Distribution Strategy

COMPLETING COURSE

Successful marketing does not end when a business has developed a product/service and has found its appropriate target audience with a view

to selling it at the right price.

• Distribution is all about getting your product/service to the right people at the right time with special consideration for profit and effectiveness.

• Strategic distribution is a competitive advantage that accrues generally from the configuration of a distribution network (who, what, where, when) and, more specifically, from the selection of partners (i.e. middlemen) who intermediate between the company and the customer by performing necessary fulfillment and service activities.

Distribution Objectives

• Minimize total distribution costs for a given service output

• Determine the target segments and the best channels for each segment

• Objectives may vary with product characteristics– e.g. perishables, bulky products, non-standard

items, products requiring installation & maintenance

DISTRIBUTION STRATEGY

• Distribution channel: Path through which products—and legal ownership of them—flow from producer to consumers or business users.

• Physical distribution: Actual movement of products from producer to consumers or business users.

Direct Distribution

• Direct contact between producer and customer.• Often found in the marketing of relatively

expensive, complex products that may require demonstrations.

Distribution Channels Using Marketing Intermediaries

• Producers distribute products through wholesalers and retailers.

• Often used for products that sell inexpensively to thousands of consumers in widely scattered locations.

• A channel of distribution comprises a set of institutions which perform all of the activities utilised to move a product and its title from production to consumption

• Bucklin - Theory of Distribution Channel Structure (1966)

Distribution- Definitions

• Retailing : Consists of the activities involved in selling goods and services to ultimate consumers. A retail sale is one in which the buyer is an ultimate consumer and the buying motive for a retail sale is always personal or family satisfaction derived from the final consumption of item being purchased.

• Wholesalers: Wholesaling is concerned with the activities of those persons or establishments which sell to retailers and other merchants , and/or to industrial , institutional and commercial users , but who don’t sell in significant amount to ultimate consumers.

Manufacturer

Consumer

Retailer Retailer

Wholesaler

Retailer

Agent Agent

Wholesaler

Retailer

Distribution Scheme for Consumer Sales

Manufacturer

Industrial Consumer

Reseller Reseller

Distributor

Agent

Value AddedReseller

Agent

Single Step

Direct

Two Step

Distribution Scheme for Industrial Sales

Channel intermediaries – Wholesalers

• Break down ‘bulk’• buys from producers and sell small quantities

to retailers• Provides storage facilities• reduces contact cost between producer and

consumer• Wholesaler takes some of the marketing

responsibility e.g. sales force, promotions

Channel intermediaries – Agents

• Mainly used in international markets• Commission agent - does not take title of the

goods. Secures orders.• Stockist agent - hold ‘consignment’ stock• Control is difficult due to cultural differences• Training, motivation, etc are expensive

Channel intermediaries – Retailer

• Much stronger personal relationship with the consumer

• Hold a variety of products• Offer consumers credit• Promote and merchandise products• Price the final product• Build retailer ‘brand’ in the high street

Functions Performed by Wholesalers/Retailers for Manufacturers

• Market coverage: Convenience to customers• Sales contact : company sales force would be calling

on a relatively small number of wholesalers/retailers rather then the much larger number of customers.

• Inventory Holding: Stock the products of the companies that they represent. They reduce the manufacturers financial burden and risk associated with holding large inventories.

• Market Information• Customer Support : service, spare parts.

Functions Performed by Wholesalers/Retailers for Customers

• Product Availability: ready availability of range of products.

• Assortment, convenience: Brings together from a variety of manufacturers an assortment of products that can greatly simplify the customer’s selection and ordering tasks.

• Bulk-Breaking : Distributor buys in bulk and gives to customers in unit of one : SKU.

• Credit and Financial Assistance• Advice and Technical Support :(installation -->A/C,PC)• Customer Service : Delivery , after sales help .

Channel intermediaries – Internet

• Sell to a geographically disperse market• Able to target and focus on specific segments• Relatively low set-up costs• Use of e-commerce technology (for payment,

shopping software, etc)• Paradigm shift in commerce and consumption

Vertical Marketing Systems

• Vertical Marketing Systems (sometimes also referred to as centrally coordinated systems) have emerged as the dominant ingredient in the competitive process and thus play a strategic role in the formulation of distribution strategy.

• Corporate, Under the corporate vertical marketing system, successive stages of production and distribution are owned by a single entity. This is achieved through forward and backward integration. KVIC, Sahakari Bhandar

• Administered, In an administered vertical marketing system, a dominant firm within the channel system, such as the manufacturer, wholesaler, or retailer, coordinates the flow of goods by virtue of its market power

• For example, the firm may exert influence to achieve economies in transportation, order procession, warehousing, advertising, or merchandising. As can be expected, it is large organizations like, Amul, Procter & Gamble, and Hindustan Unilever Brothers.

• Contractual: In a contractual vertical marketing system, independent firms within the channel structure integrate their programs on a contractual basis to realize economies and market impact.

Three types of contractual vertical marketing systems

• Wholesaler-sponsored voluntary groups, small grocery stores agree to form a chain to achieve economies with which to compete against corporate chains

• Apna Bazar retailer-sponsored ,A kind of a co-operative arrangement

• Kirana Federation• Franchise systems. A franchise system is an arrangement

whereby a firm licenses others to market a product or service using its trade name in a defined geographic area under specified terms and conditions. Hot Chips

Factors Retailers use in choosing Companies

• Accepts unsold or damaged merchandise returns

• Has quick and easy ordering procedures

• Provides prompt delivery• Maintains adequate supply• Good reputation /Brand

Name• Has a large product range.• Provides deliveries in lots

as desired by retailer.

• Promotes brand on a regular basis.

• Provides adequate margins.• Offers good schemes,

quantity discounts• Extends credit > 30 days.• Has good competent sales

team/product/technical team.• Ensures prompt service• Provides good store displays

(POP)

Six Steps in Channel design

• List the factors that could potentially influence the direct/indirect decision.

• Pick out the factors that will have the most impact on the channel design decision.

• Decide how each factor identified is related to the attractiveness of a direct or an indirect channel.

• Create a matrix based on the key factors to consider the interactions among key factors.

• Decide (for each cell in the matrix) whether a direct channel, an indirect channel or a combination of both a direct and an indirect channel is most appropriate, considering the factors involved.

• For each product or service in question, locate the corresponding cell in the box model.

Channel Design Model

• List the factors that could potentially influence the direct/indirect decision. Each factor must be evaluated carefully in terms of the firm’s industry position and competitive strategy.

• Pick out the factors that will have the most impact on the channel design decision. No factor with a dominant impact should be left out.

• For example, assume that the following four factors have been identified as having particular significance; market concentration, customer service level, asset specificity, and availability of working capital.

• Decide how each factor identified is related to the attractiveness of a direct or an indirect channel. For example, market concentration reflects the size distribution of the firm’s customers as well as their geographical dispersion. Therefore, the more concentrated the market, the more desirable the direct channel because of the lower costs of serving that market (high = direct; low = indirect).

• Customer service level is made up of at least three factors: delivery time, lot size, and product availability. The more customer service required by customers, the less desirable is the direct channel (high = indirect; low = direct).

• The direct channel is more desirable, at least under conditions of high uncertainty in the environment, with a high level of asset specificity (high = direct; low = indirect). Finally, the greater the availability of working capital, the more likely it is that a manufacturer can afford and consider a direct channel (high = direct; low = indirect). Note that a high level on a factor does not always correspond to a direct channel.

 

Channel Strategies

• Channel Structure Strategy• Distribution Scope Strategies.• Channel Modification Strategy• Channel Integration

Distribution Scope Strategy

Selecting Distribution Intensity• Distribution intensity The number of intermediaries

or outlets through which a manufacturer distributes its goods.

Intensive distribution Firm’s products in nearly every available outlet.

Selective distribution Limited number of retailers to distribute its product lines.

Exclusive distribution Limits market coverage in a specific geographical area

EXCLUSIVE DISTRIBUTION

• Exclusive distribution means that one particular retailer serving a given area is granted sole rights to carry a product. Distributing through company outlets or franchisee e.g.: LG PLAZA, HONDA Showrooms: - only company products are available.

-Firms targeting a single well defined Market Segment

-Associated with Prestige Products-BMW

-Also used for specialty products such as furniture and Clothing Eg: Gautier, Bata Stores

-Buyers in this segment try to search or travel to the outlets.• EG; Rolex watches, Regal shoes, Celine neckties, and Mark

Cross wallets, Gucci bags.

EXCLUSIVE DISTRIBUTION

• Exclusive distribution is especially relevant for products that customers seek out.

• E.g.: Rolex watches, Gucci bags, regal shoes, Celine neckties, and Mark Cross wallets.

INTENSIVE DISTRIBUTION

• Placing the products in as many outlets as possible.

• Products : Soaps, cigarettes, soft drinks , BPL MOTS etc. ( each outlet has various brands )

• If the nature of a product is such that a consumer generally does not bother to seek out the product but will buy it on sight if available, then it is to the seller’s advantage to have the product visible in as many places as possible.

SELECTIVE DISTRIBUTION

• Here companies select a combination of Exclusive distribution (only company’s products) & Intensive Distribution (some important outlets which are multiband outlets)

E.g. SAMSUNG, VIDEOCON • Customers need to do comparison shopping to

select between stores• Multiple stores sell products to suit the convenience

of customers, Vijay Sales, Sumaria, etc for TVs and white goods.

Channel-Structure Strategy

• The channel-structure strategy refers to the number of intermediaries that may be employed in moving goods from manufacturers to customers.

• To a significant extent, channel structure is determined by where inventories should be maintained to offer adequate customer service, fulfill required sorting processes, and still deliver a satisfactory return to channel members.

Selection of a Channel Structure

• Selection of channel structure may be explained with reference to Bucklin’s Postponement-Speculation framework.

• Postponement matches production/distribution with actual customer demand.

-Firm holds the stock and not the channel• Speculation, on the other hand, requires the

channel to hold the inventory.

-Firm undertakes risk through changes in form and movement of goods within channels.

• Postponement produces efficiency in marketing channels

-eliminates risk arising from unsold goods

- Sale matches actual customer’s demand

- Works on Market Pull factors• Speculation

- leads to economies of scale in manufacturing,

-reduces costs of frequent ordering

-and eliminates opportunity cost.

- Works on Push factors

Selection considerations

• Market segment - must know the specific segment and target customer

• Changes during plc - different channels are exploited at various stages of plc

• Producer-distributor fit - their policies, strategies and image

• Qualification assessment - experience and track record must be established

• Distributor training and support

Selection of Suitable Distribution Policies \based on the Relationship

between Type of Product and Type of Store

Classification Consumer behaviour Most likely form of distribution

Convenience store convenience goods

The consumer prefers to buy the most readily available brand of product at most accessible store

Intensive

Convenience store Shopping good

The customer selects his or her purchase from among the assortments carried by the most accessible store

Intensive

Convenience store speciality good

The consumer purchase his or her favourite brand from the most accessible store carrying the item in the stock

Selective/ exclusive

Shopping store/ Convenience good

The customer is indifferent to the brand of product he or she buys but shops different stores to secure better retail service and/or retail price.

Intensive

Shopping store/ Shopping good

The customer makes comparisons among both retail controlled factors and factors associated with the product (brand).

Intensive

Shopping Store / Specialty good

The consumer has a strong preference as to product brand but shops a number of stores to secure the best retail service and/or price for this brand.

Selective/ Exclusive

Specialty store/ Convenience good

The consumer prefers to trade at a specific store but is indifferent to the brand of product purchased.

Selective/ Exclusive

Specialty store / Shopping good

The consumer prefers to trade at a certain store but is uncertain as to which product he or she wishes to buy and examines the store’s assortment for the best purchase.

Selective/ Exclusive

Criteria for choosing Channel Partners

• Financial Strength of Prospective Channel Partner : revenue, P& L statement , balance sheet etc.

• Sales Strength : no. of salesmen and their technical competency– Product Lines:– Competitive products, – Compatible products – Complementary products.

• Reputation: – leadership – Well Established – Level of expertise.

• Market coverage: Geographic coverage, outlets per market area.• Sales Performance.• Advertising & Sales promotion programs.• Ordering & Payment Procedures.• Willingness to share data:

– Customers – Inventory – Sales figures.

• Installation & Repair services.

• Multiple-Channel Strategy• The multiple-channel strategy refers to a situation in

which two or more different channels are employed to distribute goods and services.

• Complementary Channels• Complementary channels exist when each channel

handles a different non-competing product or non-competing market segment. An important reason to promote complementary channels is to reach market segments that cannot otherwise be served.

• Tibbs Frankie, Orpat Calculators with Stationery, Orpat Clocks thru Watch shops in the same place.

Competitive Channels

• Competitive channels exist when the same product is sold through two different and competing channels. Two franchises could be issued to the same dealer, but they are normally issued to separate dealers. Competition between dealers holding separate franchises is both possible and encouraged.

• Amul Ice creams are sold in competing retail channels

Channel Modification Strategy• Firm to periodically review and modify its channel

arrangements. • Modification becomes necessary when:• The distribution channel is not performing.• Consumer buying patterns change. • The market expands.• New competition arises.• Innovative distribution channels emerge. • The product moves into later stage in the product life cycle.• No marketing channel will remain effective over the whole

product life cycle. Early buyers might be willing to pay for high value-added channels, but later buyers will switch to lower-cost channels.

• Small office copiers were first sold by manufacturers’ direct sales forces, later through office equipment dealers, still later through mass-merchandisers, and now by mail-order firms and internet marketers.

• Introductory stage - Radically new products or fashions tend to enter the market through specialist channels (such as boutiques) that spot trends and attract early adopters.

• Rapid growth stage - As interest grows, higher-volume channels appear (dedicated chains, department stores) that offer services but not as many as the previous channels.

• Maturity stage - As growth slows, some competitors move their product into lower-cost channels (mass-merchandisers).

• Decline stage - As decline begins, even lower-cost channels emerge (mail-order houses, off-price discounters).

Channel Integration

• Firms have to build this activity in their Channel Activities

• Benefits: When managed properly the synergy at the marketplace provides a high competitive advantage and smooth flow of information, goods and services

Factors for Integrating Channels

• Connectivity: ensures real time flow of information on activities of the channels.

• Community: Ensure a common vision and a shared set of objectives with the channel members.

• Collaboration: Recognize Mutual interdependence. Promote shared understanding beyond contractual obligations.

What factors should be taken into account in choosing the best distribution channel?

• Nature of the product • Perishable/fragile? A product with a short-life • Technical/complex? Complex products are often sold by

specialist distributors or agents • Customized? A direct distribution approach often works best for

a product that the end consumer wants providing to a distinct specification

• Type of product – e.g. convenience, shopping, speciality • Desired image for the product – if intermediaries are to be used,

then it is essential that those chosen are suitable and relevant for the product.

• The market– Is it geographically spread? – Does it involve selling overseas (see further

below) – The extent and nature of the competition – which

distribution channels and intermediaries do competitors use?

• The business– Its size and scope – e.g. can it afford an in-house

sales force? – Its marketing objectives – revenue or profit

maximization? – Does it have established distribution network or

does it need to extend its distribution option – How much control does it want over distribution? 

The longer the channel, the less control is available

• Legal issues– Are there limitations on sale? –What are the risks if an intermediary sells the

product to an inappropriate customer?