Chapter 21Chapter 21Channels of DistributionChannels of Distribution

Distribution 21.1Distribution 21.1

After finishing this section you will After finishing this section you will know:know: The concept of a channel of The concept of a channel of

distributiondistribution Who channel members areWho channel members are The different non-store retailing The different non-store retailing

methodsmethods How channels of distribution differ for How channels of distribution differ for

consumer and B2B productsconsumer and B2B products

Distribution-How it WorksDistribution-How it Works

Channel of distributionChannel of distribution- the path a - the path a product takes from producer to final userproduct takes from producer to final user

When the product is purchased for use in When the product is purchased for use in business, the final user is industrialbusiness, the final user is industrial

When the product is purchased for When the product is purchased for personal use, the final user is a consumerpersonal use, the final user is a consumer

A product can be both industrial and A product can be both industrial and consumer: when a hair salon buys consumer: when a hair salon buys shampoo in bulk to wash their customers’ shampoo in bulk to wash their customers’ hairhair

Channel MembersChannel Members

IntermediariesIntermediaries- all businesses involved - all businesses involved in sales transactions that move in sales transactions that move products from the manufacturer to the products from the manufacturer to the final userfinal user

Provide value to producers by being Provide value to producers by being located in areas that the producer located in areas that the producer cannot reachcannot reach

Reduce the number of contracts Reduce the number of contracts required to reach the final user of the required to reach the final user of the productproduct

Channel MembersChannel Members

Agent intermediariesAgent intermediaries- do not take - do not take title to the goods they are sellingtitle to the goods they are selling

Usually called agentsUsually called agents Paid commission to help buyers and Paid commission to help buyers and

sellers get togethersellers get together Merchant intermediariesMerchant intermediaries- take title - take title

to the goods they are sellingto the goods they are selling

WholesalersWholesalers WholesalersWholesalers- buy large quantities of - buy large quantities of

goods from manufacturers, store goods, goods from manufacturers, store goods, then resell them to other businessesthen resell them to other businesses

Rack jobbersRack jobbers- wholesalers that manage - wholesalers that manage inventory and merchandising for inventory and merchandising for retailers by counting stock, filling it when retailers by counting stock, filling it when needed, and maintaining store displaysneeded, and maintaining store displays

Retailers are billed for goods sold, not for Retailers are billed for goods sold, not for all items on displayall items on display

Common products include: CDs, hosiery, Common products include: CDs, hosiery, health products, and beauty aidshealth products, and beauty aids

RetailersRetailers

RetailersRetailers- sell goods to the final - sell goods to the final consumer for personal useconsumer for personal use

Brick and mortar retailersBrick and mortar retailers- sell - sell goods to the customer from their goods to the customer from their own physical storesown physical stores

Final link between the Final link between the manufacturer and consumermanufacturer and consumer

RetailersRetailers

There are a number of non-store There are a number of non-store retailing operations that serve the retailing operations that serve the customer:customer:

1.1. Automatic retailingAutomatic retailing

2.2. Direct mail and catalog retailingDirect mail and catalog retailing

3.3. TV home shoppingTV home shopping

4.4. Online retailingOnline retailing

RetailersRetailers

Vending serviceVending service- buy - buy manufacturers’ products and sell manufacturers’ products and sell them through machines that them through machines that dispense goods to consumersdispense goods to consumers

Often placed in: stores, office Often placed in: stores, office buildings, restaurants, hospitals, buildings, restaurants, hospitals, and schools for freeand schools for free

RetailersRetailers

Direct mail and catalogsDirect mail and catalogs- also reach - also reach the final consumerthe final consumer

Television home shopping networksTelevision home shopping networks- - TV stations that sell products to TV stations that sell products to consumersconsumers

Buy the products in set quantities Buy the products in set quantities and sell them on television programsand sell them on television programs

Consumers phone in orders while Consumers phone in orders while watching the programswatching the programs

RetailersRetailers

E-tailingE-tailing- retailers selling products over - retailers selling products over the Internet to the customerthe Internet to the customer

Customers with Internet access buy Customers with Internet access buy goods directly from the manufacturers’ goods directly from the manufacturers’ web sitesweb sites

Some companies are solely found on the Some companies are solely found on the Internet: Amazon.comInternet: Amazon.com

Some brick and mortar retailers have Some brick and mortar retailers have expanded to sell their products on the expanded to sell their products on the Internet: Toys R Us, and Barnes & NobleInternet: Toys R Us, and Barnes & Noble

AgentsAgents

AgentsAgents- act as intermediaries by - act as intermediaries by bringing buyers and sellers bringing buyers and sellers togethertogether

BrokersBrokers- agents who are paid a - agents who are paid a commission for selling goodscommission for selling goods

AgentsAgents

Independent manufacturer’s Independent manufacturer’s representativerepresentative- represent several - represent several related but not competing related but not competing manufacturers in a specific industrymanufacturers in a specific industry

Not on any manufacturer’s payrollNot on any manufacturer’s payroll Work independently, running their Work independently, running their

own businessown business

Direct and Indirect Direct and Indirect ChannelsChannels

Direct distributionDirect distribution- occurs when the - occurs when the goods or services are sold from the goods or services are sold from the producer directly to the consumerproducer directly to the consumer

No intermediaries are involvedNo intermediaries are involved

Direct and Indirect Direct and Indirect ChannelsChannels

Indirect distributionIndirect distribution- involves one or - involves one or more intermediariesmore intermediaries

Both are common in marketing Both are common in marketing goodsgoods

The channel of distribution is The channel of distribution is usually more direct when the usually more direct when the services are performed by the services are performed by the business itselfbusiness itself

Channels in the Consumer Channels in the Consumer and Industrial Marketsand Industrial Markets

Different channels of distribution are Different channels of distribution are generally used to reach the customer in generally used to reach the customer in the consumer and industrial market.the consumer and industrial market.

Some manufacturers might sell the Some manufacturers might sell the same same productproduct to two different to two different marketsmarkets using using two distinct channels.two distinct channels.

It is important for any manufacturer to It is important for any manufacturer to weigh all of its options when selecting weigh all of its options when selecting the best channelthe best channel

A product can fail if the wrong channel is A product can fail if the wrong channel is usedused

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Distribution Planning 21.2Distribution Planning 21.2

After finishing this section you will know:After finishing this section you will know: The key considerations in distribution planningThe key considerations in distribution planning When to use multiple channels of distributionWhen to use multiple channels of distribution How to compare the costs and control How to compare the costs and control

involved in having a direct sales force versus involved in having a direct sales force versus using independent sales agentsusing independent sales agents

The 3 levels of distribution intensityThe 3 levels of distribution intensity The effect of the Internet on distribution The effect of the Internet on distribution

planningplanning The challenges involved in distribution The challenges involved in distribution

planning for international marketsplanning for international markets

Distribution PlanningDistribution Planning

Distribution decisions affect a firm’s Distribution decisions affect a firm’s marketing program, in the following marketing program, in the following ways:ways:

Multiple channelsMultiple channels Control versus costsControl versus costs Intensity of distribution desiredIntensity of distribution desired Involvement in e-commerceInvolvement in e-commerce

Multiple ChannelsMultiple Channels

Used when the product fits the Used when the product fits the needs of both industrial and needs of both industrial and consumer marketsconsumer markets

Control vs. CostsControl vs. Costs

Manufacturers and producers must Manufacturers and producers must weigh the control they want to keep weigh the control they want to keep over the distribution of their over the distribution of their products against costs and products against costs and profitabilityprofitability

Control vs. CostsControl vs. Costs

To do this, the company must To do this, the company must answer a few questions:answer a few questions:

Who does the selling?Who does the selling? Use an in-house sales forceUse an in-house sales force

On company payrollOn company payroll Receive employee benefitsReceive employee benefits Reimbursed for expensesReimbursed for expenses Manufacturers have complete controlManufacturers have complete control

Control vs. CostsControl vs. Costs

Hire agents to do the sellingHire agents to do the selling Independent selling arm of producersIndependent selling arm of producers Can be lower in cost than hiring an in-house Can be lower in cost than hiring an in-house

sales staffsales staff There are 2 different types of agents:There are 2 different types of agents: Manufacturer’s agentsManufacturer’s agents- work for several - work for several

producers and carry non-competitive producers and carry non-competitive merchandise in an exclusive territorymerchandise in an exclusive territory

Selling agentSelling agent- represent a single - represent a single producerproducer

Control vs. CostsControl vs. Costs

Who dictates the terms?Who dictates the terms? When dealing with retail giants, When dealing with retail giants,

manufacturers must adhere to manufacturers must adhere to strict criteriastrict criteria

Some manufacturers cannot get Some manufacturers cannot get involved with the giants due to involved with the giants due to costscosts

Distribution IntensityDistribution Intensity

Exclusive distributionExclusive distribution- protected - protected territories for distribution of a territories for distribution of a product in a given geographic areaproduct in a given geographic area

Dealers are assured that they are Dealers are assured that they are the only ones within a certain the only ones within a certain radius to sell a manufacturer’s radius to sell a manufacturer’s productsproducts

Retailers are tied by contract to the Retailers are tied by contract to the manufacturermanufacturer

Distribution IntensityDistribution Intensity

Integrated distributionIntegrated distribution- variation of - variation of exclusive distribution where exclusive distribution where manufacturers own and run their manufacturers own and run their own retail operationsown retail operations

Example: Sherwin-Williams sells its Example: Sherwin-Williams sells its paints in company-owned retail paints in company-owned retail storesstores

Distribution IntensityDistribution Intensity

Selective distributionSelective distribution- a limited - a limited number of outlets in a given number of outlets in a given geographic area used to sell the geographic area used to sell the productproduct

Select channel members that can:Select channel members that can: Maintain the image of the productMaintain the image of the product Have no credit risksHave no credit risks Be aggressive marketersBe aggressive marketers Do good inventory planningDo good inventory planning

Distribution IntensityDistribution Intensity

Intensive distributionIntensive distribution- involves the - involves the use of all suitable outlets to sell a use of all suitable outlets to sell a product product

Complete market coverageComplete market coverage Sell to as many customers as Sell to as many customers as

possiblepossible

E-CommerceE-Commerce

E-marketplaceE-marketplace- online shopping - online shopping locationlocation

E-marketplaces for B2B provide:E-marketplaces for B2B provide: one-stop shoppingone-stop shopping Substantial savingsSubstantial savings

Distribution Planning for Distribution Planning for Foreign MarketsForeign Markets

Different environments in foreign Different environments in foreign markets require that businesses markets require that businesses adjust their distribution systemsadjust their distribution systems

Chance to experiment with different Chance to experiment with different distribution strategiesdistribution strategies

Cultural considerations should also Cultural considerations should also be weighedbe weighed Study foreign culture before Study foreign culture before

expandingexpanding

Distribution Planning for Distribution Planning for Foreign MarketsForeign Markets

KeiretsuKeiretsu- alignment- Japanese - alignment- Japanese distribution systemdistribution system

Groups of 20-45 companies connect Groups of 20-45 companies connect to 1 bankto 1 bank

Bank groups businesses based on Bank groups businesses based on frequency of trade with each otherfrequency of trade with each other

Wholesalers are very important in Wholesalers are very important in Japan because of lack of storage Japan because of lack of storage space for the manufacturerspace for the manufacturer

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