Marketing: Channels of Distribution

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MarketingChannels of Distribution
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Channels of Distribution

• Systems of interdependent organizations that
  direct the flow of product (title/possession)
  from producers to buyers.

Producers Intermediaries
Customer
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Channels of Distribution

• create time, place, possession and information
  utilities.

PLACE
TIME
POSSESSION
Information
Utility Box
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1
9
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Creating utilities for customers.
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Channel FunctionsProducer Intermediaries
Customer
(Facilitate exchange)
Accumulating breaking bulk
Creating Assortments (sort to quantity
Materials handling
Transporting Inventory storage
Reducing transactions
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Distribution Channels Facilitate Specialization

• Intermediaries provide Exchange efficiencies

Intermediaries
Producer
Customer
Connectivity is King for product delivery when
and where
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Channel Functions Promotion Producer
Collaborators Customer
(Facilitate exchange)

• Promotion
• - Cooperative advertising
• - In Store Sales promotion

Advertising Agencies
Sales Promotion
Personal Selling Merchant sales reps sell only,
no title transfer
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Promotional Pull Strategy
... Producers promote to the target audience to
stimulate demand and Pull the product through
the distribution channel to customers.
Promotes to
Producer Wholesaler Retailer Customer
Orders
Orders
Request
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Promotional Push Strategy

• Producers promote to marketing intermediaries to
  Push the product through the distribution
  channel to consumers.

Promotes
To
Producer Wholesaler Retailer Customer
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Ice Cream Rivals
Applied Marketing

• UNILEVER17 MShare
• Ben jerrys
• Good Humor, Breyers

• Nestle-16 (Mk Share)
• Haagen Daz,Dreyers
• Drum Stick Brands

Nestlé's GoaL Improve (intensive) distribution

• Introduce 100K branded vending machines
  freezers in big gas stations, convenience stores
  non grocer outlets
• Create new products specialty items Coffee
  Almond Crunch Bar at Starbucks

WSJ, June, 2003
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Ice Cream Distribution The Scoop
Ball, Deborah. Ice Cream Rivals Prepare to Wage
A New Cold War. WSJ, June 26, 2003
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Valued freezer space

• Freezer costs are up to 6x higher in non grocer
  venders due to electricity maintenance costs
  but offer 25 higher profit margins than super
  market tubs
• Growth Rates Out of home 10/year
• in home 8
  ( 80 of ice cream is consumed in home)

80-20 principle
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Channel Functions Pricing Producer
Intermediaries Customer
(Facilitate exchange)
Pricing How much?

• Pricing support
• - terms of sale (credit, cash, etc.)
• - convenience of payment
• - financial risk

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What Levis is Doing
Applied Marketing

• Levis jeans were the same model and price for
  many years although they were bought many
  different types of people.
• Diversifying their target markets by selling
  jeans in high end stores such as Neiman Marcus,
  to middle class stores such as Kohls and Macys,
  to large discount stores such as Wal-Mart.

2004
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Channel Functions Product Support Producer
Intermediaries Customer
(Facilitate exchange)

• Product
• - sales data feedback
• - customer service/product repairs
• - product selection delivery
• - packaging
• - financial social risk

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Distribution Channel Designs

• Organizations through which a product passes to
  reach the end user.

Zero-level (Direct)
Intermediaries (Traditional)
Manufacturer
Producer Retailer Consumer
Manufacturer
Wholesaler
Intermediaries
Retailer
Consumer
Consumer
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Channel Design
Criteria To Select Collaborators

• 1 - Target market coverage consumer purchase
  behavior
• Company Resources Objectives -
  adaptability/control
  - performance quality level
• Ease of Doing Business
• Packaging Requirements
• Order Processing Quality

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Changes in PC Buying Behavior affect Dell
(Direct sales)

• PC companies are refocusing on the consumer
  market (15 of
• Dells sales of 56 bil/yr vs the business market)
  where consumers like
• to hold test models in a store. Consumers
  prefer laptops due
• to new wireless technology on the go
  convenience.

WSJ, Consumer Demand and Growth in Laptops Leave
Dell Behind, 30Aug06
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Changes in PC Buying Behavior affect Dell
(Direct sales)

• PC companies are focusing on the consumer market
• (15 of Dells sales of 56 bil/yr vs the business
  market) where
• consumers like to hold test models in a store.
• Consumers prefer laptops due to new wireless
• technology on the go convenience.

WSJ, Consumer Demand and Growth in Laptops Leave
Dell Behind, 30Aug06
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Channel Design Criteria To Select Collaborators

• Competition
• Technical service support
• On time delivery/reliability
• Economic value/efficiency
• Total costs, a systems view, Examples of
  compensation Trade, quantity, promotion cash
  discounts.

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Channel Design1 Target Market Coverage
Intensive distribution
Exclusive distribution
Selective distribution
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Market Coverage Legal Issues
Strategic Alliances..the products of one
organization are distributed through the
marketing channels of another
Dual Distribution A producer can use two
different channels to reach the same target
market if it is not trying to engage in unfair
competition put its independent distributors
out of business

• Restricted Sales Territories - Granting exclusive
  sales territory rights to distributors is
  permissible if the rights do not restrain trade

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Direct Marketing Channels

• Producer Buyer
• Personal Selling
• Telemarketing
• Toll free phone
• Catalog order
• Fax order
• Mail order
• E Commerce

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Direct Marketing can eliminate the middleman but
not the functions
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Liquor Wholesaler A Mandated Middleman
Direct Sales of Alcohol
Applied Marketing

• Issue Florida wine aficionados desire vintages
  direct from California.
• Ecommerce simplifies the P to C relationship by
  passing wholesalers their 18-25 price cut
• Current Legislation direct shipment to
  consumers is a misdemeanor (1st time ), a felony
  (2nd time violation )
• Rationale (a) to prevent underage
  drinking and (b) to collect state taxes
  

UpdateJuly06,.5 -3mil (teens) buy on line
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Channel Integration
Manufacturer
Forward integration member acquires
a downstream member
Backward integration member acquires
an upstream member
Wholesaler
Retailer
Franchise member licenses property
to independent business
Consumer
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Vertical Channel Integrationseeks to control 2
or more levels
Oil field, Oil rig, Pipeline transport, Refinery,
transport, Station storage,

• Producer
• Wholesaler
• Retailer
• Consumer Consumer Consumer

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Horizontal Channel Integration seeks economies
of scale via advertising, purchasing,etc
(Contractual Systems)

• Wholesaler Sponsored (Ace Hardware)
• Retailer Sponsored (IGA)
• Franchise Systems (McDonaldss)

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Channel Systems(Examples)

• Corporate 1 channel member owns
  
  . other
  channel members
• Contractual channel members operate
  under contractual
  agreements (franchises)
• Administered channel members operate
  based on agreed upon
  plans (Channel Captains)

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Peoples Bank
Applied Marketing

• Founded in 1842,it is the largest state-chartered
  bank in Connecticut.

• Is part of multiple horizontal vertical
  distribution systems with Travelers, Hartford,
  Kemper, and Chubb to offer auto, home business
  insurance.
• uses a zero-level or direct marketing channel to
  distribute its financial services
• or vertical system for collaborators (Brokerage
  services).

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Other Distribution Issues

• Reverse distribution

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MAJOR RECALL
Applied Marketing

• Mitsubishi Motors Corp. presents a public image
  of economic value purity but in reality
• it was forced to recall vehicles to fix a
  potentially defective ball joint in the front
  suspension
• Affects models made between 1992 and 2001
• 960,000 vehicles recalled in U.S.
• 400,000 vehicles recalled in Japan
• 156,000 vehicles in other countries

Source The Wall Street Journal February 16,
2001,Page A3
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Distribution Channel Legal Issues

• Tying Contracts - Requiring a channel member to
  buy additional products from the supplier in
  order to purchase a particular product from the
  supplier
• Full-Line Forcing - Requiring a channel member to
  carry a suppliers entire product line to obtain
  any of the suppliers products

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Channel Legal Issues

• Product Liability,
• Resale Price maintenance ,
• Refusal to Deal - Suppliers can choose their
  distributors and refuse to deal with others if
  their decisions are not based on anticompetitive
  motives or are not part of an organized
  refusal-to-deal with certain channel members.

• Exclusive Dealing-Forbidding an intermediary to
  carry products of a competing manufacturer
• Is anticompetitive if
• it blocks competitors from 10 of the market
• sales revenues are sizable
• the manufacturer is larger than the dealer

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Channel Captain The dominant member (producer,
wholesaler, or retailer) establishes channel
policies coordinates the marketing mix
Channel Relationships
Supply Chain Management

• Leadership by example
• Cooperation..common objectives
• Conflict resolution
• Power to enforce

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Types of Channel Power (The ability of one
channel member to influence another members goal
achievement)

• Reward Power
• Legal Power
• Expert Power
• Coercive Power

Power Control
Performance
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Supply Chain ManagementChannel Conflict

• Sources of Channel Conflict
• Disagreements on responsibilities
• Communication difficulties reduce coordination
• Increased use of multiple distribution channels
  by manufacturers creating conflicts with
  distributors and retailers
• Intermediaries diversifying into and offering
  competing products
• Producers try to circumvent intermediaries and
  deal directly with retailers

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CHANNEL CONFLICT
Large retailer threatens to stop buying a product
unless the suppler grants unreasonably low
prices and/or high supports services Coercive
power? Ethical Decision? Survival Decision?
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Marketing Channels Form a Supply Chain

• Supply Chain Management
• Long-term partnerships among channel members that
  reduce inefficiencies, costs, and redundancies
  and develop innovative approaches to satisfy
  customers
• Optimizes costs throughout the whole channel for
  efficiency and service
• Includes all entities that facilitate product
  distribution and benefit from cooperative efforts
• Arises from the need to achieve a more
  competitive position