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What are Marketing Channels?

Marketing channels have traditionally been viewed as a bridge between producers and users. These are a set of interdependent organizations that ease the transfer of ownership as products move from producer to business user or consumer.

Since the core of marketing is the exchange process, marketing channels can be viewed as exchange facilitators and can be defined as an array of exchange relationships that create customer value in the acquisition, consumption, or disposition of goods and services.

Exchange relationships, and thus marketing channels themselves, emerge from market needs as a way of more efficiently serving market needs. Managing channel in such a competitive and demanding scenario is critical. Channel Management encompasses a number of activities right from designing the structure to Managing Channel Relationships.

Functions of Marketing Channels

Marketing channels ensure a smooth flow of goods and services from manufacturers or producers to end users or customers. They reduce the gaps that arise in the flow of goods between channel members.

The flow of products between producers, wholesalers, retailers, and industrial and household consumers can be forward, backward, or two-directional. The functions of marketing channels are as follows:

1. Possession
2. Ownership
3. Promotion
4. Negotiation
5. Financing
6. Risking
7. Ordering and Payment

Possession

Possession represents the flow of goods from the producer to the final consumers through intermediaries. The possession of goods gets transferred from the manufacturers to consumers.

Possession flow consists of various activities pertaining to the storage of goods and their transportation from one channel member to another.

Ownership

Ownership flow takes place when the title to the goods passes from one channel member to another during their passage from the manufacturer to the consumer. Usually, possession flow and ownership flow take place simultaneously, as goods move through the channel. The two flows are not always in the same direction.

Promotion

Promotional flows refer to activities that are aimed at making prospective buyers aware of the product features and converting them into customers. These activities can be taken up by any channel intermediary and need not be confined to the producer or retailers.

Negotiation

Negotiation flow occurs when terms of sale and after-sales relationships are discussed and agreed upon between channel members. The costs incurred are measured in terms of time spent on negotiation.

Financing

Usually, the seller grants some time to the buyer for making payment, even after the physical possession is transferred to the buyer.

The costs incurred by the seller involve the loss of income that could have been earned by investing the money receivable, elsewhere. These costs can be incurred by any channel member or even by specialized external agencies like banks and credit card companies.

Risking

Risks flow from one channel member to the other along with the flow of goods. Risks can arise because of the perishable nature of the products or adverse price changes in the market. Costs involved are those associated with risk transfer, i.e., insurance, maintenance costs for perishable goods, warranties, repairs, etc.

Ordering and Payment

Ordering and payment flow involve activities pertaining to the purchase of goods and making payments. The costs associated with such flows are incurred for the purchase of the products i.e. order processing costs, ordering costs, etc. Payment flows are associated with collection costs and costs due to bad debts.

Managing Distribution Channels

In regard to operations and provision of special services, the distributors are becoming more organized and efficient to meet the growing expectations of the customers which can manage the channels efficiently.

Channel management also helps companies in minimizing their costs, reach potential customers, and make a profit. Convenience and service factors are not under direct control in the key role of manufacturers as intermediaries provided to customers.

Specialization of customers takes place to have effective management and organization. Some aspects should be kept in mind while consideration of managing channels and they are, the company should select and recruit the right channel.

When this task is completed, it should focus on motivating channel members while increasing their profitability. Thereafter the company has to evaluate the channel member’s performance to ensure that they remain competitive in the market.

Market changes should be properly settled and the managers should modify their channel arrangements effectively. Broadly the aspects that are considered in channel management are discussed in the following paragraphs.

Recruitment of Channel Members

Distribution channel members are the key area that is outsourced and have to be selected carefully. The selection of channel members, therefore, is an important task and should ensure the selection of deserving channel partners who will serve the right customer at the right time with the right attitude.

Thus carefully designed recruitment and screening is essential:

1. Recruiting
2. Key Decisions in Channel Management
3. Price Policy
4. Terms and Conditions of Sale
5. Territorial Rights
6. Definition of Responsibilities
7. Recruitment as a Continuous Process

Recruiting

Recruiting involves those plans and actions aimed at actively soliciting participation from a new channel member. Before active recruiting can begin, key personnel from the recruiting organization must consider and reach an agreement on several important issues, including:

1. The precise role of the prospective channel members.
   
2. The specific qualifications are necessary for success in this channel role.
   
3. The precise products or channel assignments for which the prospective channel member will be responsible.
   
4. The bounds of the authority of the prospective channel member.
   
5. The way in which the role might be expected to change over time.

Key Decisions in Channel Management

The appointment of intermediaries requires a lot of decision-making processes to be carried out. This may include price policy, terms and conditions of sale, territorial rights, and definition of responsibilities. In addition, a choice has to be made between extensive and intensive coverage of the market.

Price Policy

Wholesale or retail margins, a list of prices and a specified discount have to be developed. These may reflect the interest of the intermediary as well as the interest of the producer and supplier if they have to form a stage for channel members.

Terms and Conditions of Sale

With the addition of price schedules, the producer/supplier must explicitly state payment terms, guarantees, and restrictions on where and how the product is to be sold.

If the product has a sizeable demand then the very producer/supplier may evaluate intermediaries on the basis of performance criteria such as the attainment of targets, inventory levels, customer delivery, etc. The intermediaries whose performance is below the target decided may have the right to handle the product withdrawn.

Territorial Rights

Some products and distributors will be given exclusive rights to market a product in a specified territory. It may happen with the agricultural equipment which is used to decide the boundaries of territories which the manager or supplier has to strike to maintain a balance between defining territories that are large enough to provide good sales to the distributors but are small enough to allow the distributors for providing better service to customers within the territory.

Definition of Responsibilities

The duties and responsibilities of the supplier and the customer have to clearly define. For example, if the customer encounters some problem with the product and requires technical advice or repair of the product then it should be immediately clear to both the supplier and the distributor as to which party is responsible for responding to the consumer.

As concluded, in the same way, the agreement between the producer and supplier and the distributor should clearly be specified stating which party is responsible for the cost of product training when new employees join the distributor or new products are introduced.

Recruitment as a Continuous Process

For several reasons, the recruitment of new channel members should be viewed as a continuous process. One reason is that an organization’s intermediaries sometimes withdraw from the channel relationship of their own accord, and the organization needs to be prepared to respond quickly.

Another reason for viewing recruiting as a continuous process is that marketers may need to contract with new intermediaries to help launch new products.

Organizations, particularly producers, also may have to change intermediaries as their products pass through stages in their product life cycle, when buyer behavior changes, or in response to changes in the distribution strategies of competitors.

FAQs Related to the Marketing Channels