Channels of Distribution

Marketing Framework

 Sellers prefer to produce large quantities of a limited number of goods  Buyers prefer smaller quantities of a wider variety of goods  Distribution deals with realigning the discrepancies between quantities and selections
 Breaking bulk: making goods available in smaller batches

as efficiently and profitably as possible . and buyers a means of purchasing those goods.What are Distribution Channels?  Distribution channel  A network of inter-connected firms that provide sellers a means of infusing the marketplace with their goods.

Actors in Distribution Channels     Manufacturing firms Distributors or wholesalers Retailers Consumers .

 Financial-oriented  Logistics .Activities in Distribution Channels  Customer oriented: ordering. handling. etc. shipping.  Product-oriented: storage & display.  Marketing-centric: promotion. etc. etc.

Tension in Distribution Channels  Tension in channels can be created by the contribution of each channel member  Do they provide more benefit than they cost?  Should we do this activity ourselves or have a channel member do it for us? .

Assuming all else is equal.Discussion Question  View the next two slides. which is the most efficient channel? Why? .

Manufacturer to Consumer .

Manufacturer through Channel .

Forms of Distribution Channels .

which is “best”?  What are the tradeoffs between implementing the left channel compared to the right channel? .Discussion Questions  Given the 3 channels below.

Channels and Supply Chains  Suppliers: upstream actors  Supply chain management  Channel members: downstream actors that help a company reach consumers .

Channels and Supply Chains .

Discussion Questions  Who are Dell’s suppliers?  Who are Amazon’s suppliers?  Who are DreamWorks’ channel members? .

Designing Distribution Channels  Determine distribution intensity  How many intermediaries will be used?  Determine push or pull strategy  Determine how to deal with conflict .

Intensive Distribution
 Intensive: widely distributed
 Drugstores, supermarkets, discount stores, convenience stores, etc.

 Usually for simple, inexpensive, easily transported products
 Snack food, shampoo, newspapers, etc.

 Pull strategy: promote directly to end consumers to pull through channel

Selective Distribution
 Selective: less widely distributed  Usually for complex and/or expensive products that require assistance
 Cars, computers, appliances, etc.

 Push strategy: promote to distribution partners to push goods to consumer  Manufacturer has more control due to fewer relationships to manage

Exclusive Distribution
 Exclusive: extreme case of selectivity  Manufacturers have the most control  May become monopolistic

higher prices and higher quality products . lower prices and average or lower quality products  Exclusive distribution usually goes with exclusive promotional efforts.Intensity Strategies  Intensive distribution usually goes with heavy promotion.

How intensively would you distribute this product? Why? .Discussion Question  Assume you are a marketer for Coach handbags.

Pull Strategy  Incentives offered to consumers to pull products through the channel        Advertise to consumers Distribute widely Offer price and/or quantity discounts Offer inexpensive trials or free samples Offer coupons and/or rebates Offer financing Offer loyalty programs/points .

Push Strategy  Incentives offered to distribution partners to push products through the channel        Advertise to partners (and consumers) Distribute more selectively Employ a sales force Offer incentives to sales force Offer price and/or quantity discounts Offer financing Offer allowances for marketing activities .

Channel Conflict  Conflict can arise when channel partners differ in their opinions on how to please customers and maximize profit  Conflict may motivate parties to find alternative solutions .

Types of Power  Coercive power: Ability to take away benefits or inflict punishment on other party  Information power: Having information other party seeks  Legitimate power: Using size or expertise to encourage other party .

Types of Power  Referent power: One party seeks an affiliation with other  Reward power: Ability to provide good outcomes for other party .

power isn’t a great way to resolve conflict because the less powerful player may feel resentful and act accordingly .Channel Power and Conflict  Power is usually defined by size and effectiveness  In the long term.

Dealing with Conflict  Develop effective communication to enhance trust and satisfaction  Make sure that parties feel that they’re being heard and their needs are understood and being met  Remind channel members of mutual goal of customer satisfaction .

two other possible actions:  Mediation  Negotiate through a third party that determines the two parties’ utility functions  Arbitration  The third party makes a binding decision for the two .Building Channel Relationships  If conflict cannot be resolved.

Discussion Questions  Which type of power do you think would be more likely to create cooperative channel partnerships?  Which type of power do you think would be least likely to create cooperative channel partnerships? .

Transaction Cost Analysis  Transaction cost analysis (TCA)  A model that considers channel members’ production costs and governance costs. both of which are ideally minimized .

Transaction Cost Analysis  Production Costs  Costs of producing/bringing product to market  Governance Costs  Costs involved with relational issues incurred coordinating the enterprise and controlling one’s partners .

Revenue Sharing  Channel conflict often comes down to revenue sharing  Double Marginalization  The manufacturer wants a mark-up when it sells to a retailer  The retailer wants a second markup when it sells to the consumer .

Double Marginalization Problem .

Double Marginalization Solutions .

it might wish to bring that function back in-house  Forward Integration  e. manufacturer controls its retail stores  Backward integration  e.g...g. manufacturer controls raw material .Channel Integration  If a company is currently using a partner to do something.

Private Labels  Many retailers are integrating backward into private label products  Advantages  May give retailers negotiating power with the manufacturer  May offer significant margin opportunities  May allow retailer to distinguish itself as the only place that offers that brand .

Discussion Questions  How could Barnes & Noble engage in backward integration?  How could Maytag engage in forward integration? .

Retailing  Retailers have been gaining power and momentum over the past 10-20 years  Powerful retailers can make or break a new product .

Types of Retailing  Categorize retailers according to extent of manager’s ownership  Independent retailers  Local florist  Branded store chains  Old Navy  Franchises  Jiffy Lube .

Types of Retailing  Categorize retailers according to their level of service which tends to be positively related to their price points  Full service  Nordstrom’s  Limited service  K-mart .

Types of Retailers  Categorize retailers according to product assortment  Specialty: carry depth not much breadth  Toy stores  General merchandise: carry breadth but not much depth  Department stores .

Discussion Questions  Can you categorize Wal-mart in terms of ownership. level of service and product assortment?  Why do you think Wal-mart has been successful? .

training them. service will be suboptimal and lead to customer dissatisfaction  Retailers benefit from selecting good people. and empowering them . rewarding them well. paying them.Importance of Retail Employees  If retailers are not selective in hiring and if employees are not trained or paid well.

Importance of Operations  Flowcharting operations  Front-stage: elements customers see  Back-stage: elements customers do not see  Must be run efficiently to support front-stage  What parts of the process flow smoothly? What parts do not?  What parts of the process might be streamlined or eliminated altogether? .

Importance of Location  Consider factors needed to be successful  Environmental data     population densities income and social class distributions median ages household composition. etc. .

etc. joint ventures. costs.  Depends upon: talent. government’s stance on foreign investment. . license agreements. labor pool. travel costs. direct foreign investment. infrastructure. local ethics. etc.Retailer Growth Strategies     Provide additional services Reach out to attract additional segments Open additional stores Expand internationally  Exporting. real estate costs.

Coca-Cola bottlers  Business format franchising  McDonalds.Franchising  Company can retain some control without complete ownership or capital expenditure  Franchisor: the company  Franchisee: local owner  Pays fee and royalties  Product franchising  Ford dealer. Holiday Inn .

software. and travel arrangements  Many business drive their customers online to reduce labor costs  e. music. books. DVDs. Retail banks raise fees to those who want to interact with a teller .g..E-commerce  Retail sales online are about $30 billion  Only about 3% of total retail sales  Much potential for growth  What sells well  Computer hardware.

Internet Penetration .

etc. promotions. .Catalog Sales  E-commerce and catalogs are complementary  Many companies use both successfully  83 of the top 100 catalogers saw growth  Catalogs are preferred for browsing  Catalogs trigger web visits  Customer databases are utilized for customized catalogs.

Top Catalogers .

a company’s sales force is its most important driver of its performance .Sales Force  Utilized extensively by companies utilizing a push strategy  For more undifferentiated products.

000 stores  12 visits each per year for 30 minutes  50 weeks per year x 40 hours a week = 2000 hours  500 of these hours will be spent on travel and administrative duties  (100.Sales Force Size  Estimate Workload  100.000 accounts x 12 visits per year x 0.5 hour) / 1.500 hours = 400 salespeople .

trips.  The question is how much is fixed and how much is variable .Sales Force Compensation  Sales compensation is usually salary plus bonuses  Bonuses can be cash. etc.

Sales Performance  Evaluation factors  Sales  by segment. etc. product. improvement.       Time spent with clients Expertise Knowledge Attitudes Days worked Selling expenses. . etc.

The salesperson didn’t bother to follow up . The salesperson didn’t listen to my needs 3.Complaints by B2B Customers  Top 3 complaints of salespeople 1. The salesperson isn’t following my company’s buying process 2.

Discussion Questions  How could a company reduce some of these customer complaints?  Why would a company use bonuses for its sales force? .

Integrated Marketing Channels  When designing marketing channels  Understand your customers’ behavior  Ask these questions  What are your target market segments?  What benefits do they seek?  How can we match customer needs to our corporate growth strategies?  What mix of channels will facilitate our meeting these goals? .

Discussion Questions  Why would it be important to understand your customer in designing your distribution channel?  What might you want to know about your customer prior to designing the channel? .

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