The Importance of Distribution: Most producers use intermediaries to bring their

products to market. They try to develop a distribution channel(marketing channe

l) to do this. A distribution channel is a set of interdependent organizations t
hat help make a product available for use or consumption by
the consumer or business user. Channel intermediaries are firms or individuals s
uch as
wholesalers, agents, brokers, or retailers who help move a product from the prod
ucer to the
consumer or business user.
A company’s channel decisions directly affect every other marketing decision. Plac
e
decisions, for example, affect pricing. Marketers that distribute products throu
gh mass
merchandisers such as Wal-Mart will have different pricing objectives and strate
gies than will
those that sell to specialty stores. Distribution decisions can sometimes give a
product a
distinct position in the market. The choice of retailers and other intermediarie
s is strongly tied
to the product itself. Manufacturers select mass merchandisers to sell mid-price
-range
products while they distribute top-of-the-line products through high-end departm
ent and
specialty stores. The firm’s sales force and communications decisions depend on ho
w much
persuasion, training, motivation, and support its channel partners need. Whether
a company
develops or acquires certain new products may depend on how well those products
fit the
capabilities of its channel members.
Some companies pay too little attention to their distribution channels. Others,
such as FedEx,
Dell Computer, and Charles Schwab have used imaginative distribution systems to
gain a
competitive advantage.
Functions of Distribution Channels Distribution channels perform a number of fun
ctions that make possible the flow of goods
from the producer to the customer. These functions must be handled by someone in
the
channel. Though the type of organization that performs the different functions c
an vary from
channel to channel, the functions themselves cannot be eliminated. Channels prov
ide time,
place, and ownership utility. They make products available when, where, and in t
he sizes and
quantities that customers want. Distribution channels provide a number of logist
ics or
physical distribution functions that increase the efficiency of the flow of good
s from producer
to customer. Distribution channels create efficiencies by reducing the number of
transactions
necessary for goods to flow from many different manufacturers to large numbers o
f
customers. This occurs in two ways. The first is called breaking bulk. Wholesale
rs and
retailers purchase large quantities of goods from manufacturers but sell only on
e or a few at a
time to many different customers. Second, channel intermediaries reduce the numb
er of
transactions by creating assortments—providing a variety of products in one locati
on—so
that customers can conveniently buy many different items from one seller at one
time.
Channels are efficient. The transportation and storage of goods is another type
of physical
distribution function. Retailers and other channel members move the goods from t
he
production site to other locations where they are held until they are wanted by
customers.
Channel intermediaries also perform a number of facilitating functions, function
s that make
the purchase process easier for customers and manufacturers. Intermediaries ofte
n provide
customer services such as offering credit to buyers and accepting customer retur
ns. Customer services are oftentimes more important in B2B markets in which cust
omers purchase larger quantities of higher-priced products.
Some wholesalers and retailers assist the manufacturer by providing repair and
maintenance service for products they handle. Channel members also perform a ris
k-taking function. If a retailer buys a product from a manufacturer and it doesn’t
sell, it is “stuck” with the item and
will lose money. Last, channel members perform a variety ofcommunicat ion andtra
nsac tion
functions. Wholesalers buy products to make them available for retailers and sel
l products to
other channel members. Retailers handle transactions with final consumers. Chann
el
members can provide two-way communication for manufacturers. They may supply the
sales
force, advertising, and other marketing communications necessary to inform consu
mers and
persuade them to buy. And the channel members can be invaluable sources of infor
mation on
consumer complaints, changing tastes, and new competitors in the market.
Channels A number of alternate channels of distribution may be available: • Sell
ing direct, such as via mail order, Internet and telephone sales • Agent, who typi
cally sells direct on behalf of the producer • Distributor (also called wholesaler
), who sells to retailers • Retailer (also called dealer or reseller), who sells t
o end customers • Advertisement typically used for consumption goods Distribution
channels may not be restricted to physical products alone. They may be just as i
mportant for moving a service from producer to consumer in certain sectors, sinc
e both direct and indirect channels may be used. Hotels, for example, may sell t
heir services (typically rooms) directly or through travel agents, tour operator
s, airlines, tourist boards, centralized reservation systems, etc.
There have also been some innovations in the distribution of services. For examp
le, there has been an increase in franchising and in rental services - the latte
r offering anything from televisions through tools. There has also been some evi
dence of service integration, with services linking together, particularly in th
e travel and tourism sectors. For example, links now exist between airlines, hot
els and car rental services. In addition, there has been a significant increase
in retail outlets for the service sector. Outlets such as estate agencies and bu
ilding society offices are crowding out traditional grocers from major shopping
areas.
Channel members Distribution channels can have a number of levels. Kotler defin
ed the simplest level, that of direct contact with no intermediaries involved, a
s the zero-level channel. The next level, the one-level channel, features ju
st one intermediary; in consumer goods a retailer, for industrial goods a distri
butor. In small markets (such as small countries) it is practical to reach the w
hole market using just one- and zero-level channels.
In large markets (such as larger countries) a second level, a wholesaler for exa
mple, is now mainly used to extend distribution to the large number of small, ne
ighborhood retailers. Wholesaling: Wholesaling is all activities involved in sel
ling products to those buying for resale or business use. Wholesaling intermedia
ries are firms that handle the flow of products from the manufacturer to the ret
ailer or business user. Wholesaling intermediaries add value by performing one o
r more of the following channel functions: • Selling and Promoting • Buying and Asso
rtment Building • Bulk-Breaking • Warehousing • Transportation • Financing • Risk Bearing •
Market Information – giving information to suppliers and customers about competito
rs, new products, and price developments
• Management Services and Advice – helping retailers train their sales clerks, impr
oving store layouts and displays, and setting up accounting and inventory contro
l systems. Independent Intermediaries Independent intermediaries do business wit
h many different manufacturers and many different customers. Because they are no
t owned or controlled by any manufacturer, they make it possible for many manufa
cturers to serve customers throughout the world while keeping prices low.
Merchant Wholesalers Merchant wholesalers are independent intermediaries that bu
y goods from manufacturers and sell to retailers and other B2B customers. Becaus
e merchant wholesalers take title to the
goods, they assume certain risks and can suffer losses if products get damaged,
become out-
of-date or obsolete, are stolen, or just don’t sell. At the same time, because the
y own the
products, they are free to develop their own marketing strategies including sett
ing prices.
Merchant wholesalers include full-service merchant wholesalers and limited-servi
ce
wholesalers. Limited-service wholesalers are comprised of cash-and-carry wholesa
lers, truck
jobbers, drop shippers, mail-order wholesalers, and rack jobbers.
Merchandise Agents or Brokers Merchandise agentsor brokers are a second major ty
pe of independent intermediary. Agents and brokers provide services in exchange
for commissions. They may or may not take
possession of the product, but they never take title; that is, they do not accep
t legal ownership
of the product. Agents normally represent buyers or sellers on an ongoing basis,
whereas
brokers are employed by clients for a short period of time. Merchandise agents o
r brokers
include manufacturers’ agents (manufacturers’ reps), selling agents, commission merc
hants,
and merchandise brokers.
Manufacturer-Owned Intermediaries Manufacturer-owned intermediaries are set up b
y manufacturers in order to have separate business units that perform all of the
functions of independent intermediaries, while at the
same time maintaining complete control over the channel. Manufacturer-owned
intermediaries include sales branches, sales offices, and manufacturers’ showrooms
.Sales
branches carry inventory and provide sales and service to customers in a specifi
c geographic area. Sales offices do not carry inventory but provide selling func
tions for the manufacturer in a specific geographic area. Because they allow mem
bers of the sales force to be located close to customers, they reduce selling co
sts and provide better customer service.Manufacturers’
showrooms permanently display products for customers to visit. They are often lo
cated in or near large merchandise marts, such as the furniture market in High P
oint, North Carolina.
Vertical Marketing Systems
A vertical marketing system (VMS) is a distribution channel structure in which p
roducers,
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 moreindep endent producers,
wholesalers, and retailers. A vertical marketing system, on the other hand, pro
vides a way to resolve the
channel conflict that can occur in a conventional distribution channel where ch
annel members
are separate businesses seeking to maximize their own profits—even at the expense
sometimes of the system as a whole. The VMS can be dominated by the producer, wh
olesaler,
or retailer. There are three major types of vertical marketing systems:corporate
,contrac tual,
and administered.
A corporate VMS is a vertical marketing system that combines successive stages o
f
production and distribution under single ownership—channel leadership is establish
ed
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.
A contractual VMS is a vertical marketing system in which independent firms at d
ifferent
levels of production and distribution join together through contracts to obtain
more
economies or sales impact than they could achieve alone. Coordination and confli
ct
management are attained through contractual agreements among channel members. Th
e
franchise organization is the most common type of contractual relationship. Ther
e are three types of franchises: manufacturer-sponsored retailer franchise syste
m (Ford Motor Co.), manufacturer-sponsored wholesaler franchise system (Coca-Col
a bottlers), and service-firm- sponsored retailer franchise system (McDonald’s). T
he fact that most consumers cannot tell the difference between contractual and c
orporate VMSs shows how successfully the contractual organizations compete with
corporate chains. An administered VMS is a vertical marketing system that coordi
nates successive stages of
production and distribution, not through common ownership or contractual ties, b
ut through
the size and power of one of the parties. Manufacturers of a top brand can obtai
n strong trade
cooperation and support from resellers (P&G). Large retailers such as Wal-Mart c
an exert
strong influence on the manufacturers that supply the products they sell.
Developing and Managing a Distribution Strategy • A distribution strategy defines
how you are going to create and satisfy demand for your products.
• A distribution strategy defines how you are going to move products from point o
f creation to points of consumption in an efficient and cost-effective manner. • A
distribution strategy also defines how you are going to develop and maintain cu
stomer loyalty. • But first and foremost, a distribution strategy must be in sync
with how customers want to shop and buy. • Today s customers shop and buy very dif
ferently than ever before. • Their access to high-quality information via the inte
rnet, combined with their heightened price sensitivity, has created a customer t
hat is more sophisticated, better informed and often times, more adversarial tha
n customers of the past.
• This new breed of customer no longer plays by the rules of traditional distribut
ion channels. Despite this fact, manufacturers and distributors continue to supp
ort outdated distribution strategies that actually make it hard for customers to
shop for and purchase their products.
For product-focused companies, establishing the most appropriate distribution st
rategies is a major key to success, defined as maximizing sales and profits. Unf
ortunately, many of these companies often fail to establish or maintain the most
effective distribution strategies. Problems that have been identified include:
• Unwillingness to establish different distribution channels for different product
s Fear of utilizing multiple channels, especially including direct or semi-direc
t sales, due to concerns about erosion of distributor loyalty or inter-channel c
annibalization
• Failure to periodically re-visit and update distribution strategies • Lack of crea
tivity and resistance to change • To be fair, there can be sound reasons for these
perceived weaknesses. More typically, however, they are due to failings such as
simple inertia, lack of understanding of the ultimate customers and their prefe
rences, or a failure to acknowledge the importance of a distribution strategy an
d invest sufficient resources in understanding it.
The Internet is creating sea-changes in terms of traditional manufacturer-distri
butor relations. It has seen significant waves of disintermediation in multiple
product lines, and can facilitate cost-effective broadening of distribution chan
nels. Meanwhile, improvements in supply chain management technologies must also
be factored into choice of distribution partners.
SUPPLY CHAIN MANAGEMENT Company can improve its distribution strategies by: • Mapp
ing their products to the end-user
• Determining customers’ channel preferences and comparing these preferences with a
ctual availability • Recommending new channels, and examining competitors’ strategie
s and comparing them and their effectiveness with their own Channel Strategy: Ma
rketers face several strategic decisions in choosing channels and marketing inte
rmediaries for their products. Selecting a specific channel is the most basic of
these decisions. Marketers must also resolve questions about the level of distr
ibution intensity, the desirability of vertical marketing systems, and the perfo
rmance of current intermediaries.
Marketing Channel Selection Marketing channel selection can be facilitated by an
alyzing market, product, producer, and competitive factors. Distribution Intensi
ty Distribution intensity refers to the number of intermediaries through which a
manufacturer distributes its goods. The decision about distribution intensity s
hould ensure adequate market coverage for a product. In general, distribution in
tensity varies along a continuum with three general categories: intensive distri
bution, selective distribution, and exclusive distribution.
Intensive Distribution An intensive distribution strategy seeks to distribute a
product through all available
channels in an area. Usually, an intensive distribution strategy suits items wit
h wide appeal
across broad groups of consumers, such as convenience goods.
Selective Distribution Selective distribution is distribution of a product throu
gh only a limited number of channels. This arrangement helps to control price cu
tting. By limiting the number of retailers,
marketers can reduce total marketing costs while establishing strong working rel
ationships
within the channel. Moreover, selected retailers often agree to comply with the
company’s
rules for advertising, pricing, and displaying its products. Where service is im
portant, the
manufacturer usually provides training and assistance to dealers it chooses. Coo
perative
advertising can also be utilized for mutual benefit. Selective distribution stra
tegies are
suitable for shopping products such as clothing, furniture, household appliances
, computers,
and electronic equipment for which consumers are willing to spend time visiting
different
retail outlets to compare product alternatives. Producers can choose only those
wholesalers
and retailers that have a good credit rating, provide good market coverage, serv
e customers
well, and cooperate effectively. Wholesalers and retailers like selective distri
bution because it
results in higher sales and profits than are possible with intensive distributio
n where sellers
have to compete on price.
Exclusive Distribution Exclusive distribution is distribution of a product throu
gh one wholesaler or retailer in a specific geographical area. The automobile in
dustry provides a good example of exclusive distribution. Though marketers may s
acrifice some market coverage with exclusive
distribution, they often develop and maintain an image of quality and prestige f
or the product.
In addition, exclusive distribution limits marketing costs since the firm deals
with a smaller
number of accounts. In exclusive distribution, producers and retailers cooperate
closely in
decisions concerning advertising and promotion, inventory carried by the retaile
rs, and prices.
Exclusive distribution is typically used with products that are high priced, tha
t have
considerable service requirements, and when there are a limited number of buyers
in any
single geographic area. Exclusive distribution allows wholesalers and retailers
to recoup the
costs associated with long selling processes for each customer and, in some case
s, extensive
after-sale service. Specialty goods are usually good candidates for this kind of
distribution
intensity.
The New Distribution Strategies Amazing changes in the retail marketplace over t
he last 15 years has created new, different obstacles to successfully launch a n
ew product. Marketing romantics muse glowingly about the old days when there wer
e supposedly multiple placement opportunities in every level of retail. True, th
ere were. But on closer inspection, there are as many options now, if not more.
People and organizations are not usually open to change. Change is hard, require
s a different thought process, imagination, flexibility. In the 1980’s there was a
seemingly endless array of local, regional and national store chains, including
department stores, drug, discount, food, hardware and mass merchandisers. Most
are now gone. They did not change.
WT Grant, Montgomery Ward, Venture, Ayr-Way, Gold Circle, Hills, Super-X, Bamber
gers, B. Altman, Bonwit Teller and Wannamakers are only a tiny sampling of stron
g store brands that no longer exist. The new big box chains that have taken thei
r place feature massive purchasing, merchandising and logistic assets. Certainly
Wal-Mart, Home Depot, Macys, Walgreen and Kroger have earned their collective p
erches as dominating chains in their categories.
The question for small businesses and entrepreneurs is how to successfully place
 product in these retail behemoths. And if they can’t be penetrated what other opt
ions are available. The difficulties of selling a short line or a single item to
Wal-Mart are daunting, but can be overcome.
To successfully sell the big boys, you have to adjust, change your terms and con
ditions to fit theirs. The key to the modern big box success is based on huge sa
les volumes, lowest price available and logistics that enable ever-faster deploy
ment of inventory and resources. Software for shipping and receiving is as impor
tant as product features and benefits. You have to have the capacity to particip
ate in these advanced control systems.
The inter-net and electronic media have created whole new sales opportunities th
at did not exist a generation ago. If Ebay counted all of the independent contra
ctors they serve as employees, they would be the world’s largest employer. Over 70
0,000 entities now sell product through this vast, democratic, web community. Ma
ny make a full-time living from Ebay sales. This is an inter-net department stor
e with an auction format. And there are dozens of other targeted web-based sites
seeking inventory to sell as well.
Home Shopping Network, ANC, Shop at Home and QVC are simply electronic departmen
t stores and each has a huge appetite for new products. Every year these cable t
elevision retailers search locally and through on-air solicitations for fresh, c
reative, new products that can be demonstrated in this powerful sales venue. A p
roduct that sells successfully on HSN will soon be in demand on traditional reta
il shelves.
Years ago late night infomercials were the frequent butt of comic skits. Today m
ajor companies such as Proctor & Gamble, General Motors and Estee Lauder utilize
this sales venue. Hundreds of products are launched in short format infomercial
s each year, and many succeed. These spots can be produced at amazingly affordab
le prices and test media buys mitigate financial risk. Most big box stores featu
re an area featuring the “As Seen on TV” logo. It is much easier to penetrate the bu
reaucratic maze of a national chain with a bit of proven success in hand.
Much as TV infomercials have revolutionized product marketing, an even less expe
nsive strategy can be undertaken utilizing print media. Main stream newspapers,
magazines and print supplements increasingly sell print Advertorials. An Adverto
rial is an article that reads and appears to be non-commercial, but contains a s
pecific product message. These have been extremely powerful guerilla marketing t
ools, inexpensive, easy to monitor and strong revenue generators.
There are many other potential avenues to pursue in order to create sales tracti
on for a product. Publicity campaigns (have the advantage of being free), specia
lty catalogs, remittance envelopes, commission sales coverage, and a customized
web-site with an online pay-per-click program are just a few.
The old days and stores are gone. We only have the new days and a whole raft of
new opportunities to utilize. Maybe Lowe’s is not the place to launch your product
. Successful pursuit of a guerilla option will enable a product to develop a sal
es base, sales, traction and growth. This will level the negotiating field when
the big box presentation is made.