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Distribution Channel Strategy

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

Distribution Channels in Marketing Strategy


Distribution channels are key because they are the means of making goods and services available to ultimate users. Four functions of marketing channels: Channels facilitate the exchange process by reducing the number
of marketplace contacts necessary to make a sale. Distributors adjust for discrepancies in the markets assortment of goods and services via sorting, channeling products to meet the buyers and producers needs. Channel members tend to standardize payment terms, delivery schedules, prices, purchase lots, and other conditions. Channels facilitate searches by both buyers and sellers and bring them together to complete the exchange process.

Importance of Marketing Channels


Difficulty in Gaining Sustainable Competitive Advantage
Easier for competitors to achieve parity in product design, design

features, and quality Company whose strategy emphasizes lower prices than competitors is not likely to hold on to that advantage for very long Advertising has created enormous clutter, which drastically reduces the impact of p y p promotional messages g 1. Channel strategy is long term 2. Channel strategy usually requires a structure 3. Channel strategy is based on relationships and people

Importance of Distribution Channels


Channels configurations - Consumer goods - Industrial goods - Services The firm sells to its customers - Through its own sales force - Through independent intermediaries - Through an outside distribution system with regional coverage Channels structure should be designed to manage - Physical flow of goods and services - Transactional flows - Information flows

Channel Design
- Customer Characteristics - Distribution culture - Competition - Company objectives (for market share and profitability) - Character (nature of product, positioning of the product) - Capital (financial requirement) - Cost (cost incurred in maintaining the channel) - Coverage (intensive, selective, exclusive distributions) - Control (product/service presentations, quality, image) (p p ,q y, g ) - Continuity - Communication

Channel Development
Sources for finding Intermediaries - Govt. Agency g y - Private Sources Criteria for Screening Intermediaries - Performance - Professionalism Distributors agreement includes -C Contract d duration i - Geographic boundaries - Compensation - Products and conditions of sale - Communication between parties

Channel Management
Channel management is an effective implementation of the key channel strategy decisions Channel management involves g coordination, cooperation and building long-term relationship Factor in channel management - Ownership - Geographic, culture and economic differences - Difference in rules of law Typical reasons for termination of channel relationship - Change in marketers distribution strategy - Lack of performance by the intermediary

Channel Management
Marketers have relationships with intermediaries in distribution channels. Channel Conflict Horizontal conflict - disagreements among channel members at the same level, such as two competing discount stores. Vertical conflict occurs among members at different levels of the channel. Achieving Channel Cooperation Best achieved when all members of channel see themselves as equal components; channel captain should provide this leadership. t h l t i h ld id thi l d hi

Channel Management
Managing conflict Sources of channel conflict Differences in goals Differences in desired product line Multiple distribution channels Inadequacies in performance Avoiding and resolving conflict Developing a partnership approach Training in conflict handling Market partitioning Improving performance Channel ownership

Distribution Channel strategy


Channel strategy decisions involve selection of the most effective distribution channel most appropriate level of distribution intensity and degree of channel integration

Channel Strategy

Service Provider

Distribution Intensity

Channel Integration

Channel Strategy Decisions


Selection of a Distribution Channel
Multiple factors affect selection of a distribution channel.

Market factors
Buyer behavior, buyer needs, willingness of channel intermediaries, location of costumers

Producer factors
Lack of financial resources, product mix, desired degree of control

Product factors
Di Direct di ib i distribution

Competitive factors
Innovative approach, sales force or producer-owned distribution network, direct marketing

Channel Strategy Decisions


Selection consideration
M k t segment - must know the specific segment and target Market t tk th ifi t dt t 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

Channel Strategy Decisions


Determining Distribution Density
1. 2. 3. Intensive distribution: Distribution of a product through all available channels. Selective distribution: Distribution of a product through a limited number of channels. Exclusive distribution: Distribution of a product through a single wholesaler or retailer in a specific geographic region. Responsibility of performing channel functions: Intermediary must provide better service at lower costs than manufacturers or retailers can provide for themselves. Consolidation of channel functions can represent a strategic opportunity for a company.

Channel Strategy Decisions


Channel Integration C Conventional marketing channels ti l k ti h l Hard bargaining and, occasionally, conflict Franchising A producer and channel intermediaries agree each members rights and obligations Channel ownership Total control over distributor activities

Channel Strategy and Logistics Management


Marketing mix

Product strategy

Pricing strategy

Promotion strategy

Distribution strategy

Channel strategy

Logistics management

Channel Strategy vs Logistics Management


Channel strategy is concerned with the entire process of setting up and operating the distribution channel that is responsible for meeting the firms distribution of objectives. Logistics management is more narrowly focused on providing product availability at the appropriate times and places in the marketing channel. Channel strategy must be formulated before logistics management can even be considered.

Flows in Distribution Channels


1. Product flow - the actual physical movement 2. 2 Negotiation flow - interplay of the buying and selling functions associated with the transfer of title 3. Ownership flow - movement of the title. Only involved in the transportation of the physical product itself. 4. Information flow - transportation company f f p p y 5. Promotion flow - flow of persuasive communication in the form of advertising, personal selling, sales promotion, and publicity

Five Flows in the Marketing Channel


Product flow Manufacturer1 Negotiation flow Manufacturer1 Ownership flow Manufacturer1 Information flow Manufacturer1 Promotion flow Manufacturer1

Transportation company

Transportation company

Advertising agency

Wholesalers2

Wholesalers2

Wholesalers2

Wholesalers2

Wholesalers2

Retailers3

Retailers3

Retailers3

Retailers3

Retailers3

Consumers

Consumers

Consumers

Consumers

Consumers

1. Manufacturing and packaging plants 2. Product Distributors 3. Stores, Supermarkets and Convenience stores

Channel Structure

M M M M

C R W A

C R W

C R

(two-level) (two level) (three-level) (four-level) (five-level)

where A = Agent C = Consumer M = Manufacturer R = Retailer W = Wholesaler

The group of channel members to which a set of distribution tasks has been allocated.

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

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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

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Channel intermediaries - Internet


Sell to a geographically disperse market Able t t Abl to target and focus on specific segments t df ifi t Relatively low set-up costs Use of e-commerce technology (for payment, shopping software, etc) Paradigm shift in commerce and consumption

Six basic channel decisions


1. 2. 3. 4. 5. 6. Direct or indirect channels Single or multiple channels Length of channel Types of intermediaries Number of intermediaries at each level Which intermediaries? Avoid intrachannel conflict

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Channel Structure for Consumer Goods


Two-level Manufacturer Three-level Manufacturer Four-level Manufacturer Five-level Manufacturer

Agent Wholesaler Retailer Retailer Retailer Wholesaler

Consumer

Consumer

Consumer

Consumer

Marketing Channels for Services


Services producers

Agents or brokers

Services retailers

Consumers

Businesses

Institutions

Governments

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Advantages of Distribution Channel


Channels reduce number of contacts
Four manufacturers contact four retailers directly M M M M Four manufacturers contact four retailers indirectly through a wholesale intermediary M M M M

W R R R R

Number of contacts needed for all manufacturers to contact all retailers = (number of manufacturers) X (number of retailers) = (4) X (4) = 16 contacts

Number of contacts needed for all manufacturers to contact all retailers = (number of manufacturers) + (number of retailers) = (4) + (4) = 8 contacts

Advantages of Distribution Channel


Distribution Channel increase Efficiency
Negotiation Effort (Inputs) Estimated Costs of Inputs Distribution Objective (Output) Get 500 music stores to carry a new line

Efficiency Negotiation effort in Rupees relative to achieving the distribution objective = Rs. 88,000

1,500 sales visits @Rs.50 = 75,000 1,000 phone calls @Rs.3 = 3,000 10 magazine ads @Rs.1,000 = 10,000 Total 88,000

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Advantages of Distribution Channel


Distribution Channels Create Utility
MANUFACTURER Form Utility Quantity Gap Bulk breaking Storage Packaging Time Utility Time Gap Storage Inventories Warehousing Financing Assortment Gap Order taking Accumulation of aggregation of an assortment Grading Expediting Place Utility Spatial Gap Transportation Materials handling Delivery Possession Utility Knowledge Gap Promotion or information dissemination Feedback or information gathering Ownership Gap Buying and selling Credits Collections Financing accounts receivable Passing title servicing such as product adjustments technical service, and warrantee service

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