TYPES AND FUNCTIONS OF DISTRIBUTION
WHAT IS DISTRIBUTION?
In marketing, distribution is the process of moving a product from its manufacturing source to its customers. It is the movement of goods and services from the source through a distribution channel, right up to the final customer, consumer, or user.
According to Agbonifoh et al (2007), distribution is one of the elements of the marketing mix and one of the four Ps. The aim of distribution is to get goods and services from the point of production, to the point of consumption. This involves not only the physical movement and handling of products, but the transfer of ownership as well. It is often said quite rightly, that production remains incomplete until the goods or services concerned reach the consumer.
In the opinion of Kotler/Keller (2006) most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions. These intermediaries constitute a marketing channel (also called a trade channel or distribution channel or middlemen). Formally, marketing channels are sets of interdependent organizations or middlemen involved in the process of making a product or service available for use or consumption.
TYPES OF DISTRIBUTION
For marketers the choice of distribution design comes down to the following options:
1. Direct Distribution
2. Indirect Distribution
3. Multi-Channel or Hybrid Distribution
With a direct distribution system the marketer reaches the intended final user of their product by distributing the product directly to the customer. That is, there are no other parties involved in the distribution process that take ownership of the product. The direct system can be further divided by the method of communication that takes place when a sale occurs.
With an indirect distribution system the marketer reaches the intended final user with the help of others. These resellers generally take ownership of the product, though in some cases they may sell products on a consignment basis (i.e., only pay the supplying company if the product is sold. Under this system intermediaries may be expected to assume many responsibilities to help sell the product.
Multi-Channel (Hybrid) Distribution
In cases where a marketer utilizes more than one distribution design the marketer is following a multi-channel or hybrid distribution system. Some companies follow this approach as their distribution design includes using a direct retail system by selling in company-owned stores, a direct marketing system by selling via direct mail, and a single-party selling system by selling through grocery stores (they also use other distribution systems).
The multi-channel approach expands distribution and allows the marketer to reach a wider market, however, the marketer must be careful with this approach due to the potential for channel conflict.
TYPES OF INTERMEDIARIES (DISTRIBUTORS)
Channel activities may be carried out by the marketer or the marketer may seek specialist organisations to assist with certain functions. The types of middlemen commonly used by marketers are: Wholesalers, Retailers, Agents and Brokers.
Wholesaling in the opinion of Kotler/Keller (2006) includes all the activities involved in selling goods or services to those who buy for resale or business use. Wholesaling exclude manufacturers and farmers because they are engaged primarily in production, and it excludes retailers.
Wholesalers (also called distributors) differ from retailers in a number of ways. First, wholesalers pay less attention to promotion, atmosphere, and location because they are dealing with business customers rather than final customers. Second, wholesale transactions are usually larger than retail transactions, and wholesalers usually cover a larger trade area than retailers. Third, the government deals with wholesalers and retailers differently in terms of legal regulations and taxes.
Wholesaling according to Evans et al, (1994) involves the buying and/or handling of goods and services and their subsequent resale to organizational users, retailers, and/or other wholesalers but not the sale of significant volume to final consumers. Wholesaling undertake many vital functions in a channel of distribution, particularly those in the sorting process.
Retailing, according to Boone and Kurtz, (1995) may be defined as all of the activities involved in the sale of goods and services to the ultimate consumer. Although most retail sales occur in retail stores, the definition of retailing also includes several forms of nonstore retailing, which involves such activities as orders placed via home computers, telephone and mail-order sales, vending machine sales, and direct selling.
The retail outlets continue to serve as contact points between channel members and the ultimate consumer. In a very real sense retailers are the distribution channel for most consumers, since the typical shopper has little contact with manufacturers and virtually none with wholesaling intermediaries.
Generally, retailers determine location, store hours, quality of salespeople, store layout, product selection, and return policies – factors that often influence the image consumers hold of a product more strongly than the item itself. Both large and small retailers perform the major channel activities creating time, place, and ownership utilities.
Brokers and agents
Brokers and Agents facilitate buying and selling on commission basis. They perform limited functions; generally specialize by product line or customer type. Brokers bring buyers and sellers together and assist in negotiation; paid by the party hiring them. Examples are food brokers, real estate brokers, insurance brokers. Agents represent buyers or sellers on a more permanent basis.
Most manufacturers’ agents are small businesses, with a few skilled salespeople: Selling agents have contractual authority to sell a manufacturer’s entire output; purchasing agents make purchases for buyers and often receive, inspect, warehouse, and ship merchandise; commission merchants take physical possession of products and negotiate sales.
CHANNELS OF DISTRIBUTION
A distribution channel according to Jim Riley (2012) can have several stages depending on how many organisations are involved in it.
Channel 1 contains two stages between producer and consumer – a wholesaler and a retailer. A wholesaler typically buys and stores large quantities of several producers’ goods and then breaks into bulk deliveries to supply retailers with smaller quantities. For small retailers with limited order quantities, the use of wholesalers makes economic sense.
Channel 2 contains one intermediary. In consumer markets, this is typically a retailer. The consumer electrical goods market is typical of this arrangement whereby producers such as Sony, Panasonic, Canon etc sell their goods directly to large retailers which then sell onto the final consumers.
Channel 3 is called a “direct-marketing” channel, since it has no intermediary levels. In this case the manufacturer sells directly to customers. An example of a direct marketing channel would be a factory outlet store. Many holiday companies also market direct to consumers, bypassing a traditional retail intermediary – the travel agent.
FUNCTIONS OF DISTRIBUTION CHANNELS
Marketing intermediaries such as wholesalers, retailers, brokers and agents perform many functions. Some of the functions are:
Intermediaries are at the front line when it comes to creating demand for the marketer’s product. In some cases resellers perform an active selling role using persuasive techniques to encourage customers to purchase a marketer’s product. In other cases they encourage sales of the product through their own advertising efforts and using other promotional means such as special product displays.
Distribution intermediaries can play a vital role in marketing research. Due to their closeness to the market, they generally have good insights into the characteristics and needs of customers and can therefore provide relevant information about them.
When assigning promotion roles, manufacturers and service organisations often take care of national (international) advertising. Wholesalers may help coordinate local promotions among retailers and sometimes motivate and train retailer sales staffs. Most retailers undertake local advertising, personal selling, and special events.
Customer services include delivery, credit, in-office and in-home purchases, training programs, warranties and guarantees, and return privileges. Again, these services can be provided by one channel member or a combination of channel members.
Distribution intermediaries can contribute to product planning in several ways. They often provide advice on new and existing products. Test marketing requires their cooperation. Intermediaries can be quite helpful in properly positioning products against competitors and suggesting which products to delete.
Wholesalers and retailers usually have strong input into pricing decisions. They stipulate their required markups and generally prefer to price mark merchandise (or to specify how it should be marked). Intermediaries thus have great flexibility in setting final prices.
Intermediaries often provide programs that enable customers to more easily purchase products by offering financial programs that ease payment requirements. These programs include allowing customers to: purchase on credit; purchase using a payment plan; delay the start off payments; and allowing trade-in or exchange options.
CHOICE OF DISTRIBUTION CHANNELS
An entrepreneur has to choose a suitable channel of distribution for his product such that the channel chosen is flexible, effective and consistent with the declared marketing policies and programmes of the firm. While selecting a distribution channel, the entrepreneur should compare the costs, sales volume and profits expected from alternative channels of distribution and take into account the following factors:-
The type and the nature of products manufactured is one of the important elements in choosing the distribution channel. The major product related factors are:-
Products of low unit value and of common use are generally sold through middlemen. Whereas, expensive consumer goods and industrial products are sold directly by the producer himself.
Perishable products; products subjected to frequent changes in fashion or style as well as heavy and bulky products follow relatively shorter routes and are generally distributed directly to minimise costs.
Industrial products requiring demonstration, installation and after sales service are often sold directly to the consumers. While the consumer products of technical nature are generally sold through retailers.
An entrepreneur producing a wide range of products may find it economical to set up his own retail outlets and sell directly to the consumers. On the other hand, firms producing a narrow range of products may distribute their products through wholesalers and retailers.
A new product needs greater promotional efforts in the initial stages and hence few middlemen may be required.
Another important factor influencing the choice of distribution channel is the nature of the target market. Some of the important features in this respect are:-
If the market for the product is meant for industrial users, the channel of distribution will not need any middlemen because they buy the product in large quantities. While in the case of the goods meant for domestic consumers, middlemen may have to be involved.
If the number of prospective customers is small or the market for the product is geographically located in a limited area, direct selling is more suitable. While in case of a large number of potential customers, use of middlemen becomes necessary.
If the customers place order for the product in big lots, direct selling is preferred. But, if the product is sold in small quantities, middlemen are used to distribute such products.
There are several other factors that an entrepreneur must take into account while choosing a distribution channel. Some of these are as follows:-
A new business firm may need to involve one or more middlemen in order to promote its product, while a well established firm with a good market standing may sell its product directly to the consumers.
A small firm which cannot invest in setting up its own distribution network has to depend on middlemen for selling its product. On the other hand, a large firm can establish its own retail outlets.
The distribution costs of each channel are also an important factor because it affects the price of the final product. Generally, a less expensive channel is preferred. But sometimes, a channel which is more convenient to the customers is preferred even if it is more expensive.
If the demand for the product is high, more number of channels may be used to profitably distribute the product to maximum number of customers. But, if the demand is low only a few channels would be sufficient.
The nature and the type of the middlemen required by the firm and its availability also affects the choice of the distribution channel. A company prefers middlemen who can maximise the volume of sales of their product and also offers other services like storage, promotion as well as after sale services. When the desired types of middlemen are not available, the manufacturer will have to establish his own distribution network.
All these factors or considerations affecting the choice of a distribution channel are inter-related and interdependent. Hence, an entrepreneur must choose the most efficient and cost effective channel of distribution by taking into account all these factors as a whole in the light of the prevailing economic conditions. Such a decision is very important for a business to sustain long term profitability.
Distribution is one of the elements of the marketing mix and one of the four Ps. The aim of distribution is to get goods and services from the point of production, to the point of consumption. This involves not only the physical movement and handling of products, but the transfer of ownership as well. It is often said quite rightly, that production remains incomplete until the goods or services concerned reach the consumer.
The choice of distribution design comes down to the following options: Direct Distribution Systems, Indirect Distribution Systems, Multi-Channel or Hybrid Distribution Systems.
The types of middlemen commonly used by marketers are: Wholesalers, Retailers. Agents and Brokers.
Channel functions include:
Mainly, the choice of channels depends on: Product considerations and Market considerations. Others are: distribution costs, demand for the product, nature and type of middlemen, etc.