Distribution Channels: The Place Element of the Marketing Mix

One definition of marketing is as the process of developing profitable customer relationships.  The process of marketing has a dual role; to attract new customers through promoting superior value; and to retain existing customers by delivering satisfaction.  Marketing is about delivering on your promises to create competitive advantage.

Good distribution channels (now more often described as marketing channels); the place element of the marketing mix; can be a strong contributory factor to the delivery of both competitive advantage and customer value.

We live in a world where it is highly unusual for manufacturers of goods and services to sell directly to their end consumers.

Even SMEs who sell over the internet have to deal with channel intermediaries.  You have to have a relationship with your internet service provider; you may sell through online portals such as Amazon or EBay; you may receive payment through services such as PayPal; and, of course you have to rely on logistics firms such as Yodel and Royal Mail to get your products delivered.

Successful manufacturing companies do not only need to build relationships with consumers; they need to build relationships with the members of your supply and distribution chain.  You need to build upstream relationships with your suppliers (supply chain relationships) as well as downstream relationships with distributors, wholesalers and retailers (your demand chain).

Many organisations have abandoned the terms supply chain and demand chain.  Instead they use the term Value Delivery Network.  This creates a sense that all parties within the network are working to a common goal and are all contributing to the delivery of customer value.

In making products and services readily available to consumers, members of marketing channels often perform key functions.  Without their contribution to the delivery of goods and services, transactions would never be completed.

Channel members provide:

  1. Information – about consumers, competitors and other stakeholders which allows manufacturers to plan and which aids exchange.
  2. Promotion – developing and spreading positive messages about your offer.
  3. Contact – finding and communicating with potential buyers
  4. Matching – shaping offers to meet buyer’s needs including activities such as assembly, packaging and grading.
  5. Negotiation  – reaching agreements with consumers on price and other terms so that ownership and possession of products can be transferred.

These functions are in addition services such as physical distribution and financing.  They also mean that aspects of risk can be spread across the channel.

A conventional marketing channel consists of one or more independent organisations such as suppliers, wholesalers and retailers each of which is a separate business seeking to maximise their profit margins.  Often, the desire of these organisations to maximise their profits overshadows the need for the chain as a whole to be profitable.

In the UK, dairy farmers have had a long dispute with supermarket chains over the price of milk. They argue that the supermarkets are maximising their profits by paying wholesale milk prices which are below the cost of production.  This, argue the farmers, is making dairy-farming unprofitable and is putting their businesses at risk.

Some producers have therefore chosen to set up vertical marketing systems.  A VMS is where Producers, Wholesalers and Retailers work together and act as a unified system. Often the channel is wholly owned by one organisation but a VMS can be contractual or imposed by the power of one participant who can force other channel members to participate.

An example of a vertical marketing system is the franchise opportunities operated by MacDonald’s and other fast food chains.  Many fast food restaurants are independently run businesses badged with the chains identity.  It is MacDonald’s who control virtually all the aspects of the business; from the restaurant layout to the food served. The franchisee takes a share of the profits but has to take much of the business risk.

An example of a wholly owned vertical marketing system is how milk used to be delivered in the UK. Companies such as Associated Dairies used to own the dairy farms, the creameries and controlled the milk floats which delivered the bottles of milk to the doorstep.  Associated Dairies became the supermarket chain Asda.

Macdonald’s franchises are an example of a contractual VMS.

An administered vertical marketing system is where cooperation is achieved through market power.  For example Kraft Foods have enough power in the market they can control where in the supermarket and how their products are displayed. Similarly, cosmetics firms closely control how their goods are displayed in department stores and often don’t allow retailers to restock displays; instead they send in their own staff to undertake that role.

Horizontal marketing systems are where two or more companies join together to follow a new marketing opportunity.  It is the creation of a marketing channel through partnership.

An example of a horizontal marketing system from America is the partnership deal between Wal-Mart and MacDonald’s.  Wal-Mart allowed Macdonald’s to set up express outlets in their supermarkets.  Macdonald’s get to take advantage of Wal-Mart’s high levels of customer foot fall and Wal-Mart get a food outlet to feed hungry shoppers.

Some businesses use multi-channel marketing.  This is where a combination of traditional, vertical and horizontal marketing channels are used in consort.

As we have seen, MacDonald’s are one such company, they own their own restaurants (direct marketing channel);  they offer franchises (a contractual vertical marketing system); and they have a partnership deal with Wal-Mart (a horizontal marketing system).

Many SMEs may be unwittingly using multi-level marketing.  I know of one jewellery designer who sells over the net, runs pop-up shops, attends craft fairs and has a deal with a local family jewellery shop to sell her wares.  She has direct marketing, vertical marketing and horizontal marketing system in place to distribute her goods.

When deciding how you are going to distribute your goods, it is worth planning your marketing channels in a way which maximises value and which offers the most in terms of competitive advantage to your business.