Distribution Sellers prefer to produce large quantities of a limited number of goods Buyers prefer smaller quantities of a wider variety of goods Distribution deals with realigning the discrepancies between quantities and selections Breaking bulk: making goods available in smaller batches
What are Distribution Channels? Distribution channel A network of inter-connected firms that provide sellers a means of infusing the marketplace with their goods, and buyers a means of purchasing those goods, as efficiently and profitably as possible
Actors in Distribution Channels Manufacturing firms Distributors or wholesalers Retailers Consumers
Tension in Distribution Channels Tension in channels can be created by the contribution of each channel member Do they provide more benefit than they cost? Should we do this activity ourselves or have a channel member do it for us?
Discussion Question View the next two slides. Assuming all else is equal, which is the most efficient channel? Why?
Discussion Questions Who are Dell’s suppliers? Who are Amazon’s suppliers? Who are DreamWorks’ channel members?
Designing Distribution Channels Determine distribution intensity How many intermediaries will be used? Determine push or pull strategy Determine how to deal with conflict
Intensive Distribution Intensive: widely distributed Drugstores, supermarkets, discount stores, convenience stores, etc. Usually for simple, inexpensive, easily transported products Snack food, shampoo, newspapers, etc. Pull strategy: promote directly to end consumers to pull through channel
Selective Distribution Selective: less widely distributed Usually for complex and/or expensive products that require assistance Cars, computers, appliances, etc. Push strategy: promote to distribution partners to push goods to consumer Manufacturer has more control due to fewer relationships to manage
Exclusive Distribution Exclusive: extreme case of selectivity Manufacturers have the most control May become monopolistic
Intensity Strategies Intensive distribution usually goes with heavy promotion, lower prices and average or lower quality products Exclusive distribution usually goes with exclusive promotional efforts, higher prices and higher quality products
Discussion Question Assume you are a marketer for Coach handbags. How intensively would you distribute this product? Why?
Pull Strategy Incentives offered to consumers to pull products through the channel Advertise to consumers Distribute widely Offer price and/or quantity discounts Offer inexpensive trials or free samples Offer coupons and/or rebates Offer financing Offer loyalty programs/points
Push Strategy Incentives offered to distribution partners to push products through the channel Advertise to partners (and consumers) Distribute more selectively Employ a sales force Offer incentives to sales force Offer price and/or quantity discounts Offer financing Offer allowances for marketing activities
Channel Conflict Conflict can arise when channel partners differ in their opinions on how to please customers and maximize profit Conflict may motivate parties to find alternative solutions
Types of Power Coercive power: Ability to take away benefits or inflict punishment on other party Information power: Having information other party seeks Legitimate power: Using size or expertise to encourage other party
Types of Power Referent power: One party seeks an affiliation with other Reward power: Ability to provide good outcomes for other party
Channel Power and Conflict Power is usually defined by size and effectiveness In the long term, power isn’t a great way to resolve conflict because the less powerful player may feel resentful and act accordingly
Dealing with Conflict Develop effective communication to enhance trust and satisfaction Make sure that parties feel that they’re being heard and their needs are understood and being met Remind channel members of mutual goal of customer satisfaction
Building Channel Relationships If conflict cannot be resolved, two other possible actions: Mediation Negotiate through a third party that determines the two parties’ utility functions Arbitration The third party makes a binding decision for the two
Discussion Questions Which type of power do you think would be more likely to create cooperative channel partnerships? Which type of power do you think would be least likely to create cooperative channel partnerships?
Transaction Cost Analysis Transaction cost analysis (TCA) A model that considers channel members’ production costs and governance costs, both of which are ideally minimized
Transaction Cost Analysis Production Costs Costs of producing/bringing product to market Governance Costs Costs involved with relational issues incurred coordinating the enterprise and controlling one’s partners
Revenue Sharing Channel conflict often comes down to revenue sharing Double Marginalization The manufacturer wants a mark-up when it sells to a retailer The retailer wants a second markup when it sells to the consumer
Channel Integration If a company is currently using a partner to do something, it might wish to bring that function back in-house Forward Integration e.g., manufacturer controls its retail stores Backward integration e.g., manufacturer controls raw material
Private Labels Many retailers are integrating backward into private label products Advantages May give retailers negotiating power with the manufacturer May offer significant margin opportunities May allow retailer to distinguish itself as the only place that offers that brand
Discussion Questions How could Barnes & Noble engage in backward integration? How could Maytag engage in forward integration?
Retailing Retailers have been gaining power and momentum over the past 10-20 years Powerful retailers can make or break a new product
Types of Retailing Categorize retailers according to extent of manager’s ownership Independent retailers Local florist Branded store chains Old Navy Franchises Jiffy Lube
Types of Retailing Categorize retailers according to their level of service which tends to be positively related to their price points Full service Nordstrom’s Limited service K-mart
Types of Retailers Categorize retailers according to product assortment Specialty: carry depth not much breadth Toy stores General merchandise: carry breadth but not much depth Department stores
Discussion Questions Can you categorize Wal-mart in terms of ownership, level of service and product assortment? Why do you think Wal-mart has been successful?
Importance of Retail Employees If retailers are not selective in hiring and if employees are not trained or paid well, service will be suboptimal and lead to customer dissatisfaction Retailers benefit from selecting good people, training them, paying them, rewarding them well, and empowering them
Importance of Operations Flowcharting operations Front-stage: elements customers see Back-stage: elements customers do not see Must be run efficiently to support front-stage What parts of the process flow smoothly? What parts do not? What parts of the process might be streamlined or eliminated altogether?
Importance of Location Consider factors needed to be successful Environmental data population densities income and social class distributions median ages household composition, etc.
Retailer Growth Strategies Provide additional services Reach out to attract additional segments Open additional stores Expand internationally Exporting, joint ventures, direct foreign investment, license agreements, etc. Depends upon: talent, costs, labor pool, infrastructure, government’s stance on foreign investment, real estate costs, travel costs, local ethics, etc.
Franchising Company can retain some control without complete ownership or capital expenditure Franchisor: the company Franchisee: local owner Pays fee and royalties Product franchising Ford dealer, Coca-Cola bottlers Business format franchising McDonalds, Holiday Inn
E-commerce Retail sales online are about $30 billion Only about 3% of total retail sales Much potential for growth What sells well Computer hardware, software, books, music, DVDs, and travel arrangements Many business drive their customers online to reduce labor costs e.g., Retail banks raise fees to those who want to interact with a teller
Catalog Sales E-commerce and catalogs are complementary Many companies use both successfully 83 of the top 100 catalogers saw growth Catalogs are preferred for browsing Catalogs trigger web visits Customer databases are utilized for customized catalogs, promotions, etc.
Sales Force Utilized extensively by companies utilizing a push strategy For more undifferentiated products, a company’s sales force is its most important driver of its performance
Sales Force Size Estimate Workload 100,000 stores 12 visits each per year for 30 minutes 50 weeks per year x 40 hours a week = 2000 hours 500 of these hours will be spent on travel and administrative duties (100,000 accounts x 12 visits per year x 0.5 hour) / 1,500 hours = 400 salespeople
Sales Force Compensation Sales compensation is usually salary plus bonuses Bonuses can be cash, trips, etc. The question is how much is fixed and how much is variable
Sales Performance Evaluation factors Sales by segment, product, improvement, etc. Time spent with clients Expertise Knowledge Attitudes Days worked Selling expenses, etc.
Complaints by B2B Customers Top 3 complaints of salespeople 1. The salesperson isn’t following my company’s buying process 2. The salesperson didn’t listen to my needs 3. The salesperson didn’t bother to follow up
Discussion Questions How could a company reduce some of these customer complaints? Why would a company use bonuses for its sales force?
Integrated Marketing Channels When designing marketing channels Understand your customers’ behavior Ask these questions What are your target market segments? What benefits do they seek? How can we match customer needs to our corporate growth strategies? What mix of channels will facilitate our meeting these goals?
Discussion Questions Why would it be important to understand your customer in designing your distribution channel? What might you want to know about your customer prior to designing the channel?