Business Marketing Channels of Distribution

Business Marketing Channel Members Channel members: independent –A set of independent companies cooperative –that form cooperative buyer-seller relationships –involving transactions (such as raw materials, components, process materials, & finished goods for resale), –all leading to getting a particular product line to the final user.

Channels Can Create Efficiency V1 V2 V3 V4 C1 C2 C3 C4 C1 C2 C3 C4 V1 V2 V3 V4 RS Direct: V x C transactions Via Reseller: V + C transactions V = Vendors; C=Customers; RS=Reseller Rationale for Channel Design

Do Middlemen Cause Increases in Consumer prices? Yes –If not adding value to product offering No –If adding value thru creation of utilities Form Time Place Possession

Functions of the Channel Intermediary BuyingBuying: –Intermediary buys products for resale to other intermediaries or to final business users. SellingSelling: –Intermediary with capable sales force supported by established warehouse distribution centers, which is already serving other product needs of a wide user customer base. (continued)

Functions of the Channel Intermediary StoringStoring: –Inventory commitment composed of products to satisfy customer purchase requirements in a timely manner. TransportingTransporting: –Vast array of transportation alternatives are available for intermediaries to use to manage the physical flow of the product to the business user. (continued)

SortingSorting: –Many intermediaries buy in large quantities and then Breaking the bulk of the shipments into smaller lots Typically sort into combinations for resale to business users. FinancingFinancing: –Intermediaries may provide credit terms and/or, finance the exchange process. Functions of the Channel Intermediary (continued)

Risk takingRisk taking: –Risk of ownership includes Obsolescence Deterioration Uncollectable customer accounts. Providing market informationProviding market information: –Continuous & accurate flow of market information necessary concerning final user needs pricing conditions competitive conditions user satisfaction Functions of the Channel Intermediary

1.Number of levels to be included in the channel. 2.Types of intermediaries to employ. 3.Number of channel intermediaries. 4.Number of channels to employ. Channel Alternatives Issues

Basic Channel Options Direct Channel of DistributionDirect Channel of Distribution –Producer sells directly to the user –Accounts for roughly 70% of all B2B transactions Indirect Channel of DistributionIndirect Channel of Distribution –At least one intermediary (middleman) exists in the channel between the producer and the user

Rockwell Automation Inc. Direct distribution Indirect distribution BMW (car image courtesy of BMW USA) (continued)

 Highly customized product  New or innovative product  Technically sophisticated product  Significant missionary selling is required  Require control over selling function (or any 4 P element)  Buyers geographically concentrated Direct Sales Viable When:

 Product requires local stock  Small product line; unable to support direct sales  Generic product  Low unit value product  Product in PLC decline stage  Customers widely dispersed  Local repackaging, sizing, or fabrication required  Many small-volume buyers  Extensive sales effort required  Sales effort directed at buying professionals  New competition entering market  Competition uses distributors  Customers prefer distributors Indirect Sales Viable When:

Distributors Serve Buyers & Sellers Seller Benefits 1.Buy & Hold inventory 2.Combine supplier outputs (reduce discrepancy of assortment) 3.Share credit risk 4.Share selling risk 5.Forecast market needs 6.Provide market info Buyer Benefits 1.Provide fast delivery 2.Provide market segment- based product assortment 3.Provide local credit 4.Provide product info 5.Assist buying decisions 6.Anticipate needs

Distributors Full-service intermediaries –Take title to the products they sell –Perform full range of marketing functions –Compensated by their profit margins Classification of Distributors –General-line Distributors Cater to broad array of industrial needs Stock extensive variety of products –Specialists Focus on one line or a few related lines –Combination House Operates in 2 markets: industrial and consumer

Manufacturers’ Representatives Do not take title to products Do not hold inventory of products Usually limited to defined geographic areas Typically represent several companies in the same geographic area –Sell noncompeting, but complementary products Compensated on commission basis

Sales Branches Part of manufacturer’s organization Can be on-site or off Typically do not carry inventory Role is to sell organization’s products

Sales Agents & Brokers Do not take title to products Do not hold inventory of products Usually no limit on geographic areas May represent several companies in the same geographic area –Sell competing products Compensated on commission basis

Channel Transaction Facilitators Do not take title Do not carry inventory Services such as –Storage –Transportation –Arranging of sales –Finance Include –Independent Warehouses –Carriers –Manufacturer’s Representatives –Financial Institutions

Channel Conflict Channel conflict may result when channel members have mutually exclusive values, interests, or goals. –Manufacturers may want control of distribution channels for better execution of their marketing strategies. –Intermediaries may not see the manufacturer- determined strategies as in their best interest. The Key to remember: –Channel conflict cannot be fully eliminated –It can be properly managed

Bases of Power in Marketing Channels  “Soft” Bases of Power o Expertise o Information o Identification  “Hard” Bases of Power o Reward o Coercion o Legitimate