© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Marketing Management, 8e Chapter Ten Distribution Strategy Key Words / Outline Marketing intermediaries, Direct marketing, Indirect channels, Intensive distribution, Selective distribution, Exclusive distribution, Total distribution cost, Channel flexibility, Relationship marketing, Administered system, Contractual system, Corporate system, Mass merchandisers, Catalogs and direct mails, Vending machines

Channels of Distribution A channel of distribution is the combination of institutions through which a seller markets products to the user or ultimate consumer

Marketing Intermediaries Middleman – independent link between producers and consumers Merchant middleman – actually buys goods and takes title/ownership Agent – business unit that negotiates purchases and sales but does not take ownership Wholesaler – a merchant who primarily stores and handles goods in large quantities Retailer – merchant middleman who sells to final consumers Broker – middleman who serves as a go-between for the buyer and seller

Marketing Intermediaries Manufacturer’s agent – an agent who operates by contract serving a geographic territory Distributor – wholesale middleman in lines with selective or exclusive distribution Jobber – a middleman who buys from manufacturers and sells to retailers Facilitating agent – a firm that performs distribution tasks other than buying, selling and transferring

Channel Functions Transactional functions -Buying: Purchasing products for resale or as an agent for supply of a product -Selling: Contacting potential customers, promoting orders and soliciting orders -Risk taking: Assuming business risks in the ownership of inventory that can become obsolete or deteriorate Logistical functions -Assorting: Creating product assortments from several sources to serve customers

Channel Functions -Storing: Assembling and protecting products at a convenient location to offer better customer service -Sorting: Purchasing in large quantities and breaking into smaller amounts desired by the customer -Transporting: Physically moving products to customers Facilitating functions -Financing: Extending credit to customers -Grading: Inspecting, testing and judging products and assigning them quality grades -Marketing Information/Research: Providing information to customers and suppliers, including competitive conditions and trends

Channel Distribution – Consumer Goods

Channel Distribution – Organizational Goods

Channel Considerations Selecting a channel of distribution can hinge on one of these factors -Distribution coverage required -Degree of control desired -Total distribution cost -Channel flexibility

General Considerations – Channel Planning Customer characteristics Product characteristics Intermediary characteristics Competitor characteristics Company characteristics Environmental characteristics

Distribution Alternatives Channel selection may depend upon the nature of market coverage desired -Intensive distribution: Using as many wholesalers and retailers as possible -Selective distribution: Using only the best available per geographic area -Exclusive distribution: Selected intermediaries are given exclusive rights within a particular territory

Distribution Alternatives Degree of control desired: The degree of control achieved by the seller is proportionate to the directness of channel Total distribution costs: A channel of distribution should be viewed as a total system composed of interdependent subsystems and the objective of the system should be to optimize total system performance Channel flexibility: Ability of the manufacturer to adapt to changing conditions

Relationship Marketing Popularly defined as “marketing with conscious aim to develop and manage long term and/or trusting relationships with customers distributors, suppliers or other parties in the marketing environment”

Vertical Marketing System Vertical marketing systems are channels in which members are more dependent on one another and develop long-term relationships in order to improve efficiency and effectiveness Administered systems – highly dependent on close relationships between channel members Contractual systems – relationships governed by contracts to perform specific functions Corporate systems – single ownership of two or more levels of a channel

Vertical Marketing System

Franchised Business - Ingredients Technical knowledge Managerial techniques Commercial knowledge Financial instruction Accounting controls Protective safeguards

Ideal Elements- Franchise Business High gross margin In-store value added Secret process Real estate profits Simplicity

Wholesalers Merchants primarily involved in buying, taking title to, storing and physically handling goods The create value for suppliers and retailers by handling their function efficiently and effectively They seek producers of major brands for which sales and profits are greatest

Benefits of Wholesalers to Channel Members Benefits for manufacturers -Reach out to diverse geographic markets cost effectively -Information supply about retailers and various end users -Reduction of costs through greater efficiency and effectiveness in distribution functions -Reduce potential losses by assuming risks and offering expertise Benefits for retailers -Provide potentially profitable products otherwise unavailable for resale in retail area

Benefits of Wholesalers to Channel Members -Provide information about industries, manufacturers and other retailers -Reduce costs by providing an assortment of goods from different manufacturers -Reduce costs through greater efficiency in distribution function performed Benefits for end users -Increase the product alternatives available in the local market -Reduce retail prices by the efficiency and effectiveness contributed to the channel -Improve product selection by providing information to retailers about the best products to offer to end users

Store Retailing Mass merchandisers carry a broad assortment of goods and compete based on selection and price Specialty stores handle deep assortments in a limited number of product categories Convenience stores are retailers whose primary advantage is location

Non-store Retailing Catalogs and direct mail Vending machines Television home shopping Direct sales E-commerce

Electronic Exchange - Advantages Cost effective Good visual presentation and full description of products Allows strategic elements to change quickly Global presence of products Products offered on 24/7 basis One-on-one interaction with customers Effect means to develop customer base and online marketing research

Electronic Exchange – Disadvantages Strong price competition Low entry barriers leading to low infrastructure Website advertising expensive for small e-marketers Limits the markets to customers who are willing to by the products electronically Products not as good for selling touch and feel as opposed to look and buy unless branded Often less effective and efficient in business to consumer markets than in business to business markets