MBA 604 Four P's: Place

| Distribution Channels | | Channel Functions | | Channel Levels | | Logistics |
| Retailing | | Wholesaling |

Place includes all company activities involved in making the product available to target consumers. It includes: channels of distribution, the extent of market coverage, managing discrepancies of quantity and assortment, retail locations, and the management of inventory, transportation, and logistics.

Ultimately, Place is involved in making the product convenient for the target customers to purchase.

The Nature of Distribution Channels

Most producers use intermediaries to bring their products to market. They try to forge a distribution channel in making goods and services available to target markets.

Although turning over part of the selling function to intermediaries means giving up some control of how, and to whom, products are sold, producers know that the use of distribution specialists results in greater efficiency.

Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own.

Intermediaries provide economies by reducing the number of transactions that must be conducted to move products between producers and consumers.

Producers make narrow assortments of products in large quantities, but their customers want broad assortments of products in small quantities. In a distribution channel, intermediaries buy the large quantities of many producers and break them down into the smaller quantities and broader assortments wanted by consumers. Thus, intermediaries play an important role in matching supply and demand.

With an intermediary ...

... there are only 6 transactions

A Distribution Channel is a set of interdependent organizations involved in the process of making a product available for use or consumption by the end user.

Without an intermediary ...

... 3 Manufacturers + 3 customers = 9 transactions

Intermediaries transform the quantities and assortments of products made by producers into the quantities and assortments wanted by customers.

Distribution Channel Functions

Members of the marketing channel perform many key functions. These functions help to complete transactions...

A distribution channel moves goods from producers to consumers. It overcomes the major time, place, and possession gaps that separate goods and services from those who would use them.

The question is not whether these functions need to be performed -- they must be -- but rather who is to perform them.

Information: gathering and distributing marketing research and intelligence about forces in the marketing environment needed for planning and aiding exchange.

Promotion: developing and spreading persuasive communications about an offer.

Contact: finding and communicating with prospective buyers.

Matching: shaping and fitting the offer to the buyer's needs, including such activities as manufacturing, grading, assembling, and packaging.

Negotiation: reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred.

... or help to fulfill completed transactions:

Physical distribution: transporting and storing goods.

Financing: acquiring and using funds to cover the costs of the channel work.

Risk taking: assuming the risks of carrying out the channel work, including taking title and possession of goods.

All of the above functions have three things in common:
They use up scarce resources;
They often can be performed better through specialization;
They can be shifted among different channel members.

To the extent the manufacturer performs the above functions, its costs go up and its prices have to be higher. At the same time, when some of the channel functions are shifted to intermediaries, the producer's costs may be lower, but the intermediaries must charge more to cover the costs of their work.

In dividing the work of the channel, the various functions should be assigned to the channel members who can perform them most efficiently and effectively to provide a satisfactory assortment and quantity of goods to target customers.

Distribution Channel Levels

Distribution channels can be defined by the number of levels involved. Each layer of marketing intermediaries, or "middlemen," that performs some work in bringing the product and its ownership closer to the final buyer is a channel level.

Because the producer and the final consumer both perform some work, they are part of every channel. We use the number of middlemen to indicate the length of a channel, as depicted below:

Channel 1, called a direct marketing channel, has no middlemen. It consists of a company selling directly to customers. For example, Lands' End sells direct through mail order, by telephone, and via the Internet.

The remaining channels are called indirect marketing channels. Channel 2 contains one intermediary level which, in consumer markets, is typically a retailer. For example, the makers of televisions, cameras, tires, furniture, and many other products sell their goods directly to large retailers such as Wal-Mart and Sears, which then sell the goods to final consumers.

Channel 3 contains two intermediary levels, a wholesaler and a retailer. This channel often is used by small manufacturers of food, drugs, hardware, and other products.

Channel 4 contains three intermediary levels. In the meatpacking industry, for example, jobbers usually come between wholesalers and retailers. The jobber buys from wholesalers and sells to smaller retailers who generally are not served by larger wholesalers.

Distribution channels with even more levels are sometimes found, but less often. From the manufacturer's point of view, a greater number of levels means less control and greater channel complexity.

The chart below shows some common business distribution channels. For the most part, business markets include multi-level distribution channels.

The business marketer can use its own sales force to sell directly to business customers. It also can sell to industrial distributors, who sell to business customers.
Another business channel is through manufacturer's representatives or the company's own sales branches. It can use these representatives and branches to sell directly to industrial customers, or to sell through an industrial distributor.

All of the institutions in the channel are connected by several types of flows. These include the physical flow of products, the flow of ownership, the payment flow, the information flow, and the promotion flow.

These flows can even make channels with only one or a few levels very complex.

Physical Distribution in the Service Sector

The concept of distribution channels is not limited to the distribution of physical goods. Producers of services and ideas also face the problem of making their output available to target populations.

In the private sector, department stores, hotels, banks, and other service providers take great care to place their outlets in locations convenient to target customers.

In the public sector, service organizations and agencies develop "educational distribution systems" and "health delivery systems" for reaching sometimes widely spread populations. Hospitals must be located geographically to serve various patient populations with complete medical care, and schools must be located close to the children who need to be taught. Communities must locate their fire stations to provide rapid coverage of fires in every neighborhood, and polling stations must be placed where people can vote without spending excessive time and effort.

Distribution channels are also used in "person" marketing. Before 1940, professional comedians could reach audiences through vaudeville houses, special events, nightclubs, radio, movies, carnivals, and theatres. In the 1950's, television became a strong channel and vaudeville disappeared. More recently, the comedian's channels have grown to include promotional events, product endorsements, cable television, and videotapes. Politicians must also find cost-effective channels -- mass media, rallies, coffee hours -- for distributing their messages to voters.

Physical Distribution and Logistics Management

In today's global marketplace, selling a product is sometimes easier than getting it to customers. Companies must decide on the best way to store, handle, and move their products and services so that they are available to customers in the right assortments and quantities, in the right place, and at the right time.

Logistics effectiveness will have a major impact on both customer satisfaction and company costs. A poor distribution system can destroy an otherwise good marketing effort.

Physical distribution, or marketing logistics, involves planning, implementing, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit. Logistics involves the management of entire supply chains, or value-added flows from suppliers to final users.

The logistics manager's task is to coordinate the whole channel physical distribution system -- balancing the activities of suppliers, purchasing agents, marketers, channel members, and customers.

These activities include forecasting, information systems, purchasing, production planning, order processing, inventory, warehousing, and transportation planning.
A Typical Supply Chain

Companies today are placing greater emphasis on logistics for several reasons:
Firstly, customer service and satisfaction have become the cornerstones of marketing strategy for many businesses, and distribution is an important customer service attribute.

Secondly, logistics is a major cost element for most organizations. About 15% of the average product's price is accounted for by shipping and transport alone.

Thirdly, the explosion in product variety has created a need for improved logistics. In 1911, the average grocery store carried only 270 items. Today, that same store may carry upwards of 17,000 items, some 63 times more than in 1911! Ordering, stocking, shipping, and controlling such a variety presents a significant logistical challenge.

Lastly, improvements in information technology have created opportunities for major gains in distribution efficiency. Computers, point-of-sale scanners, uniform product codes (UPC's), satellite tracking, electronic data interchange (EDI), and electronic funds transfer (EDF) have allowed companies to create advanced systems for order processing, inventory control, and transportation routing and scheduling.

Many political observers believe that the 1960 Presidential election between John Kennedy and Richard Nixon was decided by JFK's performance in a series of televised debates. This was the first national Presidential campaign where television played a key role, and Kennedy's natural charisma came right through the TV screen into people's living rooms. Kennedy understood the power of this "new" medium, and was able to use it to his advantage. What new media do you think will shape our elections system in the future? Will the Internet and interactive TV change the way in which political candidates deliver their messages to the American public? Do you foresee a time when we can cast our votes electronically? And where the polling is constantly updated so we can observe how the vote is going in "real time?"

last update: May 11, 1998
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