Distribution Strategy

Distribution Strategy

Introduction “Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption” Philip Kotler

Functions of a Distribution Channel • The main function of a distribution channel is to provide a link between production and consumption.

Importance of Distribution Decision • Firms market share • Market penetration

Decisions In Physical Distribution Systems • Order processing • Warehousing • Inventory • Transportation

Distribution - types of distribution intermediary • Distributors • Distributors have a similar role to wholesalers – that of taking products from producers and selling them on. They also usually have a much narrower product range. Distributors are often involved in providing after-sales service. Wholesalers Wholesalers stock a range of products from several producers. The role of the wholesaler is to sell onto retailers. Wholesalers usually specialise in particular products.

Franchises Franchises are independent businesses that operate a branded product (usually a service) in exchange for a licence fee and a share of sales. Agents Agents sell the products and services of producers in return for a commission (a percentage of the sales revenues)

Retailers • Retailers operate outlets that trade directly with household customers. Retailers can be classified in several ways: • Type of goods being sold( e.g. clothes, grocery, furniture) • Type of service (e.g. self-service, counter-service) • Size (e.g. corner shop; superstore) • Ownership (e.g. privately-owned independent; public-quoted retail group • Location (e.g. rural, city-centre, out-of-town) • Brand (e.g. nationwide retail brands; local one-shop name)

Number of Channel Levels • Size of the market • Service requirement • Complexity of product • Price • Order lot size

Manufacturers/products Agents/brokers Wholesalers/distributors Retailers Retailers Consumers and organizational end users Basic Channels of Distribution

Transaction Cost by Channels As the value-added increases, the cost of transaction also increases • Direct marketing channels—low value-added; low cost of transactions e.g. e-commerce, telemarketing • Indirect marketing channels—medium value-added; medium cost of transactions e.g. retail stores, distributors • Direct sales channels—high value-added; high cost of transactions e.g. own sales force

Distribution Objectives • Minimize total distribution costs for a given service output • Determine the target segments and the best channels for each segment • Objectives may vary with product characteristics • e.g. perishables, bulky products, non-standard items, products requiring installation & maintenance

Role of Intermediaries • Information • Price stability • Promotion • Financing • Title

Factors Influencing Distribution Decision • Marketing Mix Strategy • External Environmental Factors • Market Characteristics • Consumer Preference And Behaviour

Marketing Mix Strategy • Long term strategic pricing plan determines distribution through high margin outlets or high volume outlets • Product characteristics • Image of the product • After sales service

External Environmental Factors • Government policy • State of the economy • Infrastructure development

Market Characteristics • No of customers • Average purchase • Type of customers

Aligning Channels With How Customers Buy • Identify customers’ channel preferences and buying behavior • Tabulate channel selection to key buying criteria • Provide flexible channel options • Monitor (and respond to) changes in buying behavior

Distribution-Scope Strategies • Exclusive Distribution • Limiting the distribution to only one intermediary in the territory • Intensive distribution • Distribute from as many outlets as possible to provide location convenience • Selective distribution • Appoint several but not all retailers

Example of Exclusive Distribution • LEICA was officially appointed Jebsen & Jebsen Marketing as the exclusive distributor for Singapore, Malaysia, Thailand, Indonesia and Brunei • A main factor in choosing J&J was its expertise in “high-quality technical products on the consumer market.” Source: Smartinvestor, Singapore Ed. June 2000

Exclusive Distribution:Advantages • Maximize control over service level/output • Enhance product’s image & allow higher markups • Promotes dealers loyalty, better forecasting, better inventory and merchandising control • Restricts resellers from carrying competing brands

Exclusive Distribution: Disadvantages • Betting on one dealer in each market • Only suitable for high price, high margin, and low volume products

Example of Intensive Distribution • Newspapers • Most fast moving consumer goods you see in the newsstand • Photo processing shops

Intensive Distribution • Advantages: • Increased sales, wider customer recognition, and impulse buying • Disadvantages: • Characteristically low price and low-margin products that require a fast turnover • Difficult to control large number of retailers

Example of Selective Distribution Daewoo have 2 distributors in Singapore • “Starsauto, part of a larger Indonesian group, represents Daewoo’s traditional line of sedans. • Homegrown family-owned JTA Motors market Daewoo’s offroad vehicles like the Musso and Korando, and an upmarket model called the Chairman. (Source: BT, Motoring, Feb4/1999)

Selective Distribution • Advantages: • Better market coverage than exclusive distribution • More control and less cost than intensive distribution • Concentrate effort on few productive outlets • Selected firms capable of carrying full product line and provide the required service

Selective Distribution (cont’d) • Disadvantages: • May not cover the market adequately • Difficult to select dealers (retailers) that can match your requirement and goals

Multiple-Channel Strategy Using two or more different channels to distribute goods and services • Why? • Permits optimal access to each market segment • Increase market coverage, lower channel cost and provide more customized selling • What to look out for? • More channels usually means more conflict and control problems

Complementary Channels Each channel handles a product or segment that is different or non-competing e.g. • Toyota Lexus • Magazine distributions

Competitive Channels The same product is sold through two different and competing channels e.g. • Non-prescriptive drugs • Electronic goods • Why? To increase sales • What to look out for? • Over extending yourself • Dealers’ resentment • Control problems

Modifying Distribution Strategies Modify when the following changes occur: • Consumer markets and buying habits • Customer needs • Competitor’s perspectives • Relative importance of outlet types • Manufacturer’s financial strength • Sales volume level of existing products, and • The marketing mix

Channel-Control Strategy • Vertical Marketing System (VMS) • Also known as centrally coordinated, professionally managed and centrally programmed network systems • The emerging trend in ASPAC replacing existing conventional marketing channels • Classified into corporate, administered and contractual VMS

Channel-Control Strategy (cont’d) Horizontal Marketing System • One company putting together different resources to exploit a marketing opportunity. • Eg. ITC E-choupals • Aqua, Soya, Planters.net.com set up in A P. M P and Karnataka.

Competitive Advantage of Channels • Traditional means of achieving competitive advantage is through products but can be easily copied • Low-cost as a competitive advantage • Also suffer from sustainability • Brands as competitive advantage • Only if you are a strong brand • Marketers are turning more and more to channels as a competitive advantage e.g. Dell Computer Source: The Channel Advantage by Friedman and Furey

Distribution Strategy