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 Dells suppliers? Who are Amazons 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 isnt 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 theyre 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 ones 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 managers 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
Nordstroms

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, governments 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 companys 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 salespeople
1. The salesperson isnt following my companys buying process 2. The salesperson didnt listen to my needs 3. The salesperson didnt 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?