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Chapter 8

TARGET MARKETS AND CHANNEL DESIGN STRATEGY

Chapter Outline

A Framework for Market Analysis

Markets, whether consumer or industrial, are complex. Frameworks consisting of four basic dimensions for discussing markets are:

1. Market geography
2. Market size
3. Market density
4. Market behavior

Figure 8.1 illustrates this market framework.

The emphasis will be on showing how these market dimensions influence channel design strategy.

Market Geography and Channel Design Strategy

Key Term and Definition

▪ Market geography: Refers to the geographical extent of markets and where they are located.

The channel manager is charged with the task of evaluating market geography relative to channel structure to make sure that the structure is able to serve the markets effectively and efficiently. Changing market locations resulting from expanding geographical boundaries or the opening up of new, more distant markets should signal the channel manager that modifications in channel structure may be needed.

1) Locating Markets

The channel manager may be called upon to delineate the geographical locations of target markets.

Table 8.1 provides definitions of these geographical entities and Table 8.2 lists some useful sources for obtaining additional geographical market data.

As an in-class exercise, you may want to have the students explore the amount of information obtainable from these sources for a particular area code or ZIP code (such as the school’s or student’s residence) to see how pertinent the information is that is obtained.

What is required of the channel manager is an awareness of and sensitivity to changes in market geography reflected in the data and a willingness to examine their possible implications for channel design decisions.

Market Size and Channel Design Strategy

Key Term and Definition

▪ Market size: Refers to the number of buyers or potential buyers (consumer or industrial) in a given market.

Bucklin developed a model relating market size to channel structure, which provides some insight for using market size data.

Figure 8.2 shows the effect of the number of buyers on the relative cost of direct channel versus middleman channels. The key teaching lesson here is that when the market size reaches point Ue, the cost of the intermediary structure is equal to the direct structure.

Market Density and Channel Design Strategy

Key Terms and Definitions

▪ Market density: Refers to the number of buyers or potential buyers per unit of geographical area.

A useful concept that helps to illustrate the relationship is that of efficient congestion.

▪ Efficient congestion: According to this concept, congested (high-density) markets can promote efficiency in the performance of several basic distribution tasks, particularly those of transportation, storage, communication, and negotiation.

The major strategic implication of this discussion is that the opportunity to achieve a relatively high level of customer access at low cost is higher in dense markets than in more dispersed ones. Even though dense markets are most often located in major metropolitan areas and are the most competitive, the large number of customers in close proximity to huge assortments of products provides the greatest opportunity and highest level of efficiency.

Figure 8.3 shows a typical Japanese channel of distribution for a consumer product and points out that due to Japanese sociocultural patterns, Japanese channels are longer than would be indicated otherwise.

Market Behavior and Channel Design Strategy

The fourth dimension, market behavior, consists of four subdimensions: (1) when the market buys, (2) where the market buys, (3) how the market buys, and (4) who buys.

1) When the Market Buys

Neither consumer nor industrial markets buy products on a precisely predictable time schedule...
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