Distribution Decisions Tutorial
Our discussions in the tutorials Product Decisions and Managing Products indicate product decisions may be the most important of all marketing decisions since these lead directly to the reasons (i.e., offer benefits that satisfy needs) why customers decide to make a purchase. But having a strong product does little good if customers are not able to easily and conveniently obtain it. With this in mind we turn to the second major marketing decision area – distribution.
Distribution decisions focus on establishing a system that, at its basic level, allows customers to gain access and purchase a marketer’s product. However, marketers may find that getting to the point at which a customer can acquire a product is complicated, time consuming, and expensive. The bottom line is a marketer’s distribution system must be both effective (i.e., delivers a good or service to the right place, in the right amount, in the right condition) and efficient (i.e., delivers at the right time and for the right cost). Yet, as we will see, achieving these goals takes considerable effort.
Distribution decisions are relevant for nearly all types of products. While it is easy to see how distribution decisions impact physical goods, such as laundry detergent or truck parts, distribution is equally important for digital goods (e.g., television programming, downloadable music) and services (e.g., income tax services). In fact, while the Internet is playing a major role in changing product distribution and is perceived to offer more opportunities for reaching customers, online marketers still face the same distribution issues and obstacles as those faced by offline marketers.
In order to facilitate an effective and efficient distribution system many decisions must be made including (but certainly not limited to):
- Assessing the best distribution channels for getting products to customers
- Determining whether a reseller network is needed to assist in the distribution process
- Arranging a reliable ordering system that allows customers to place orders
- Creating a delivery system for transporting the product to the customer
- For tangible and digital goods, establishing facilities for product storage
In this part of our highly detailed Principles of Marketing Tutorials we cover the basics of distribution including defining what channels of distribution are and why these are important. We will also introduce the key parties in a distribution system, such as the reseller network, though much greater coverage will be given to channel partners and to technical aspects of distribution (e.g., ordering, delivery, storage, etc.) in our next tutorial.
What are Channels of Distribution?
In the Business Buying Behavior Tutorial, we describe a supply chain as consisting of all parties and their supplied activities that help a marketer create and deliver products to the final customer. For marketers, the distribution decision is primarily concerned with the supply chain’s front-end or channels of distribution that are designed to move the product (goods or services) from the hands of the company to the hands of the customer. Obviously when we talk about intangible services the use of the word “hands” is a figurative way to describe the exchange that takes place. But the idea is the same as with tangible goods. All activities and organizations helping with the exchange are part of the marketer’s channels of distribution.
Activities involved in the channel are wide and varied though the basic activities revolve around these general tasks:
- Handling and shipping
- Information feedback
Importance of Distribution Channels
As noted, distribution channels often require the assistance of others in order for the marketer to reach its target market. But why exactly does a company need others to help with the distribution of their product? Wouldn’t a company that handles its own distribution functions be in a better position to exercise control over product sales and potentially earn higher profits? Also, doesn’t the Internet make it much easier to distribute products thus lessening the need for others to be involved in selling a company’s product?
While on the surface it may seem to make sense for a company to operate its own distribution channel (i.e., handling all aspects of distribution) there are many factors preventing companies from doing so. While companies can do without the assistance of certain channel members, for many marketers some level of channel partnership is needed. For example, marketers who are successful without utilizing resellers to sell their product (e.g., Dell Computers sells mostly through the Internet and not in retail stores) may still need assistance with certain parts of the distribution process (e.g., Dell uses parcel post shippers such as FedEx and UPS). In Dell’s case creating their own transportation system makes little sense given how large such a system would need to be in order to service Dell’s customer base. Thus, by using shipping companies Dell is taking advantage of the benefits these services offer to Dell and to Dell’s customers.
Type of Channel Members
Channel activities may be carried out by the marketer or the marketer may seek specialist organizations to assist with certain functions. We can classify specialist organizations into two broad categories: resellers and specialty service firms.
These organizations, also known within some industries as intermediaries, distributors or dealers, generally purchase or take ownership of products from the marketing company with the intention of selling to others. If a marketer utilizes multiple resellers within its distribution channel strategy the collection of resellers is termed a Reseller Network. These organizations can be classified into several sub-categories including:
- Retailers – Organizations that sell products directly to final consumers.
- Wholesalers – Organizations that purchase products from suppliers, such as manufacturers or other wholesalers, and in turn sell these to other resellers, such as retailers or other wholesalers.
- Industrial Distributors – Firms that work mainly in the business-to-business market selling products obtained from industrial suppliers.
Specialty Service Firms
These are organizations that provide additional services to help with the exchange of products but generally do not purchase the product (i.e., do not take ownership of the product):
- Agents and Brokers – Organizations that mainly work to bring suppliers and buyers together in exchange for a fee.
- Distribution Service Firms – Offer services aiding in the movement of products such as assistance with transportation, storage, and order processing.
- Others – This category includes firms that provide additional services to aid in the distribution process such as insurance companies and firms offering transportation routing assistance.
Benefits Offered by Channel Members
When choosing a distribution strategy a marketer must determine what value a channel member adds to the firm’s products. Remember, as we discussed in the Product Decisions tutorial, customers assess a product’s value by looking at many factors including those that surround the product (i.e., augmented product). Several surrounding features can be directly influenced by channel members, such as customer service, delivery, and availability. Consequently, for the marketer selecting a channel partner involves a value analysis in the same way customers make purchase decisions. That is, the marketer must assess the benefits received from utilizing a channel partner versus the cost incurred for using the services. These benefits include:
- Cost Savings in Specialization – Members of the distribution channel are specialists in what they do and can often perform tasks better and at lower cost than companies who do not have distribution experience. Marketers attempting to handle too many aspects of distribution may end up exhausting company resources as they learn how to distribute, resulting in the company being “a jack of all trades but master of none.”
- Reduce Exchange Time – Not only are channel members able to reduce distribution costs by being experienced at what they do, they often perform their job more rapidly resulting in faster product delivery. For instance, consider what would happen if a grocery store received direct shipment from EVERY manufacturer that sells products in the store. This delivery system would be chaotic as hundreds of trucks line up each day to make deliveries, many of which would consist of only a few boxes. On a busy day a truck may sit for hours waiting for space so they can unload their products. Instead, a better distribution scheme may have the grocery store purchasing its supplies from a grocery wholesaler that has its own warehouse for handling simultaneous shipments from a large number of suppliers. The wholesaler will distributes to the store in the quantities the store needs, on a schedule that works for the store, and often in a single truck, all of which speeds up the time it takes to get the product on the store’s shelves.
- Customers Want to Conveniently Shop for Variety – Marketers have to understand what customers want in their shopping experience. Referring back to our grocery store example, consider a world without grocery stores and instead each marketer of grocery products sells through their own stores. As it is now, shopping is time consuming, but consider what would happen if customers had to visit multiple retailers each week to satisfy their grocery needs. Hence, resellers within the channel of distribution serve two very important needs: 1) they give customers the products they want by purchasing from many suppliers (termed accumulating and assortment services), and 2) they make it convenient to purchase by making products available in single location.
- Resellers Sell Smaller Quantities – Not only do resellers allow customers to purchase products from a variety of suppliers, they also allow customers to purchase in quantities that work for them. Suppliers though like to ship products they produce in large quantities since this is more cost effective than shipping smaller amounts. For instance, consider what it costs to drive a truck a long distance. In terms of operational expenses for the truck (e.g., fuel, truck driver’s cost) let’s assume it costs (US) $1,000 to go from point A to point B. Yet in most cases, with the exception of a little decrease in fuel efficiency, it does not cost that much more to drive the truck whether it is filled with 1000 boxes containing the product or whether it only has 100 boxes. But when transportation costs are considered on a per product basis ($1 per box vs. $10 per box) the cost is much less for a full truck. The ability of intermediaries to purchase large quantities but to resell them in smaller quantities (referred to as bulk breaking) not only makes these products available to those wanting smaller quantities but the reseller is able to pass along to their customers a significant portion of the cost savings gained by purchasing in large volume.
- Create Sales – Resellers are at the front line when it comes to creating demand for the marketer’s product. In some cases resellers perform an active selling role using persuasive techniques to encourage customers to purchase a marketer’s product. In other cases they encourage sales of the product through their own advertising efforts and using other promotional means such as special product displays.
- Offer Financial Support – Resellers often provide programs that enable customers to more easily purchase products by offering financial programs that ease payment requirements. These programs include allowing customers to: purchase on credit; purchase using a payment plan; delay the start of payments; and allowing trade-in or exchange options.
- Provide Information – Companies utilizing resellers for selling their products depend on distributors to provide information that can help improve the product. High-level intermediaries may offer their suppliers real-time access to sales data including information showing how products are selling by such characteristics as geographic location, type of customer, and product location (e.g., where located within a store, where found on a website). If high-level information is not available, marketers can often count on resellers to provide feedback as to how customers are responding to products. This feedback can occur either through surveys or interviews with reseller’s employees or by requesting the reseller allow the marketer to survey customers.
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