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Monday, September 28, 2009

Distribution Channel

Definitions
•A distribution channel is the method a company uses to get their products into the marketplace for consumer use. The traditional channel goes from supplier, manufacturer, distributor, wholesaler and retailer.
•Distribution Channel (also known as Channel of distribution or marketing channel) is Path or 'pipeline' through which goods and services flow in one direction (from vendor to the consumer), and the payments generated by them flow in the opposite direction (from consumer to the vendor). A distribution channel can be as short as being direct from the vendor to the consumer or may include several inter-connected (usually independent but mutually dependent) intermediaries such as wholesalers, distributors, agents, retailers. Each intermediary receives the item at one pricing point and moves it to the next higher pricing point until it reaches the final buyer.
Two types of distribution channels exist, indirect and direct, namely:
Indirect Channel
•The indirect channel is used by companies who do not sell their goods directly to consumers. Suppliers and manufacturers typically use indirect channels because they exist early in the supply chain Depending on the industry and product, direct distribution channels have become more prevalent due to the Internet.
Direct Channel
•A direct distribution channel is where a company sells their products direct to consumers. While direct channels were not popular many years ago, the Internet has greatly increased the use of direct channels. Additionally, companies needing to cut costs may use direct channels to avoid middlemen markups on their products.
Indirect Channel Methods
•Distributors, wholesalers and retailers are the primary indirect channels a company may use when selling their products in the marketplace. Companies choose the indirect channel best suited for their product to obtain the best market share; it also allows them to focus on producing their goods.
Direct Channel Methods
•Selling agents and Internet sales are two types of direct distribution channels. Selling agents work for the company and market their products directly to consumers through mail order, storefronts or other means. The Internet is an easy distribution channel because of the global availability to consumers

For instant:
Paper is available from a variety of paper suppliers, however, not all suppliers provide paper to the end user. The following diagram illustrates how the distribution channel works for purchasing paper stocks.

The Paper Mill sells larger volume orders direct to the Paper Retailer, Distributor, or Printer who then resell the product. The Paper Distributor handles full and partial carton orders, which are considered smaller orders, to fit the needs of the Paper Retailer or Printer when the End User places an order for paper that is not considered to be at a volume level that a Paper Mill will sell directly to the Printer or Retailer.
The newest entry to the paper distribution channel is the Paper Portal which enables Printers, Retailers, and Paper Mills to source paper needs to a wider network of potential buyers and sellers via the Web, regardless of whether they are Paper Retailers, Paper Distributors, Printers, or End Users. Buyers and sellers of paper access the portal and use it as a marketplace to locate paper, to negotiate pricing, and to complete the transaction of either buying or selling.

Distribution - channel strategy
The following table describes the factors that influence the choice of distribution channel by a business:

Influence Comments
Market factors An important market factor is "buyer behaviour"; how do buyer's want to purchase the product? Do they prefer to buy from retailers, locally, via mail order or perhaps over the Internet? Another important factor is buyer needs for product information, installation and servicing. Which channels are best served to provide the customer with the information they need before buying? Does the product need specific technical assistance either to install or service a product? Intermediaries are often best placed to provide servicing rather than the original producer - for example in the case of motor cars.
The willingness of channel intermediaries to market product is also a factor. Retailers in particular invest heavily in properties, shop fitting etc. They may decide not to support a particular product if it requires too much investment (e.g. training, display equipment, warehousing).
Another important factor is intermediary cost. Intermediaries typically charge a"mark-up" or "commission" for participating in the channel. This might be deemed unacceptably high for the ultimate producer business.
Producer factors A key question is whether the producer has the resources to perform the functions of the channel? For example a producer may not have the resources to recruit, train and equip a sales team. If so, the only option may be to use agents and/or other distributors.
Producers may also feel that they do not possess the customer-based skills to distribute their products. Many channel intermediaries focus heavily on the customer interface as a way of creating competitive advantage and cementing the relationship with their supplying producers.
Another factor is the extent to which producers want to maintain control over how, to whom and at what price a product is sold. If a manufacturer sells via a retailer, they effective lose control over the final consumer price, since the retailer sets the price and any relevant discounts or promotional offers. Similarly, there is no guarantee for a producer that their product/(s) are actually been stocked by the retailer. Direct distribution gives a producer much more control over these issues.

Product factors Large complex products are often supplied direct to customers (e.g. complex medical equipment sold to hospitals). By contrast perishable products (such as frozen food, meat, bread) require relatively short distribution channels - ideally suited to using intermediaries such as retailers.


Distribution Intensity
There are three broad options - intensive, selective and exclusive distribution:
Intensive distribution aims to provide saturation coverage of the market by using all available outlets. For many products, total sales are directly linked to the number of outlets used (e.g. cigarettes, beer). Intensive distribution is usually required where customers have a range of acceptable brands to chose from. In other words, if one brand is not available, a customer will simply choose another.
Selective distribution involves a producer using a limited number of outlets in a geographical area to sell products. An advantage of this approach is that the producer can choose the most appropriate or best-performing outlets and focus effort (e.g. training) on them. Selective distribution works best when consumers are prepared to "shop around" - in other words - they have a preference for a particular brand or price and will search out the outlets that supply.
Exclusive distribution is an extreme form of selective distribution in which only one wholesaler, retailer or distributor is used in a specific geographical area.

Distribution channels are the pathways that companies use to sell their products to end-users. B2B companies can sell through a single channel or through multiple channels that may include
 Direct/sales team: One or more sales teams that you employ directly. You may use multiple teams that specialize in different products or customer segments.
 Direct/internet: Selling through your own e-commerce website.
 Direct/catalog: Selling through your own catalog.
 Wholesaler/distributor: A company that buys products in bulk from many manufacturers and then re-sells smaller volumes to resellers or retailers.
 Value-added reseller (VAR): A VAR works with end-users to provide custom solutions that may include multiple products and services from different manufacturers.
Consultant: A consultant develops relationships with companies and provides either specific or very broad services; they may recommend a manufacturer’s product or simply purchase it to deliver a solution for the customer.
Dealer: A company or person who buys inventory from either a manufacturer or distributor, then re-sells to an end-user.
Retail: Retailers sell directly to end-users via a physical store, website or catalog.
Sales agent/manufacturer’s rep: You can outsource your sales function to a company that sells different manufacturers’ products to a group of similar customers in a specific territory.
Distribution is one of the classic “4 Ps” of marketing (product, promotion, price, placement a.k.a. distribution). It’s a key element in your entire marketing strategy — it helps you expand your reach and grow revenue.

If they need personalized service, you can utilize a local dealer network or reseller program to provide that service.
If your users prefer to buy online, you can create an e-commerce website and fulfillment system and sell direct; you can also sell to another online retailer or a distributor to offer your product on their own sites.
You can build your own specialized sales team to prospect and close deals directly with customers.
Wholesalers, resellers, retailers, consultants and agents already have resources and relationships to quickly bring your product to market. If you sell through these groups instead of (or in addition to) selling direct, treat the entire channel as a group of customers – and they are, since they’re buying your product and re-selling it. Understand their needs and deliver strong marketing programs; you’ll maximize everyone’s revenue in the process.

Key concepts & steps
Before you begin

You can evaluate a new distribution channel or improve your channel marketing / management at any time. It’s especially important to think about distribution when you’re going after a new customer segment, releasing a new product, or looking for ways to aggressively grow your business.

Evaluate how your end-users need to buy
Your distribution strategy should deliver the information and service your prospects need. For each customer segment, consider
How and where they prefer to buy
Whether they need personalized education and training
Whether they need additional products or services to be used alongside yours
Whether your product needs to be customized or installed
Whether your product needs to be serviced
Match end-user needs to a distribution strategy
If your end-users need a great deal of information and service, your company can deliver it directly through a sales force. You can also build a channel of qualified resellers, consultants or resellers. The size of the market and your price will probably dictate which scenario is best.
If the buying process is fairly straightforward, you can sell direct via a website/catalog or perhaps through a wholesale/retail structure. You may also use an inbound telemarketing group or a field sales team.
If you need complete control over your product’s delivery and service, adding a channel probably isn’t right for you.
Identify natural partners
If you want to grow beyond the direct model, look for companies that have relationships with your end-users. If consultants, wholesalers or retailers already reach your customer base, they’re natural partners.
Build your channel
If you’re setting up a distribution channel with one or more partners, treat it as a sales process:
Approach the potential channel partner and “sell” the value of the partnership
Establish goals, service requirements and reporting requirements
Deliver inventory (if necessary) and sales/support materials
Train the partner
Run promotions and programs to support the partner and help them increase sales
Minimize pricing conflicts
If you use multiple channels, carefully map out the price for each step in your channel and include a fair profit for each type of partner. Then compare the price that the end-user will pay; if a customer can buy from one channel at a lower price than another, your partners will rightfully have concerns. Pricing conflict is common but it can jeopardize your entire strategy, so do your best to map out the price at each step and develop the best solution possible.
Drive revenue through the channel
Service your channel partners as you’d service your best customers and work with them to drive revenue. For example, provide them with marketing funds or materials to promote your products; run campaigns to generate leads and forward them to your partners

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