Place in Marketing Mix mainly involves dealing with a channel of distribution. Several different channels of distribution are available for firms to use. Therefore, place decisions are indeed concerned with how products should pass from manufacturer to the final customer.
Example 1: Bridgestone & Michelin Two different producers of car tires Bridgestone and Michelin consider selling their products abroad. Both companies will sell at low price to increase North American market share. They can sell replacement tires where people buy them, e.g. in Sears. Sell higher quality tire through dealerships so dealers can still bring in high end customers. Convert some stores to no-frills quick-serve.
Traditionally, the channel of distribution starts in the factory operated by the producer. This factory sells the product to wholesalers who buy the product in bulk in order to reduce the unit cost of the product. Then, wholesalers break the bulk into smaller units and sell lower quantities of products to retailers. The final part of the traditional distribution channel is when the retailer sells the product to the individual consumer.
Definition of a channel of distribution
A channel of distribution refers to the means used and route taken by a product as it passes from the producer to the customer. It is the chain of intermediaries that the product is passing through to get to the final consumer.
Distribution channels create the following benefits:
- Time. Delivered at the right time which is time utility.
- Place. Delivered to the right place which is place utility.
- Possession / ownership. With appropriate legal requirements which is possession / ownership utility.
What is important to point out is that each intermediary in the channel of distribution adds a profit margin to the costs paid to its supplier. Therefore, the product and three other Ps in Marketing Mix must be decided in a way that various resellers in the channel of distribution have their needs met, for instance profit margin objectives, volumes of product sold, etc.
Functions of a distribution channel
The main function of a distribution channel is to provide a link between production and consumption. Organizations that form any particular distribution channel perform many key functions:
- Information. Gathering and distributing market research and intelligence information important for marketing planning.
- Promotion. Developing and spreading communications about promotional offers.
- Contact. Finding and communicating with prospective buyers to provide a link between production and consumption.
- Matching. Adjusting the offer to fit buyer’s needs, including grading, assembling and packaging.
- Negotiation. Reaching agreements on price, delivery arrangements and other terms of trade.
- Physical distribution. Transporting and storing goods.
- Financing. Acquiring and using funds to cover the costs of the distribution channel as other parties finance the stock.
- Risk taking. Assuming some commercial risks by other parties in the channel, e.g. holding stock properly, safety of the warehouses, etc.
All of the above functions need to be undertaken in any market. The question is who performs them and how many levels there need to be in the distribution channel in order to make it cost effective.
Why is using a channel of distribution important?
A channel of distribution refers to the means used to get a product to the end-user with the use of intermediaries. Intermediaries are all the business organizations through which a product passes between its production point and consumption point.
So, why does a business give the job of selling its products to intermediaries as it means giving up control over how products are sold and who they are sold to?
Most importantly, intermediaries forge a distribution. They act as a middle person in the channel of distribution between the products and consumers of a product to bring their products to market. Different parties in a channel of distribution are important and necessary to make that passing of the product more efficient.
The answer lies in efficiency of distribution costs.
Intermediaries specialize in selling products, possess a variety of business contacts, know the market, and have experience and scale of operation. Hence, the greater scale can be achieved and costs can be minimized than if the producing business runs all of the sales operations by itself.
Different channels of distribution
Different channels of distribution are classified based on the numbers of levels in the channel. Each layer of marketing intermediaries is called a ‘channel level’.
Six entities can be involved for the product to go from the original producer to the final consumer:
- Producers
- Wholesalers
- Agents (brokers)
- Distributors
- Retailers
- Consumers
Each level then performs a specific work in bringing the product from the producer to its final buyer. Each of the channels of distribution has its own advantages and disadvantages for the producer and the consumer.
Every business must decide the best way of getting their product to the final consumer. The following shows some examples of the most popular channel levels for consumer marketing channels.
1. A 0-Level Channel of Distribution: Direct Selling to customers
The producer sells the product directly to the final consumer. This is called direct selling.
2. A 1-Level Channel of Distribution: One-intermediary channel
The producer sells the product to retailers. The retailers then sell the product in their shops to the final consumer. There is one middle man here.
3. A 2-Level Channel of Distribution: Two-intermediaries channel
The producer sells large quantities of the product to the wholesalers. The wholesalers then sell the product in smaller quantities to retailers. The retailers then sell the product in their shops to the final consumer. There are two middle men here.
4. A 3-Level Channel of Distribution: Three-intermediaries channel
The producer uses an agent (broker) to enter into a new market or the foreign market for the first time. The agent has specialist knowledge about the country and its markets. The agent helps the producer to place the product with wholesalers. The wholesalers then sell the product in smaller quantities to retailers. The retailers then sell the product in their shops to the final consumer. There are three middle men here.
Businesses can use any of the channels of distribution as different distribution channels have different potential to provide good customer service. The knowledge about different product classes will aid the firm in making appropriate place decisions:
- Convenience Products have to be in convenient places such as in small independent retail stores, kiosks, vending machines, etc.
- Shopping Products have to be where shoppers go such as department stores, supermarkets, hypermarkets, etc.
- Specialty Products have to be available where people want to buy them such as movie theatres, cinemas, swimming pools or amusement parks have to be located where many people go, and where you can park your can easily.
A channel map can be drawn in order to visualize this keeping in mind all the middlemen, agents, shops, stores, etc. along the way.
Example 2: Vintage Computers - AES Data Superplus IV. The question of control when it comes to distribution. When AES Data launched the world's first word processor in the early 1970's, it signed up the Lanier company in the USA to handle U.S. sales. However, Lanier was selling the AES product under its own label, i.e. the Lanier name. And, when Lanier decided to switch to another supplier of word processors (as competition emerged), AES had little control over its U.S. customers. To gain a foothold in the U.S. market, it had to start from the beginning in a market which it created! Even if Lanier sold the AES products under the AES name, the channel would still be owned by Lanier in that Lanier had its own loyal customer base along with sales and service offices to support this customer base. A choice of channels may also be dictated by cost constraints. If it is considered too expensive and risky to advertise and promote a new product in an established market, it may make more sense to go the Lanier route. In this case, your partner will absorb the up-front sales expenses allowing you to concentrate more on product development. At the risk of oversimplifying, a good practical way to determine, or at least analyze, appropriate channels for your product would be to start at the point of final purchase. Who is the final consumer or user of your product? Where does that person look when buying your type of product? If she buys this product from an office products retail store, then where does that retailer obtain his products (...) and so on. Once the various channels have been identified, it is easier to determine which ones make the most sense or which ones offer the path of least resistance. The choice of channels may also have a significant bearing on pricing. For example, in the AES/Lanier case, it was possible for AES to offer very attractive pricing to Lanier because Lanier was absorbing the promotional and distribution costs. This gave Lanier an incentive to focus on sales and marketing and not compete with AES by also manufacturing such machines.
In summary, a channel of distribution moves the product from the production stage to the consumption stage. The intermediaries present in the distribution channel make products available in the right place at the right time and in the right quantities.
