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Distribution - Introduction

Distribution - Introduction

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Published by: sirsumit88 on Feb 19, 2010
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01/31/2011

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distribution - introduction
Distribution (or "Place") is the fourth traditional element of the marketing mix. The other threeare Product, Price and Promotion.
The Nature of Distribution Channels
Most businesses use third parties or
intermediaries
to bring their products to market. They tryto forge a "distribution channel" which can be defined as
"all the organisations through which a product must pass between its point of productionand consumption" 
Why does a business give the job of selling its products to intermediaries? After all, usingintermediaries means giving up some control over how products are sold and who they are soldto.The answer lies in efficiency of distribution costs. Intermediaries are specialists in selling. Theyhave the contacts, experience and scale of operation which means that greater sales can beachieved than if the producing business tried run a sales operation itself.
Functions of a Distribution Channel
The main function of a distribution channel is to provide a link between production andconsumption. Organisations that form any particular distribution channel perform many keyfunctions:
Information
Gathering and distributing market research and intelligence -important for marketing planning
Promotion
Developing and spreading communications about offers
Contact
Finding and communicating with prospective buyers
Matching
Adjusting the offer to fit a buyer's needs, including grading, assemblingand packaging
Negotiation
Reaching agreement on price and other terms of the offer
Physical distribution
Transporting and storing goods
Financing
Acquiring and using funds to cover the costs of the distribution channel
Risk taking
Assuming some commercial risks by operating the channel (e.g. holdingstock)All of the above functions need to be undertaken in any market. The question is - who performsthem and how many levels there need to be in the distribution channel in order to make it costeffective.
Numbers of Distribution Channel Levels
Each layer of marketing intermediaries that performs some work in bringing the product to itsfinal buyer is a "channel level". The figure below shows some examples of channel levels forconsumer marketing channels:
 
In the figure above, Channel 1 is called a
"direct-marketing"
channel, since it has nointermediary levels. In this case the manufacturer sells directly to customers. An example of adirect marketing channel would be a factory outlet store. Many holiday companies also marketdirect to consumers, bypassing a traditional retail intermediary - the travel agent.The remaining channels are
"indirect-marketing channels"
.Channel 2 contains one intermediary. In consumer markets, this is typically a
retailer
. Theconsumer electrical goods market in the UK is typical of this arrangement whereby producerssuch as Sony, Panasonic, Canon etc. sell their goods directly to large retailers such as Comet,Dixons and Currys which then sell the goods to the final consumers.Channel 3 contains two intermediary levels - a wholesaler and a retailer. A wholesaler typicallybuys and stores large quantities of several producers goods and then breaks into the bulkdeliveries to supply retailers with smaller quantities. For small retailers with limited orderquantities, the use of wholesalers makes economic sense. This arrangement tends to work bestwhere the retail channel is fragmented - i.e. not dominated by a small number of large,powerful retailers who have an incentive to cut out the wholesaler. A good example of thischannel arrangement in the UK is the distribution of drugs.
distribution - channel strategy
The following table describes the factors that influence the choice of distribution channel by abusiness:
InfluenceComments
 
Marketfactors
An important market factor is
"buyer behaviour"
; how do buyer's want topurchase the product? Do they prefer to buy from retailers, locally, via mail orderor perhaps over the Internet? Another important factor is
buyer needs
forproduct information, installation and servicing. Which channels are best served toprovide the customer with the information they need before buying? Does theproduct need specific technical assistance either to install or service a product?Intermediaries are often best placed to provide servicing rather than the originalproducer - for example in the case of motor cars.The willingness of channel intermediaries to market product is also a factor.Retailers in particular invest heavily in properties, shop fitting etc. They maydecide not to support a particular product if it requires too much investment(e.g. training, display equipment, warehousing).Another important factor is intermediary cost. Intermediaries typically chargea
"mark-up"
or
"commission"
for participating in the channel. This might bedeemed unacceptably high for the ultimate producer business. 
Producerfactors
A key question is whether the producer have the resources to perform thefunctions of the channel? For example a producer may not have the resources torecruit, train and equip a sales team. If so, the only option may be to use agentsand/or other distributors.Producers may also feel that they do not possess the customer-based skills todistribute their products. Many channel intermediaries focus heavily on thecustomer interface as a way of creating competitive advantage and cementingthe relationship with their supplying producers.Another factor is the extent to which producers want to maintain control overhow, to whom and at what price a product is sold. If a manufacturer sells via aretailer, they effective lose control over the final consumer price, since theretailer sets the price and any relevant discounts or promotional offers. Similarly,there is no guarantee for a producer that their product/(s) are actually beenstocked by the retailer. Direct distribution gives a producer much more controlover these issues. 
Productfactors
Large complex products are often supplied direct to customers (e.g. complexmedical equipment sold to hospitals). By contrast perishable products (such asfrozen food, meat, bread) require relatively short distribution channels - ideallysuited to using intermediaries such as retailers.
Distribution Intensity
There are three broad options - intensive, selective and exclusive distribution:
Intensive distribution
aims to provide saturation coverage of the market by using all availableoutlets. For many products, total sales are directly linked to the number of outlets used (e.g.cigarettes, beer). Intensive distribution is usually required where customers have a range of acceptable brands to chose from. In other words, if one brand is not available, a customer willsimply choose another.
Selective distribution
involves a producer using a limited number of outlets in a geographicalarea to sell products. An advantage of this approach is that the producer can choose the mostappropriate or best-performing outlets and focus effort (e.g. training) on them. Selective

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