Distribution

Sanjeev Varshney

Middlemen and Distribution Channels

• A middlemanmiddleman is a firm that renders services related directly to the sale and/or purchase of a product as it flows from producer to consumer.– Merchant middlemen take title to products.– Agent middlemen do not take title to products,

but arrange the transfer of title.– Middlemen serve as purchasing agents for their

customers and as sales specialists for their suppliers.

Channel Members

• Distributors or Stockists

• Carrying & Forwarding agent

• Wholesalers

• Dealers/Retailers

• Brokers

Classification of Channel Members

Title of Goods Transferred

Titles of Goods Not Transferred

Redistributors Distributors Carrying & Forwarding Agent

Selling to End Consumers

Retailer Agent

Role of the Marketing Channel (manufacturers viewpoint)

• Offers manpower and physical facilities• Provides personal selling, advertising and

display to aid in selling• Interprets consumer demand and transfers this

information back• Breaks the bulk• Offers storage• Shares risk of the manufacturer• Information provider of all other sought

Role of Channel (consumers view point)

• Product decision• Brand decision

– Consideration set formation– Information search– Evaluation of alternatives

• Purchase– Form utility– Time utility– Place utility– Possession utility

Functions to be performed

• Prospecting

• Promoting

• Bulk breaking & assortment

• Service

• Feedback

Information Flows

© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Designing a Distribution Channel

Copyright © 1997 by The McGraw-Hill Companies, Inc.

Specifythe role of

distributionwithin themarketing

mix

Selecttype of

distribu-tion

channel

Determine appropriate

intensityof distri-bution

Choosespecificchannel

members

WELL-WELL-DESIGNEDDESIGNED

DISTRIBUTIONDISTRIBUTIONCHANNELCHANNEL

Consumer Decision Process & the Role of Channel

Decision Process The role the channel can play

Picking/Impulse Displaying the brand ensuring visibility

Variety seeking Brand enters the consideration set through the process of recognition (merchandising & display)

Habit Supplement the buyers evaluation through testimonial based POP advertising

Sub-contracting Increase the credibility by acquiring technical skills

Extended problem solving

Brand enters the consideration set and also help in information search and evaluation by increasing the credibility by acquiring technical knowledge

Framework for Designing the Channel Objective

Variables Dimensions of the Channel Objective, which is likely to be influenced

Consumer Role of the channel in decision making

Positioning Type of outlet

Company norms Minimum standards

Market orientation Middlemen service norms (push vs pull)

Exercise

• A company is planning to launch a new product. There are no substitutes available in the market. What should be the distribution objective

• A company is entering into a already crowded market but with some enhanced features. What should be the distribution objective

• A company is entering into a product which is in growth stage. Company has developed a new cheaper production technology than the competitor and thereby plans to launch the product at a price lower than the competitor. What should be the distribution objective.

Major Channels of Distribution

• For distribution of consumer goodsconsumer goods, five different types of channels are widely used.

• Business goodsBusiness goods are normally distributed through four major types of channels.

• There are only two common channels of distribution for servicesservices.

• Some producers are not content to use only a single distribution channel and use multiple channelsmultiple channels.

• Multiple channels can aggravate middlemen and cause conflicts in the channels.

Major Distribution Channels

ULTIMATE CONSUMERS

PRODUCERS OF CONSUMER GOODSCONSUMER GOODS

Retailers Retailers Retailers Retailers

Merchantwholesalers

Merchantwholesalers

Agents Agents

BUSINESS USERS

PRODUCERS OF BUSINESS GOODSBUSINESS GOODS

Merchant wholesalers(industrial

distributors)

Agents Agents

Merchant wholesalers(industrial

distributors)

Major Distribution Channels

Merchant wholesalers(industrial

distributors)

Resellers

ULTIMATE CONSUMERS OR BUSINESS USERS

PRODUCERS OF SERVICESSERVICES

Agents

Major Distribution Channels

Multiple Distribution Channels

• Some firms choose to use two or more channels of distribution

• They are used when:– the same product is sold to business &

consumer markets– the producer has unrelated products– the buyers are of different sizes– geographic concentration differs across parts

of the market

Vertical Marketing Systems (VMS)

• Has become the dominant form of channel

• High degree of coordination and control– Corporate VMS - common ownership of

successive channel levels– Contractual VMS - contracts between channel

members– Administered VMS - market power of one or

more members, or willing cooperation of channel members

Factors Affecting Choice of Channels

• Market Considerations– Type of market– Number of potential customers– Geographic concentration of the market– Order size

• Product Considerations– Unit Value– Perishability– Technical nature

Factors Affecting Choice ofChannels (Con’t.)

• Middlemen Considerations– Services provided by middlemen– Availability of desired middlemen– Producer’s and middleman’s policies

• Company Considerations– Desire for channel control– Services provided by seller– Ability of management– Financial resources

Marketing Channels & Customer Value

• Product benefits (Quality, assortment & form)

• Service Benefits (after sales service, availability & delivery, transaction services)

• Image benefits

• Company benefits

• Cost efficiency

• Competitive advantage

Determining Intensity of Distribution

• A firm must decide on the appropriate intensity of distributionintensity of distribution for its product.

• Intensity is actually a continuum, but three categories are normally used:– Intensive– Selective– Exclusive

Conflict and Control in Channels

• Channel conflictChannel conflict exists when one channel member perceives another to be acting in a way that prevents the first member from achieving its distribution objectives.– Horizontal Conflict

• Middlemen of the same type

• Different types of middlemen on the same level

– Vertical Conflict• Producer versus wholesaler

• Producer versus retailer

Who Controls Channels?

• Sources of power in distribution channels– Expertise– Rewards– Sanctions

• A channel viewed as a partnership– Collaborative planning – Relationship marketing

Some of the criteria's to appraise Channel members

• Sales Performance (against targets)

• Servicing

• Financial Discipline

• Inventory Maintenance (no more a very imp criteria)

• Personal Commitment & involvement

• Adherence to norms (infrastructure and people) and reporting structure

Channel Evaluation: Concept

• Includes both – Financial Performance measures– Contribution to consumers demand

Dimensions of channel performance measures

• Effectiveness– Delivery (how the channel meet demands)– Stimulation (how well it stimulates latent demand)

• Efficiency– Productivity (measure of physical efficiency)– Profitability (measure of financial efficiency)

• Equity – Service to problem ridden market or disadvantged

market

Profitability Analysis

NMC =

Volume X [ End user price X (1-%channel cost)-COG]-Marketing Expenses

• Direct channels have higher margin per unit but incurred higher marketing expenses

• Indirect channels have a lower margin per unit but lower marketing expenses

© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Supply Chains Streamline Distribution

• Reduce number of transactions

• Increase value for consumers

• More efficient and effective

© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Supply Chain Management Affects Marketing

• Fulfilling delivery promises

• Meeting customer expectations

• Reliant on an efficient supply chain