3. Able to create some sort of positive emotional attachment beyond
just being “good”
4. Repeated internally and externally within your organization
5. Adaptable to the business climate
6. Continually reinforced
7. Consistent across advertising and marketing mediums
8. Known and echoed by business partners

Pricing in Channel Management

The desired price at which a marketer seeks to sell their product

can impact how they choose to distribute. As previously mentioned, the
inclusion of resellers in a marketer’s distribution strategy may affect a
product’s pricing since each member of the channel seeks to make a profit
for their contribution to the sale of the product. If too many channel
members are involved the eventual selling price may be too high to meet
sales targets in which case the marketer may explore other distribution
options.

The one element of marketing strategy that is malleable, but is least

understood and hence constantly feared by many managers is pricing. This
is because pricing is a very complex issue. On one hand, it is supposed to
reflect all the strategic steps the company has taken to bring the product to
the consumer and convince him/her to buy it as well. On the other hand,
it is supposed to reflect what the consumer would get out of the product
by paying that price to acquire it. Will there be a match between the two?

144
 Notes
Perhaps and perhaps not! This dilemma makes it imperative for a manager
to understand and analyze the various factors before deciding at an
appropriate pricing strategy. And, pricing does not operate in vacuum. It
has to be married with other elements of the marketing strategy, including
the channel management. Thus, understanding the broader picture of
the various elements of pricing, and building a scientific framework on
pricing will always be reliable and better in the long run.

➢  Cost
➢  Market
➢  Competition
➢  Channels

Promotion through the Channel

➢  Pull Promotional Strategy

➢  Push Promotional Strategy

Pull Strategy for Sales Promotion

Sales promotion decisions are significantly affected by whether

the company decides to do “pull or push strategies” to accomplish its
objectives. Such a decision may require a little or a lot of cooperation
from resellers. The requirements to implement one strategy might be little
more than to just stock the product by the retailers.

The other strategy may demand more participation from resellers

such as the ability to explain to the consumers as to how a product works.

In case of using a pull strategy, marketing efforts are directed at the

ultimate consumer and consumer promotions such as consumer contests
and sweepstakes, rebates, coupons, free samples, consumer premiums, etc
are used. If this strategy is also chosen to include advertising, then, there
are large advertising expenditures.

The objective of such promotional efforts would be to create

sufficient consumer demand to pull the product through the channels,
that is the consumers are encouraged to demand the product from retailers

145
Notes
who in torn place orders with wholesaler or manufacturer to meet the
consumer demand.

Bajaj Auto Ltd. offered a scheme of taking home a scooter at ` 999

was a sales promotional offer communicated through effective advertising
and was essentially a pull strategy.

This strategy may require little promotional efforts from the

resellers except to stock input the product on shelves.
A pull strategy is appropriate when

➢  The product demand as high.

➢  It is possible to differentiate the product on the basis of real or
emotional features.
➢  Brand consumers show high degree of involvement in the product
purchase,
➢  There is reasonably high brand loyalty and
➢  Consumers make brand choice decision before they go to the store.

Push Strategy for Sales Promotion

If a firm decides to use push strategy, its efforts are directed at

resellers and the manufacturer becomes very dependent on their personal
selling abilities and efforts. The promotional efforts are focused at pushing
the product through the distribution channels; the resellers may be
required to display, demonstrate and offer discounts, to sell the product.
Product categories where there is low brand loyalty.

➢  Where many acceptable substitutes are available in the market.

➢  Relatively new products are to be launched
➢  When the brand choice is often made in response to displays in the
stores,
➢  The product purchase is unplanned or on impulse and
➢  The consumer is familiar and has reasonably adequate knowledge
about the product.

Manufacturers, who cannot afford to engage in sustained mass

advertising, often use push strategy and offer effective incentives to

146