Business Marketing Channels of Distribution

Business Marketing Channel Members

• Channel members: –A set of independentindependent companies–that form cooperativecooperative 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 productNew or innovative productTechnically sophisticated productSignificant missionary selling is requiredRequire 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 Benefits1. 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 Benefits1. 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 DistributorsGeneral-line Distributors

• Cater to broad array of industrial needs• Stock extensive variety of products

– SpecialistsSpecialists• Focus on one line or a few related lines

– Combination HouseCombination 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 PoweroExpertiseoInformationoIdentification

“Hard” Bases of PoweroRewardoCoercion oLegitimate