What is a marketing channel system and value network

Health Services Marketing 7-9 Discussions

HSA 305, Week 8: Designing and Managing Health Care Marketing Channels

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Topic

Narration

1

Introduction

Welcome to Health Services Marketing. In this lesson, we will discuss designing and managing health care marketing channels.

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2

Objectives

Upon completion of this lesson, you will be able to:

Describe the various tools of the marketing mix available to health care providers.

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3

Marketing Channels and Value Networks

It is very important for a health care organization to build and manage a continuously advancing a value network. In this lesson, we will discuss and analyze strategic marketing and tactical issues related to health care service and product channels as well as their accompanying value networks. Since many health care organizations do not often directly sell their services to the end user, channel partners perform a variety of functions necessary to deliver them. The channel partners work as marketing channels, service delivery networks, and distribution channels. Marketing channels are sets of independent organizations involved in the process of marking a product or service available for use or consumption. As this relates to healthcare, the marketing channels are the set of pathways a service benefit or product follows either before or after production. The outcome of the pathway is the purchase and use by the final end user.

A marketing channel system is a particular set of organizational paths and relationships that an organization use to reach potential buyers and persuade them into actions leading to profitable sales. The decisions of the marketing channel system structure and management are critical due channel members are able to collectively earn margin that account for 30 to 50 percent of the ultimate selling price. In addition, marketing channels also represent a considerable opportunity cost. They not only serve markets, but they also create markets.

The impact of the channels an organization selects is as follows:

Pricing is influenced by the kinds and cost of distribution;

Cost are often higher for products that require many channel partners due to each member of the distribution chain needs to be paid;

Organization’s sales force and advertising decisions depend on how much training and motivation deals need;

In addition to these, channel decisions involve long term commitments to its members as well as establishing a set of policies and procedures to define mutual goals and responsibilities.

Organizations must decide on how much effort to devote to push and pull marketing. Push strategy involves the organization implementing its sales force and resources to encourage intermediaries to carry, promote, and sell products to the end users. This strategy is usually implemented when there is low brand loyalty, brand choice is selected at the time of purchase, the product is an impulse item, and the benefits of the products are well understood.

The pull strategy involves the organization’s application of advertising and promotion to encourage consumers to ask intermediaries for the product, thereby encouraging the intermediaries to order it. This strategy is best applied when there is high brand loyalty and high involvement in the category, when people perceive variances among brands, and when customers select the brand prior to making a purchase. Many top marketing organizations apply both pull and push strategies.

A value network is a system of partnerships, alliances that is created to source, augment, and deliver its offerings. It includes an organization’s suppliers, its suppliers’ suppliers, its immediate customers, and customers’ end customers. A demand planning chain is a process in which an organization first thinks of the target market and then designs the supply chain backward from that point. This process can yield the following :

An estimate of whether more funding is to be made upstream or downstream;

An awareness of disturbances in the supply chain that may cause costs, prices, or supplies to change abruptly.

And

Application of online access with their channel partners to carry on faster and more accurate communications, transactions, and payments to reduce costs, speed up information transfer, and increase accuracy.

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4

Advantages of Using Intermediaries

A service provider or a product manufacturer would delegate some of the delivery or selling task to intermediaries when delegation means giving up some control over how and to whom the services and products are sold. The producers of products gain the following advantages by using intermediaries :

Many producers do not have the funding resources to carry out direct marketing.

Producers who establish their own channels can often earn a greater return by increasing investment in their main business.

And in some cases direct marketing is not feasible .

Intermediaries are able to achieve stellar efficiency in making goods available and accessible to target markets through their contacts, experience, specialization, and scale of operation.

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5

Channel Functions and Flows

Marketing channels move services and goods from the producer to the consumer. During this process, it overcomes the time, place and possession gaps that divide goods and services from those who need or want them. The key functions of the members of the marketing channel are as followings:

Gather information regarding potential and current customers, competitors, and other actors and forces in the marketing environment;

Develop and disseminate persuasive communications to stimulate purchasing;

Reach agreements on price and other terms so transfer of ownership or possession can be impacted;

Place orders with manufacturers;

Acquire the funds to finance inventories at different levels in the marketing channel;

Assume risks connected with carrying out channel work;

Provide for the successive storage and movement of physical products;

Provide for buyers payment of their bills through banks and other financial institutions;

And oversee actual transfer of ownership from one organization to another.

Some functions such as providing physical possession or title to goods constitute a forward flow of activity from the organization to the customer while others functions such as ordering and payment constitute a backward flow from customer to the organization. Some actually occur in both directions such as with information, negotiation, finance, and risk tasking functions.

All channels have three things in common :

One. They use up scarce resources.

Two. They often can be performed better through specialization.

And three. They can be shifted between channel members.

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6

Channel Levels

The number of intermediaries levels to indicate the length of a channel are as follows:

Zero level channel is also known as direct marketing channel in which the producer is selling directly to the final customer through door to door sales, mail order, telemarketing, television selling, internet selling, and other methods.

One level channel has one selling intermediary such as a retailer.

Two level channel has two intermediaries.

Three level channel has three intermediaries.

Most channels are normally described as a forward movement of services or products. However, reverse flow channels brings products back to reuse such as surgical instruments, refurbishing items for resale, or disposal of products and packaging.

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7

Service Sector Channels

Health services producers have the challenge of making their output available and accessible to target populations. Many traditional treatments are not being offered in day spas in malls and other retail areas.

It is the convenience, ambience, and pampering that are the benefits which differentiate these medical spas from the traditional physician’ office. In addition, there is a strong price competition in some geographic markets. With the internet and other technologies advancements, health service organizations such as physician groups, hospital, health insurance companies, and disease management can operate in these new channels.

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8

Channel-Design Decisions

Analyze customer needs . In designing the marketing channel, there must be an understanding of the service output levels target customers want. There are five service outputs: Lot size, waiting and delivery time, spatial convenience, product variety, and service backup.

Establish channel objectives . The channel objectives should be measurable in terms of targeted service output levels at the lowest possible cost. Effective planning involves determining which markets segments to serve, what level of service they expect, and the best channels for each. The design must consider the strengths and weaknesses of each intermediary.

Identify major channel alternatives. There are three elements of a channel alternative:

Type of intermediaries available. There are three types of intermediaries: merchants, agents, and facilitators.

Number of intermediaries. There are three strategies in trying to determine the number of intermediaries:

Exclusive distribution, which is severely restricting the number of intermediaries;

Selective distribution which is the use of more but fewer than all of the intermediaries who are willing to carry a particular product; and

Intensive distribution which consists of the manufacturer placing the goods and services as many outlets as possible.

Terms and responsibilities of channel members. An organization must determine the rights and responsibilities of participating channel members.

The linkages can be strengthened if each channel member is treated with respect and provided the opportunity to be profitable or gain value. Price policies, conditions of sale, territorial rights, and specific services to be performed by each party are the elements in the trade relations mix.

Evaluate major channel alternatives. Once the major channel alternatives have been identified, it must evaluate each choice against appropriate economic, control and adaptive criteria.

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9

Channel-Management Decisions

Once an organization has chosen a channel alternative, each intermediary must be selected, trained, motivated, and evaluated.

Selecting channel members. Since the channels represent the organization to the customers, it is important for organizations to select their channel members carefully. An evaluation of the channel characteristics such as the number of years in business, growth, and profit record, financial strength, cooperativeness, and service reputation needs to take place. If the intermediaries are sales agent, then the producers should asses the number and character of other lines carried and the size and quality of the sales force.

Training channel members . Organizations need to make sure that careful planning and implementation of training programs for intermediaries occur.

Motivating channel members . Organizations need to motivate their channel members by identifying their needs and tailoring their channel positioning to provide them stellar value. In essence, the organization should provide training, market research and other capability building programs to improve intermediaries’ performance. A constant effort by the organization to work to make the intermediaries their partners in a joint effort to satisfy the customer should be evident.

Evaluating channel members . Producers should periodically evaluate intermediaries ‘performance against standards such as sales quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods and cooperation in promotional and training programs.

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10

Channel Dynamics

A conventional marketing channel consists of an independent producer, wholesaler and retailer. Each is a separate business looking to maximize its own profits, even if this goal reduces profit for the system as a whole. No channel member has complete control.

A vertical marketing system consists of the producer, wholesaler, and retailer acting as a unified system. One channel member or the channel captain owns the others, franchises them or has so much power that they all cooperate.

Corporate VMS combines successive stages of production and distribution under-one-ownership.

An administered VMS coordinates successive stages of production and distribution through the size and power of one of its members.

Contractual VMS consists of independent organizations at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact can they could achieve solo. There are three types of contractual VMS:

Wholesaler-sponsored voluntary chains which organize groups of independent retailers to assist them compete with large chain organizations by standardizing selling practices and achieving buying economies;

Retailer cooperatives come about when the stores take the initiative and organize a new business entity to carry on wholesaling and possibly some production; and

Franchise organizations are created when a channel member called a franchisor links several successive stages in the production-distribution process.

Horizontal marketing systems is another channel development in which tow or more unrelated organizations combine resources or programs to exploit an emerging marketing opportunity in a business that is somewhat familiar for at least two of the partners. Each one alone lacks the capital, delivery capability, know-how, production, or marketing resources to venture by itself or is risk-averse.

Multi-channel marketing systems. Multi-channel marketing occurs when a single organization uses two or mare marketing channels to reach one or more customer segments. There are three benefits that can be gained by adding more channels: increased market coverage, lower channel cost, and more customized selling.

The major causes of conflict are:

Goal incompatibility

Unclear roles and responsibilities

Difference in perceptions

And Intermediaries dependence on manufacturers.

These conflicts and others can be managed in many ways such as the following:

Adopting super-ordinate goals. Members agree on the basis goal where they are jointly looking to achieve.

Exchange people between two or more channel levels; and

Co-optation is the effort by one organization to win support of the leaders of another organization by including them in groups such as advisory councils and board of directors.

When a conflict is chronic or acute, diplomacy, mediation, and arbitration may result. Diplomacy happens when each side sends a person or group to meet with his counterpart to resolve the conflict. Medication happens between both parties resort to a neutral third party who is skilled in conciliating the two parties interests. Arbitration happens when two parties agree to present their arguments to one or more arbitrators and accept the arbitration decision. If any of these methods fail, legations may result.

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11

Legal and Ethical Issues in Channel Relations

Organizations are free to develop any channel arrangement. However, the law does seek to prevent organizations from using exclusionary tactics that may keep competition from using a channel.

Exclusionary distribution is a strategy in which the seller permits only certain outlets to carry its products. Exclusive dealing is when the seller requires that the dealers not handle competitor’s products. These are legal as long as both parties enter into the agreement voluntarily and they do not significantly reduce competition or create a monopoly. These types of arrangement include territorial agreements.

Full time forcing is when producers of a strong brand are sold to dealers only if they take some or all of the rest of the product line. These typing agreements violate US law if they tend to reduce competition significantly.

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12

Check Your Understanding

13

Summary

We have now reached the end of this lesson. Let’s take a look at what we’ve covered.

First, we discussed the delivery of efficient health care products and services require an intricate set of channel members. Intermediaries are between the producers and end users. These intermediaries have a variety of functions with the most important ones being the following:

Information provision

Promotion

Negotiation

Ordering

Financing

Risk taking

Physical possession

Payment

and

Assuming title

Next, we discussed that there are a number of intermediaries depending upon the function need to be performed. In order to decide which type of channel, the following needs to occur:

An evaluation of the customer needs;

Establishing channel objectives; and

Identifying and evaluating the major alternatives.

Then, we discussed setting up a channel. When setting up a channel, the members must be:

Trained;

Motivated; and

Evaluated.

These must be done with other channel members and alternative channel arrangements should be implemented as needed to build long term partnerships that are profitable for all channel members. To achieve this, it is important that all channel members have a clear sense of their responsibilities and benefits.

Finally, we discussed poorly defined terms of engagements can create conflict; therefore, channel cooperation is needed. In addition, effective management of conflict can be applied to avoid prolonged, expensive litigation.

This concludes this lecture.