Distribution (Place) Overview
Place, more commonly called distribution , includes the organizations (a company and its partners), locations (quantity and type), and processes (physical, digital, intellectual) that support the creation and fulfillment of customer demand, and provide any required post-purchase service.
Effective distribution provides customers with convenience in the form of availability (what, where, when - the right product, at the right place, at the right time), access (customers' awareness of the availability and authorization to purchase), and support (e.g. pre-sales advice, sales promotion and merchandising, post-service repairs).
Distribution decisions have both strategic and logistical dimensions:
Strategic distribution is a competitive advantage that accrues generally from the configuration of a distribution network (who, what, where, when) and, more specifically, from the selection of partners (i.e. middlemen) who intermediate between the company and the customer by performing necessary fulfillment and service activities.
Logistical distribution (aka. supply chain management), which is geared to efficiently supporting the strategic objectives, refers to the storage and movement of goods, information, and money between the manufacturer and the final customer. Logistics is sometimes inappropriately viewed as an exclusive operations function. In reality, marketing often has a major role in the day-to-day logistics process with responsibilities ranging from sales forecasting and demand management to inventory planning and the allocation of short supplies.
Specific distribution-related decisions include:
(1) the number of layers between the company and the customer (channel depth)
(2) the specific type of partners in each layer (e.g. wholesalers or distributors, mass merchants or high-end specialty retailers)
(3) the number of partners at each layer (channel breadth), and the geographic placement of partners (location, density).
These strategic and logistical decisions frame the distribution channels (from a marketing perspective) or downstream supply chain (from an operations perspective) for a company's products.
More specifically, a company's distribution strategy is largely defined by decisions on the number and type of customer interfaces. That is, order entry points (where and how orders are placed) and fulfillment nodes (where and how customers obtain finished goods).
For consumer products, the fulfillment approach is a retail distribution strategy that can range from exclusive distribution though select retailers, or intensive distribution through a multitude of stores.
For example, Coke seeks to be ubiquitous ("always within an arm's length") with very broad distribution across markets via numerous outlets of many different types (e.g. grocery and convenience stores, restaurants, vending machines).
At the other end of the continuum, some companies choose to distribute their products through relatively few, geographically clustered specialty stores (e.g. innovative, tech-based entertainment products - like TiVo -distributed through electronics stores like Best Buy or Circuit City), or may restrict distribution to protect retailers' margins (e.g. "hot" toys exclusively available at Toy 'r Us).
A retail distribution strategy is driven by three inter-related objectives: broadening market coverage, enlisting product support (from retailers) and containing channel conflict (among retailers).
The primary objective of distribution strategy is to provide sufficiently broad, gap-free market coverage, i.e. being available in enough outlets so that customers have convenient access for purchases.
Retailers are gatekeepers since they decide whether or not to carry products based on their prospective retail profitability, considering factors such as:
- Gaps (versus duplication) in the retailer's product line assortment
- Track record (credibility) of the supplier
- Projected retail margins (initially and over time)
- Anticipated promotion support (e.g. advertising, displays, "deals")
- Compatibility of logistics infrastructures (location of facilities, information systems)
- The supplier's market position (clout)
Historically, manufacturers - especially big
national brands - held the balance of power over most retailers and could,
more or less, force them to carry products and provide support. In
the past couple of decades, though, the balance of power has generally
shifted to the retailers, largely due to retail consolidation (the big
have gotten bigger) and the emergence of power retailers "Power retailers" like Home Depot, Staples, and Toy 'r Us
are usually called category killers since they dominate their respect
product categories with very high, concentrated sales volume driven by
low prices. Traditional
retailers sometimes call this type of retailer "category margin killers"
because of their low price strategies.
like Wal-mart and Home Depot.
Still, large prominent brands and companies (like P&G, Kellogg) that have proven track records, established customer relationships, and in-place infrastructures (e.g. regional DCs, real-time data links) are usually able to secure distribution quickly and broadly with target accounts, especially for new, high margin products. Conversely, while small upstart companies may crave distribution through the power retailers, they often find that the high-volume retailers are reluctant to take on the cost burden and risk of reallocating valuable shelf space to unproven suppliers, brands, and products.
In part to defray initialization costs and mitigate risk (to the retailer), an increasing number of retailers have instituted slotting fees, payments made to the retailer whenever new products are adopted. Slotting fees are highly controversial since, in essence, they erect de facto economic barriers excluding all but the biggest, most deep-pocketed suppliers.
The second retail distribution strategy objective is to enlist product support.
More specifically, a company needs to select and motivate partners who:
(a) Maintain adequate inventories
(b) Display the product in desirable locations (e.g. eye-level shelves, high traffic areas)
and promote (special displays and signing, discounted sales prices,
inclusion in flyers and ads)
(d) Sell the product (educating customers, demonstrating the product, 'closing the sale')
(e) Install and service the product
The specific support (level and type) that a product requires hinges primarily on the product characteristics (simple or complex; high end or mass market; position along the product life cycle).
At the most basic intuitive level, the required support depends on whether a product is "bought" (well known and demanded), or needs to be "sold" (unrecognized product, brand or need). The former benefit from distribution that is broad and deep, and don't require extensive in-store support. The latter are best served by more selective distribution through specialty stores with highly motivated, well-trained salespeople who can educate customers and close sales.
The third retail distribution strategy objective is to contain channel conflict.
Given that their prospective profitability is the primary reason that retailers carry products, projected profit margins and sales volume are critical variables.
On a macro basis, a product's inherent market value drives customer demand, and largely determines aggregate sales volume and average pricing.
On a more micro basis (i.e. from the perspective of a specific retailer), sales are a share of the total sales volume in a specific trading area and margins are a direct function of prevailing (or lowest prices) offered by competing retailers.
The implication is that the intensity of competition among retailers is a major driver of retailer support (or lack thereof). Invariably, as a product's distribution base is broadened (more accounts, stores, and types of stores are added), the likelihood of horizontal channel conflict increases. In most instances, horizontal channel conflict boils down to a question of economics: retailer profits are pushed below acceptable levels as a result of direct or indirect competitive behavior. As their economics deteriorate, retailers' support for a product understandably deceases.
Horizontal channel conflict is increasingly common in real life as companies attempt to reach different customer segments by utilizing multiple distribution channels (including direct from the manufacturer).
More specifically, when multiple channels are employed and distribution intensity increases, three profit threats may confront a retailer:
(1) Sales cannibalization: when a retailer loses sales to a newly authorized retailer
(2) Margin dilution: when aggressive retail competition drives retail prices down
(3) Customer diversion: when customers
get sold by one retailer,
but buy from another offering lower prices.
So, the dominating distribution objective, broadening market coverage (i.e. increasing customers' convenience), is somewhat at odds with the other two objectives - enlisting product support and avoiding channel conflict. While a company may want broad rather than selective distribution, and may want to attack different market segments though multiple channels of distribution, the stark reality is that intensive hybrid distribution may, if not very carefully managed, result in horizontal channel conflict, deteriorating retail economics, and eventual loss of critical retail-level product support.
Once the retail distribution strategy is set, the management focus shifts to distribution logistics (i.e. moving goods from the manufacturer, through any intermediaries, to the customer).
To achieve its strategic distribution objectives, a company may choose to use few layers of intermediaries (called short distribution channels), or relatively many layers (long distribution channels).
At one extreme, the shortest of channels is direct distribution, i.e. a customer places an order directly with the company, and the company ships the goods directly to customers.
At the other logistical extreme are long, highly intermediated distribution channels. For example a company may sell to a specialized distributor who sells to a wholesaler who sells to a retailer who sells to a final customer.
The rationale for intermediation can be quite compelling since:
- Intermediaries can add real value. Broadly speaking, intermediaries typically perform one or more of four basic functions: breaking large bulk quantities into smaller units (e.g. from truckloads to cases), modifying products, creating assortments, and batching orders.
- Intermediaries can materially improve distribution economics. From an economic perspective, a manufacturer may lack the scale, scope, systems or specialized knowledge required to perform all distribution activities effectively. And more broadly, manufacturers may have no practical choice but to engage intermediaries as a means of syndicating investment. It is financially prohibitive for many companies to own their entire worldwide distribution network, even if such structure would be strategically desirable.
- Intermediaries can develop extraordinarily deep market presence and customer relationships. Often, intermediaries have particularly keen market knowledge since they are closer to the market than manufacturers. Further, some customers prefer dealing with intermediaries since they simplify transaction interfaces (efficiency), offer a broad line of products (choice), and provide an apparently independent, customer-oriented perspective (impartial credibility). As a result, intermediaries often develop strong, leveragable relationships with customers that manufacturer's have difficulty replicating.
From a conceptual perspective, the decision as to where on the channel length continuum a company should operate depends on two key factors:
and nature of the value added services required to take a product
from the manufacturer to customers
effectiveness (cost and service quality) of alternative providers
of the services
More specifically, certain value-added logistics tasks must be performed to distribute a product. Once the necessary value-added activities are identified, the pivotal question is: who can most effectively perform the activities from both cost and quality perspectives - the company or third party intermediaries.
In many (bordering on most) instances, companies find that intermediaries (such as distributors) have better facilities, have specialized knowledge and processes, and have the relevant scale (an adequate volume of related products) to do a more efficient job on many value added activities. Accordingly, many companies are outsourcing distribution activities that they previously performed themselves, and many eCommerce companies that staked their futures on channel disintermediation (i.e. eliminating middlemen) are now history.
Managing a network of intermediaries is a formidable challenge, especially for long distribution channels.
From the logistical perspective, the process is called supply chain management (SCM). SCM's goal is to construct a chain of partners that optimizes cost and service quality as a system.
More specifically, there are four keys to effective supply chain management:
1. Smooth synchronization of activities, based on a clear delineation of roles, goals and responsibilities, and supported by technology-enabled processes for transactions and planning
that is tied to customer service expectations, including:
- Hassle-free order entry (prompt, user-friendly)
- High fill rates (available when ordered)
- Consistent cycle times (predicable order to receipt times)
- Dependable deliveries (on time, intact)
- Timely order tracking (real-time status)
- Accurate invoicing (right quantities and prices)
- Appropriate post-sales service (installation, returns, repairs)
compensation for services, recognizing that all high performance
supply chain partners are entitled to earn an acceptable return for the
value added services that they provide
4. Authentic commitment to partnership, recognizing that an efficient supply chain is a competitive necessity that is best achieved through "true" cooperative partnerships, and not the arm's length, adversarial relationships that have been historically prevalent
Distribution, which is arguably the least understood and most overlooked of the traditional marketing Ps (place), is fundamental to a companies' operational effectiveness, and is becoming central to many marketing strategies, driven in part by the electronic commerce revolution.