MARKETING CHANNELS An Introduction
Distribution • Products must be available to consumers who want to purchase them conveniently, quickly, and with a minimum of effort. • The distribution system determines a product's marketing presence and the buyers' accessibility to the product.
Utilities offered by Distribution • Distribution (also known as place) provides utility. • Time utility is offering the product when the customers want to purchase it. • Place utility is offering the product where the customers want to purchase it. • Possession utility facilitates customer ownership of the product. • Form utility might be needed if changes have been made to the product in the distribution channel (Coca-Cola concentrate sold to bottlers).
Definition of a Marketing Channel • A distribution channel (also known as a marketing channel) is a set of interdependent organizations or intermediaries involved in the process of making a product available for consumption.
A channel directs the flow of products from producers to customers. Intermediaries are organizations operating in the middle or between the producer and the final buyer. They link producers to other intermediaries or to the ultimate users of the product. Traditionally, intermediaries have been referred to as middlemen.
Channel interactions How a marketing intermediary reduces the number of channel transactions and raises economy of effort
Functions of Intermediaries • Costs are associated with an exchange and can be reduced by reducing the number of transactions (exchanges). Marketing intermediaries increase efficiency in making products available to target markets. Through contacts, experience, specialization, and scale of operation, intermediaries usually offer the organization more than it can achieve on its own.
Functions of Intermediaries • Intermediaries smoothen the flows of products to buyers by performing the key functions of informing, promoting, and physical possession (including negotiation, title, payment, risk taking and financing). A producer will use an intermediary when it believes that the intermediary can perform the function(s) more economically and efficiently than it can.
Functions of Intermediaries • The information function involves gathering and distributing marketing research and intelligence about the environment for planning purposes. • The promotion function involves developing and spreading persuasive communications about an offer. • The physical possession function consists of the transporting and storing of products.
Functions of Intermediaries • This activity involves the negotiations for reaching an agreement on price and other terms. • The title is the actual transfer of ownership from one organization or person to another. The payment involves buyers paying their bills. • The risk taking function assumes the risk of carrying the product and receiving payment. • The financing function involves acquiring and using funds to cover costs
Manufactures typically produce a large quantity of a limited variety of goods. • Consumers usually desire a small quantity of a wide variety of goods. • Intermediaries reduce this quantity discrepancy by matching supply and demand. They buy in large quantities and sell in smaller quantities. • They help to smooth the distribution path for goods by creating utility, performing marketing functions, and cutting costs.
Channel Members • Channels of distribution include consumer channels and business to business channels. Marketers can choose either a direct distribution channel, which moves goods directly from the producer to the consumer, or an indirect distribution channel, which involves using one, two, three or more intermediary channel levels. The number of levels in a channel defines the length of a channel.
Channel Members Channel Members • The choice of a distribution channel should support the organization’s marketing strategy. Organizations must consider their target market, the type of product being distributed, their own internal systems and concerns, and competitive factors. A competitive advantage can be gained by strategically managing channels of distribution.
Channel Members Channel Members • Once the decision is made, the company needs to identify the types of marketing intermediaries, if any, that it will use to distribute its goods and services. A channel may include manufacturer, wholesaler, retailer, and consumer. The functions of the manufacturer are to design, produce, brand, price, promote, and sell the product.
Channel Members Channel Members • Marketing intermediaries include wholesalers and retailers. Wholesale transactions are all transactions except the transaction with the ultimate consumer. The functions of the wholesaler are to buy, stock, promote, display, sell, deliver, and finance. The functions of the retailer are to buy, stock, promote, display, sell, deliver, and finance.
Channel Members Channel Members • The purchaser, not the price, determines the classification of the intermediary as a wholesaler or retailer. If over 50% of sales are with other intermediaries, then the intermediary is a wholesaler. If over 50% of sales are with the consumer, then the intermediary is a retailer.
Channel Members Channel Members • Channels are depicted as chains with vertical dimensions (number of channel members at different levels). Horizontal dimensions are the numbers of channel members at the same level.
Market Intensity • The organization must decide on the amount of market coverage--intensive, selective, or exclusive--needed to achieve its marketing strategies. In terms of number of intermediaries to use, an organization has three basic strategies it can follow.
Market Intensity • For convenience products, where widespread availability is key, the company may opt for intensive distribution. This is stocking the product in as many outlets as possible. An example would be soft drinks, gum, candy, and potato chips. They are sold at grocery stores, gas stations, and neighborhood stores. Companies that frequently use this method are Proctor & Gamble, Coca-Cola, and Campbell Soup.
Market Intensity • For shopping products, where consumers spend some time in the decision process and have some brand preferences, selective distribution may be the best option. Under selective distribution, the organization tries to use more than one, but fewer than all the intermediaries who are willing to carry the product. Most television, furniture, and small appliance brands are distributed in this manner. Maytag, Whirlpool, and General Electric use this method to distribute their products.
Market Intensity • For specialty products where consumers have strong brand preferences and are willing to go out of their way to obtain the product, an organization may opt to use exclusive distribution, where a limited number of dealers have the exclusive right to distribute an organization’s products in their territories. This form is often used in the distribution of new automobiles and prestige women’s clothing. Rolls Royce dealerships, for example, are limited to only large metropolitan areas where significant portions of their customers reside.