Distribution Channels

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Distribution Channels
NATURE AND IMPORTANCE OF DISTRIBUTION SYSTEMS
Components of distribution system: –
The distribution system involves two components such as below.
Channels of distribution
Physical distribution
Channels of distribution: – means a process through which the products are transferred
from the producers to the ultimate consumers. It also known as marketing channels. The
channels members such as merchants’ agents wholesalers and retailers are middlemen in
distribution and they perform all marketing functions. These channels members such as
merchants’ agents wholesalers and retailers are middlemen in contribution and try
perform according to marketing functions. These middlemen facilitate the process of
exchange and create time, place and possession utilities through matching and sorting
process. Sorting enables meeting or matching the supply with consumers demand.
Physical distribution: – it looks after physical handling of goods and assures maximum
customers services. It aims at offering of delivery of right goods at the night distribution
activities cover:
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Order processing
Packaging
Warehousing
Transportation
Inventory control
Customer service.
All middle in distribution on performs these function and they assure putting the products
within an arm’s length customer’s desire and demand.
Elements of distribution channels:
Path way: distribution channels are a pathway through which products and services flow
from manufacturers to customers.
Flow: this of goods and services in sequential and usually in directional.
Composition: it is composed of intermediaries also called middlemen who participate in
the flow of voluntarily.
Objectives: although channels components largely strive to achieve mutually acceptable
objectives, the manufacturer focus is an achieving corporate marketing objective.
Leader: manufacturer leads the channels components and their behavior is regulated by
mutually acceptable code of conduct, trade customer and or contracted stipulation. Thus
the company acts as the channels caption and manages the ‘pathway’.
Functions: the intermediaries perform such functions which facilitates transfers of
ownership and possession of goods and services from marketers to consumers.
The function performed by intermediaries is been classified as follows:
Sorting out: it involves breaking a homogeneous through grading or inspection.
Accumulation: it involves bringing a number of like products together into a large
homogeneous
Allocation: it involves sorting out of accumulated products and consists of breaking down a
homogeneous supply into smacker lots it is also referred to as the process of “dispersion”.
Assorting: it involves building an assortment of different but perhaps a related product to
form a stock of an intermediary. At the manufacturer level assortment are dictated by
production technology while at the consumer and, use assortments are governed by
consumption pattern. These discrepancies in assortment create opportunities for
intermediaries to participate in the channels of distribution.
Importance of distribution channels:
Channels of distribution for a product the route taken by the title to goods they are from
the producers to the ultimate consumers. It is very important because product in one place
while the consumption scattered in many place. So there is big gap between producers and
the consumers. So through channels of distribution can only fill the gap. A channel of
distribution connects a link between the producers and the consumers.
The middle man plays an important role in consumer orientation demand. The middlemen
are specialist in concentration equalization and dispersion, i.e.
Collects output of various producers
Subdivide the products according to the needs of the consumers.
Disperse this assortment to the consumers.
The success of channels of distribution [COD] is completely depending upon the
middlemen as they create time and possession utility. The COD helps in making products
available at right time in the night place and in the right quality.
Marketing is a comprehensive term, which includes distribution also, distribution is a
function to distribution or sub divided the producer’s goods to various specific markets
which incurred to all ultimate consumers.
Role of channels of distribution
Channel of Distribution plays a very important role in achieving the marketing objectives of
a company. Undoubtedly, the manufacturer of product or services creates involve utility
but the distribution channels create time and place utilities. According to Drucker, “both
the market and distribution channels are offer more crucial than the product. They are
primary; the product is secondary.
In an ever widening market, particularly in consumer goods market distribution channels
have a distinctive role in the successful implementation of marketing plans and strategies.
These channels performing the following marketing functions the machinery of
distribution.
The searching out of buyers and seller.
Matching goods to requirements of the market(merchandising)
Offering products in the form of assortments packages of items usable and acceptable by
the consumers /users.
Persuading and influencing the prospective buyers to favor a certain products and its
maker [personal selling /sales promotion].
Implementing pricing strategies in such a manner that would be acceptable to the buyers
and ensure effective distribution functions.
Participating actively in the creation and establishment of market for a new product.
Offering pre- and after sales service to customer
Transferring of new technology to the users along with the supply of products and playing
green resolution in our country.
Providing feels back information, marketing intelligence and sales forecasting services for
their regions their suppliers.
Offering credit to retailers and consumers.
Risk- bearing with references to stock holding transport.
MIDDLEMAN IN DISTRIBUTION CHANNELS
Merchant intermediaries are those channels member who take both title to and position of
goods from the proceeding member (s) and channel’s them to the subsequence. These may
classify as follows:
Wholesalers : A merchants wholesalers may be defined as that intermediary who buys
goods in bulk from manufactures and sells them largely to subsequent intermediaries
participating in the channel, namely, semi-wholesalers and retailers, they buy the goods
and sees the same on their own account and risk. They take title of goods and they resale
the goods at a profit with commission.
Retailers: A retailer may be defined as that merchant intermediary who buys product from
preceding challes members in smaller assorted lots to suit individuals’ consumer
requirements. Retail in the final middlemen in the channel of distribution as he is going to
sell products to houses holds consumers for non- business use.
Retailers are further classified as institutional and non- institutional retailers.
The institutional retailers are:
Consumer Co- operative stores.
Fair price shops.
Departmental stores.
Chain / multiple stores.
Mail order houses.
The non-institutional buyers are:
Stress sellers.
Peddlers.
Hawkers.
Agent Intermediaries:
Agent Intermediaries are those channel components who never take title to end usually do
not take title to and usually do not take possession of goods but merely assist
manufacturers, merchants intermediaries and consumers in carrying out transactions of
sale and purchase. There for, unlike merchant intermediaries, they do not buy or sell goods
on their own account but merely bring buyers and sellers together in order to strike a
transaction. There exist an agency relationship between such an intermediary
manufacturers where in the former acts as agent and the latter as his principal, such agent
intermediaries solicit orders, sometimes with discretion a fixing prices, and determines the
term of sale with buyers.
Agent intermediaries are usually compensable for their services by way of commission on
the value of sale affected through them or any other basis naturally agrees upon.
Agent intermediaries may be further classified as follows:
Sole selling agent.
Selling agent.
Commission agent.
Brokers.
Channel decision
The first problem of channel design in whether you want direct sale to consumer or
indirect sale i.e., sale through middleman under the direct sales the channel problem
becomes problems of company organization. If the company chooses the indirect route, it
must consider such problem as the type and number of middleman’s and methods to be
employed in motivating and controlling them. The selection of these middlemen beings
with the knowledge of ultimate customers-his needs and desires for distribution services.
Customer conveniences and economics of exclusive distribution will determine the number
of middleman employed. The company must choose whether to attempt extensive,
selective or exclusive distribution or combination of all three types, the decision is made
after the careful analysis of product, customer, dealers, and company objectives and
policies, and the conflict with in the channels and any other relevant factors. The company
must resolve channels and bring the product profitably to the market.
In the chance managements a manufacturer has to make three decisions:
Section of a particular middleman at each level and in each market.
Number of middlemen at each level and in each market.
Selection of particular middlemen for selling goods, with or without any exclusive rights of
distribution.
Once the company has determined, its basic channel design and levels of distribution, it has
to select middlemen appoint them, motivate their efforts, evaluate their utility periodically
and if necessary, it has to reorganizing the channels in the light of experience.
Channel choice
Channel decisions also require special attention as involve long term commitments to other
firms with whom marketer enters in to a contract. The problem of selecting the most
suitable channel 0f distribution for a product is complex. The most fundamental factor for
channel choice and channel management it economic criteria, viz., cost and profit criteria,
we have to consider a number of factors such as the nature of the product, market trends,
competition outlooks pricing policies typical consumer needs, as well as needs of the
manufacture critical factor.
Product factors
Product manufactured by a company itself is a governing factor of great force in the
distribution channel selection. The product attributes shape the channel decision in the
following manners,
If a commodity is perishable or fragile a producer prefers few and controlled levels of
distribution.
For durable and standardized goods longer and diversified channel may be necessary.
For custom made product direct distribution to consumer or industrial user may be
desirable.
Systems approaches needs package deal and shorter-channel serves the purpose.
For technical product requiring specialized and selling and serving talent, we here the
shortest channel.
Products of high unit value are sold directly by traveling sales force and not through
middlemen.
Market factors
Under the modern concept of marketing market factor shape all marketing decision. As a
corollary, the distribution channel choice is considerably influenced by market factor.
Consumers: the numbers of consumers, their geographic location and purchase pattern
considerably govern the choice of a channel.
Intermediaries: the relative strength and weakness of intermediaries and the difference in
the type of function performed and facilities and privileges desired by them often
determine the choice of channel.
Competitors: the distribution channels used by competitors also influence the channel
choice because it may be the customary channel used by all those operating in the field.
If the market size is large, we have many channels where as in a small market direct selling
may be profitable.
Company factors
Like markets and products, companies own strength and weakness significantly influence
and shape channel choices.
Financial strength: – a company with substantial and financial resources need not really too
much on the middlemen and can offered. To reduce the levels of distribution a weaker
company has to open on middlemen to secure financial and warehousing relief.
Past channel experience: – in case often old and established company its past experience of
working with certain kind of intermediaries also condition channel choice.
Marketing policies: – the marketing policies relevant to channels decision may relate to
advertising delivery, after – sales service and pricing.
Reputation: – it is said that the reputation travels faster than the man. It is true in case of
companies also who wish to select distribution channels.
Middlemen
Middlemen who can provide wanted marketing services will be given first preference.
The selected middle men must offer maximum co – operation particularly in promotional
services. They must expect marketing policies and programs of the manufacturers and
actively help them in their implementation.
The channel generating the largest sales volume unit cost will be given top priority this will
be minimizing distribution cost.
Competitors
Marketers closely watch the channels used by rivals. Many a times, similar channels may be
desirable to bring about distribution of your products also. Followers, sometimes
marketers deliberately avoid customary channels (dominated by rivals) and adopt
different channels strategy for instance, you may by – pass retail store channel (usually
used by rival) and adopt door to door sales (where there is no competitors).
Environmental factors
Marketing environment can also influence the channel decision. During recession or
depression, shorter and cheaper channel is always preferable. In times of prosperity we
have a wider choice of channel alternatives. Technological inventions also have impact on
distribution. The distribution of the perishable goods even in distant markets becomes a
reality due to cold storage facilities in transport and warehousing. Hence this led to
expanded role of intermediaries in the distribution of perishable goods.
Arranging in classes of distribution channels and intermediaries
Types of distribution channels: broadly distribution channels may be classified as a non –
integrated and integrated channel is individual or conventional marketing channels.
Top 20 things every travel agent should do right now, online and offline
In recent months, some industry research reports found that more consumers are now
inclined to use a good travel agent, reversing a downward trend.
That’s good news for the offline agent industry and certainly there are many reasons for
optimism.
However, the travel agent industry continues to be a challenge, with very low average
annual incomes and almost no top young talent joining the industry. Yet, there are still
those who perform much better than the rest.
As CEO of Zicasso, it’s been part of my job to find these top performers, partner with them,
coach them, and make them even better performers.
Based on my interactions with them and analysis of thousands of traveler-and-travelspecialist interactions on Zicasso, I’ve put together a list of 20 useful tips for travel agents.
The ideas in the list are things that every agent can do - right now - in order to adapt to and
thrive in today’s environment, in which travelers want personalized attention, good value,
and the convenience of the internet.
1. Specialize
Pick a few destinations or activities and resolve to be a better expert at them than anyone
else. Consumers now have access to so much travel information, particularly at their
fingertips via the Internet that they have themselves become “generalist travel agents.”
When they seek help, they’re seeking a true specialist.
2. Personalize
Differentiate yourself from DIY, self-service online solutions – and instead give consumers
highly personalized service, recommendations, etc., right from your very first interaction
with them -- whether online, by phone or in-person.
3. Develop a repertoire of unique experiences and special access
It’s all about selling experiences. The more unique, the more value you’re adding. The more
you can get clients access to special events or people, the more differentiated you are.
4. Be complex
Consumers can book the simple trips themselves (e.g. point-to-point trips such as Seattle to
Las Vegas). Travelers really need agents for complex trips (e.g. longer international trips or
cruises). Your energy and specialization should be on these complex trips.
5. Go upmarket
Segment the market into two traveler types: Those with more money than time, and those
with more time than money. Agents can only compete for the former segment’s business.
Travelers with more money than time value purchasing a travel agent’s expertise and
ability to handle every aspect of the trip.
6. Work with net rates rather than take commission
Especially for custom tours, agents should consider getting net rates from suppliers and
marking them up rather than taking commission. This gives pricing flexibility and better
cash flow, and reduces the hassle of collecting commission.
7. Constantly do a self-check: Am I delivering the best value?
The market’s constantly changing. For all your products and services that you offer, are you
getting competitive rates? Do you have a variety of strategies to get your clients the most
value?
8. Master your pitch
Have you perfected your pitch if clients ask: “Tell me about yourself and your agency,” or
“What makes you different from other agents?” What are the top three messages in your
pitch? Memorize them.
9. Brush up on "trusted advisor" sales skills
It’s a consultative sales job: Most agents can sell a lot more if they can be perceived as a
trusted advisor. This means relationship-building and trust-building skills rather than
pushy sales skills.
10. Develop a trusted reputation/brand
Get yourself or your agency written up in national media or at least your local newspaper.
Join the BBB. Get clients to write you endorsements on LinkedIn. Build your reputation
with real traveler reviews on a referral service.
11. Have a good website
Many agents have websites that do them a disservice. Agent websites need three key
things: good design + compelling content + easy to maintain/update. If you don’t have a
good web developer, use services like Intuit Websites or HP LogoWorks.
12. Be incredibly responsive & reachable – use a smartphone
Even when you’re not at the office, use a smartphone to be extremely responsive through
voice, email, and social media. Use Google Voice to have one number that rings you at your
landline, mobile, or any other number.
13. Improve process efficiency
Most agents have plenty of opportunities to be more efficient in their operational
processes. For example, streamline the time to develop a custom itinerary, the time to price
a quote, etc.
14. Know when to ask for a fee
I don’t believe there’s a cookie cutter answer on when to ask for a planning fee or good
faith deposit. Make a judgment call on this for various types of clients.
15. Engage with social media
I highly recommend a Facebook Page for your travel business. Get your clients to be fans
and to post reviews of your services. Engage them with insights and tips.
It is fine to post some specials or deals, but a Facebook page is best used when it’s less
about selling and more about engaging with fans and being helpful with your knowledge.
As an example, check out the Zicasso Facebook Page.
16. Partner to get new leads
Be a good marketer - or if you’re not, hire a marketing agency to help you, or use a travel
referral service like Zicasso for targeted, pre-qualified luxury leads. Save yourself the time
and focus on the selling.
17. Improve your writing/email skills
Many clients prefer email communications. Good writing is a sales skill that helps build
trust and relationship with clients. Take a class to improve this skill and you’ll also improve
sales conversion.
18. Sharpen your first response to clientsObsess over the quality of your first interaction
with a new client, whether it’s a phone call or an email. Making a good first impression
plays a major role in sales conversion.
19. Don’t sell deals: Sell expertise!
Many agents advertise deals on their website and send the message that they can find the
best deals. It’s tough to beat deals on the Internet, and will be even tougher going forward.
Transform your business and your message to sell expert advice and personalized service.
20. Be a lifelong student of change
This industry has changed tremendously and the pace of change will only accelerate. Be a
constant student of best practices and be ready to adapt and adopt new ways of doing
things….no matter how many years you’ve been in the industry.
And lastly...
I have a request of everyone: as you achieve success, be a role model for the next
generation of young agents.
Recruit, inspire, and mentor them. This industry desperately needs new blood and young
talent will only join when they see successful role models. I wish everyone great success in
your continued business endeavors.
NB: This is a guest article by Brian Tan, founder and CEO of Zicasso, an online luxury travel
referral service that connects consumers with top travel specialists.
Types of Marketing Intermediaries
Agents and Brokers
Agents and brokers are nearly synonymous in their roles as intermediaries. In fact, when it
comes to real estate transactions, they are synonymous to any client, despite the
differences in their roles in the industry. In most cases, however, agents serve as an
intermediary on a permanent basis between buyers and sellers, while brokers do this on a
temporary basis only. Both are paid in commission for each sale and do not take ownership
of the goods being sold.
In addition to real estate, agents and brokers are also common in the travel agency.
Companies routinely use agents and brokers when importing or exporting products across
the border.
2. Merchant Wholesalers and Resellers
Merchant wholesalers, which are also simply called wholesalers, buy products from
manufacturers in bulk and then resell them, usually to retailers or other businesses. Some
carry an extensive range of different products, while others specialize in a few products but
carry a large assortment. They may operate cash-and-carry outlets, warehouses, mail order
businesses or online sales, or they may simply keep their inventories in trucks, and travel
to their customers.
3. Distributors and Functional Wholesalers
Also called functional wholesalers, distributors do not buy products from the producers.
Instead, they expedite sales between the manufacturer and retailers or other businesses.
Like agents and brokers, they can be paid by commission, or they can be paid in fees from
the manufacturer.
4. Traditional and Online Retailers
Whenever a consumer buys a product from anyone other than the company that makes it,
the consumer is dealing with a retailer. This includes corner stores, shopping malls and ecommerce website. Retailers may buy directly from the producers or from another
intermediary. In some markets, they may stock items and pay for them only after they
make a sale, which is common for most bookstores today.
Any e-commerce website that's not owned by the company that makes a product, which it
then sells to a consumer, can also be called a retailer. However – with companies such as
Amazon, which make their own products and sell them directly to customers in addition to
products made by other companies – the line between producers and retailers is becoming
increasingly blurry.
Functions of marketing intermediaries
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Physical movement of goods from manufacturers to consumers. Marketing
intermediaries are responsible for transportation cost: The wholesaler/distributor
transport finished products from the manufacturer to their warehouse, while the
retailer transports it to their shops.
Provision of storage facilities: Marketing intermediaries provide warehouse where
manufactured goods purchased are started.
he Wholesalers buy in bulk from the manufacturer thereby reducing the stock level
and the cost of stock of the producers.
They assist the manufacturer in sales promotion and advertising activities.
The wholesaler gives credit facilities to retailer. They allow retailers to buy, make
part payment and balance up at a fixed date.
The wholesalers also give quality discounts to retailers.
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Wholesalers finance the manufacturer. In some cases wholesalers are made to pay
for goods in advance of supply. Under this situation wholesalers are financing the
manufacturers.
Information is passed from the consumer through the retailer and wholesaler to the
manufacturer.
CHANNEL
BEHAVIOR
A marketing channel consists of firms that have banded together for their common
good. Each channel member depends on the others. For example, a Ford dealer
depends on Ford to design cars that meet consumer needs. In turn, Ford depends
on the dealer to attract consumers, persuade them to buy Ford cars, and service
cars after the sale. The Ford dealer also depends on other dealers to provide good
sales and service that will uphold the brand's reputation. In fact, the success of
individual Ford dealers depends on how well the entire Ford marketing channel
competes with the channels of other auto manufacturers.
Each channel member plays a specialized role in the channel. For example, Sony's
role is to produce personal consumer electronics products that consumers will like
and to create demand through national advertising. Best Buy's role is to display
these Sony products in convenient locations, to answer buyers' questions, and to
close sales. The channel will be most effective when each member is assigned the
tasks it can do best.
Ideally, because the success of individual channel members depends on overall
channel success, all channel firms should work together smoothly. They should
understand and accept their roles, coordinate their activities, and cooperate to
attain overall channel goals. However, individual channel members rarely take
such a broad view. Cooperating to achieve overall channel goals sometimes means
giving up individual company goals. Although channel members depend on one
another, they often act alone in their own short-run best interests. They often
disagree on who should do what and for what rewards. Such disagreements over
goals, roles, and rewards generate channel conflict.
Horizontal conflict occurs among firms at the same level of the channel. For
instance, some Ford dealers in Chicago might complain the other dealers in the
city steal sales from them by pricing too low or by selling outside their assigned
territories. Or Holiday Inn franchisees might complain about other Holiday Inn
operators overcharging guests or giving poor service, hurting the overall Holiday
Inn image.
Vertical conflict, conflicts between different levels of the same channel, is even
more common. For example, H&R Block franchisees complained when the parent
company began using the Internet to deal directly with customers. Similarly,
McDonald's created conflict with some of its California dealers when it placed new
stores in areas that took business from existing locations. And office furniture
maker Herman Miller created conflict with its dealers when it opened an online
store—www.hmstore.com—and began selling its products directly to customers.
Although Herman Miller believed that the Web site was reaching only smaller
customers who weren't being served by current channels, dealers complained
loudly. As a result, the company closed down its online sales operations.3
VERTICAL
MARKETIN
G SYSTEMS
For the channel as a whole to perform well, each channel member's role must be
specified and channel conflict must be managed. The channel will perform better if it
includes a firm, agency, or mechanism that provides leadership and has the power to
assign roles and manage conflict.
Historically, conventional distribution channels have lacked such leadership and power,
often resulting in damaging conflict and poor performance. One of the biggest channel
developments over the years has been the emergence of vertical marketing systems that
provide channel leadership. Figure 13.3 contrasts the two types of channel
arrangements.
A conventional distribution channel consists of one or more independent producers,
wholesalers, and retailers. Each is a separate business seeking to maximize its own
profits, even at the expense of the system as a whole. No channel member has much
control over the other members, and no formal means exists for assigning roles and
resolving channel conflict. In contrast, a vertical marketing system (VMS) consists of
producers, wholesalers, and retailers acting as a unified system. One channel member
owns the others, has contracts with them, or wields so much power that they must all
cooperate. The VMS can be dominated by the producer, wholesaler, or retailer.
We look now at three major types of VMSs: corporate,
contractual, and administered. Each uses a different means for setting up leadership and
power in the channel.
ACTIVE
FIGURE 13.3
A conventional marketing channel versus a vertical
marketing system
Corporate
VMS
A corporate VMS integrates successive stages of production and distribution under single
ownership. Coordination and conflict management are attained through regular
organizational channels. For example, Sears obtains more than 50 percent of its goods
from companies that it partly or wholly owns. Giant Food Stores operates an ice-making
facility, a soft drink bottling operation, an ice cream plant, and a bakery that supplies
Giant stores with everything from bagels to birthday cakes. And little-known Italian
eyewear maker Luxottica sells its many famous eyewear brands—including Giorgio,
Armani, Yves Saint Laurent, and Ray-Ban—through the world's largest optical chain,
LensCrafters, which it also owns.5
Controlling the entire distribution chain has turned Spanish clothing chain Zara into the
world's fastest-growing fashion retailer.
The secret to Zara's success is its control over almost every aspect of the supply
chain, from design and production to its own worldwide distribution network. Zara
makes 40 percent of its own fabrics and produces more than half of its own
clothes, rather than relying on a hodgepodge of slow-moving suppliers. New
styles take shape in Zara's own design centers, supported by real-time sales data.
New designs feed into Zara manufacturing centers, which ship finished products
directly to 450 Zara stores in 30 countries, saving time, eliminating the need for
warehouses, and keeping inventories low. Effective vertical integration makes
Zara faster, more flexible, and more efficient than international competitors such
as Gap, Benetton, and Sweden's H&M. Zara can make a new line from start to
finish in just three weeks, so a look seen on MTV can be in Zara stores within a
month, versus an industry average of nine months. And Zara's low costs let it offer
midmarket chic at downmarket prices. The company's stylish but affordable
offerings have attracted a cult following, and the company's sales have more than
doubled to $2.3 billion in the past five years.6
Contractual VMS
A contractual VMS consists of independent firms at different levels of production and
distribution who join together through contracts to obtain more economies or sales
impact than each could achieve alone. Coordination and conflict management are
attained through contractual agreements among channel members. The franchise
organization is the most common type of contractual relationship—a channel member
called a franchiser links several stages in the production-distribution process. An
estimated 2,000 franchised U.S. companies with over 320,000 outlets account for some
$1 trillion in annual sales. Industry analysts estimate that a new franchise outlet opens
somewhere in the United States every eight minutes and that about one out of every 12
retail business establishments outlets is a franchised business.7 Almost every kind of
business has been franchised—from motels and fast-food restaurants to dental centers
and dating services, from wedding consultants and maid services to funeral homes and
fitness centers.
There are three type of franchises. The first type is the manufacturer-sponsored retailer
franchise system—for example, Ford and its network of independent franchised dealers.
The second type is the manufacturer-sponsored wholesaler franchise system—Coca-Cola
licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup concentrate
and then bottle and sell the finished product to retailers in local markets. The third type
is the service-firm-sponsored retailer franchise system—examples are found in the autorental business (Hertz, Avis), the fast-food service business (McDonald's, Burger King),
and the motel business (Holiday Inn, Ramada Inn).
The fact that most consumers cannot tell the difference between contractual and
corporate VMSs shows how successfully the contractual organizations compete with
corporate chains. Chapter 14 presents a fuller discussion of the various contractual
VMSs.
Administered VMS
In an administered VMS, leadership is assumed not through common ownership or
contractual ties but through the size and power of one or a few dominant channel
members. Manufacturers of a top brand can obtain strong trade cooperation and
support from resellers. For example, General Electric, Procter & Gamble, and Kraft can
command unusual cooperation from resellers regarding displays, shelf space,
promotions, and price policies. Large retailers such as Wal-Mart, Home Depot, and
Barnes & Noble can exert strong influence on the manufacturers that supply the
products they sell.
HORIZONTAL MARKETING SYSTEMS
Another channel development is the horizontal marketing system, in which two or more
companies at one level join together to follow a new marketing opportunity. By working
together, companies can combine their financial, production, or marketing resources to
accomplish more than any one company could alone.
Companies might join forces with competitors or noncompetitors. They might work with
each other on a temporary or permanent basis, or they may create a separate company.
For example, the Lamar Savings Bank of Texas arranged to locate its savings offices and
automated teller machines in Safeway stores. Lamar gained quicker market entry at a
low cost, and Safeway was able to offer in-store banking convenience to its customers.
Similarly, McDonald's now places "express" versions of its restaurants in Wal-Mart
stores. McDonald's benefits from Wal-Mart's considerable store traffic, while Wal-Mart
keeps hungry shoppers from having to go elsewhere to eat.
Such channel arrangements also work well globally. For example, because of its excellent
coverage of international markets, Nestlé jointly sells General Mills's cereal brands in
markets outside North America. Coca-Cola and Nestlé formed a joint venture to market
ready-to-drink coffee and tea worldwide. Coke provides worldwide experience in
marketing and distributing beverages, and Nestlé contributes two established brand
names—Nescafé and Nestea. Seiko Watch's distribution partner in Japan, K. Hattori,
markets Schick's razors there, giving Schick the leading market share in Japan, despite
Gillette's overall strength in many other markets.
MULTICHANNEL DISTRIBUTION SYSTEMS
In the past, many companies used a single channel to sell to a single market or market
segment. Today, with the proliferation of customer segments and channel possibilities,
more and more companies have adopted multichannel distribution systems—often
called hybrid marketing channels. Such multichannel marketing occurs when a single firm
sets up two or more marketing channels to reach one or more customer segments. The
use of multichannel systems has increased greatly in recent years.
Horizontal marketing systems: Nestlé jointly sells General Mills cereal brands in markets outside North
America.
Figure 13.4 shows a hybrid channel. In the figure, the producer sells directly to consumer
segment 1 using direct-mail catalogs, telemarketing, and the Internet and reaches
consumer segment 2 through retailers. It sells indirectly to business segment 1 through
distributors and dealers and to business segment 2 through its own sales force.
These days, almost every large company and many small ones distribute through
multiple channels. Charles Schwab reaches customers through its branch offices, by
telephone, and over the Internet. Staples markets through its traditional retail outlets, a
direct-response Internet site, virtual malls, and 30,000 links on affiliated sites. And IBM
uses multiple channels to serve dozens of segments and niches, ranging from large
corporate buyers to small businesses to home office buyers. In addition to selling
through its vaunted sales force, IBM also sells through a full network of distributors and
value-added resellers, which sell IBM computers, systems, and services to a variety of
special business segments. Final consumers can buy IBM personal computers from
specialty computer stores or any of several large retailers. IBM uses telemarketing to
service the needs of small and medium-size business. And both business and final
consumers can buy online from the company's Web site (www.ibm.com).
FIGURE 13.4
Multichannel distribution system
Multichannel distribution systems offer many advantages to companies facing large and
complex markets. With each new channel, the company expands its sales and market
coverage and gains opportunities to tailor its products and services to the specific needs
of diverse customer segments. But such multichannel channel systems are harder to
control, and they generate conflict as more channels compete for customers and sales.
For example, when IBM began selling directly to customers through catalogs,
telemarketing, and its own Web site, many of its retail dealers cried "unfair competition"
and threatened to drop the IBM line or to give it less emphasis. Many outside
salespeople felt that they were being undercut by the new "inside channels."
CHANGING CHANNEL ORGANIZATION
Changes in technology and the explosive growth of direct and online marketing are
having a profound impact on the nature and design of marketing channels. One major
trend is toward disintermediation—a big term with a clear message and important
consequences. Disintermediation means that more and more, product and service
producers are bypassing intermediaries and going directly to final buyers, or that
radically new types of channel intermediaries are emerging to displace traditional ones.
Thus, in many industries, traditional intermediaries are dropping by the wayside. For
example, companies such as Dell Computer and American Airlines are selling directly to
final buyers, eliminating retailers from their marketing channels. E-commerce is growing
rapidly, taking business from traditional brick-and-mortar retailers. Consumers can buy
Flowers from 1-800-Flowers.com; books, videos, CDs, toys, consumer electronics, and
other goods from Amazon.com; and clothes from landsend.com or gap.com, all without
ever visiting a store.
Disintermediation presents problems and opportunities for both producers and
intermediaries. To avoid being swept aside, traditional intermediaries must find new
ways to add value in the supply chain. To remain competitive, product and service
producers must develop new channel opportunities, such as the Internet and other
direct channels. However, developing these new channels often brings them into direct
competition with their established channels, resulting in conflict.
To ease this problem, companies often look for ways to make going direct a plus for both
the company and its channel partners. For example, to trim costs and add business,
Hewlett-Packard opened three direct-sales Web sites—Shopping Village (for consumers),
H-P Commerce Center (for businesses buying from authorized resellers), and Electronic
Solutions Now (for existing contract customers). However, to avoid conflicts with its
established reseller channels, HP forwards all its Web orders to resellers, who complete
the orders, ship the products, and get the commissions. In this way, H-P gains the
advantages of direct selling but also boosts business for resellers.
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