Place in the marketing mix refers not only to the location to sell the product. But it’s also about how the product gets to the customer and how fast. In other words, it also concerns distribution channels.
The selected distribution channel determines the following:
- Speed for the product to reach the customer
- The costs involved are, therefore, profits
- Control during delivery
The right strategy and decisions are the key to success in marketing. This is because customers are happy when they get products when they are in need at their favorite places. Thus, companies must ensure their products reach customers in the right quantity, at the right place, at the right time, and in the right conditions.
Factors to consider in choosing a distribution channel
How is a product distributed? There are several determining factors, including:
Marketing objective. For example, the company targets an increase in market share from 5% to 10% in three years. This requires the company to secure the broadest possible distribution to increase sales volume.
Corporate image and competitive strategy. For example, a cost leadership strategy relies on mass channels to reach as many consumers as possible. In contrast, a differentiation strategy relies on dedicated channels. And if a company with a differentiation strategy relies on mass channels, it can damage the image.
Product characteristics. This can be related to the product type (perishable or not), shelf life, and useful economic life. For example, perishable goods require special distribution channels. Meanwhile, non-durable goods with short useful economic life require prompt delivery.
Market coverage. For example, a company develops broad distribution channels to reach geographically dispersed consumers. In contrast, a small business with a local market focus does not require extensive distribution channels.
Cost considerations. Distribution channels expose costs. For example, a more extended distribution channel requires higher costs because it involves more intermediaries.
Control degree. The company has complete control if it relies on direct distribution. On the other hand, control is lower if using a longer channel relying on one or more intermediate levels.
Legal limitations. Some products may only be sold in certain places. For example, the Indonesian government banned selling alcoholic beverages in mini-markets and other small shops.
Product life cycle. For example, a company needs to expand its distribution channels during the growth stage to cope with growing demand. Conversely, they may reduce outlets during the decline stage to reduce costs.
Distribution channels and their types
The distribution channel is the route followed by the product as it moves from the producer to the final consumer. It may be without involving intermediaries. Or, it may involve intermediaries such as wholesalers and retailers.
Distribution channels are divided into three, namely:
- Direct distribution channel
- Indirect distribution channel
- Hybrid distribution channel
The distribution channel model might be:
- Producers -> Consumers
- Producers -> Retailers -> Consumers
- Producers -> Wholesalers -> Retailers -> Consumers
- Producers -> Agents/Distributors -> Wholesalers -> Retailers -> Consumers
The first is known as direct distribution. Meanwhile, the second to fourth are indirect distributions because they involve intermediaries.
Direct distribution or zero-level distribution does not rely on intermediaries. Instead, the company sells products directly to customers. Therefore, they spare no expense in paying intermediaries.
No middleman means no additional markup is involved when the goods reach the customer. Intermediaries usually charge a markup, the difference between buying and selling prices. For example, a retailer buys $5 per unit from a company. They then add a 10% markup to their profit and sell the item at $5.5 per unit ($5 + 10% * $5).
The direct distribution model offers several advantages, including:
- Saves costs as there is no need to pay intermediaries
- Higher profits by cutting intermediary fees and, perhaps, capturing the intermediary’s markup
- More competitive prices because the markup (profit) by intermediaries are eliminated (some may be taken by the company as an advantage)
- Direct contact with customers, enabling feedback and stronger relationships
- Full control over the product during delivery from the warehouse to the customer
- More flexible and able to react faster to changing market conditions
- Faster to the customer because the company deals directly with them
However, not relying on intermediaries also comes with some limitations, including:
- Requires more effort as the company has to manage everything
- Lost opportunities to benefit from intermediaries’ economies of scale or competencies
- Bear the costs involved, such as logistics and warehousing
- May be uncomfortable for consumers when dealing directly with companies
- Low economies of scale because it is not the company’s core competency
Direct distribution can involve the following methods:
- Personal selling
- Mail orders
Companies rely on sales staff to market products directly to customers. So, for example, they will sell directly to customers’ homes. Or, they offer it over the phone.
This method requires persuasive skills, as well as product knowledge. In addition, the company has to incur costs to pay for staff and administration.
However, personal selling allows the product to be demonstrated to the customer. That’s important, for example, for complex products, which involve complicated instructions for using them.
The company sells products directly via the internet. For example, they may offer it through popular e-commerce sites and service customers through them. Or they use the company’s website to serve orders.
E-commerce offers several advantages, including:
- Wide market coverage, from local to overseas
- Save money because without incurring store rent and overhead costs
- Convenience for customers because they can shop anywhere and anytime
- Unlimited internet shelf space where companies can display various items
- Flexibility in developing promotional messages and customizing product display formats in online stores
- Rich in data, which is helpful for marketing strategy development
However, selling via e-commerce also comes with limitations:
- The surge in orders due to wide coverage and 24-hour-a-day operations
- Increased delays between orders and shipments due to spikes in orders
- Does not allow hands-on trial before purchase
- Expensive and time-consuming to create and maintain a website
- Bear the costs for shipping and returns
- Privacy and security concerns regarding personal data and credit card information
Mail orders rely on catalogs to market products. Companies offer products through catalogs without opening a store or sending sales staff to meet customers. The catalog may be available in print or electronic media. In addition to the products offered, it also contains contacts such as telephone, order address, or email.
The customer orders products in the catalog. They can do this by sending an order form by post or electronic mail. Or they order by phone. The alternative is to fill out a form on the website or mobile app.
This method offers some flexibility. For example, customers can shop from home. Meanwhile, companies save on costs involved when selling through brick-and-mortar stores, such as rent and overhead.
Indirect distribution involves intermediaries. Companies do not deal with customers but with intermediaries. So they can focus on production.
Intermediaries could be:
The distribution model could be:
- One-level distribution
- Two-level distribution
- Hybrid distribution
One-level distribution or one-tier distribution involves retailers as intermediaries. This strategy allows for faster delivery as the company deals with fewer intermediaries.
Companies ship products to retailers, who in turn sell directly to consumers. In addition, they may rely on multiple retailers or cooperate with retail chains to reach more markets.
Selling to retailers may be less risky than selling directly to customers. This is because retailers will usually buy in bulk to get a discount.
In addition, relying on retail also reduces storage or shipping costs. The company also benefits from the retailer’s competence and economies of scale.
However, because it relies on external parties, the company has less control over the products it sells. Product competitiveness can also be reduced because retailers will add markups to prices. In addition, retailers may also sell products from competitors because there are no exclusive contracts.
Two-level or two-tier distribution involves two or more intermediary levels, namely wholesalers, distributors, and retailers. The company sells products to wholesalers, who sell them to retailers. Finally, the retailer passes the product on to the consumer.
This model provides benefits similar to the one-level distribution model. However, because wholesalers operate on a larger scale, the benefits may be higher than when the company deals directly with the retailer. For example, a company can sell products quickly because wholesalers place orders larger than retailers. As a result, it reduces costs associated with inventory.
However, compared to one-level distribution, the product can take longer to reach consumers because it involves more intermediaries. In addition, control is also lower. The two-tier distribution also involves more markups, making the product quite expensive when it reaches the consumer.
Hybrid distribution combines direct and indirect distribution. Companies sell products directly to consumers, for example, through company websites or e-commerce sites. However, the company also opens cooperation with intermediaries. Also called a multichannel system.
Multichannel systems not only allow companies to reach a broad market. But it also offers the opportunity to dig up customer information through direct interaction with them. As a result, they can learn consumer spending patterns and changing needs, something they don’t get when relying solely on retailers or distributors.
However, multichannel systems also have drawbacks. Budget allocations are becoming more complex. In addition, pricing strategies may be inconsistent. While indirect distribution involves more markup, it doesn’t work with direct distribution. Thus, the prices charged to customers may differ between the two channels.
Intermediaries in distribution channels
Retailers sell directly to end consumers. They may buy directly from the company, distributors, or wholesalers. They charge a margin (markup) to the purchase price as profit.
Retailers sell goods to consumers often in smaller quantities than wholesalers. However, they could have the ability to reach many consumers, for example, a retail chain.
Retail can include:
An independent store is owned by a particular party and is not part of a retail chain. They usually cater to people around the store and offer unique items at higher prices than larger stores.
A chain store or retail chain has multiple retail outlets in various locations. Still, it is owned and operated by one company. Walmart is a good example.
Supermarkets offer a wide variety of products, from groceries to clothing. They operate self-service and usually buy products from manufacturers directly, bypassing wholesalers.
Department stores are characterized by a broad product mix and are organized into separate departments. Each department sells various goods, from clothing to cosmetics to electronics.
A hypermarket (supercentre or superstore) combines a supermarket and a department store. They offer a full grocery line and general merchandise under one roof, enabling consumers to fulfill their routine shopping needs in one visit.
Discount stores sell products at the lowest possible price. However, they often have a limited product selection.
Wholesalers buy goods from producers for resale to parties other than final consumers. They act as intermediaries between manufacturers and retailers.
Wholesalers buy products in bulk from manufacturers. They then segregate their bulk purchases into smaller units for resale to smaller wholesalers or retailers.
The advantages for a company when dealing with wholesalers are:
- Large purchasing scale reduces costs, such as inventory costs and transportation costs.
- Wholesalers bear distribution costs and offer warehousing facilities.
- Wholesalers assume the risks and costs associated with holding stock.
However, relying on wholesalers also carries risks, such as:
- Diversification is low because it depends on a few wholesalers.
- The risk can be significant if wholesalers fail in their business.
- Companies have lost control over how products are handled and sold.
- Profits are reduced because the company may have to offer discounts and lose out on the potential to capture the markups enjoyed by wholesalers.
Agents are independent intermediaries with exclusive rights to sell products in a territory. They connect buyers and sellers and manage transfers but don’t own them. Instead, they earn commissions based on a percentage.
Relying on agents is important because they have specialties. Companies usually rely on them to enter new markets, such as overseas. They handle administration and export procedures and deal with different local regulations. Thus, relying on them potentially eliminates the hassle involved in exporting.
Distributors are independent specialist intermediaries who trade products from only a few manufacturers. They do not earn commissions like agents. Instead, they, like retailers, gain by charging a margin to cover costs and as a profit.
Then, unlike agents, distributors own the goods. They also take risks when goods don’t sell. While agents negotiate contracts for other companies, distributors work for themselves.
Explore More #MARKETING MANAGEMENT
- Introduction to Marketing
- Product vs. Market Orientation and Commercial vs. Social Marketing
- Marketing Objectives, Strategy, and Ethics
- Market and Its Features
- Consumer Behavior, Customer Service and Satisfaction
- Marketing Planning
- Market Targeting and Market Segmentation
- Market positioning, Target Marketing, and Product Strategy
- Sales Forecasting and Market Research
- Marketing Mix: Product
- Marketing Mix: Price
- Marketing Mix: Promotion
- Marketing Mix: Place
- Marketing Mix: People, Process, and Physical Evidence
- International Marketing
- Internet Marketing