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Chapter Goals
To gain an understanding of: The nature and importance of intermediaries What a distribution channel is and does The decisions involved in designing a channel of distribution Major channels used to distribute consumer goods, business goods, and services Vertical marketing systems Intensity of distribution Choice of intermediaries and conflict management Legal considerations and channel arrangements
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Distribution Channels
The role of distribution entails: Arranging for its sale and transfer of title Promoting the product Storing the product Assuming some risk during distribution. Intermediaries often perform these activities for producer or consumer.
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Definition A direct channel of distribution describes a situation in which the producer sells a product directly to a consumer without the help of intermediaries. A direct chain of distribution may involve face-to-face sales, computer sales or mail order but does not involve any form of distributor other than the original producer. Chains of distribution that involve nonaffiliated retailers or wholesalers cannot be described as direct channels of distribution and are instead classified as indirect chains of distribution.
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Examples Although major retailers and indirect channels of distribution are everywhere in the United States, there are many examples of direct distribution in our economy. Farmers who sell produce on site or at farmers markets use a direct channel of distribution. A company that produces its own products and sells them directly to the consumer in its own retail stores is using a direct chain of distribution. Producers frequently connect directly to consumers through company websites or assisted marketing systems such as eBay or Etsy.
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Advantages Using a direct channel of distribution to connect consumers with your product, especially a Webbased channel, can have several benefits. Most importantly, web-based selling has low overhead and gives your product a potentially global reach. Because no intermediaries share the profits, most direct distribution channels tend to have higher rates of profit than indirect distribution channels. Direct distribution via the Internet is convenient for customers and available 24 hours a day. Lastly, many customers appreciate the opportunity to give profits directly to producers and artists
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Disadvantages The most obvious disadvantage is that a direct distribution channel cannot compete with the geographical reach and business volume of a distribution channel that includes major wholesalers and retailers. If you make specialty coffee, you cannot sell as much product over your company website as you can if you sell through major grocery store chains. Some consider another downside to direct distribution of tangible products by phone, mail or Internet is that customers are often asked to shoulder the burden of shipping costs.
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I N T E R M E D I A R Y
PURCHASING AGENT FOR BUYERS Anticipates wants Subdivides large quantities of a product Stores products Transports products Creates assortments Provides financing Makes products readily available Guarantees products Shares risks
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Consumer Channels
PRODUCERS OF CONSUMER GOODS
Agents
Merchant wholesalers
Agents
Merchant wholesalers
Retailers
Retailers
Retailers
Retailers
ULTIMATE CONSUMERS
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Business Channels
PRODUCERS OF BUSINESS GOODS
Agents
Agents
BUSINESS USERS
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Service Channels
PRODUCERS OF SERVICES
Agents
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Intensity of Distribution
SELECTIVE Distribution through multiple, but not all, reasonable outlets in a market
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Producer/Retailer Conflict
Small suppliers complaints about large department stores:
Onerous logistical demands. Pressure to cut prices. Demands to give the stores exclusivity. Forcing suppliers to contribute advertising and promotional dollars to the stores. Requiring suppliers to invest in elaborate computerized inventory systems.
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More Complaints
Small suppliers complaints about discounters: Being asked to supply their goods on consignment. Being asked to deal directly with the retailers headquarters and to give to the retailer an amount equal to the commission that would have gone to manufacturers agents. Responses from smaller suppliers: Quit doing business with big retailers whose demands are too strict and outlandish. Become a retailer. Merge with another manufacturer.
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Legal Considerations
Dealer Selection: Refusing to sell to some firms. Can be done carefully. Exclusive Dealing involves shutting out competitors, giving most business to one firm. Tying Contracts involves providing one item on condition other lines be carried as well. Exclusive Territories can create monopolies.
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Exporting, through: An export merchant in the manufacturer's country that buys goods and exports them. An export agent located in either the manufacturer's or the destination country. A companys sales branches. Contracting, via: Licensing: Right to use production process, patents trademarks, or other assets. Franchising. Contract manufacturing: having a foreign-based manufacturer produce the product
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