Channels of Distribution

Marketing Framework

Distribution

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

What are Distribution Channels?

Distribution channel A network of inter-connected firms that provide

sellers a means of infusing the marketplace with their goods, and buyers a means of purchasing those goods, as efficiently and profitably as possible

Actors in Distribution Channels

Manufacturing firms Distributors or wholesalers Retailers Consumers

Activities in Distribution Channels

Customer oriented: ordering, handling, shipping, etc.

Product-oriented: storage & display, etc. Marketing-centric: promotion, etc. Financial-oriented Logistics

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?

Discussion Question

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

Manufacturer to Consumer

Manufacturer through Channel

Forms of Distribution Channels

Discussion Questions

Given the 3 channels below, which is “best”? What are the tradeoffs between implementing the

left channel compared to the right channel?

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

Intensity Strategies

Intensive distribution usually goes with heavy promotion, lower prices and average or lower quality products

Exclusive distribution usually goes with exclusive promotional efforts, higher prices and higher quality products

Discussion Question

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

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

Channel Power and Conflict

Power is usually defined by size and effectiveness

In the long term, power isn’t a great way to resolve conflict because the less powerful player may feel resentful and act accordingly

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

Building Channel Relationships

If conflict cannot be resolved, 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

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

Channel Integration

If a company is currently using a partner to do something, it might wish to bring that function back in-house Forward Integration

e.g., manufacturer controls its retail stores

Backward integration e.g., manufacturer controls raw material

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?

Importance of Retail Employees

If retailers are not selective in hiring and if employees are not trained or paid well, service will be suboptimal and lead to customer dissatisfaction

Retailers benefit from selecting good people, training them, paying them, rewarding them well, and empowering them

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.

Retailer Growth Strategies

Provide additional services Reach out to attract additional segments Open additional stores Expand internationally

Exporting, joint ventures, direct foreign investment, license agreements, etc.

Depends upon: talent, costs, labor pool, infrastructure, government’s stance on foreign investment, real estate costs, travel costs, local ethics, etc.

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, Coca-Cola bottlers

Business format franchising McDonalds, Holiday Inn

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, software, books, music,

DVDs, and travel arrangements Many business drive their customers

online to reduce labor costs e.g., Retail banks raise fees to those who want to

interact with a teller

Internet Penetration

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, promotions, etc.

Top Catalogers

Sales Force

Utilized extensively by companies utilizing a push strategy

For more undifferentiated products, a company’s sales force is its most important driver of its performance

Sales Force Size

Estimate Workload 100,000 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 (100,000 accounts x 12 visits per year x 0.5

hour) / 1,500 hours = 400 salespeople

Sales Force Compensation

Sales compensation is usually salary plus bonuses Bonuses can be cash, trips, etc.

The question is how much is fixed and how much is variable

Sales Performance

Evaluation factors Sales

by segment, product, improvement, etc. Time spent with clients Expertise Knowledge Attitudes Days worked Selling expenses, etc.

Complaints by B2B Customers

Top 3 complaints of salespeople1. The salesperson isn’t following my company’s

buying process

2. The salesperson didn’t listen to my needs

3. The salesperson didn’t bother to follow up

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?