Reading for this week:
5 Lecture 1 “Distribution”
Welcome to the “dark” side of marketing – channels of distribution, physical distribution and logistics. It sounds like the “dismal science” tag that economics got stuck with. Well, having been there, let me assure you there is light at the end of the “distribution” tunnel. In fact, it’s one of the “hottest” areas in marketing right now as firms strive to improve customer service and the bottom line.
Channel of distribution decisions involve numerous interrelated variables that must be integrated into the total marketing mix. Because of the time and money required to set up an efficient channel, and since channels are often hard to change once they are set up, these decisions are critical to the success of the firm. This week we’re concerned with the development and management of channels of distribution and the process of goods distribution in an extremely complex, highly productive, and specialized economy. It should be noted at the outset that channels of distribution provide the ultimate consumer, or organizational buyer, with time, place, and possession utility. Thus, an efficient channel is one that delivers the product when and where it is wanted at a minimum total cost.
THE NEED FOR MARKETING INTERMEDIARIES
Let’s start off with a relatively simple concept…but it is important in the grand scheme of things. In today’s economy, most producers do not sell their goods directly to the final users. Between them (the producer) and the final users, stand a host of marketing intermediaries performing a variety of functions and bearing a variety of names. Some intermediaries — such as wholesalers and retailers–buy, take title to, and resell the merchandise; sometimes we call them merchant middlemen. Others– such as brokers, manufacturers’ representatives, and sales agents–search for customers and may negotiate on behalf of the producer, but do not take title to the goods. They’re called agent middlemen. Still others–such as transportation companies, independent warehouses, banks, and advertising agencies–assist in the performance of distribution, but neither take title to goods nor negotiate purchases or sales. Hence the name – facilitators.
A channel of distribution is the combination of institutions through which a seller markets products to the user or ultimate consumer. The need for other institutions or intermediaries in the delivery of goods is sometimes questioned, particularly since the profits they make are viewed as adding to the cost of the product. However, this reasoning is generally fallacious, since producers use marketing intermediaries because the intermediary can perform functions more cheaply and more efficiently than the producer can. This notion of efficiency is critical when the characteristics of our economy are considered.
For example, our economy is characterized by heterogeneity in terms of both supply and demand. In terms of numbers alone, there are nearly 6 million establishments comprising the supply segment of our economy, and there are close to 90 million households making up the demand side. Clearly, if each of these units had to deal on a one-to-one basis to obtain needed goods and services, and there were no intermediaries to collect and disperse assortments of goods, the system would be totally inefficient. This is pretty much where most of the ex-Soviet economies are today. The primary job of intermediaries is to bring supply and demand together in an efficient and orderly fashion.
Marketing-channel decisions are among the most critical decisions facing you and your company’s management. The chosen channels intimately affect all the other marketing decisions. For example: The company’s pricing depends on whether it uses mass merchandisers or high-quality boutiques. The firm’s salesforce and advertising decisions depend on how much training and motivation the dealers need. In addition, (and this one can really be important) the company’s channel decisions involve relatively long-term commitments to other firms. Consider this: When an auto maker signs up independent dealers to sell its automobiles, the auto maker cannot buy them out the next day and replace them with company-owned outlets. There is a powerful inertial tendency in channel arrangements. Therefore, management must choose channels with an eye on tomorrow’s likely selling environment as well as today’s.
Now remember, a marketing channel performs the work of moving goods from producers to consumers. It overcomes the time, place, and possession gaps that separate goods and services from those who would use them. Members in the marketing channel perform several key functions and participate in the marketing flows.
It should be remembered that whether a manufacturer utilizes intermediaries to perform these functions, the functions should be performed by someone. In other words, the managerial question is not whether to perform the functions, but who will perform them, and to what degree.
To the extent that the manufacturer performs the functions, the manufacturer’s costs go up, and its prices must be higher. When some functions are shifted to middlemen, the producer’s costs and prices are lower, but the middlemen must add a charge to cover their work. If the middlemen are more efficient than the manufacturer, the prices faced by consumers should (this isn’t always the case) be lower. Consumers might decide to perform some of the functions themselves, in which case they should enjoy lower prices. The issue of who should perform various channel tasks is one of relative efficiency and effectiveness.
CHANNELS OF DISTRIBUTION
As previously noted, a channel of distribution is the combination of institutions through which a seller markets products to the user or ultimate consumer. Some of these links assume the risks of ownership; others do not. Some perform marketing functions, while others perform non-marketing, or facilitating functions, such as transportation and storage.
Some manufacturers use a direct channel, selling directly to a market. For example, Dell Computer sells computers through the mail without the use of other intermediaries. Using a direct channel, called direct marketing, increased in popularity as marketers found that products could be sold directly using a variety of media. These media include direct mail, telemarketing, direct-action advertising, catalog selling, cable selling, online selling, and direct selling through demonstrations at home or place of work.
In other cases, one or more intermediaries may be used in the distribution process. For example, Hewlett-Packard sells its computers and printers through retailers such as Best Buy and Office Max. A common channel for consumer goods is one in which the manufacturer sells through wholesalers and retailers. For instance, a cold remedy manufacturer may sell to drug wholesalers who, in turn, sell a vast array of drug products to various retail outlets. Small manufacturers may also use agents, since they do not have sufficient capital for their own sales forces. Channels with one or more intermediaries are referred to as indirect channels.
In contrast to consumer products, the direct channel is often used in the distribution of organizational goods. The reason for this stems from the structure of most organizational markets, which often have relatively few, but extremely large customers. Also, many organizational products, such as computers, need a great deal of presale and post-sale service. Distributors are used in organizational markets when the number of buyers is large and the size of the buying firm is small. As in the consumer market, agents are used in organizational markets in cases where manufacturers do not wish to have their own sales forces. Such an arrangement may be used by small manufacturers or when the market is geographically dispersed.
SELECTING CHANNELS OF DISTRIBUTION
Given the numerous types of channel intermediaries and functions that must be performed, the task of selecting and designing a channel of distribution may at first appear to be overwhelming. However, in many industries, channels of distribution have developed over many years and have become somewhat traditional. In such cases, the producer may be limited to this type of channel to operate in the industry. This is not to say that a traditional channel is always the most efficient and that there are no opportunities for innovation, but the fact that such a channel is widely accepted in the industry suggests it is highly efficient. A primary constraint in these cases and in cases where no traditional channel exists is that of availability of the various types of middlemen.
All too often in the early stages of channel design, executives map out elaborate channel networks only to find out later that no such independent intermediaries exist for the firm’s product in selected geographic areas. Even if they do exist, they may not be willing to accept the seller’s products. It’s all a part of the complexity of marketing channels of distribution.
W5 Video Distribution Strategy – An Introduction
What are the various types and functions of marketing intermediaries? Which are more important for large businesses and why? Which are more important for the small business and why? How could additional marketing channel options help you better serve your target market?
In your initial post…Provide a synopsis for your case and evaluation of your results, using a scholarly article found on EBSCOhost as your basis for your reasoning. Give specific examples, and be sure to cite your source.
Follow up posts…After your initial post, read over the responses posted by your peers and your instructor. Select at least two different posts, and address the following in your responses: Is there a common theme in your peer’s responses?
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