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Of the 4Ps, none are more important than placement, which is more commonly known as distribution. It may seem obvious, but a company have the greatest product, with the most competitive price, and the most clever promotion campaign, but without the benefit of distribution, no one will be able to purchase the product. Distribution encompasses all of the activities that take the finished product or service from the manufacturers, through Marketing channels (in most cases), to end customers. It includes logistics (which is beyond the scope of this lecture), transportation, wholesaling, and retailing. In some cases, it involves the use of agents and brokers, a special category of middlemen who do not take title to the products and services that they sell. This lecture will begin with a basic review of essential distribution (a.k.a. Marketing Channels) knowledge, and then will examine several current issues in distribition confronting Marketers. Several links are provided to research papers that will further explain these topics. Review In addition to distribution being of critical importance to Marketers, it so happens that distribution also generates much controversy with the general public. Middlemen are frequently accused of causing prices to be higher than they otherwise would, because each "layer" (i.e., manufacturer, wholesaler, retailer) takes are percentage of their sales as profit. Truth be known, it is not uncommon for a product's price to double at each step in the distribution process, so that a product that a manufacturer sold for $1 to the wholesaler eventually winds up costing the end customer $8 at retail. With these kinds of numbers and exponential growth in prices, it is little wonder that distribution takes a lot of heat. But the general public knows not of what they speak. The alternative to middlemen is for manufacturers to sell directly to end customers. While this may work for a few select products, it simply will not work for the vast majority of items. In fact, if we had to buy everything directly from manufacturers, our entire lives would be spent trying to acquire goods and services. There are 281 million people in the USA, and if there were no middlemen, each company would have to employ untold thousands of people to be salespersons, all of whom would have the frustrating task of trying to call on customers who were not home---because they, too, were busy elsewhere trying to sell products to other people who also were not home. While the above example may seem a little stretched, there is a huge element of truth in it. Were it not for middlemen, we would not enjoy many of the conveniences we currently enjoy, such as being able to choose from an enormous array of products from many manufacturers, all under one roof, and available 24 hours each day. But before we conclude that middlemen work only for the benefit of consumers, we must consider what they do for manufacturers. There are many tasks that middlemen perform that are of direct benefit to the manufacturer; in totality, they reduce the cost of products to end customers, not increase them, as critics allege. For example:
Distribution Paths Manufacturers have many options available to them to distribute their goods and services. The "traditional" three-level channel (manufacturer, wholesaler, retailer) is merely one of nearly a dozen choices available. The following lists some of these many options: Legend M = Manufacturer
Channel Length The phrase "channel length" refers to how many levels of middlemen are used to distribute the product or service. Certain classes of products have fairly short channels, while others have fairly long ones. For example, perishable foodstuffs generally have short channels. Capital equipment items have direct channels, in most cases, because they are usually very expensive, infrequently purchased items. A locomotive is something that only railroad companies could ever buy, and only infrequently. Thus, they negotiate each purchase directly with the two different manufacturers (General Electric and General Motors), and await delivery from them. Non-perishable, regularly-purchased consumer goods often have "long" channels, utilizing wholesalers and retailers, and sometimes also agents and brokers. "Common" products need longer channels in order to keep the "pipeline" filled, whereas locomotives don't need to be ready for customer pick-up. Service-oriented purchases can also utilize Marketing channels. While a haircut will certainly be conveyed to the consumer by the manufacturer, an airline ticket will be sold by a middleman known as a travel agent who does not own the product, and does not "warehouse" tickets, but simply sells them on demand. Some classes of manufacturers are able to use direct marketing only to distribute their goods. Some examples include Lands End clothiers, Escort radar detectors, and Gateway Computers. In each case, the manufacturer has shunned "traditional" Marketing channels in favor of selling directly. But what makes their clothes, radar detectors, and computers any better than what is commonly available in retail stores elsewhere? Quality and prestige. In other words, if a manufacturer is able to cultivate a high quality image and convince consumers their products have prestige, the manufacturers may very well be able to avoid middlemen. For example, Lands End sells traditional, high-quality clothing; Escort makes the best radar detector; and Gateway makes high-quality PCs to consumer specifications. Finally, there is the MO--manufacturer's outlet. As discussed in the previous lecture, MOs often sell products at substantial discounts as compared to other retailers. The MO has enjoyed an enormous amount of popularity, consistent with America's fascination with anything "discount." Thus, this format is likely to remain strong for years to come, and "traditional" retailers will have to learn new ways to overcome this vertical competition. Visit Mills Corp online to read more about one of the premier outlet mall developers in the US. Channel Intensity The intensity of the channel is a function of how many types of intemediaries are used, as well as the number of intermediaries. Intensity operates along a continuum as follows:
Slotting Fees One of the most controversial practices in Marketing today is the payment of slotting fees. Known by a variety of euphemistic names (entry fees, slotting allowances, push money, etc.), slotting fees represent a variety of payments from manufacturers to retailers for the privilege of having their product(s) "slotted" in the store's warehouse and on the store shelves. In essence, the store shelf has become real estate, and the retailer has become landlord. While slotting fees are most prevalent in the grocery industry, they are common throughout all walks of retailing. Furthermore, the incidence of slotting fees signals a shift in the power balance between channel members. Whereas manufacturers once dominated channel relationships, retailers, empowered with computerized sales data, are in a position to extract (or is it extort?) large sums of money from manufacturers for the risk of stocking their products. Slotting fees traditionally ocur when a new product is introduced, and serve to "sweeten the deal" with accepting retailers. But various forms of slotting fees may also be used with established products. For example, an endcap (end-of-aisle display) may be "rented" by a manufacturer, or the retailer may "rent" a section of floor space for a manufacturer to set up a special display. Finally, manufacturers may pay to have their brand be the only brand on the shelf, or to be featured in a prominent location. Critics of slotting fees abound. Among their criticisms:
How can a small firm compete when they are unable to pay slotting fees? It is not uncommon for large manufacturers to spend $1-3 million on the nationwide introduction of a new product, which many small companies simply cannot afford. While this may create a disadvantage for small firms, there are tactics that can be used to overcome this obstacle, including:
Placement on the store shelf is no longer to be taken for granted. A high price is to be paid for being "slotted" in the store. Every linear foot of shelf space now has a price tag.
Endcaps like this one are often bought for short-duration time periods, like one or two weeks. It allows a manufacturer to have their product featured apart from competing items, and allows retailers to pad their bottom line (both from the slotting fee and from added volume).
Even free-standing displays like this island from Nabisco must be paid for. In addition to "renting" the floor space, the manufacturer must also provide the point-of-sale (POS) materials (in this case, the cardboard school bus). These islands are also rented for specified calendar periods. Resources: Check the following links for more discussion on this subject:
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