Distribution (business)

Distribution strategies

Prior to designing a distribution system, the planner needs to determine what the distribution channel is to achieve in broad terms. The overall approach to distributing products or services depends on a number of factors including the type of product, especially perishability; the market served; the geographic scope of operations and the firm's overall mission and vision. The process of setting out a broad statement of the aims and objectives of a distribution channel is a strategic level decision.

Strategically, there are three approaches to distribution:

Mass distribution

Selective distribution

Exclusive distribution

Intensive distribution: (also known as mass distribution) When products are destined for a mass market, the marketer will seek out intermediaries that appeal to a broad market base. For example, snack foods and drinks are sold via a wide variety of outlets including supermarkets, convenience stores, vending machines, cafeterias and others. The choice of distribution outlet is skewed towards those than can deliver mass markets in a cost efficient manner.

Selective distribution: A manufacturer may choose to restrict the number of outlets handling a product. For example, a manufacturer of premium electrical goods may choose to deal with department stores and independent outlets that can provide added value service level required to support the product. Dr Scholl orthopedic sandals, for example, only sell their product through pharmacies because this type of intermediary supports the desired therapeutic positioning of the product. Some of the prestige brands of cosmetics and skincare, such as Estee Lauder, Jurlique and Clinique, insist that sales staff are trained to use the product range. The manufacturer will only allow trained clinicians to sell their products.

Exclusive distribution: In an exclusive distribution approach, a manufacturer chooses to deal with one intermediary or one type of intermediary. The advantage of an exclusive approach is that the manufacturer retains greater control over the distribution process. In exclusive arrangements, the distributor is expected to work closely with the manufacturer and add value to the product through service level, after sales care or client support services. The most common type of exclusive arrangement an agreement between a supplier and a retailer granting the retailer exclusive rights within a specific geographic area to carry the supplier's product.

Channels and intermediaries

Distribution of products takes place by means of channels to become available on markets, in stores or in webshops. Channels are sets of interdependent organizer (called intermediaries) involved in making the product available for consumption to end-user. This is mostly done by merchants or distributors, or in international context by importers.

Typical intermediaries involved in distribution include:

Wholesaler: A merchant intermediary who sells chiefly to retailers, other merchants, or industrial, institutional, and commercial users mainly for resale or business use. Wholesalers typically sell in large quantities. (Wholesalers, by definition, do not deal directly with the public). Retailer: A merchant intermediary who sells direct to the public. There are many different types of retail outlet - from hypermarts and supermarkets to small, independent stores. Agent: An intermediary who is authorised to act for a principal in order to facilitate exchange. Unlike merchant wholesalers and retailers, agents do not take title to goods, but simply put buyers and sellers together. Agents are typically paid via commissions by the principal. For example, travel agents are paid a commission of around 15% for each booking made with an airline or hotel operator. Jobber: A jobber is a special type of wholesaler, typically one who operates on a small scale and sells only to retailers or institutions. For example, rack jobbers are small independent wholesalers who operate from a truck, supplying convenience stores with snack foods and drinks on a regular basis.

Channel design

A firm can design any number of channels they require. Channels can be distinguished by the number of intermediaries between producer and consumer. If there are no intermediaries then this is known as a zero-level distribution system or direct marketing. A level one channel has a single intermediary. This flow is typically from manufacturer to retailer to consumer, but may involve other types of intermediaries. In practice, distribution systems for perishable goods tend to be shorter - direct or single intermediary. In other cases, distribution systems can become quite complex involving many levels and different types of intermediaries.

Channel mix

In practice, many organizations use a mix of different channels; in particular, they may complement a direct sales-force who typically call on larger customers with agents who cover the smaller customers and prospects. In addition, online retailing or e-commerce is leading to disintermediation. Retailing via smartphone or m-commerce is also a growing area.

Managing channels

The firm's marketing department needs to design the most suitable channels for the firm's products, then select appropriate channel members or intermediaries. The firm needs to train staff of intermediaries and motivate the intermediary to sell the firm's products. The firm should monitor the channel's performance over time and modify the channel to enhance performance.

Channel motivation

To motivate intermediaries the firm can use positive actions, such as offering higher margins to the intermediary, special deals, premiums and allowances for advertising or display. On the other hand, negative actions may be necessary, such as threatening to cut back on margin, or hold back delivery of product.

Channel conflict

Channel conflict can arise when one intermediary's actions prevent another intermediary from achieving their objectives. Vertical channel conflict occurs between the levels within a channel and horizontal channel conflict occurs between intermediaries at the same level within a channel.