As you will be aware from your experiences as a consumer, producers rarely sell their goods or services directly to the person that consumes them. Marketing channels, or place in terms of the marketing mix, are the means by which interdependent organizations move products or services from the producer to the person that purchases or consumes the product. This is the basic role of distribution.
Let us consider the nature of distribution by looking at a very simple example of how it works in relation to our everyday experiences.
A basic example would be a tin of vegetable soup. The entire chain would begin with the seeds that the farmer sews and then plants. The farmer would sell the vegetables to the soup manufacturer, who would create soup from a recipe and then package the soup in a tin, and then bulk pack tins into a box and then those same boxes onto a pallet. The pallets would be driven by lorry or some other vehicle to a wholesaler. Independent retailers whilst visiting the wholesaler would break down a pallet and take a box of tinned soup. The retailer would return to his or her store and open the boxes of soup and place individual items onto a shelf next to similar products. The purchaser or customer would enter the store and buy a series of products including tinned soup. Having paid for the products the customer returned home and cooked soup for his or her family. The family eats the soup and they are the final consumers, as opposed to customers. This is an example of a very basic marketing channel in operation.
The case is that a manufacturer will attempt to maximise the accessibility of his product to as many consumers as possible. A prime example of this is Coca-Cola and their attempt to put a bottle of Coke within the arms reach of every consumer. For Coca-Cola this means a number of channels of distribution including manufacturing, transportation, bottling, wholesaling, retailing, vending machines and any other form of distribution you can think of. Coca-Cola maximises its accessibility.
(A marketing channel is) . . . a set of interdependent organisations that help make a product or service available for use or consumption by the consumer or business user.
A channel of distribution comprises a set of institutions which perform all of the activities utilised to move a product and its title from production to consumption.
The Bucklin definition above albeit more than 50 years old still represents the basic concept of place in the marketing mix.
Place has a number of names. Place is also known as channel, distribution or intermediary. It is the mechanism through which goods and/or services are moved from the manufacturer/ service provider to the user or consumer. So let's take a look at some basic distribution or channel decisions, and how we decide on the best distribution channel for our product or service.
There are six basic 'channel' decisions:
- Do we use direct or indirect channels? (e.g. 'direct' to a consumer, 'indirect' via a wholesaler).
- Single or multiple channels.
- Cumulative length of the multiple channels.
- Types of intermediary (see later).
- Number of intermediaries at each level (e.g. How many retailers in southern Spain?).
- Which companies as intermediaries to avoid 'intrachannel conflict' (i.e. infighting between local distributors).
Selection Consideration - how do we decide upon a distributor?
- Market segment - the distributor must be familiar with your target consumer and segment.
- Changes during the Product Life Cycle - different channels can be exploited at different points in the PLC e.g. Foldaway scooters are now available everywhere. Once they were sold via a few specific stores.
- Producer/distributor fit - Is there a match between their polices, strategies, image, and yours? Look for 'synergy'.
- Qualification assessment - establish the experience and track record of your intermediary.
- How much training and support will your distributor require?
Different customers have different needs. Customers in different segments have different needs, for example a food distributor will sell flour in different ways when it sells to a hotel as opposed to when the sales to a wholesaler. A business customer will have different needs to a retail customer, for example a stationary distributor will sell printer paper in bulk directly to a large company but will sell a single ream (500 sheets) indirectly to the average householder via his local stationery store.
Types of Channel Intermediaries.
There are many types of intermediaries including wholesalers, agents, retailers, the Internet, licensing and franchising. The main modes of distribution will be looked at in more detail as follows:
Channel Intermediaries - Wholesalers
- They break down 'bulk' into smaller packages for resale by a retailer.
- They buy from producers and resell to retailers. They take ownership or 'title' to goods whereas agents do not (see below).
- They provide storage facilities. For example, cheese manufacturers seldom wait for their product to mature. They sell on to a wholesaler that will store it and eventually resell to a retailer.
- Wholesalers offen reduce the physical contact cost between the producer and consumer e.g. customer service costs, or sales force costs.
- A wholesaler will often take on some of the marketing responsibilities. Many produce their own brochures and use their own telesales operations.
Channel Intermediaries - Agents
- Agents are mainly used in international markets.
- An agent will typically secure an order for a producer and will take a commission. They do not tend to take title to the goods. This means that capital is not tied up in goods. However, a 'stockist agent' will hold consignment stock (i.e. will store the stock, but the title will remain with the producer. This approach is used where goods need to get into a market soon after the order is placed e.g. foodstuffs).
- Agents can be very expensive to train. They are difficult to keep control of due to the physical distances involved. They are difficult to motivate.
Channel Intermediaries - Retailers
- Retailers will have a much stronger personal relationship with the consumer.
- The retailer will hold several other brands and products. A consumer will expect to be exposed to many products.
- Retailers will often offer credit to the customer e.g. electrical wholesalers, or travel agents.
- Products and services are promoted and merchandised by the retailer.
- The retailer will give the final selling price to the product.
- Retailers often have a strong 'brand' themselves e.g. Ross and Wall-Mart in the USA, and Alisuper, Modelo, and Jumbo in Portugal.
Channel Intermediaries - Internet
- The Internet has a geographically dispersed market.
- The main benefit of the Internet is that niche products reach a wider audience e.g. Scottish salmon direct from an Inverness fishery.
- There are low barriers to entry as set up costs are relatively small.
- Use e-commerce technology (for payment, shopping software, etc)
- There is a paradigm shift in commerce and consumption which benefits distribution via the Internet
There is a huge growth in online retailing. People buy physical products from companies such as Amazon or eBay, as well as a whole plethora of other smaller retailers marketing in a wide variety of small niches, also known as the long thin tail of marketing. There are many transaction related products such as theatre tickets and software upgrades that can be bought solely online. One way of segmenting Internet users was identified by McKinsey in 2000 and is summarised here as follows:
Simplifiers - experienced Internet users who seek convenience and low prices.
Surfers – an innovative minority who enjoy buying niche items and experiences based upon their own initiative.
Bargainers – price sensitive surfers looking for the best price.
Connectors – those new to the Internet who want to connect with others via Facebook and Twitter, with little knowledge to go much further.
Routiners - who have a small number of favourite sites which they visit often, such as online banking for example.
Sportsters - who spend most of their time looking at entertainment and sport.
Which of the above best represent you and your buyer behaviour when you are online?
Licensing and franchising
Some businesses are hothouses of ideas and innovation but they may lack expertise in terms of business and finance. In these situations licensing or franchising are an ideal option.
Licensing is essentially a contract which allows another business to manufacture or provide a service which conforms to your licence. Licensing is useful if the business wishes to quickly move into foreign countries, if manufacturing in a local market is too expensive then manufacturing could be undertaken overseas under licence, if shipping costs are too expensive or perhaps a market overseas would prefer a locally branded item. In return the licensee will get fees, will be able to penetrate a wide range of overseas markets, generally can control quality and production levels, and ultimately will be able to introduce new models as they arise.
Franchising is similar to licensing but tends to be used where there is a brand name or a particular format that a company owns. There are lots of familiar examples of franchising including KFC and many familiar high street and mall names - marketing everything from hamburgers to jewellery. Try to identify some franchises the next time that you go for a day out shopping.
Changing roles of logistics
Place also includes logistics. Logistics historically were largely about the physical distribution of goods from manufacturer to consumer by road and rail, sea and air. Logistics has undergone many changes since the 1970s. The cargo container was developed which reduced the amount of times the products needed loading on and off vehicles, and in and out of warehouses. More recently goods are loaded onto the container at the factory and products stay in the container until they are unloaded in at their final desination.
Supply chain management is now a focal discipline which takes logistics to the next level. Distribution is a central strategic management topic, and involves logistics professionals with highly technical information technology, resources and software.
The logistics manager integrates all elements of physical distribution and will optimise the flow of services and goods. There is a large amount of planning and organising in terms of the whole process, which includes selecting other agents and suppliers who are integrated into the process. Often logistics will integrate forwards with the supply chain of a large customer. An example of current thinking on logistics would include Just In Time Management (JIT) where components are delivered directly to manufacturing sites as the producers need them on the assembly line.