DISTRIBUTION (THE PLACE 'P') - Business-TES

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Distribution notes ... sales aren't necessarily good if they harm your brand image. ... The main function of a distribution channel is to provide a link between ...

DISTRIBUTION (THE PLACE ‘P’) Distribution (or "Place") is the fourth traditional element of the marketing mix. The other three are Product, Price and Promotion. This is often the ‘P’ that students forget about, but there is a wealth of stuff you can talk about. Remember it is not as simple as the supplier ‘choosing’ the channel. Others must agree to stock the good. The Nature of Distribution Channels Most businesses use third parties or intermediaries to bring their products to market. They try to forge a "distribution channel" which can be defined as

"all the organisations through which a product must pass between its point of production and consumption" Why does a business give the job of selling its products to intermediaries? After all, using intermediaries means giving up some control over how products are sold and who they are sold to. Remember, more sales aren’t necessarily good if they harm your brand image. The answer lies in efficiency of distribution costs. Intermediaries are specialists in selling. They have the contacts, experience and scale of operation which means that greater sales can be achieved than if the producing business tried running a sales operation itself. Functions of a Distribution Channel The main function of a distribution channel is to provide a link between production and consumption. Organisations that form any particular distribution channel perform many key functions: 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, assembling and 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. holding stock) All of the above functions need to be undertaken in any market. The question is - who performs them and how many levels there need to be in the distribution channel in order to make it cost effective. Numbers of Distribution Channel Levels Each layer of marketing intermediaries that performs some work in bringing the product to its final buyer is a "channel level". The figure below shows some examples of channel levels for consumer marketing channels:

IB Business & Management Distribution notes [email protected]

In the figure above, Channel 1 is called a "direct-marketing" channel, since it has no intermediary levels. In this case the manufacturer sells directly to customers. An example of a direct marketing channel would be a factory outlet store. Many holiday companies also market direct 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. The consumer electrical goods market in the UK is typical of this arrangement whereby producers such 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 typically buys and stores large quantities of several producers goods and then breaks into the bulk deliveries to supply retailers with smaller quantities. For small retailers with limited order quantities, the use of wholesalers makes economic sense. This arrangement tends to work best where 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 this channel arrangement in the UK is the distribution of drugs. The following table describes the factors that influence the choice of distribution channel by a business: Influence Market factors

Comments An important market factor is "buyer behaviour"; how do buyer's want to purchase the product? Do they prefer to buy from retailers, locally, via mail order or perhaps over the Internet? Another important factor is buyer needs for product information, installation and servicing. Which channels are best served to provide the customer with the information they need before buying? Does the product need specific technical assistance either to install or service a product? Intermediaries are often best placed to provide servicing rather than the original producer - 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 may decide 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 charge a "mark-up" or "commission" for participating in the channel. This might be deemed unacceptably high for the ultimate producer business. IB Business & Management Distribution notes [email protected]

Producer factors

A key question is whether the producer have the resources to perform the functions of the channel? For example a producer may not have the resources to recruit, train and equip a sales team. If so, the only option may be to use agents and/or other distributors. Producers may also feel that they do not possess the customer-based skills to distribute their products. Many channel intermediaries focus heavily on the customer interface as a way of creating competitive advantage and cementing the relationship with their supplying producers. Another factor is the extent to which producers want to maintain control over how, to whom and at what price a product is sold. If a manufacturer sells via a retailer, they effective lose control over the final consumer price, since the retailer sets the price and any relevant discounts or promotional offers. Similarly, there is no guarantee for a producer that their product/(s) are actually been stocked by the retailer. Direct distribution gives a producer much more control over these issues.

Product factors

Large complex products are often supplied direct to customers (e.g. complex medical equipment sold to hospitals). By contrast perishable products (such as frozen food, meat, bread) require relatively short distribution channels - ideally suited 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 available outlets. 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 will simply choose another.

Selective distribution involves a producer using a limited number of outlets in a geographical area to sell

products. An advantage of this approach is that the producer can choose the most appropriate or bestperforming outlets and focus effort (e.g. training) on them. Selective distribution works best when consumers are prepared to "shop around" - in other words - they have a preference for a particular brand or price and will search out the outlets that supply.

Exclusive distribution is an extreme form of selective distribution in which only one wholesaler, retailer or distributor is used in a specific geographical area.

There is a variety of intermediaries that may get involved before a product gets from the original producer to the final user. These are described briefly below: Retailers Retailers operate outlets that trade directly with household customers. Retailers can be classified in several ways: • Type of goods being sold( e.g. clothes, grocery, furniture) • Type of service (e.g. self-service, counter-service) • Size (e.g. corner shop; superstore) • Ownership (e.g. privately-owned independent; public-quoted retail group • Location (e.g. rural, city-centre, out-of-town) • Brand (e.g. nationwide retail brands; local one-shop name)

IB Business & Management Distribution notes [email protected]

Wholesalers Wholesalers stock a range of products from several producers. The role of the wholesaler is to sell onto retailers. Wholesalers usually specialise in particular products. Distributors and dealers Distributors or dealers have a similar role to wholesalers – that of taking products from producers and selling them on. However, they often sell onto the end customer rather than a retailer. They also usually have a much narrower product range. Distributors and dealers are often involved in providing after-sales service. Franchises Franchises are independent businesses that operate a branded product (usually a service) in exchange for a licence fee and a share of sales. Agents Agents sell the products and services of producers in return for a commission (a percentage of the sales revenues)

IB Business & Management Distribution notes [email protected]