Part Eight: Distribution
Distribution is the fourth element in the marketing mix, dubbed as ‘Place’. Basically, it is everything involved with making the product offering available to the market. An organisation is faced with many options to get the product within reach of the consumer and that can be either through a channel or direct to market. Having distributors makes economic sense in certain contexts, however the organisation needs to trust the channel by giving up a lot of control.
Today, distribution channels are getting shorter and shorter with technology, which has been called ‘disintermediation’. This basically means it is becoming easier to ‘cut out the middle man to increase profits, maintain greater control and give the organisation direct contact with the customer.
The Strategic Value of Channels
In a more general sense, an organisation can usually cover the information, promotion, contact, matching and negotiation activities of a transaction, however the physical distribution can often be outside the scope and therefore outsourced by the organisation, especially when in the form of a physical good.
Intermediaries specialise in the essential distribution duties and can also offer value-add services like storage and warranty support, so often, it makes strategic and financial sense for, for example, a manufacturing organisation to enlist the partnership of such intermediaries to complete the channel flow, so they can focus on what they do more effective and efficiently.
The issue is, intermediaries are starting to gain a lot of power given that the other organisation relies so heavily upon them to make any sales at all. They can make all kinds of demands and then threaten to stop supplying the market the organisation’s product should they not comply.
This is why some organisations attempt to shift the power using VMS, Vertical Marketing Systems.
Vertical Marketing Systems (VMS)
A VMS is where one part of the channel either purchases or sets-up their own distribution channel or intermediary in order to by-pass powerful distributors and do it themselves. The obvious advantage is that power goes to the original organisation and they have far greater control over the whole channel, even if they use their own and use another distributor, as diluting the stage means that the powerful intermediaries lose their monopolistic power.
The problem with a VMS is that it can be risky and costly to do as the organisation needs to learn to be a good distributor and retailer as well as a manufacturer. There is little use in setting up a VMS if the newly opened intermediaries do not have the right contacts or skill set to really compete with a specialised one.
Apart from a straight VMS, there are two other slightly different VMS models. The first is a contractual VMS, where another intermediary is not technically owned, however they are contractually secured by the other organisation, such as what is done in franchising. The other is a weaker administrative VMS, where an intermediary is not technically owned or contracted to the other organisation, however both organisations work together as partners.
The Intermediary Focus
Whilst this topic can become focused on the manufacturer as the only central focus of a distribution channel, the intermediaries are large players in the channel themselves. There are several intermediaries that have become very successful simply by finding manufacturers in a localised area and simply brought them together in one unified distribution model, creating a symbiotic relationship. An example is a meal delivery service, where the service promotes all of the food and the delivery to the customer, the customer orders through them, and then the meal delivery service places orders with local restaurants and delivers the food.
Influences on Channel Strategy
The strategy an organisation chooses is impacted by both external and internal factors. Internal factors include the organisation’s strategy, goals, objectives, resources, skillset, control and marketing mix. External factors include customers, the market environment, competitors and intermediaries.
As is normal from a marketing focus, the key is to keep customers as a focus for all activities. Therefore, considerations such as what benefits they’re seeking, what channels will provide the best access, which distribution strategy will position the product as the most appealing to them, and so on.
This is a very popular trend in modern distribution strategy and is extremely popular with consumers. There are a few factors to impact on this type of distribution:
- Certain taxes can be avoided
- Legislation and consumer protection
- Loss of physical store jobs
- Government focusing on internet legislation and internet services (such as the NBN)
- Globalisation of economies and markets
- Increased competition as physical restrictions are removed
- Currency exchange rates
- More informed, price conscious consumers
- Access to foreign products
- Cost advantages due to competitive pricing
- Social media has become a norm in society
- Other demographics are becoming more involved
- Socially acceptable to be thrifty
- Time poor customers have a need for convenience
- More accepting and tech savvy demographics
- Self-image is important, so customers can easily share their purchases online
- Easier for all organisations to use and take advantage of
- Increase in accessibility
- Increased security on technology which increases buyer confidence
- More devices to access online shopping
- Big Data allows customers to be better catered to
- More advanced software to assist all stakeholders
- The shortening of the supply chain could reduce environmental impact
- Less need for bricks and mortar stores
- Customers are more environmentally aware
- Less physical distance, reducing barriers to access
There are three main classifications of channel densities.
(1) Zero Level: where the manufacturer goes straight to the consumer direct, such as Dell computers.
(2) One level: where there is only one intermediary in between the manufacturer and customer, such as book sellers and Amazon.
(3) Multilevel: where there are many intermediaries, such as wholesalers and retailers between the manufacturer and consumers. In a multilevel channel, the producer can sell in one straight line (i.e.: one wholesaler and then on to one retailer, then the customer) or through many different intermediaries in different industries (such as agents).
Distribution intensity refers to all strategies an organisation has for getting product through the channel.
(1) Intensive distribution
Where an organisation sends their product through a large variety of intermediaries, channels and stores for maximum access to the market. This type is mainly for simple, inexpensive and easily transportable products that tend to be repeat or impulse buys, given the consumer as much exposure and therefore opportunity for purchase as possible.
Typically, products that are intensively distributed are heavily promoted with low cost and high turn-over. The quality can also be average or low in general.
(2) Selective distribution
Where the organisation is slightly more selective about which channels they chose so as to not cut off all access to customers, but be more selective to give the product a different positioning to a commodity product. This is for products, such as specialty retailers and branded stores, that are more on the specialty or higher end, and therefore restrict certain levels of access to create an aura of quality or provide more intimate customer service.
(3) Exclusive distribution
Where an organisation has a very low number of channels and outlets. This is a very restricted distribution strategy for very high-end, high involvement products and give the perception of exclusivity and uniqueness.
Typically, products that are selectively or exclusively distributed are promoted exclusively, are priced high and the consumer will specifically seek the product as the quality and value is high.
All three distribution types position the product differently in the eyes of the consumer, hence why the channel strategy selected must be consistent with the marketing plan. Obviously this varies with product and industry type.
There are also two types of alternative strategies to the above to increase the flow of the distribution channel:
(1) Pull strategy: the organisation advertises and conducts marketing efforts directly to the end consumer at the end of the channel, which increases their demand, ‘pulling’ products through the channel. To do this, the distribution must be so there is enough access provided for consumers to get the maximum effect.
Such marketing efforts, besides straight promotion, could include free samples, trials, coupons, financing, discounts, specials and so on. Usually, these are quite successful as, being normal fast moving consumer goods (FMCG), a consumer will tend to take advantage of these types of bargains.
(2) Push strategy: when the organisation advertises and conducts marketing efforts directly at other intermediaries within the channel to encourage their demand, ‘pushing’ products through the channel.
Marketing efforts in a push strategy involve incentivising intermediaries so as to encourage their demand, such as benefits to their sales forces, bulk discounts, financing and negotiation on marketing efforts to the end consumer.