Importance of Distribution Channels

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. For example, marketers who are successful without utilizing resellers to sell their product (e.g., Dell Computers sells mostly through the Internet and not in retail stores) may still need assistance with certain parts of the distribution process (e.g., Dell uses parcel post shippers such as FedEx and UPS). In Dell’s case creating their own transportation system makes little sense given how large such a system would need to be in order to service Dell’s customer base. Thus, by using shipping companies Dell is taking advantage of the benefits these services offer to Dell and to Dell’s customers.

When choosing a distribution strategy a marketer must determine what value a channel member adds to the firm’s products. Remember, as we discussed in the Product Decisions Tutorial, customers assess a product’s value by looking at many factors including those that surround the product (i.e., augmented product). Several surrounding features can be directly influenced by channel members, such as customer service, delivery, and availability. Consequently, for the marketer selecting a channel partner involves a value analysis in the same way customers make purchase decisions. That is, the marketer must assess the benefits received from utilizing a channel partner versus the cost incurred for using the services.

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. For instance, consider what it costs to drive a truck a long distance. In terms of operational expenses for the truck (e.g., fuel, truck driver’s cost) let’s assume it costs (US) $1,000 to go from point A to point B. Yet in most cases, with the exception of a little decrease in fuel efficiency, it does not cost that much more to drive the truck whether it is filled with 1000 boxes containing the product or whether it only has 100 boxes. But when transportation costs are considered on a per product basis ($1 per box vs. $10 per box) the cost is much less for a full truck. The ability of intermediaries to purchase large quantities but 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.