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Monday, August 1, 2011

Distrubution Channels

The method we use to get our product to the consumer can define our competitive advantage and reputation and add to the quality of our service. It can also mean cost efficiencies.

Direct Marketing
Direct Marketing is where the manufacturer sells directly to the consumer. For example, an Internet company which has its catalogue on the Internet would sell directly to the consumer and ship directly to the consumer either by parcel post, FEDEX or UPS. The advantage here is that the manufacturer has control over shipping and expedites the shipment via his "strategic partners" the U.S. Postal Service, FEDEX or UPS. It is also cost effective. The manufacturer is able to offer the product cheaper than if the product were offered in a retail store or department store. Case in point, you can purchase books and other items from Amazon.com, receive them in 3 to 5 business days and the shipping is FREE. The charge is cheaper than if you were to buy it in a store.

Levels of Channels
The more links you have in your distribution channel the more the costs are added to the product.
  • One Level - The manufacturer would use a retailer, like Bloomingdale's who would sell to the consumer. Bloomingdale's is going to add their cost to the cost of your product. Therefore, the consumer will be paying more for the product.
  • Two Levels - The manufacturer would use a wholesaler who would use the retailer who sells to the consumer. The wholesaler, like the retailer, would add on his costs to the cost of the product. The consumer would be paying more for the product.
  • Three Levels - The manufacturer would use a jobber (used for overseas sales), who would utilize a wholesaler, who would use a retailer who sells to the consumer. Yes, as you are now catching on, there are more costs and the end result is that the consumer pays for the product. The lengthier the channel and the more links in the channel chain the more costs are added to the product!
Designing the Distribution Channel
There are factors to consider when deciding upon the best method of distribution for your product. We must consider the nature and characteristics of our product, the buying habits and patterns of the consumer, the frequency of purchases and the amount spent.

Product characteristics
The nature and characteristics of the product will necessitate certain services offered by an intermediary. Is the product bulky, standardized or understandardized, does it require technical knowledge or increased service, or it is perishable or not? Some of these characteristics will require storage or salespeople who will be able to demonstrate, answer technical questions and sell the product. If your product is ice cream, it will require refrigeration in transit to the local retailer.

If your product is expensive (a large ticket item) then you may need a distribution channel which has the capability of offering financing for its purchase. Some wholesalers will offer advertising and promotion services because they know what the retailer needs and what the consumer wants.

Your business characteristics
The size of your company or business and its financial position will indicate whether you can handle your our distribution. How many products are you selling and are you capable of maintaining your own truck fleet to distribute the products to the retailer? If you can, then you will have little reliance on others to move your product.

Types of Distribution
  • Intensive Distribution - If you have a product which is inexpensive, may be considered a staple or a necessity, then you may want to have Intensive Distribution where it would be available in as many outlets as possible, like razor blades or batteries. They are almost everywhere you can think of.
  • Exclusive Distribution - Are you a designer of evening gowns? Maybe you would want to have your gowns sold exclusively -- in only one outlet in a certain area.
  • Selective Distribution - Perhaps you have a quality product and would want to sell it "Wherever quality products are sold". More than exclusive but not intensive.
Salesforce Distribution
Depending upon the kind and nature of your business, you may consider using your own salesforce. However, management of a salesforce has associated problems and considerations:
  • Personnel Management. You have to define the profile for selecting and hiring individuals for your sales team. You have to train them, assign them to regions or accounts, and your have to motivate them and hold their hands for them to sell. Once they sell something you have to pay them. How much will you pay them.
  • Evaluation of Personal Performance. What criteria will you use to evaluate their performance: sales volume, gross margins on product SOLD, call rate, average order size, or orders received vis-a-vis calls made.

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