- Explain what channels of distribution are and why organizations use them
The distribution strategy supports company-level objectives, as well as marketing objectives. Typically, distribution approaches support company-level objectives related to growth, as in the example of Monster Energy, or profitability, since distribution can improve company efficiencies.
Think about your perspective as a buyer. When you need food, you most likely shop at a grocery store. You could purchase bread from a bakery, milk and eggs from a dairy, fruit and vegetables directly from a farm, but most people don’t. They appreciate the convenience of purchasing many different types of items from a single store. We call this contact efficiency, because the buyer is able to make contact with many different product types in a more efficient way.
Distribution channels provide efficiencies in a number of areas: product form, time, place, and exchange. Remember the example of the Coca-Cola bottlers: The bottlers purchase a concentrate that is condensed and easy to distribute all around the world. Once the concentrate is mixed with carbonated water and bottled or canned, it’s larger and heavier—and more difficult to distribute. For that reason, this process happens in the local markets, where final distribution to customers is easier. The bottlers provide efficiency in product form. Likewise, grocery retailers provide efficiency in time and place by offering many different products in a single shopping experience. Similarly, the groceries are purchased in a single cash or credit card transaction, even though they are coming from many different producers.
These efficiencies benefit both consumers and businesses. Early in this course we looked at the success of the Chobani yogurt company, which has grown through a national and now global distribution network. An effective distribution network enables the company to get its product in front of consumers far from its headquarters in Norwich, New York, and it means that a consumer in Norwalk, California, can buy Chobani’s greek yogurt in a local supermarket without ever thinking about the time and effort it required to get it there.
The primary purpose of any channel of distribution is to efficiently bridge the gap between the producer of a product and the user of it, whether the parties are located in the same community or in different countries thousands of miles apart.
Channel Partners That Support Objectives
The channel is composed of different institutions that facilitate the transaction and the physical exchange. Institutions in channels fall into one of the following three categories:
- The producer of the product: a craftsman, manufacturer, farmer, or other producer
- The user of the product: an individual, household, business buyer, institution, or government
- Middlemen at the wholesale and/or retail level
Not all channel members perform the same function. Channel partners perform the following three important functions:
- Transactional functions: buying, selling, and risk assumption
- Logistical functions: assembly, storage, sorting, and transportation
- Facilitating functions: post-purchase service and maintenance, financing, information dissemination, and channel coordination or leadership
These functions are necessary for the effective flow of product and title to the customer and payment back to the producer. Certain characteristics are implied in every channel. First, although you can eliminate or substitute channel institutions, the functions performed by these institutions cannot be eliminated. Typically, if a wholesaler or a retailer is removed from the channel, the function they perform will either be shifted forward to a retailer or to the consumer, or shifted backward to a wholesaler or to the manufacturer. For example, a producer of custom hunting knives might decide to sell through direct mail instead of retail outlets. The producer absorbs the sorting, storage, and risk functions; the post office absorbs the transportation function; and the consumer assumes more risk in not being able to touch or try the product before purchase.
Second, all channel institution members are part of many channel transactions at any given point. As a result, the complexity may be quite overwhelming. Consider for the moment how many different products you purchase in a single year and the vast number of channel mechanisms you use.
Third, the fact that you are able to complete all these transactions to your satisfaction, as well as to the satisfaction of the other channel members, is due to the routinization benefits provided through the channel. Routinization means that the right products are most always found in the places where the consumer expects to find them, comparisons are possible, prices are marked, and methods of payment are available. Routinization aids the producer as well as the consumer, in that the producer knows what to make, when to make it, and how many units to make.
Fourth, there are instances when the best channel arrangement is direct—from the producer to the ultimate user. This is particularly true when the producer feels he can perform the tasks best or when no competent middlemen are available. It may be important for the producer to maintain direct contact with customers so that quick and accurate adjustments can be made. Direct-to-user channels are common in B2B settings where personal sales are a more common tactic. Indirect channels are more typical and prevalent, though, because producers are not able to perform the tasks provided by middlemen as efficiently or with as broad of a reach.