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Various marketing strategies related to product distribution and intermediaries. It covers topics such as selective distribution, logistical functions, resellers, specialty service firms, product factors, transportation, and selling through intermediaries. The document also discusses different distribution systems and benefits for both producers and consumers.
Typology: Summaries
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June 2013 EB 2013-
S andra Cuellar-Healey, MFS MA
Charles H. Dyson School of Applied Economics & Management College of Agriculture and Life Sciences Cornell University, Ithaca NY 14853-
Direct Selling, Direct Marketing, Online Marketing, Farmer’s Markets, Community
1. What is Placement/Distribution?
Placement, more commonly named distribution, encompasses all the physical activities necessary to make your product or service available to your customers when and where they need it. The distribution strategies and channels that a firm chooses should match the characteristics of its product or service, the firm’s business plan and the target market.
Distribution is also a key component of the so-called “supply chain”, a procurement model designed to streamline the distribution system by eliminating transaction costs that don’t add value to the enterprise. To achieve maximum supply chain profitability, a firm’s distribution system must be both effective (deliver a product or service to the right place, in the right amount, in the right condition) and efficient (deliver at the right time and for the right cost). For more information on Supply Chain and Supply Chain Management see Supplement No.1 at the end of this module.
The way a product is distributed, including the place where it is offered for sale and the reputation of the reseller, along with the purchasing experience (delivery time, condition of delivery, etc.) is important because it impacts customers’ views on the product and the likelihood of follow-up sales.
2. Marketing Channels of Distribution
A marketing channel consists of individuals and businesses that participate in the process of making a firm’s product or service available for use or consumption by the end user (consumers or industrial users). Marketing channel design and marketing channel management constitute the most important decisions a firm must make regarding its distribution strategy.
Channel design encompasses the issues of “length” and “breadth”. Channel length refers to whether the distribution will be “direct” or “indirect” or both and whether the firm deals directly with the end user or one or more intermediaries. Some firms may use both approaches to serve different target markets. Channel breadth refers to how intensely or selectively the firm wants to distribute its product. Intense distribution is justified when the firm is aiming for maximum customer convenience (such as a basic product/service). Selective distribution is justified for those products/services for which the customer is willing to travel and search for the product/service, the costs of stocking the product are high and the degree of market development needed to sell the product/service is high (e.g., high end cars).
Channel management relates to the policies and procedures that will be adopted in order for all members involved in the distribution channel to perform the required functions. Because conflict between members of the distribution channel is common, good communications, trust and understanding among all members, along with attention to proper design of contracts are key to the effective functioning of the channel.
2.1 Direct Channels
A direct marketing channel is one in which the producing firm establishes contact with the clients (consumers or businesses) of its products or services and performs all the channel functions. To this end, firms use a variety of vehicles to communicate and sell to their customers, including: sales personnel, direct mail, catalogs, telemarketing, e-mail, the internet, and text messaging. In other types of direct marketing channels such as farmer’s markets, Community Supported Agriculture (CSA), U-Pick operations and special events like craft shows and fairs, the producer directly interacts with the buyer to make the sale.
2.2 Indirect Channels
An indirect marketing channel consists of a chain of businesses (or intermediaries) involved in the distribution process, each passing the product down until it finally reaches the end-user. An indirect marketing channel might just mean using a retailer to get to the end consumer, or it might imply using both a wholesaler and a retailer or even using an agent/broker/sales representative, a wholesaler and a retailer.
Intermediaries are generally classified as resellers or specialty service firms that perform transactional, logistical and facilitating functions. Transactional functions involve buying, selling and risk taking (stocking merchandise in advance of sales). Logistical functions include gathering, storing, and dispersing of products. Facilitating functions encompass a variety of activities to assist producers in making their products and services more attractive to buyers (promotions, demonstrations, etc.).
2.2.1 Resellers
Resellers purchase or take ownership of products from the producing firm with the intention of selling them to others. The most common categories are:
Retailers: businesses or persons that sell products directly to final consumers as opposed to wholesalers or suppliers who sell products to other businesses.
Wholesalers: distributors or middlemen that purchase products from suppliers (such as producers or other wholesalers) and in turn sell them to other resellers, such as retailers or other wholesalers.
Industrial Distributors : work mainly in the business-to-business market and perform a variety of functions including, selling, stocking, and delivering a full product assortment along with financing.
2.2.2 Specialty Service Firms
Specialty service firms provide additional services to help with the exchange of products but generally do not purchase the product, that is, they do not take ownership of the product. The most common categories are:
3.2 Firm Factors
The financial, human and technological characteristics of your firm have an important bearing on the distribution channel choice as well. Firms that can’t afford to have their own sales force, for example, might use agents or brokers to reach wholesalers or other buyers. On the other hand, a firm that produces multiple products for a particular target market might be better off using a direct channel.
3.3 Price Factors
The price at which you seek to sell your product also impacts how you need to distribute it. For example, the inclusion of intermediaries in your distribution strategy may affect your product’s pricing since each member of the channel seeks to make a profit for their contribution to the sale of your product. If there are too many intermediaries the eventual selling price may be too high to meet your sales’ targets.
3.4 Customer Factors
In selecting a distribution channel for your product, you need to choose the approach that reaches your customers in the most effective way possible. You need to know who your potential buyers are, where they buy, when they buy, how they buy, and what they buy.
Another key factor is the level of distribution coverage needed to effectively address your customer’s needs. Distribution coverage is measured in terms of the intensity with which the product is made available. The density or number of stores in a particular geographical area and the type of intermediaries used constitute the basics of distribution coverage. In the case of products that are purchased by a customer at a physical outlet, there are three main levels of distribution coverage: mass (or intensive) coverage, exclusive coverage and selective coverage. Mass coverage means that a firm tries to place its products or services in as many outlets as possible. Exclusive coverage is the exact opposite of mass coverage with only one retail outlet in a particular geographical area carrying the firm’s product. In selective coverage a firm selects a few retail outlets in a specific area to carry its products. For more information about distribution coverage see Supplement No.2 at the end of this module.
4. Distribution Functions Your distribution system should be designed to achieve the level of customer service you want to offer at the lowest possible cost. The main distribution functions are: order processing, inventory control, transportation, warehousing, and inventory management.
4.1 Order Processing
Order entry and processing directly affects a firm’s ability to meet its customer needs and expectations. You need to have a system that allows your customers to easily place orders, according to their specific needs, be it at the counter, by phone, by mail or electronically. Order processing typically consists of five major activities: a credit check, recording the sale, making
the appropriate accounting, locating and shipping the item, and adjusting inventory records. The development of the UPC (Universal Products Code) or bar code, used to identify products, and capable of storing lots of information in a very limited space, has facilitated the efficiency of order processing. For more information about UPC see Marketing Module 5: Product.
4.2 Inventory Management
Inventory management is a major element of the distribution system and constitutes a “balancing act” between the costs of excessive inventory and the costs of “out of stocks”. Forecasting techniques are commonly used to project future sales and their implications for inventory management. Knowledge about the demand patterns at the consumer level gives producers a better chance of ensuring that the right amount of product is available at any given time.
Significant improvements have been possible in inventory management during recent years due to the development and adoption of “just-in-time” (JIT) and “quick response” systems. JIT involves reducing costs by cutting inventories to absolute minimum levels and requiring vendors to deliver products as they are needed. Among “quick response” systems, Electronic Data Interchange (EDI) and the Internet are widely used. EDI consists in the electronic exchange of business documents in machine-readable formats, thereby allowing for cutting costs associated with time-consuming data entry and expensive paperwork, reducing errors and speeding up the procurement cycle. It constitutes a very efficient system for order processing and inventory management and updating.
4.3 Transportation
Transportation is a critical component in the cost of distribution and for many products (such as perishables) constitutes the key to satisfactory customer service. A fast and efficient transportation system often gives a firm a competitive edge.
The primary factors to consider are the route and network along which your product is to be shipped and the mode of transportation to use. The route refers to whether the product will be shipped directly to the end consumer or if it will go through a series of layers. The network is the collection of locations and routes along which your product can be shipped.
There are four distinct modes of transportation from which to choose: air, truck, rail, and ship. Each option has specific characteristics with respect to the speed, size of shipments (from small packages to pallets to full trucks), costs of shipping, and flexibility.
When analyzing the different modes of transportation you need to take into consideration which will be best for shipping your product: whether or not it allows for final delivery of your product at your buyer’s desired location, how quickly it will be delivered, the cost of shipment and the amount of product that can be shipped at one time within one transportation unit. It is often necessary to make use of more than one transportation mode. Package carriers, i.e., transportation companies like FedEx, UPS and the U.S. Postal Service, typically use a multimodal approach mostly using air, truck and rail transportation.
(mail-order/catalog sales and telemarketing), on-line marketing (Internet), farmer’s markets, Community Supported Agriculture (CSA) Operations, U-Pick Operations and special events.
Direct Selling, also called door-to-door retailing, involves direct sales of goods and services to consumers through personal interactions and demonstrations in their home or office. The concept of direct selling is to provide maximum convenience to consumers and allow the producing firm to control its distribution channels. In recent years however, direct selling sales have been on a steady decline.
Direct Marketing, refers to other selling strategies in which there is a direct communication between the producer and the end consumer. Customers can order merchandise by mail, by phone, by visiting a mail-order desk in a retail store, or by computer or fax. Mail order, catalog sales and telemarketing are traditional examples of this type of marketing. In the mail order and catalog sales strategy, producers focus on attracting buyers through customer services provided through toll free numbers, computerized shopping services and unique catalogs. Mail ordering and catalog sales are particularly effective for products that are not available in stores, have unusual features and whose appeal can be communicated with words and pictures. Telemarketing involves interacting directly with the consumer by phone. It is often considered a more efficient way of targeting consumers than direct mail. However, this distribution channel has undergone dramatic changes that limit its use. New legislation and tighter regulation for telephone solicitations now address consumer privacy, industry standards and ethical guidelines issues.
Online Marketing constitutes an increasingly popular marketing channel that allows buyers to search for, evaluate and order products electronically. Using the Internet or other electronic commerce modes implies displaying your products, making sales, managing inventory and doing accounting all electronically. To this end you can develop your own website, join existing ones or offer your products though other firm’s websites. Developing a website can be relatively inexpensive or very costly. To be effective, the website has to be interactive and up-to-date, connected to other sites, indexed to search engines, and finally, it has to be promoted!
Farmer’s Markets play a vital role in enabling farmers (particularly small and medium-size growers) to gain direct access to customers eliminating the middlemen and potentially increasing their profit. On the other hand, farmer’s markets provide customers the opportunity to buy high quality fresh produce and to interact with the producer of their food. They have become increasingly popular throughout the United States with the number of operating farmers markets increasing by a 4.5 factor in the last 18 years: from 1,755 in 1994 to 7,864 in 2012.
Community Supported Agriculture (CSA) Operations are becoming more and more popular as a direct farm marketing channel due to increased consumer interest in local and organic fruit and vegetables. The core principle of a CSA operation is that growers and consumers provide mutual support and share the risks and benefits of food production. As such, consumers become "share-holders" of the farm or garden by pledging in advance to cover the anticipated costs of the farm operation and the farmer's salary. In return, they receive a share of the farm's output throughout the growing season, and the satisfaction of reconnecting to the land and of supporting local growers. By participating in CSA operations growers receive better prices for their crops,
gain some financial security, and are relieved of much of the burden of marketing. According to the 2007 Census of Agriculture, more than 12,500 farms in the US reported marketing products through a CSA operation
U-Pick/Pick Your Own (PYO) Operations became popular during the Depression and after World War II when prices were so low that farmers were not able to cover the labor and material costs. This kind of operation is most common with crops that imply high labor costs and little harvesting expertise. Products typically sold through this type of operation include berries, tomatoes, pumpkins and Christmas trees.
Special Events such as fairs and craft shows constitute not only an important opportunity for a producer to interact and sell directly to consumers but also a way to assess their response to new products and a way to build a mailing list. Sampling is possible and labeling is often less important. Firms need to investigate and select those events most appropriate for their product and target market.
For more information about Selling Directly to Consumer see “Direct Marketing” in the Marketing Module 8: Promotion.
5.2 Selling Though Intermediaries
Activities performed by intermediaries include, but are not limited to: buying and selling, assembling, storing, displaying and promoting products or services. Intermediaries represent benefits to both producers and consumers. They facilitate producers’ entrance to traditional markets and/or access to new markets, reaching geographically scattered customers, and speedy delivery of products in small quantities. For firms that don’t have the money or the time to conduct the distribution functions themselves, hiring intermediaries or outsourcing some of these functions is the only alternative. Consumers benefit from intermediaries due to their ability to bring the products or services to convenient places in a timely fashion.
5.2.1 Selling Through Retailers
Retailers offer many benefits to suppliers and consumers alike. For consumers the benefits relate to the possibility of buying small quantities of a wide assortment of products at reasonable and/or affordable prices. Benefits to suppliers relate to the opportunity of reaching their target market, building product demand through retail promotions and having access to feedback from consumers. Selling to retailers usually implies that the producer must be able to offer a product line in the right volume, to provide promotional support and to adequately deal with the business practices of each specific retailer, including warehousing, packaging, UPC labeling, distribution systems, credit terms, sales promotions, etc. Retailers can be classified on the basis of one or more of the following criteria, related to their marketing strategies: target market served, product offerings, pricing structure, promotional emphasis, distribution method and service level. An additional characteristic used in classifying retailers relates to ownership.
In the U.S. food retail industry the number and type of outlets has increased significantly in recent years. Starting in the early 1990’s over a dozen different types of traditional, convenience
number of larger, preferred suppliers who can provide products in the volumes needed on a year- round basis. Under this new procurement model of direct transactions between retailer buyers and their suppliers, sales arrangements typically go beyond price to include different types of fees (off-invoice and/or promotional, rebates, or other discounts), volume commitments or automatic product replenishment provisions, quality and packaging specifications, and food safety assurances such as third party certifications.
7. Distribution Practices - Foodservice Industry
Foodservice in the U.S. is a diverse and highly competitive industry, including all establishments, businesses and services that prepare and serve meals, snacks and beverages away from home, ranging from corner pubs and fast-food franchises to fine restaurants. However, chain/multi-unit operations dominate the foodservice industry.
To ensure consistent quality and freshness, as well as competitive prices, foodservice companies negotiate directly with national and regional suppliers. The larger the customer, the greater the bargaining power over suppliers.
Distributors to the foodservice industry vary widely in size, territory covered, types of accounts serviced, volume of business and approach to the markets they serve. Typically they are classified according to: ownership (publicly or independently owned), geographical coverage (local, regional or national), product line(s) (broad-line or specialty) and mode of operation (systems or customer specialists). Approximately three-quarters of the foodservice business of both broad-line and produce distributors is focused on commercial accounts with the remainder dedicated to non-commercial businesses (schools, military, government, etc).
References:
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available to suppliers through a protected web-based portal, thus making the supply chain more “demand based”. Vendors co-manage inventories and are responsible for monitoring inventory at various distribution centers and replenishing it on a “just-in-time” basis.
Supplement No. 2 - Distribution Coverage
Mass Distribution Coverage
The mass coverage (also known as intensive coverage) strategy attempts to distribute products widely at 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. 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. This type of distribution is mainly used for convenience products or services like candy, fast food, newspapers, and soft drinks.
Exclusive Coverage
Under this distribution strategy, a firm chooses to distribute its products or services to just one retail outlet in a particular geographical area. This type of distribution is typically used for high- end products targeted to very narrow markets. A relatively small number of customers characterized as “discriminating” in their taste for products, seeking to satisfy their needs with high-quality and expensive products and often demanding a high level of customer service constitute these markets. Another type of exclusive distribution that doesn’t necessarily involve high-end products corresponds to those products only available in selected locations such as company-owned stores.
Selective Coverage
Under selective coverage, a firm seeks to limit the locations in which its product is sold. Products distributed with selective coverage appeal to smaller, more focused target markets 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 less.
agents are: manufacturers’ agents and selling agents. A manufacturer’s agent represents a number of manufacturers of related but non-competing products. A selling agent is responsible for the entire marketing program of a firm’s product line.
