Chapter 10 Distribution Strategy High-Level Chapter Outline I. The Need for Marketing Intermediaries II. Classification of Marketing Intermediaries and Functions III. Channels of Distribution IV. Selecting Channels of Distribution A. Specific Considerations Distribution Coverage Required Degree of Control Desired Total Distribution Cost Channel Flexibility V. Managing a Channel of Distribution A. Relationship Marketing in Channels B. Vertical Marketing Systems Administered Systems Contractual Systems Corporate Systems VI. Wholesaling VII. Store and Nonstore Retailing A. Store Retailing B. Nonstore Retailing Catalogs and Direct Mail Vending Machines Television Home Shopping Direct Sales Online and Mobile Retailing Multichannel Marketing Detailed Chapter Outline I. The Need for Marketing Intermediaries A channel of distribution is the combination of institutions through which a seller markets products to organizational buyers or ultimate consumers. 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. II. Classification of Marketing Intermediaries There are a great many types of marketing intermediaries. Figure 10.1 presents the major types of marketing intermediaries common to many industries. Figure 10.2 is a listing of the more common marketing functions performed in the channel. The managerial question is not whether to perform the functions, but who will perform them and to what degree. III. Channels of Distribution A channel of distribution is the combination of institutions through which a seller markets products to the user or ultimate consumer. The conventional channel of distribution patterns for consumer goods markets are shown in Figure 10.3. Some manufacturers use direct channels, selling directly to a market. Using a direct channel, called direct marketing, increased in popularity as marketers found that products could be sold directly using a variety of methods. A common channel for consumer goods is one in which the manufacturer sells through wholesalers and retailers. 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. As in the consumer market, agents are used in organizational markets in cases where manufacturers do not wish to have their own sales forces. The final channel arrangement in Figure 10.4 may also be used by a small manufacturer or when the market consists of many small customers. Under such conditions, it may not be economical for sellers to have their own sales organization. IV. 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 appear to be overwhelming. All too often in the early stages of channel distribution, executives map out elaborate channel network only to find out later that no such independent intermediaries exist for the firm’s product in selected geographic areas. In general, there are six basic considerations in the initial development of channel strategy. These are outlined in Figure 10.5. A. Specific Considerations The choice of channels can be further refined in terms of—distribution coverage required, degree of control desired, total distribution cost, and channel flexibility. Distribution Coverage Required Distribution coverage can be viewed along a continuum ranging from intensive to selective to exclusive distribution. Intensive Distribution—here the manufacturer attempts to gain exposure through as many wholesalers and retailers as possible. Selective Distribution—here the manufacturer limits the use of intermediaries to the ones believed to be the best available in a geographical area. Exclusive Distribution—here the manufacturer severely limits distribution, and intermediaries are provided exclusive rights within a particular territory. Degree of Control Desired In selecting channels of distribution, the seller must take decisions concerning the degree of control desired over the marketing of the firm’s product. Ordinarily, the degree of control achieved by the seller is proportionate to the directness of the channel. When more indirect channels are used, the manufacturer must surrender some control over the marketing of the firm’s product. Total Distribution Cost The total distribution cost concept has developed out of the more general topic of systems theory. The concept suggests that a channel of distribution should be viewed as a total system composed of interdependent subsystems, and that the objective of the system (channel) manager should be to optimize total system performance. The following is a representative list of the major distribution costs to be minimized: Transportation Order processing Cost of lost business Inventory carrying costs Packaging Materials handling Channel Flexibility A final consideration relates to the ability of the manufacturer to adapt to changing conditions. If a manufacturer had long-term exclusive dealership with retailers in the inner city, the ability to adapt to this population shift could have been severely limited. V. Managing the Channel of Distribution Once the seller has decided on the type of channel structure to use and selected the individual members, the entire coalition should operate as a total system. The behavioral perspective views a channel of distribution as more than a series of markets or participants extending from production to consumption. A. Relationship Marketing in Channels For many years in theory and practice, marketing has taken a competitive view of channels of distribution. In other words, since channel members had different goals and strategies, it was believed that the major focus should be on concepts such as power and conflict. Research interests focused on issues concerning bases of power, antecedents and consequences of conflict, and conflict resolution. More recently, however, a new view of channels has developed. The success of Japanese companies in the 1980s led to the recognition that much could be gained by developing long-term commitments and harmony among channel members. This view is called relationship marketing, which can be defined as “marketing with the conscious aim to develop and manage long-term and/or trusting relationships with customers, distributors, suppliers, or other parties in the marketing environment.” It is well documented in the marketing literature that long-term relationships throughout the channel often lead to high quality products with lower costs. B. Vertical Marketing Vertical marketing systems are channels in which members are more dependent on one another and develop long-term working relationship in order to improve the efficiency and effectiveness of the system. Figure 10.6 shows the major types of vertical marketing systems, which include administered, contractual, and corporate systems. Administered Systems Administered vertical marketing systems are most similar to conventional channels. However, in these systems there is a higher degree of interorganizational planning and management than in a conventional channel. The dependence in these systems can result from the existence of a strong channel leader such that other channel members work closely with this company in order to maintain a long-term relationship. Contractual Systems Contractual vertical marketing systems involve independent production and distribution companies entering into formal contracts to perform designated marketing functions. Three major types of contractual vertical marketing systems are the retail cooperative organization, wholesaler-sponsored voluntary chain, and various franchising programs. In a retail cooperative organization, a group of independent retailers unite and agree to pool buying and managerial resources to improve competitive position. Usually, retailers agree to concentrate a major portion of their purchasing with the sponsoring wholesaler and to sell advertised products at the same price. The most visible type of contractual vertical marketing systems involves a variety of franchise programs. Franchises involve a parent company (the franchisor) and an independent firm (the franchisee) entering into a contractual relationship to set up and operate a business in a particular way. Corporate Systems Corporate vertical marketing systems involve single ownership or two or more levels of a channel. A manufacturer’s purchasing wholesalers or retailers is called forward integration. Wholesalers or retailers’ purchasing channel members above them is called backward integration. Firms may choose to develop corporate vertical marketing systems in order to compete more effectively with other marketing systems, to obtain scale economies, and to increase channel cooperation and avoid channel conflict. VI. Wholesaling Wholesalers are merchants that are primarily engaged in buying, taking title to, usually storing and physically handling goods in large quantities, and reselling the goods (usually in smaller quantities) to retailers or to industrial or business users. Wholesalers are also called distributors in some industries, particularly when they have exclusive distribution rights, such as in the beer industry. Wholesalers create value for suppliers, retailers, and users of goods by performing distribution functions efficiently and effectively. Producers use wholesalers to reach large markets and extend geographic coverage for their goods. Wholesalers may lower the costs for other channel members by efficiently carrying out such activities as physically moving goods to convenient locations, assuming the risk of managing large inventories of diverse products, and delivering products as needed to replenish retail shelves. While producers may actively seek out wholesalers for their goods, wholesalers also try to attract producers to use their services. Wholesalers with excellent track records that do not carry directly competing products and brands that have appropriate locations and facilities, and that have relationships with major retail customers can more easily attract manufacturers of successful products. Wholesalers that serve large markets may be more attractive since producers may be able to reduce the number of wholesalers they deal with and thereby lower their costs. Wholesalers need to attract retailers and organizational customers to buy from them. For new or small market share products and brands, particularly for those of less well known manufacturers, wholesalers may have to do considerable marketing to get retailers to stock them. While there are still many successful wholesalers, the share of products they sell is likely to continue to decrease. The survival of wholesalers depends on their ability to meet the needs of both manufacturers and retailers by performing distribution functions more effectively and efficiently than a channel designed without them. Marketing insight 10-3 presents some benefits of wholesalers for various channel members. VII. Store and Nonstore Retailing Marketers have a number of decisions to make to determine the best way to retail their products. Decisions have to be made about whether to sell through nonstore methods, such as the Internet, and if so, which methods of nonstore retailing should be used. A. Store Retailing About 90 percent of retail purchases are made through stores. Retailers vary not only in the types of merchandises they carry but also in the breadth and depth of their product assortments and the amount of services they provide. In general, mass merchandisers carry broad product assortments and compete on two bases. Specialty stores handle deep assortments in a limited number of product categories. Convenience stores are retailers whose primary advantages to consumers are location convenience. In selecting the types of stores and specific stores and chains to resell their products manufacturers have variety of factors to consider. Selling products in the right store and chains increase sales, and selling in prestigious stores can increase the equity of a brand and the price that can be charged. In addition to the merchandise offered, store advertising and price levels, the characteristic of the store itself–including layouts, colors, smells, noises, lights, signs, and shelf space and displays–influence the success of both the stores and the products they offer. B. Nonstore Retailing Five nonstore methods of retailing include catalogs and direct mails, vending machines, television home shopping, direct sales, and electronic exchanges. Catalogs and Direct Mail The advantages of this type of nonstore retailing for marketers are that consumers can be targeted effectively and reached in their homes or at work, overhead costs are decreased, and assortments of specialty merchandise can be presented with attractive pictures and in-depth descriptions of features and benefits. Although consumers cannot experience products directly as they can in a store, catalog retailers with reputations for quality and generous return policies can reduce consumers’ risk. Vending Machines Vending machines are a relatively limited method of retail merchandising, and most vending machine sales are for beverages, food, and candy. The advantages for marketers include the following: They are available for sales 24 hours a day, they can be placed in a variety of high-traffic locations, and marketers can charge higher prices. Television Home Shopping Television home shopping includes cable channels dedicated to shopping, infomercials, and direct response advertising shown on cable and broadcast network. While this method allows better visual display than catalogs, potential customers must be watching at the time the merchandise is offered; if not, they have no way of knowing about the product or purchasing it. Direct Sales Direct sales are made by salespeople to consumers in their homes or offices or by telephone. The most common products purchased this way are cosmetics, fragrances, decorative accessories, vacuum cleaners, home appliances, cooking utensils, kitchenware, jewelry, food and nutritional products, and educational materials. Salespeople can demonstrate products effectively and provide detailed feature and benefit information. A limitation of this method is that consumers are often too busy to spend their time this way and do not want to pay the higher prices needed to cover the high costs of this method of retailing. Online and Mobile Retailing Online retailing is the marketing of products and services directly to consumers via the Internet. Online retailing is the fastest-growing type of retailing, and in some years, online sales have grown 20 to 25 percent per year. Some of the growth in online sales is the result of online-only stores like Amazon.com and Priceline.com developing successful strategies to serve consumers effectively. Figure 10.7 lists some of the advantages and disadvantages of electronic exchanges for marketers. Because online retailing offers low-entry barriers, this is an advantage for a small company that wants to get into a market and compete for business with less capital. One of the recent developments in online retailing is mobile retailing in which products and services are marketed to consumers via smartphones and tablets. Multichannel Marketing As noted, a number of companies offer products and services in stores, in catalogs, and online. This is called multichannel marketing, and it has been found that sales usually increase with this strategy over that of a single channel. However, there are some problems in implementing this strategy that marketers have not fully overcome. While it is easy to argue that all channels should provide a consistent marketing mix, some marketers have had difficulty generating such a mix. This, combined with concerns about transaction speed and security, may explain why relatively few purchases are actually made on smartphones, compared with tablets and desktop computers. While marketers are still working on these issues, one thing that can help provide consistency is a customer relationship management system. This involves a centralized customer data warehouse that houses a complete history of each customer’s interactions with the company—regardless of whether it occurred in a store, on the Internet, on the telephone, or by mail. Such an information storehouse allows marketers to efficiently handle complaints, expedite returns, target promotions, and provide a near-seamless experience for customers. Key Terms Administered system: A vertical marketing system with a higher degree of interorganizational planning than a conventional channel often brought about by having a strong channel leader. Backward integration: The purchase by wholesalers or retailers of channel members above them. Channel of distribution: The combination of institutions through which a seller markets products to organizational buyers or ultimate consumers. Contractual system: A vertical marketing system that involves independent production and distribution companies entering into formal contracts to perform designated marketing functions. Convenience stores: Retailers whose primary advantages to consumers are location convenience, close-in parking, and easy entry and exit. They typically stock a limited number of items that consumers want to buy in a hurry, such as milk or soft drinks and include stores like 7-Eleven and PDQ. Corporate system: A vertical marketing system involving single ownership of two or more levels of a channel such as a manufacturer owning a wholesale operation. Direct channels: Channels in which the manufacturer sells directly to a market without the use of intermediaries. Direct marketing: A direct channel in which the seller uses direct mail, telemarketing, direct-action advertising, catalog selling, cable selling, online selling, or direct selling through demonstrations at home or place of work to reach buyers. Exclusive distribution: An approach to distribution that involves the manufacturer providing exclusive rights to intermediaries in particular territories. Forward integration: A manufacturer’s purchase of wholesalers or retailers who distribute its products. Indirect channels: Distribution channels with one or more intermediaries. Intensive distribution: An approach to distribution that involves using as many wholesalers and retailers as possible to get broad distribution. It is commonly used with convenience goods. Mass merchandisers: Large retailers that carry broad product assortments and compete on the basis of a good selection in a number of different categories (e.g. Macy's, Kroger) or on the basis of lower prices on products in their large assortment (e.g. Walmart, Costco). Mobile retailing: The marketing of products and services directly to consumers via smartphones and tablets. Multichannel marketing: Offering products and services in multiple channels such as in stores, in catalogs, and online. Online retailing: The marketing of products and services directly to consumers via the Internet. Consumers can search, order, and pay for products on their computers, tablets, or smartphones using this channel. Relationship marketing: Marketing with the conscious aim to develop and manage long-term and/or trusting relationships with customers, distributors, suppliers, or other parties in the marketing environment. Selective distribution: An approach to distribution in which the manufacturer limits the use of intermediaries to the best available in a geographic area. The intermediaries are commonly selected on the basis of the service or sales organization available or reputation. Specialty stores: Stores that handle deep assortments in a limited number of product categories, such as The Gap, Batteries Plus, or Best Buy. Total distribution cost: Concept that suggests that a channel of distribution should be viewed as a total system composed of interdependent subsystems and that the objective of the system (channel) manager should be to optimize total system performance. This typically means the total system should minimize costs for a given level of service. Vertical marketing systems: Channels in which members are more dependent on one another and develop long-term working relationships in order to improve the efficiency and effectiveness of the system. Additional Resources Coughlin, Anne T.; Erin Anderson; Louis W. Stern; and Adel I. El-Ansary. Marketing Channels. 7th ed. Upper Saddle River, NJ: Prentice Hall, 2006. Levy, Michael, and Barton A. Weitz. Retailing Management. 8th ed. Burr Ridge, IL: McGraw-Hill, 2012. Pasqua, Rachel, and Noah Elkin. Mobile Marketing. Indianapolis: John Wiley and Sons, 2013. Rosenbloom, Bert. Marketing Channels: A Management View. 8th ed. Mason, OH: Thomson South-Western, 2012. Simchi-Levi, David; Philip Kaminsky, and Edith Simchi-Levi. Designing and Managing the Supply Chain. 3rd ed. Burr Ridge, IL: McGraw-Hill, 2008. Instructor Manual for A Preface to Marketing Management J. Paul Peter, James H. Donnelly, Jr. 9780077861063, 9781259251641
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