) is one of the four elements of marketing mix
. An organization or set of organizations (go-betweens) involved in the process of making a product or service available for use or consumption by a consumer or business user.
The other three parts of the marketing mix are product, pricing, and promotion.
The distribution channel
Frequently there may be a chain of intermediaries, each passing the product down the chain to the next organization, before it finally reaches the consumer or end-user. This process is known as the 'distribution chain' or the 'channel.' Each of the elements in these chains will have their own specific needs, which the producer must take into account, along with those of the all-important end-user.
A number of alternate 'channels' of distribution may be available:
- Selling direct, such as with an outbound salesforce or via mail order, Internet and telephone sales
- Agent, who typically sells direct on behalf of the producer
- Distributor (also called wholesaler), who sells to retailers
- Retailer (also called dealer or reseller), who sells to end customers
- Advertisement typically used for consumption goods
Distribution channels may not be restricted to physical products alone. They may be just as important for moving a service from producer to consumer in certain sectors, since both direct and indirect channels may be used. Hotels, for example, may sell their services (typically rooms) directly or through travel agents, tour operators, airlines, tourist boards, centralized reservation systems, etc.
There have also been some innovations in the distribution of services. For example, there has been an increase in franchising and in rental services - the latter offering anything from televisions through tools. There has also been some evidence of service integration, with services linking together, particularly in the travel and tourism sectors. For example, links now exist between airlines, hotels and car rental services. In addition, there has been a significant increase in retail outlets for the service sector. Outlets such as estate agencies and building society offices are crowding out traditional grocers from major shopping areas.
Distribution channels can thus have a number of levels. Kotler defined the simplest level, that a of direct contact with no intermediaries involved, as the 'zero-level' channel.
The next level, the 'one-level' channel, features just one intermediary; in consumer goods a retailer, for industrial goods a distributor. In small markets (such as small countries) it is practical to reach the whole market using just one- and zero-level channels.
In large markets (such as larger countries) a second level, a wholesaler for example, is now mainly used to extend distribution to the large number of small, neighborhood retailers or dealers.
In Japan the chain of distribution is often complex and further levels are used, even for the simplest of consumer goods.
In Bangladesh Telecom Operators are using different Chains of Distribution, especially 'second level'.
In IT and Telecom industry levels are named "tiers". A one tier channel means that vendors IT product manufacturers (or software publishers) work directly with the dealers. A one tier / two tier channel means that vendors work directly with dealers and with distributors who sell to dealers. But the most important is the distributor or wholesaler.
The internal market
Many of the marketing principles and techniques which are applied to the external customers of an organization can be just as effectively applied to each subsidiary's, or each department's, 'internal' customers.
In some parts of certain organizations this may in fact be formalized, as goods are transferred between separate parts of the organization at a `transfer price'. To all intents and purposes, with the possible exception of the pricing mechanism itself, this process can and should be viewed as a normal buyer-seller relationship. The fact that this is a captive market, resulting in a `monopoly price', should not discourage the participants from employing marketing techniques.
Less obvious, but just as practical, is the use of `marketing' by service and administrative departments; to optimize their contribution to their `customers' (the rest of the organization
in general, and those parts of it which deal directly with them in particular). In all of this, the lessons of the non-profit organizations, in dealing with their clients, offer a very useful parallel.
- Channel strategy
- Product (or service)<>Cost<>Consumer location
The channel decision is very important. In theory at least, there is a form of trade-off: the cost of using intermediaries to achieve wider distribution is supposedly lower. Indeed, most consumer goods manufacturers could never justify the cost of selling direct to their consumers, except by mail order.
Many suppliers seem to assume that once their product has been sold into the channel, into the beginning of the distribution chain, their job is finished. Yet that distribution chain is merely assuming a part of the supplier's responsibility; and, if he has any aspirations to be market-oriented, his job should really be extended to managing all the processes involved in that chain, until the product or service arrives with the end-user. This may involve a number of decisions on the part of the supplier:
- Channel membership
- Channel motivation
- Monitoring and managing channels
- Intensive distribution - Where the majority of resellers stock the 'product' (with convenience products, for example, and particularly the brand leaders in consumer goods markets) price competition may be evident.
- Selective distribution - This is the normal pattern (in both consumer and industrial markets) where 'suitable' resellers stock the product.
- Exclusive distribution - Only specially selected resellers or authorized dealers (typically only one per geographical area) are allowed to sell the 'product'.
It is difficult enough to motivate direct employees to provide the necessary sales and service support. Motivating the owners and employees of the independent organizations in a distribution chain requires even greater effort. There are many devices for achieving such motivation. Perhaps the most usual is `incentive': the supplier offers a better margin, to tempt the owners in the channel to push the product rather than its competitors; or a competition is offered to the distributors' sales personnel, so that they are tempted to push the product. Dent
defines this incentive as a Channel Value Proposition
or business case, with which the supplier sells the channel member on the commercial merits of doing business together. He describes this as selling business models not products.
Monitoring and managing channels
In much the same way that the organization's own sales and distribution activities need to be monitored and managed, so will those of the distribution chain.
In practice, many organizations use a mix of different channels; in particular, they may complement a direct salesforce, calling on the larger accounts, with agents, covering the smaller customers and prospects.
- Richard E. Wilson, 'A Blueprint for Designing Marketing Channels', (www.chicagostrategy.com, 2008)
- Julian Dent, "Distribution Channels: Understanding and Managing Channels to Market" (Kogan Page, 2008)
- William D. Perreault, Jr. et al, 'Basic Marketing: A Marketing Strategy Planning Approach', (McGraw-Hill, 16th ed., 2008)
- Louis W. Stern et al, 'Marketing Channels', (Prentice-Hall, 7th ed., 2006)
- P. Kotler, 'Marketing Management' (Prentice-Hall, 7th ed., 1991)
- G. Lancaster and L. Massingham, 'Essentials of Marketing' (McGraw-Hill, 1988)
Specific types of distribution