Trade-off Analysis: Service-Level vs. Cost

The distribution activities we discuss in this part of the Principles of Marketing Tutorials are important elements in the marketer’s overall customer service package. As we discussed in the Managing Customers Tutorial, marketers strive to deliver an optimal level of service to their customers. However, “optimal” does not always translate into providing the “best” service options to customers. The service-level marketers offer for their distribution activities, like the service-level offered by other company-related activities that impact customers (e.g., customer help desk), is determined using trade-off analysis.

With service-level trade-off analysis, the marketer compares the number and quality of distribution features (e.g., speed of delivery, ease of placing orders, order tracking, etc.) they would like to offer versus the cost of providing the features. For instance, when it comes to transportation options (e.g., truck, railroad, air, etc.), trade-off analysis may show that choosing the fastest method for delivery may not make economic sense since options for fast delivery often are very expensive compared to slower methods. While the customer may appreciate having their order arrive quickly, the marketer may find that offering fast delivery may significantly reduces their profit margin.

Since most distribution activities are non-revenue producing (i.e., are used to support the selling of a product but do not actually create a sale) and, thus, represent a cost to the marketer, it should be understood that the marketer’s distribution system choice may not be the overall best available in terms of getting the product into customer’s hand as fast as possible. Rather, the marketer’s choice for what is optimal will be determined by analyzing distribution features and costs and evaluating how these fit within the marketer’s overall objectives (e.g., financial objectives, product positioning, etc.).