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 why customers decide to make a purchase (i.e., offer benefits that satisfy needs). 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 decisions.
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 services (e.g., income tax services) and for digital goods (e.g., television programming, online music). 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
- Establishing facilities for product storage for tangible and digital goods
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 the Managing Product Movement Tutorial.
What are Channels of Distribution?
In the Business Buying Behavior Tutorial, we describe a supply chain as consisting of all parties and 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.
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As described below, activities involved in the channel are wide and varied. A while some marketers may choose to handle all distribution activities on their own, most marketers find many of these tasks are best left to others. Whether handled by the marketer or contracted to others, these activities are crucial when structuring a cost-effective and efficient distribution system.
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Type of Channel Members
Channel activities may be carried out by the marketer or the marketer may seek specialist organizations to assist with certain distribution functions. We can classify specialist organizations into two broad categories: resellers and specialty service firms. Each is discussed below:
These organizations, also known within some industries as intermediaries, distributors or dealers, generally purchase or take ownership of products from a marketer 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 (see Retailing Tutorial).
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 (see Wholesaling Tutorial).
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.
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 an organization 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, which then lessens the need for others to be involved in selling a marketer’s product?
While, on the surface, it may seem to make sense for an organization to operate its own distribution channel (i.e., handling all aspects of distribution), there are many factors preventing them 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, L.L. Bean, which sells a large percentage of its products through catalogs and over the internet, is successful without utilizing other resellers to sell their products. However, L.L. Bean still needs assistance with certain parts of the distribution process, primarily with its free shipping program (e.g., FedEx, UPS and USPS). In L.L. Bean’s case, creating its own transportation system makes little sense given how large such a system would need to be in order to service their customer base. Therefore, by using shipping companies, L.L. Bean is taking advantage of the benefits these services offer to the company and to its customers..
When choosing a distribution strategy, a marketer must determine what value a channel member adds to its products. As we discussed in Product Decisions Tutorial, customers assess a product’s value by looking at many factors, including those surrounding the product (i.e., augmented product). Several surrounding features can be directly influenced by channel members, such as customer service, delivery, and availability. Consequently, 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 their services.
Benefits Offered by Channel Members
Marketers seeking distribution assistance will find that channel members can offer a number of advantages including:
Offer Cost Savings Through 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.
Allow Customers 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 can be a time-consuming activity, 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 a 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 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, other operational expenses), let’s assume it costs (US) $1,000 to go from point A to point B. 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.
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.
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). Even 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 a reseller’s employees or by requesting the reseller to allow the marketer to survey the reseller’s customers.
Costs of Utilizing Channel Members
As noted, when developing a channel strategy, marketers must also be aware of potential costs that may come with utilizing channel members. These costs include:
Loss of Revenue
Channel members are not likely to offer services to a marketer unless they see financial gain in doing so. Firms obtain payment for their services as either direct payment (e.g., marketer pays specialty service firms for shipping costs) or, in the case of resellers, by charging their customers more than what they paid the marketer for acquiring the product (see Markup Pricing). For the latter, marketers have a good idea of what the final customer will pay for their product, which means the marketer must charge less when selling the product to resellers. In these situations, marketers are not reaping the full sale price by using resellers, which they may be able to do if they sold directly to the customer.
Loss of Communication Control
Marketers not only give up revenue when using channel partners, they may also give up control of the message being conveyed to customers. If the reseller engages in communication activities, such as when a retailer uses salespeople to sell to customers, the marketer is no longer controlling what is being said about the product. This can lead to miscommunication problems with customers, especially if the reseller embellishes the benefits the product provides to the customer. While marketers can influence what is being said by offerings sales training to resellers’ salespeople, they lack ultimate control of the message.
Loss of Product Importance
Once a product is out of the marketer’s hands, the importance of that product is left up to channel members. If there are pressing issues in the channel, such as transportation problems, or if a competitor is using promotional incentives in an effort to push its product through resellers, the marketer’s product may not receive as much of the resellers’ attention as the marketer feels it should.
The distribution channel consists of many parties each seeking to meet their own business objectives. Clearly for the channel to work well, relationships between channel members must be strong. For product distribution to flow smoothly, each member must understand and trust others on whom they depend. For instance, a small sporting goods retailer trusts a wholesaler to deliver required items on time in order to meet customer demand, while the wholesaler counts on the retailer to place regular orders and to make prompt payments.
Relationships in a channel are in large part a function of the arrangement that occurs between the members. These arrangements can be divided in two main categories:
Independent Channel Arrangement
Under this arrangement, a channel member negotiates deals with others that do not result in binding relationships. In other words, a channel member is free to make whatever arrangements they feel is in their best interest. This so-called conventional distribution arrangement often leads to significant conflict as individual members decide what is best for them and not necessarily for the entire channel (see Channel Conflict). On the other hand, an independent channel arrangement is less restrictive than dependent arrangements and makes it easier for a channel members to move away from relationships they feel are not working to their benefit.
Dependent Channel Arrangement
With a dependent channel arrangement, a channel member feels tied to one or more members of the distribution channel. Sometimes referred to as vertical marketing systems, this approach makes it more difficult for an individual member to make changes to how products are distributed. However, the dependent approach provides much more stability and consistency since members are united in their goals. The dependent channel arrangement can be further broken down into three types:
Corporate – Under this arrangement, a supplier operates its own distribution system in a manor that produces an integrated channel. This occurs most frequently in the retail industry where a supplier operates a chain of retail stores. Starbucks is a company that does this. They import and process coffee and then sell it under their own brand name in thousands of their own stores. It should be mentioned that Starbucks also distributes their products in other ways, such as through grocery stores and online sales. As we will see in more detail later, Starbucks is using a multichannel structure to market their products (see Multichannel or Hybrid System).
Contractual – Under this arrangement, a legal document obligates members to agree on how a product is distributed. Often times, the agreement specifically spells out which activities each member is permitted to perform or not perform. This type of arrangement can occur in several formats including:
- Wholesaler-sponsored – where a wholesaler brings together and manages many independent retailers including having the retailers use the same name
- Retailer-sponsored – this format also brings together retailers but the retailers are responsible for managing the relationship
- Franchised – where a central organization controls nearly all activities of its members
- Licensing Agreement – where a central organization controls some activities of its channel members, but it does not control all activities of the members
Administrative – In certain channel arrangements, a single member may dominate the decisions that occur within the channel. These situations occur when one channel member has achieved a significant power position (see Channel Power). This most likely occurs if a manufacturer has significant power due to brands in strong demand by target markets (e.g., Apple) or if a retailer has significant power due to size and market coverage (e.g., Walmart). In most cases, the arrangement is understood to occur and is not bound by legal or financial arrangements.
Issues in Establishing Distribution Channels
Like most marketing decisions, a great deal of research and thought must go into determining how to carry out distribution activities in a way that meets a marketer’s objectives. The marketer must consider many factors when establishing a distribution system. Some factors are directly related to marketing decisions while others are affected by the existing infrastructure and the relationships that exist with members of the channel.
Next we examine the key factors to consider when designing a distribution strategy. We group these into three main categories with each category contains several topics of concern to marketers:
1. Marketing Decision Issues in Channels
Distribution strategy can be shaped by how decisions are made in other marketing areas. These include:
The nature of the product often dictates the distribution options available especially if the product requires special handling. For instance, companies selling delicate or fragile products, such as flowers, look for shipping arrangements that are different than those sought for companies selling extremely tough or durable products, such as steel beams.
Besides issues related to physical handling of products, distribution decisions are affected by the type of promotional activities needed to sell the product to customers. For products needing extensive salesperson-to-customer contact (e.g., automobile purchases), the distribution options are different than for products where customers typically require no sales assistance (i.e., bread purchases).
The desired price at which a marketer seeks to sell their product can impact how they choose to distribute. As previously mentioned, the inclusion of resellers in a marketer’s distribution strategy may affect a product’s pricing since each member of the channel seeks to make a profit for their contribution to the sale of the product. If too many channel members are involved, the eventual selling price may be too high to meet sales targets in which case the marketer may explore other distribution options.
Target Market Issues
A distribution system is only effective if customers can obtain the product. Consequently, a key decision in setting up a channel arrangement is for the marketer to choose the approach that reaches customers in the most effective way possible. The most important decision with regard to reaching the target market is to determine the level of distribution coverage needed to effectively meet customer’s needs. As we will see, the marketer must take into consideration many factors when choosing the right level of distribution coverage. However, all marketers should understand that distribution creates costs to the organization. Some of these expenses can be passed along to customers (e.g., shipping costs) but others cannot (e.g., need for additional salespeople to handle more distributors). Thus, the process for determining the right level of distribution coverage often comes down to an analysis of the benefits (e.g., more sales) versus the cost associated with gain the benefits.
Distribution coverage is measured in terms of the intensity of product availability. For the most part, distribution coverage decisions are of most concern to consumer products companies, though there are many industrial products that also must decide how much coverage to give its products. There are three main levels of distribution coverage – mass coverage, selective and exclusive.
Mass Coverage – The mass coverage strategy (also known as intensive distribution) attempts to distribute products widely in nearly all locations in which that type of product is sold. This level of distribution is only feasible for relatively low-priced products that appeal to very large target markets (see Consumer Convenience Products). A product such as Coca-Cola is a classic example since it is available in a wide variety of locations, including grocery stores, convenience stores, vending machines, hotels and many, many more. With such a large number of locations selling the product, the cost of distribution is extremely high and must be offset with very high sales volume.
Selective Coverage – Under selective coverage, the marketer deliberately seeks to limit the locations in which this type of product is sold. To the non-marketer it may seem strange for an organization to not want to distribute their product in every possible location. However, the logic of this strategy is tied to the size and nature of the product’s target market. Products with selective coverage appeal to smaller, more focused target markets (see Consumer Shopping Products) compared to the size of target markets for mass marketed products. Consequently, because the market size is smaller, the number of locations needed to support the distribution of the product is fewer.
Exclusive Coverage – Some high-end products target very narrow markets having a relatively small number of customers. These customers are often characterized as “discriminating” in their taste for products and seek to satisfy some of their needs with high-quality, though expensive products. Additionally, many buyers of high-end products require a high level of customer service from the channel member from whom they purchase. These characteristics of the target market may lead the marketer to sell their products through a very select or exclusive group of resellers. Another type of exclusive distribution may not involve high-end products, but rather products only available in selected locations such as company-owned stores. While these products may or may not be higher priced compared to competitive products, the fact these are only available in company outlets give exclusivity to the distribution.
We conclude this section by noting that while the three distribution coverage options just discussed serve as a useful guide for envisioning how distribution intensity works, the advent of electronic communications has brought into question the effectiveness of these schemes. For all intents and purposes, all products available for purchase over the internet or through mobile technologies are distributed in the same way – mass coverage. So, a better way to look at the three levels is to consider these as options for distribution coverage of products that are physically purchased by a customer (i.e., walk-in to purchase).
2. Infrastructure Issues in Channels
The marketer’s desire to establish a distribution channel is often complicated by what options are available to them within a market. While in the planning stages the marketer has an idea of how the distribution plan should be executed, the organization may find that certain parts of the distribution channel may not be what they expected. For example, a supplier of high-end, specialty snack foods may find a promising target market for their products is located in a mountain ski area in Colorado. However, the company may also discover that no suitable distributor in that area possesses the required refrigerated storage space that is necessary to store the product in the proper way specified by the marketer.
This concern is even greater when a marketer looks to expand into international markets. Marketers often find the type of distribution system they are used to employing is lacking or even nonexistent (e.g., poor transportation, few acceptable retail outlets). In fact, depending on the type of product, a marketer could be prevented from entering a foreign market because there are no suitable options for distributing the product. More likely, marketers will find options for distributing their product but these options may be different, and possibly inferior, from what has made them successful in their home country. While viewed as risky, companies entering foreign markets often have little choice but to accept the distribution structure that is in place if they want to enter these markets.
3. Relationship Issues in Channels
An appropriate distribution strategy takes into account not only marketing decisions, but also considers how relationships within the channel of distribution can impact the marketer’s product. In this section, we examine three such issues – channel power, channel conflict and need for long-term commitments
A channel can be made up of many parties each adding value to the product purchased by customers. However, some parties within the channel may carry greater weight than others. In marketing terms, this is called channel power, which refers to the influence one party within a channel has over other channel members. When power is exerted by a channel member, they are often in the position to make demands of others. For instance, they may demand better financial terms (e.g., will only buy if prices are lowered, will only sell if suggested price is higher) or demand other members perform certain tasks (e.g., do more marketing to customers, perform more product services). Channel power can be seen in several ways:
Backend or Product Power – Occurs when a product manufacturer or service provider markets a brand that has a high level of customer demand. The marketer of the brand is often in a power position since other channel members have little choice but to carry the brand or risk losing customers.
Middle or Wholesale Power – Occurs when an intermediary, such as a wholesaler, services a large number of smaller retailers with products obtained from a large number of manufacturers. In this situation, the wholesaler can exert power since the small retailers are often not in the position to purchase products cost-effectively or in as much variety as what is offered by the wholesaler.
Front or Retailer Power – As the name suggests, the power in this situation rests with the retailer who can command major concessions from their suppliers. This type of power is most prevalent when the retailer commands a significant percentage of sales in the market they serve and others in the channel are dependent on the sales generated by the retailer.
In an effort to increase product sales, marketers are often attracted by the notion that sales can grow if the marketer expands distribution by adding additional resellers. Such decisions must be handled carefully, however, so that existing dealers do not feel threatened by the new distributors who they may feel are encroaching on their customers and siphoning potential business. For marketers, channel strategy designed to expand product distribution may, in fact, do the opposite if existing members feel there is a conflict in the decisions made by the marketer to increase the number of resellers. If existing members sense a conflict and feel the marketer is not sensitive to their needs, they may choose to stop handling the marketer’s products.
Need for Long-Term Commitments
Channel decisions have long-term consequences for marketers since efforts to establish new relationships can take an extensive period of time, while ending existing relationships can prove difficult. For instance, Company A, a marketer of kitchen cabinets that wants to change distribution strategy, may decide to stop selling their product line through industrial supply companies, who distribute cabinets to building contractors, and instead sell through large retail home centers. If, in the future, Company A decides to once again enter the industrial supply market they may run into resistance since supply companies may have replaced Company A’s product line with other products and, given what happened to the previous relationship, may be reluctant to deal with Company A again. As another example of problems with long-term commitments, building contractors may be comfortable purchasing kitchen cabinets from industrial suppliers. If Company A decides to change their reseller network to retail home centers, they may find it difficult to retain the building contractor customer base, who may continue to purchase from the industrial suppliers. Considering these potential problems, Company A may have to give serious thought to whether breaking their long-term relationship with industrial suppliers is in the company’s best interest.
When settling on a design for its distribution network, the marketer may have several potential distribution systems to choose from. We stress the word “may” since while in theory an option would appear to be available, marketing decision factors (e.g., product, promotion, pricing, target markets), infrastructure limitations, or the nature of distribution channel relationships may not permit the marketer to pursue a particular option. For example, selling through a desired retailer may not be feasible if the retailer refuses to handle a product.
For marketers, the choice of distribution design comes down to the following options:
With a direct distribution system, the marketer reaches the intended final user of their product by distributing the product directly to the customer. That is, there are no other parties involved in the distribution process that take ownership of the product. The direct system can be further divided by the method of communication that takes place when a sale occurs. These methods are:
Direct Marketing Systems – With this system, the customer places the order either through information gained from non-personal contact with the marketer, such as by visiting the marketer’s website, ordering from the marketer’s catalog, or through personal communication with a customer representative who is not a salesperson, such as through toll-free telephone ordering.
Direct Retail Systems – This type of system exists when a product marketer also operates their own retail outlets under an independent channel arrangement. As previously discussed, Starbucks’ own stores would fall into this category.
Personal Selling Systems – The key to this direct distribution system is that a person, whose primary job responsibility include creating and managing sales (e.g., salesperson), is involved in the distribution process, generally by persuading the buyer to place an order. While the order itself may not be handled by the salesperson (e.g., buyer physically places the order online or by phone), the salesperson plays a role in generating the sales.
Assisted Marketing Systems – Under the assisted marketing system, the marketer relies on others to help communicate the marketer’s products but handles distribution directly to the customer. The classic example of assisted marketing systems is eBay which helps bring buyers and sellers together for a fee. Other agents and brokers would also fall into this category.
Indirect Distribution System
With an indirect distribution system, the marketer reaches the intended final user with the help of others. These resellers usually take ownership of the product, though in some cases they may sell products on a consignment basis (i.e., only pay the supplying company if the product is sold). Under this system, intermediaries may be expected to assume many responsibilities to help sell the product. Indirect methods include:
Single-Party Selling System – Under this system, the marketer engages another party who sells and distributes directly to the final customer. This is most likely to occur when the product is sold through large store-based retail chains or through online retailers.
Multiple-Party Selling System – This indirect distribution system has the product passing through two or more distributors before reaching the final customer. The most likely scenario is when a wholesaler purchases from the manufacturer and sells the product to retailers.
Multichannel or Hybrid System
In cases where a marketer utilizes more than one distribution design, the marketer is following a multichannel or hybrid distribution system. Starbucks follows this approach as its distribution design not only includes using a direct retail system by selling their products in company-owned stores, they also utilize several other distribution systems, including a single-party selling system by selling through grocery stores and a direct marketing system as they sell product via an online store.
By using a multichannel approach, a marketer can expands distribution and reach a wider market, however, as we discussed under Channel Relationships, the marketer must be careful with this approach due to the potential for channel conflict.
Distribution in Global Markets
Organizations looking to distribute outside their home market may experience challenges that are significantly greater than what they face in their home market. Marketers, who are new to selling internationally, often discover the learning-curve for doing this effectively can be quite steep. Additionally significant cultural differences and financial burdens (e.g., differences in exchange rates, increased shipping expense, additional packaging costs) may also be issues. Consequently, upon entering a new foreign market, many companies discover that strategies they utilized successfully in their home market do not work in the new market.
Because organizations often find it difficult to replicate their success when entering new markets, they may need to consider different strategies for establishing a marketing presence beyond their home country. In general, marketers have available the following options for gaining distribution in global markets:
With this distribution method, a marketer does not set up a physical presence in a foreign market. Instead, product is shipped by the company to buyers in the foreign market. In the simplest arrangement, a marketer will accept customer orders on their website then arrange for international shipment to reach the customer (e.g., FedEx shipment). In some exporting arrangements, the marketer negotiates with a marketing firm located in the foreign country to assist in generating orders, managing customers, and possibly handling some distribution activities. The main benefit of the export option is that risks and costs are relatively low. On the downside, exporting may not enable a company to realize full demand for the product since the marketer does not have a local presence and, consequently, cannot dedicate full attention to developing the market.
In general, this is a relationship where two or more organizations team to market products. For instance, a company may agree on a licensing arrangement where the marketer allows another company in a foreign country to handle its products. This arrangement may even extend to allowing the foreign company to manufacture the product. Other forms of joint operation occur when a marketer forms a partnership with a company in the host country, often resulting in the creation of a new company. Ownership in such an arrangement may be equally split or one partner may have a greater percentage of the final company. Under this arrangement, the risk is split between the partnering organizations.
This represents the most involved business situation where the marketer owns nearly all key aspects of conducting business in another country. The key advantage with direct investment is the control it offers as the company can make all decisions and retain all profits. However, the risks are quite high as the marketer must often invest heavily to establish and maintain operations.
Establishing Channel Relationships
Since channel members must be convinced to handle a marketer’s product, it makes sense to consider channel partner’s needs in the same way the marketer considers the final user’s needs. However, the needs of channel members are much different than those of the final customer. As we noted in the Business Buying Behavior Tutorial, a reseller seek products of interest to the reseller’s customers but are also concerned with many other issues such as:
Products – Primarily resellers seek products of interest to their customers. For instance, a buyer for a large retailer may personally not like a particular product but, nonetheless, will purchase it as long as customers are willing to buy. Thus, selling to resellers means the marketer must show convincing evidence the customers serviced by the reseller will purchase the products.
Delivery – Resellers want the product delivered on time and in good condition in order to meet customer demand and avoid inventory out-of-stocks.
Profit Margin – Resellers are in business to make money so a key factor in their decision to handle a product is how much money they will make on each product sold. They expect the difference (i.e., margin) between their cost for acquiring the product from a supplier and the price they charge to sell the product to their customers will be sufficient to meet their profit objectives.
Other Incentives – Besides profit margin, resellers may want other incentives to entice them, especially if they are required to give extra effort selling the product. These incentives may be in the form of additional free products or even bonuses (e.g., money, free trips) for achieving sales goals.
Packaging – Resellers want to handle products as easily as possible and want their suppliers to ship and sell products in packages that fit within their system. For example, retailers may require products be a certain size or design in order to fit on a store’s shelf, or the shipping package must fit within the reseller’s warehouse or receiving dock space. Also, many resellers are now requiring marketers to consider adding identification tags to products (e.g., RFID tags) to allow for easier inventory tracking when the product is received and also when it is sold.
Training – Some products require the reseller to have strong knowledge of the product including demonstrating the product to customers. Marketers must consider offering training to resellers to ensure the reseller has the knowledge to present the product accurately.
Promotional Help – Resellers often seek additional help from the product supplier to promote the product to customers. Such help may come in the form of funding for advertisements, online how-to videos, point-of-purchase product materials, or in-store demonstrations.
We will continue our discussion of distribution decision in our next three tutorials as we discuss in greater detail the reseller network – retailers and wholesalers – and the processes involved in physically handling product flow through the channel.