Tag: Place

Is Distribution Part of Your Marketing Strategy?

When I see many organisations defining their marketing activity, I find that their definition is often limited to two areas, Promotion; and the incorrect definition of marketing as sales.

As I have discussed in previous blog entries, marketing strategy involves a far wider mix of subject matter.  The extended marketing mix has seven elements which affect all aspects of your business; Product, Price, Promotion, Place, People, Process and Physical Evidence.

When you consider distribution, you are dealing with the fourth of those elements, Place.  If you are a retailer place would include the location of your shop premises.  But the vast majority of businesses are not retailers.  For them Place has a different definition.  For non-retail businesses Place refers to distribution and supply networks.  It is the relationships you develop with suppliers, logistics firms, wholesalers and retail chains such as supermarkets and department stores.

Often achieving commercial success isn’t only about the relationship you have with consumers; the end users of your products and services; but about how frictionless and efficient are your distribution channels.  That is why such channels are often called ‘marketing channels’.

Good distribution channels and strategies can contribute strongly to developing strong links with your customers and help build your competitive advantage.  Distribution channels are an important part of your value delivery network.

To build strong distribution channels you need to build strong relationships with key suppliers and resellers.  This extends marketing functionality beyond your customer base.

Marketing channels include your upstream and downstream partners, your suppliers, your logistics contractor, your wholesalers and your retailers.  Your downstream partners are the vital link between your firm and your consumers.

The term supply chain is limited.  It implies that raw materials, production inputs and factory capacity should be the starting point for marketing activity.  Many businesses decided to use the term demand chain instead.  It was felt that demand chain was a better fit to the serve and respond view of markets.  It emphasised the process of identifying consumer needs and the response of producing a chain of resources and activities which produce customer value.

However, today the term demand chain is also seen as limiting.  It limits marketing channels to a step-by-step linear model of purchase, produce and consume.  The term now used to define distribution channels is Value Delivery Network: a network of suppliers, distributors and ultimately customers who partner to improve performance of the entire system in delivering sustainable customer value.

Few manufacturers sell goods directly to the end consumer. Although direct sales are more common in industrial markets and increasingly thanks to the internet.  In the majority of markets, manufacturers need to develop strong and reliable channels as the effectiveness of their distribution activity will affect every other aspect of their marketing mix.  Pay too little attention to your distribution channel and your distribution partners and you can cripple your business.

Your distribution network will be affected by retailers.  You will have different distribution arrangements and expectations if you work with discount retailers compare to working with luxury retailers.  These differences will affect the price of your products.

Innovative distribution can create strong competitive advantage.  Why do you think Amazon is investing in drone technology and truck manufacturers are looking at self-driving and convoy vehicles?

Creating strong distribution channels takes long-term commitment.  It is far easier to adapt your product range or to change your promotional strategy than to build strong distribution channels.  Building reliable channels cannot be done overnight.  Channels have to be built not only with regard to current practices but with one eye on the future.

So how do strong marketing and distribution channels add value?

  1.  Information:  Your distributors and resellers are critical to the gathering and distribution of marketing information.  They are the direct contact between your firm and your consumers, your competitors and other market actors.  Their knowledge of market forces are critical to business planning and exchange.
  2. Promotion: Your distribution partners are often a crucial messenger for developing and spreading persuasive communications about your products and offers
  3. Contact:  Your distribution network are a good way to find and communicate with prospective buyers.
  4. Matching:  Distributors can help to develop your products to meet customer expectations through activities such as packing and product bundling.  They may be involved in the assembly of your products e.g. most cycle shops need to  part assemble and test a bicycle before it can be ridden by the customer.
  5. Negotiation:  Often members of your distribution channel are given the ability to negotiate with customers on issues such as price and timescales for delivery.  They allow ownership and possession of products to be transferred.  Remember, in law, a price indication is an invitation to treat, not a contractual offer.
  6. Physical Distribution:  Obviously, your distributors are responsible for the physical movement of goods and components.
  7. Financing:  Often your distribution partners are crucial in acquiring and raising funds to cover the cost of the channel.
  8. Risk-Taking:  Often the risk of carrying out the distribution network is, in full or in part, transferred to the distribution partner from the business core e.g. in franchise models.  Often critical decisions need to be made as to who carries out certain distribution channel activities.  It is a question of who carries out that work, not that the work needs to be done.  The shifting of tasks from a manufacturer to intermediaries can lower costs and increase profitability.  Channel intermediaries may have more technical expertise than a manufacturer.  Distribution channel partners may increase your productivity and efficiency trough their knowledge and resources.

The following factors must be taken into consideration when selecting distribution channels:

  1.  Market Factors:  Your buyers may expect your products to be sold in a particular way.  A failure to meet buyer expectations through the way you organise distribution will have serious consequences for your business.  Often consumers need product information such as technical specifications and installation advice.  Often the provision of this information is the responsibility of channel intermediaries.
  2. Geographic Location:  Are you remote from your customers.  Do you need to employ territory agents to sell and distribute your products in distant locations?
  3. Producer Factors:  Do you lack the resources to carry out all channel functions?  Do you have the finances, skills and other resources?  Do you make a wide range of products that means distribution activity can be brought in-house?  Or do you make a single product and therefore rely on others as direct distribution is cost ineffective?  How much control do you want or need over your distribution channel?  Levi’s jeans are a good example.  Levi’s has very tight control over the distribution and reselling of their clothing.  they even control how their products are displayed on the shop floor and the type of retailer they want to sell their products.  The retailer is part of Levi’s brand image.  As a result, Levi’s fought a long legal battle with Tesco over the supermarket chain’s purchase of ‘parallel import’ clothing for sale in its supermarket.  If you make hazardous or bulky products you may have no option but to develop direct distribution to end users.  Retailers may not want to stock your products as they are difficult to display.
  4. Competitive Factors:  You may operate in a market sector where your competitors own or control the major distribution channels, through vertical integration or market power.  Often you may have to disrupt the distribution channels through the use of alternative technology.  Much of the disruptor activity is driven by new distribution technologies.  We live in the age of the digital download and soon 3-D printers will be common domestic appliances.  My father recently needed a small plastic plumbing part for a DIY repair.  He bought it over the internet.  In a few years time he will purchase the computer code for the component and print the part himself.

Distribution channels are a critical part of your marketing strategy and planning.  They should be a central part of your SMART marketing objectives.

 

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.