5 CHANNEL AND PHYSICAL DISTRIBUTION

Distribution Decisions

Our discussions in Product Decisions and Managing Products indicate product

decisions may be the most important of all marketing decisions since these lead
directly to the reasons (i.e., offer benefits that satisfy needs) why customers decide to
make a purchase. But having a strong product does little good if customers are not
able to easily and conveniently obtain it. With this in mind we turn to the second
major marketing decision area – distribution.

Distribution decisions focus on establishing a system that, at its basic level, allows
customers to gain access and purchase a marketer’s product. However, marketers
may find that getting to the point at which a customer can acquire a product is
complicated, time consuming, and expensive. The bottom line is a marketer’s
distribution system must be both effective (i.e., delivers a good or service to the right
place, in the right amount, in the right condition) and efficient (i.e., delivers at the
right time and for the right cost). Yet, as we will see, achieving these goals takes
considerable effort.

Distribution decisions are relevant for nearly all types of products. While it is easy to
see how distribution decisions impact physical goods, such as laundry detergent or
truck parts, distribution is equally important for digital goods (e.g., television
programming, downloadable music) and services (e.g., income tax services). In fact,
while the Internet is playing a major role in changing product distribution and is
perceived to offer more opportunities for reaching customers, online marketers still
face the same distribution issues and obstacles as those faced by offline marketers.

In order to facilitate an effective and efficient distribution system many decisions must
be made including (but certainly not limited to):

 Assessing the best distribution channels for getting products to customers

 Determining whether a reseller network is needed to assist in the distribution
process
 Arranging a reliable ordering system that allows customers to place orders
 Creating a delivery system for transporting the product to the customer
 For tangible and digital goods, establishing facilities for product storage

What are Channels of Distribution?

In Business Buying Behavior, we describe a supply chain as consisting of all parties

and their supplied activities that help a marketer create and deliver products to the
final customer. For marketers the distribution decision is primarily concerned with the
supply chain’s front-end or channels of distribution that are designed to move the
product (goods or services) from the hands of the company to the hands of the
customer. Obviously when we talk about intangible services the use of the word
“hands” is a figurative way to describe the exchange that takes place. But the idea is
the same as with tangible goods. All activities and organizations helping with the
exchange are part of the marketer’s channels of distribution.

Activities involved in the channel are wide and varied though the basic activities
revolve around these general tasks:

 Ordering

 Handling and shipping

 Storage

 Display

 Promotion

 Selling

 Information feedback

Type of Channel Members

Channel activities may be carried out by the marketer or the marketer may seek
specialist organizations to assist with certain functions. We can classify specialist
organizations into two broad categories: resellers and specialty service firms.

Resellers

These organizations, also known within some industries as intermediaries,

distributors or dealers, generally purchase or take ownership of products from the
marketing company with the intention of selling to others. If a marketer utilizes
multiple resellers within its distribution channel strategy the collection of resellers is
termed a reseller network. These organizations can be classified into several sub-
categories including:

 Retailers – Organizations that sell products directly to final consumers.

 Wholesalers – Organizations that purchase products from suppliers, such as

manufacturers or other wholesalers, and in turn sell these to other resellers, such as
retailers or other wholesalers.

 Industrial Distributors – Firms that work mainly in the business-to-business

market selling products obtained from industrial suppliers.

Specialty Service Firms

These are organizations that provide additional services to help with the exchange of
products but generally do not purchase the product (i.e., do not take ownership of the
product):
 Agents and Brokers – Organizations that mainly work to bring suppliers and buyers
together in exchange for a fee.

 Distribution Service Firms – Offer services aiding in the movement of products such
as assistance with transportation, storage, and order processing.

 Others – This category includes firms that provide additional services to aid in the
distribution process such as insurance companies and firms offering transportation
routing assistance.

Importance of Distribution Channels

As noted, distribution channels often require the assistance of others in order for the
marketer to reach its target market. But why exactly does a company need others to
help with the distribution of their product? Wouldn’t a company that handles its own
distribution functions be in a better position to exercise control over product sales and
potentially earn higher profits? Also, doesn’t the Internet make it much easier to
distribute products thus lessening the need for others to be involved in selling a
company’s product?

While on the surface it may seem to make sense for a company to operate its own
distribution channel (i.e., handling all aspects of distribution) there are many factors
preventing companies from doing so. While companies can do without the assistance
of certain channel members, for many marketers some level of channel partnership is
needed.

Benefits Offered by Channel Members

 Cost Savings in Specialization – Members of the distribution channel are

specialists in what they do and can often perform tasks better and at lower cost than
companies who do not have distribution experience. Marketers attempting to handle
too many aspects of distribution may end up exhausting company resources as they
learn how to distribute, resulting in the company being “a jack of all trades but master
of none.”

 Reduce Exchange Time – Not only are channel members able to reduce distribution
costs by being experienced at what they do, they often perform their job more rapidly
resulting in faster product delivery. For instance, consider what would happen if a
grocery store received direct shipment from EVERY manufacturer that sells products
in the store. This delivery system would be chaotic as hundreds of trucks line up each
day to make deliveries, many of which would consist of only a few boxes. On a busy
day a truck may sit for hours waiting for space so they can unload their products.
Instead, a better distribution scheme may have the grocery store purchasing its
supplies from a grocery wholesaler that has its own warehouse for handling
simultaneous shipments from a large number of suppliers. The wholesaler will
distributes to the store in the quantities the store needs, on a schedule that works for
the store, and often in a single truck, all of which speeds up the time it takes to get the
product on the store’s shelves.

 Customers Want to Conveniently Shop for Variety – Marketers have to

understand what customers want in their shopping experience. Referring back to our
grocery store example, consider a world without grocery stores and instead each
marketer of grocery products sells through their own stores. As it is now, shopping is
time consuming, but consider what would happen if customers had to visit multiple
retailers each week to satisfy their grocery needs. Hence, resellers within the channel
of distribution serve two very important needs: 1) they give customers the products
they want by purchasing from many suppliers (termed accumulating and assortment
services), and 2) they make it convenient to purchase by making products available in
single location.

 Resellers Sell Smaller Quantities – Not only do resellers allow customers to

purchase products from a variety of suppliers, they also allow customers to purchase
in quantities that work for them. Suppliers though like to ship products they produce
in large quantities since this is more cost effective than shipping smaller amounts. The
ability of intermediaries to purchase large quantities to resell them in smaller
quantities (referred to as bulk breaking) not only makes these products available to
those wanting smaller quantities but the reseller is able to pass along to their
customers a significant portion of the cost savings gained by purchasing in large
volume.

 Create Sales – Resellers are at the front line when it comes to creating demand for
the marketer’s product. In some cases resellers perform an active selling role using
persuasive techniques to encourage customers to purchase a marketer’s product. In
other cases they encourage sales of the product through their own advertising efforts
and using other promotional means such as special product displays.

 Offer Financial Support – Resellers often provide programs that enable customers
to more easily purchase products by offering financial programs that ease payment
requirements. These programs include allowing customers to: purchase on credit;
purchase using a payment plan; delay the start of payments; and allowing trade-in or
exchange options.

 Provide Information – Companies utilizing resellers for selling their products

depend on distributors to provide information that can help improve the product.
High-level intermediaries may offer their suppliers real-time access to sales data
including information showing how products are selling by such characteristics as
geographic location, type of customer, and product location (e.g., where located within
a store, where found on a website). If high-level information is not available, marketers
can often count on resellers to provide feedback as to how customers are responding
to products. This feedback can occur either through surveys or interviews with
reseller’s employees or by requesting the reseller allow the marketer to survey
customers.

Costs of Utilizing Channel Members

 Loss of Revenue – Resellers are not likely to offer services to a marketer unless they
see financial gain in doing so. They obtain payment for their services as either direct
payment (e.g., marketer pays for shipping costs) or, in the case of resellers, by
charging their customers more than what they paid the marketer for acquiring the
product (termed markup). For the latter, marketers have a good idea of what the final
customer will pay for their product which means the marketer must charge less when
selling the product to resellers. In these situations marketers are not reaping the full
sale price by using resellers, which they may be able to do if they sold directly to the
customer.

 Loss of Communication Control – Marketers not only give up revenue when using
resellers, they may also give up control of the message being conveyed to customers. If
the reseller engages in communication activities, such as personal selling in order to
get customers to purchase the product, the marketer is no longer controlling what is
being said about the product. This can lead to miscommunication problems with
customers, especially if the reseller embellishes the benefits the product provides to
the customer. While marketers can influence what is being said by training reseller’s
salespeople, they lack ultimate control of the message.

 Loss of Product Importance – Once a product is out of the marketer’s hands the
importance of that product is left up to channel members. If there are pressing issues
in the channel, such as transportation problems, or if a competitor is using
promotional incentives in an effort to push their product through resellers, the
marketer’s product may not get the attention the marketer feels it should receive.

Channel Arrangements

The distribution channel consists of many parties each seeking to meet their own
business objectives. Clearly for the channel to work well, relationships between
channel members must be strong with each member understanding and trusting
others on whom they depend for product distribution to flow smoothly. For instance, a
small sporting goods retailer that purchases products from a wholesaler trusts the
wholesaler to deliver required items on-time in order to meet customer demand, while
the wholesaler counts on the retailer to place regular orders and to make on-time
payments. Relationships in a channel are in large part a function of the arrangement
that occurs between the members. These arrangements can be divided in two main
categories: independent and dependent.

Independent Channel Arrangement

Under this arrangement a channel member negotiates deals with others that do not
result in binding relationships. In other words, a channel member is free to make
whatever arrangements they feel is in their best interest. This so-called “conventional”
distribution arrangement often leads to significant conflict as individual members
decide what is best for them and not necessarily for the entire channel. On the other
hand, an independent channel arrangement is less restrictive than dependent
arrangements and makes it easier for a channel members to move away from
relationships they feel are not working to their benefit.

Dependent Channel Arrangement

Under this arrangement a channel member feels tied to one or more members of the
distribution channel. Sometimes referred to as “vertical marketing systems” this
approach makes it more difficult for an individual member to make changes to how
products are distributed. However, the dependent approach provides much more
stability and consistency since members are united in their goals. The dependent
channel arrangement can be broken down into three types:

 Corporate – Under this arrangement a supplier operates its own distribution system
in a manner that produces an integrated channel. This occurs most frequently in the
retail industry where a supplier operates a chain of retail stores. Starbucks is a
company that does this. They import and process coffee and then sell it under their
own brand name in their own stores.

 Contractual – Under this arrangement a legal document obligates members to agree

on how a product is distributed. Often times the agreement specifically spells out
which activities each member is permitted to perform or not perform. This type of
arrangement can occur in several formats including:

o Wholesaler-sponsored – where a wholesaler brings together and manages many

independent retailers including having the retailers use the same name

o Retailer-sponsored – this format also brings together retailers but the retailers are
responsible for managing the relationship

o Franchised – where a central organization controls nearly all activities of other

members

 Administrative Arrangement – In certain channel arrangements a single member

may dominate the decisions that occur within the channel. These situations occur
when one channel member has achieved a significant power position. This most likely
occurs if a manufacturer has significant power due to brands in strong demand by
target markets (e.g., Procter &Gamble) or if a retailer has significant power due to size
and market coverage (e.g., Wal-Mart). In most cases the arrangement is understood to
occur and is not bound by legal or financial arrangements.
Factors in Creating Distribution Channels

Like most marketing decisions, a great deal of research and thought must go into
determining how to carry out distribution activities in a way that meets a marketer’s
objectives. The marketer must consider many factors when establishing a distribution
system. Some factors are directly related to marketing decisions while others are
affected by relationships that exist with members of the channel.

Marketing Decision Issues

Distribution strategy can be shaped by how decisions are made in other marketing
areas.

Product Issues

The nature of the product often dictates the distribution options available especially if
the product requires special handling. For instance, companies selling delicate or
fragile products, such as flowers, look for shipping arrangements that are different
than those sought for companies selling extremely tough or durable products, such as
steel beams.

Promotion Issues

Besides issues related to physical handling of products, distribution decisions are

affected by the type of promotional activities needed to sell the product to customers.
For products needing extensive salesperson-to-customer contact to (e.g., automobile
purchases) the distribution options are different than for products where customers
typically require no sales assistance (i.e., bread purchases).

Pricing Issues

The desired price at which a marketer seeks to sell their product can impact how they
choose to distribute. As previously mentioned, the inclusion of resellers in a
marketer’s distribution strategy may affect a product’s pricing since each member of
the channel seeks to make a profit for their contribution to the sale of the product. If
too many channel members are involved the eventual selling price may be too high to
meet sales targets in which case the marketer may explore other distribution options.

Target Market Issues

A distribution system is only effective if customers can obtain the product.

Consequently, a key decision in setting up a channel arrangement is for the marketer
to choose the approach that reaches customers in the most effective way possible. The
most important decision with regard to reaching the target market is to determine the
level of distribution coverage needed to effectively meet customer’s needs. Distribution
coverage is measured in terms of the intensity by which the product is made available.
For the most part, distribution coverage decisions are of most concern to consumer
products companies, though there are many industrial products that also must decide
how much coverage to give their products. There are three main levels of distribution
coverage - mass coverage, selective and exclusive.

 Mass Coverage - The mass coverage (also known as intensive distribution) strategy
attempts to distribute products widely in 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 (e.g., see consumer convenience
products). A product such as Coca-Cola is a classic example since it is available in a
wide variety of locations including grocery stores, convenience stores, vending
machines, hotels and many, many more. 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.

 Selective Coverage - Under selective coverage the marketer deliberately seeks to

limit the locations in which this type of product is sold. To the non-marketer it may
seem strange for a marketer to not want to distribute their product in every possible
location. However, the logic of this strategy is tied to the size and nature of the
product’s target market. Products with selective coverage appeal to smaller, more
focused target markets (e.g., see consumer shopping products) 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
fewer.

 Exclusive Coverage - Some high-end products target very narrow markets that have
a relatively small number of customers. These customers are often characterized as
“discriminating” in their taste for products and seek to satisfy some of their needs with
high-quality, though expensive products. Additionally, many buyers of high-end
products require a high level of customer service from the channel member from
whom they purchase. These characteristics of the target market may lead the
marketer to sell their products through a very select or exclusive group of resellers.
Another type of exclusive distribution may not involve high-end products but rather
products only available in selected locations such as company-owned stores. While
these products may or may not be higher Principles of Marketing 2020 109 priced
compared to competitive products, the fact these are only available in company outlets
give exclusivity to the distribution.

Channel Relationship Issues

A good distribution strategy takes into account not only marketing decisions, but also
considers how relationships within the channel of distribution can impact the
marketer’s product. In this section we examine three such issues:

1. Channel Power
 A channel can be made up of many parties each adding value to the product
purchased by customers. However, some parties within the channel may carry
greater weight than others. In marketing terms this is called channel power,
which refers to the influence one party within a channel has over other channel
members. When power is exerted by a channel member they are often in the
position to make demands of others. Channel power can be seen in several
ways:

 Backend or Product Power – Occurs when a product manufacturer or

service provider markets a brand that has a high level of customer demand. The
marketer of the brand is often in a power position since other channel members
have little choice but to carry the brand or risk losing customers.

 Middle or Wholesale Power – Occurs when an intermediary, such as a

wholesaler, services a large number of smaller retailers with products obtained
from a large number of manufacturers. In this situation the wholesaler can
exert power since the small retailers are often not in the position to purchase
products cost-effectively and in as much variety as what is offered by the
wholesaler.

 Front or Retailer Power – As the name suggests, the power in this situation
rests with the retailer who can command major concessions from their
suppliers. This type of power is most prevalent when the retailer commands a
significant percentage of sales in the market they serve and others in the
channel are dependent on the sales generated by the retailer.

2. Channel Conflict

In an effort to increase product sales, marketers are often attracted by the

notion that sales can grow if the marketer expands distribution by adding
additional Principles of Marketing 2020 110 resellers. Such decisions must be
handled carefully, however, so that existing dealers do not feel threatened by
the new distributors who they may feel are encroaching on their customers and
siphoning potential business. For marketers, channel strategy designed to
expand product distribution may in fact do the opposite if existing members feel
there is a conflict in the decisions made by the marketer. If existing members
sense a conflict and feel the marketer is not sensitive to their needs they may
choose to stop handling the marketer’s products.

3. Need for Long-Term Commitments

Channel decisions have long-term consequences for marketers since efforts to
establish new relationships can take an extensive period of time while ending
existing relationships can prove difficult. For instance, Company A, a marketer
of kitchen cabinets that wants to change distribution strategy, may decide to
stop selling their product line through industrial supply companies that
distribute cabinets to building contractors and instead sell through large retail
home centers. If in the future Company A decides to once again enter the
industrial supply market they may run into resistance since supply companies
may have replaced Company A’s product line with other products and, given
what happened to the previous relationship, may be reluctant to deal with
Company A.

Overall Distribution Design

Mindful of the factors affecting distribution decisions (i.e., marketing decision

issues and relationship issues), the marketer has several options to choose from
when settling on a design for their distribution network. We stress the word
“may” since while in theory an option would appear to be available, marketing
decision factors (e.g., product, promotion, pricing, target markets) or the nature
of distribution channel relationships may not permit the marketer to pursue a
particular option. For example, selling through a desired retailer may not be
feasible if the retailer refuses to handle a product. For marketers the choice of
distribution design comes down to selecting between direct or indirect methods,
or in some case choosing both.

Direct Distribution System

With a direct distribution system the marketer reaches the intended final user
of their product by distributing the product directly to the customer. That is,
there are no other parties involved in the distribution process that take
ownership of the product. The direct system can be further divided by the
method of communication that takes place when a sale occurs. These methods
are:

 Direct Marketing Systems – With this system the customer places the order
either through information gained from non-personal contact with the
marketer, such as by visiting the marketer’s website or ordering from the
marketer’s catalog, or through personal communication with a customer
representative who is not a salesperson, such as through toll-free telephone
ordering.

 Direct Retail Systems – This type of system exists when a product marketer
also operates their own retail outlets. As previously discussed, Starbucks would
fall into this category.

 Personal Selling Systems – The key to this direct distribution system is that
a person whose main responsibility involves creating and managing sales (e.g.,
salesperson) is involved in the distribution process, generally by persuading the
buyer to place an order. While the order itself may not be handled by the
salesperson (e.g., buyer physically places the order online or by phone) the
salesperson plays a role in generating the sales.

 Assisted Marketing Systems – Under the assisted marketing system, the

marketer relies on others to help communicate the marketer’s products but
handles distribution directly to the customer. The classic example of assisted
marketing systems is eBay which helps bring buyers and sellers together for a
fee. Other agents and brokers would also fall into this category.

Indirect Distribution System

With an indirect distribution system the marketer reaches the intended final
user with the help of others. These resellers generally take ownership of the
product, though in the some cases they may sell products on a consignment
basis (i.e., only pay the supplying company if the product is sold).

Under this system intermediaries may be expected to assume many

responsibilities to help sell the product. Indirect methods include:

 Single-Party Selling System - Under this system the marketer engages

another party who then sells and distributes directly to the final customer. This
is most likely to occur when the product is sold through large store-based retail
chains or through online retailers, in which case it is often referred to as a trade
selling system.
 Multiple-Party Selling System – This indirect distribution system has the
product passing through two or more distributors before reaching the final
customer. The most likely scenario is when a wholesaler purchases from the
manufacturer and sells the product to retailers.

Multi-channel or Hybrid System

In cases where a marketer utilizes more than one distribution design the
marketer is following a multi-channel or hybrid distribution system. As we
discussed, Starbucks follows this approach as their distribution design includes
using a direct retail system by selling in company-owned stores, a direct
marketing system by selling via direct mail, and a single-party selling system by
selling through grocery stores.

The multi-channel approach expands distribution and allows the marketer to

reach a wider market, however, as we discussed under Channel Relationships,
the marketer must be careful with this approach due to the potential for
channel conflict.

Establishing Channel Relationships

Since channel members must be convinced to handle a marketer’s product it

makes sense to consider channel partner’s needs in the same way the marketer
considers the final user’s needs. However, the needs of channel members are
much different than those of the final customer. Business Buying Behavior,
resellers seek products of interest to the reseller’s customers but are also
concerned with many other issues such as:

 Delivery – Resellers want the product delivered on-time and in good condition
in order to meet customer demand and avoid inventory out-of-stocks.

 Profit Margin – Resellers are in business to make money so a key factor in

their decision to handle a product is how much money they will make on each
product sold. They expect that the difference (i.e., margin) between their cost for
acquiring the product from a supplier and the price they charge to sell the
product to their customers will be sufficient to meet their profit objectives.

 Other Incentives – Besides profit margin, resellers may want other incentives
to entice them especially if they are required to give extra effort selling the
product. These incentives may be in the form of additional free products or even
bonuses (e.g., bonus, free trips) for achieving sales goals.

 Packaging – Resellers want to handle products as easily as possible and want

their suppliers to ship and sell products in packages that fit within their
system. For example, products may need to be a certain size or design in order
to fit on a store’s shelf, or the shipping package must fit within the reseller’s
warehouse or receiving dock space.

 Training – Some products require the reseller to have strong knowledge of the
product including demonstrating the product to customers. Marketers must
consider offering training to resellers to insure the reseller has the knowledge to
present the product accurately.

 Promotional Help – Resellers often seek additional help from the product
supplier to promote the product to customers. Such help may come in the form
of funding for advertisements, point-of-purchase product materials, or in-store
demonstrations