Place (Distribution)

1. Professor Joel Huber BA 360 Marketing Management Fuqua School of Business Introduction Three C’s Four P’s Product Placement Promotion Price Summary Place (Distribution)

2. Agenda • The function of channels • Channel design • Depth • Breadth • Relationships with channel members

3. Marketing Channels • Channels are intermediaries whose function is to facilitate the movement of things between producers and customers • Channels exist when they are more efficient than direct distribution (note the internet is a channel) M C M C M C M D C M C M C Pure direct distribution (zero level channel) Number of Contacts = 9 Pure intermediation (one-level channel illustrated) Number of Contacts = 6

4. Generic Channel Functions • Product Information • Promotion & Demand Generation • Product Customization • Quality Assurance • Lot Size • Assortment • Availability • After Sales Service • Logistics • Financing • Waiting Time • Spatial Convenience (Especially Internet)

5. Channel Depth • Issue isn’t whether these functions will be done, it is who will do them! • To the extent that the manufacturer does them • Its costs go up => its prices will be higher • When some of them are shifted to intermediaries • Manufacturer’s costs are lower, but intermediaries will add their charges • If intermediaries are more efficient than manufacturer, prices should be lower than under direct distribution • All else the same, consumers will purchase from the system giving the lowest price, which explains why efficiency is necessary for channels to exist

6. Example – Grocers do the walking

7. Channel Flow Figure Internet -

8. Channel Breadth • Intensive distribution • As many outlets as possible • Selling support not considered vital • Firm seeks to minimize customers’ cost of obtaining offering • Selective distribution • Multiple, but limited, outlets per area • Firm seeks optimal tradeoff between selling support and the costs customers must face to obtain the offering, both are considered important • Exclusive distribution • Single outlet per area • Firm seeks strongest selling support • Customers’ cost of obtaining offering not considered vital

9. Channel Breadth Guidelines • Internet limits ability to selectively distribute information goods.

10. Example - Selective to Extensive

11. Example - Parts Exchange

12. Channel Relationships: Power • Power in the channel relationship is • The ability of one channel member to get another to do what it otherwise would not • Four bases of power • Coercive power • Reward power • Expert power • Referent power

13. Channel Relationships: Conflict • Conflict in the channel arises when the interests of entities diverge • Vertical conflict => interests of different levels within same channel are opposed • Horizontal conflict => interests of different members at same level are opposed • Minimizing/handling conflict • Avoidance: superordinate goals, personnel exchanges, joint membership in trade associations • Resolution: diplomacy, mediation, arbitration

14. Sources of Channel Conflict

15. Mutiple Channels- PC’s Manufacturer Wholesale VAR Office Retail Computer Retail Private Label Catalog Large Corporate Account (National) OEM Individual User Small Corporate Account Government

16. Channel evolution-Package Goods • 1980’s a few goods companies dominated: P&G, Lever, Kraft, General Foods • Each had multiple brands, high advertising budgets, frequent new products • Each had salesforces (n=500) who stocked shelves and encouraged retailers to promote products • New competitors found themselves facing a $50MM advertising barrier or they could not get shelf space

17. How manufacturers lost their edge • Discovered that cash cow brands could be milked for profit—opened doors for competitors • Frequent consumer and retail dealing resulted in greater switching among brands • There were fewer truly new products coupled with decreased perceived differences among brands • To make money brand companies manufactured store or generic brands

18. How retailers gained an edge • Developed quality store brands • Played equally matched competitors against each other for shelf space—Trade promotions went from $8B in 1980 to $80B in 2000 • Used proprietary scanner data to • Reveal profitability and vulnerability—cut back number of SKU (stock keeping units) • Understand the value of shelf position, displays • Track the impact of new product introductions • Instituted slotting allowances

19. Slotting allowances • Originally were charges to add a new slot in the warehouse for new products • Became general fee for new products, fees if product fails, and the pay-to-stay allowance • Negotiated with each company separately, allow the retailers to act like monopsonists • Smaller and less powerful companies pay more • Established companies pay less

20. Resolution • Retailers moves have made brands less profitable for manufacturers • Retailer competition has kept retailer profit low • Efficient consumer response has made the system more efficient • Big winner—consumers!

21. Summary • Channels exist when they are more efficient than direct distribution • Channel length is determined on the basis of comparative efficiency and effectiveness • Channel breadth is a function of customers’ perceptions of the offering’s uniqueness, complexity, consequences of a poor choice • All channels are subject to conflict stemming from divergent interests of members • Conflict generates evolutionary changes