4.5. Place

Subject Content

The importance of place in the marketing mix
The effectiveness of different types of distribution channels

4.5. Place (Distribution)

Importance of Place in the marketing mix

Place deals with how the product is distributed and how it reaches the customers:

a. Channel: zero level distribution is where the organization sells directly to the customer; in one level distribution, the organization sells to a retailer, who sells to the customer; two level distribution involves the organization selling to a wholesaler who in turn sells to the retailer.

b. Logistics: the speed of delivery is an important issue in place.

Place

Explain the components of an organisation's place mix

The 'Marketing mix' describes the different kinds of choice organisations have to make in the whole process of bringing a product or service to market. The 4 Ps is one way of defining the marketing mix in terms of Product or service, Price, Promotion and Place.

The place mix represents one element in an organisation's overall marketing mix. Place refers to the means by which customers acquire a company’s goods or services. Place therefore includes:

· The actual place the product is purchased. This might be a shop, a specialist store, a Supermarket, factory outlet, retail market, etc.);

· Purchases made remotely either by telephone, or through cyberspace (in the case of on-line purchases);

· The use of sales personnel interacting with potential customers.

Place also includes the mechanism and logistics through which goods are moved from the manufacturer to the consumer and so includes the actual route of distribution.

Task 1: Question on Place

5NX is a growing regional company that has successfully used local radio advertising to raise awareness of its products. The company supplies fresh 'quality' sandwiches, home baked snacks, the finest coffee and freshly squeezed fruit juices for sale at relatively high prices in petrol filling stations. Products are produced by traditional methods from very early morning by a team of employees at a central depot and are delivered throughout the day by temporary workers in a fleet of company vehicles. Drivers bring back order sheets at the end of a shift for future deliveries to be scheduled. Invoicing for payment takes place sometime afterwards.

5NX is, for the first time, undertaking a full strategic marketing planning process in conjunction with a local business advisor. So far, limited market research, financial projections and a SWOT (strengths, weaknesses, opportunities, threats) analysis have been prepared. One weakness already identified as part of the SWOT analysis is that the number of deliveries required is increasing, while some of the drivers are becoming unreliable. The owner is worried that this may create a poor image with customers and lead to delays in delivery. She is also interested in two opportunities that have emerged from the planning process:

• The use of time saving food preparation and packaging equipment. This will mean considerably fewer people being involved in food preparation but some employees could be redeployed as drivers on a permanent basis.

• In addition to making deliveries, drivers could get direct feedback from customers, persuade petrol stations to take new product lines and provide intelligence on competitors' products. If time allows they could also leave promotional brochures with staff at other petrol stations and outlets (such as railway stations and newspaper shops) in the hope of future business.

The business advisor has suggested that the owner captures the elements of 5NX's marketing mix for incorporation into its marketing plan.

(a) Outline 5NX’s place/distribution strategy

The effectiveness of different types of distribution channels

Marketing Channels

A channel of distribution or trade channel is defined as the path or route along which goods move from producers or manufacturers to ultimate consumers or industrial users. In other words, it is a distribution network through which producer puts his products in the market and passes it to the actual users. This channel consists of: - producers, consumers or users and the various middlemen like wholesalers, selling agents and retailers (dealers) who intervene between the producers and consumers. Therefore, the channel serves to bridge the gap between the point of production and the point of consumption thereby creating time, place and possession utilities.

A channel of distribution consists of three types of flows:-

Downward flow of goods from producers to consumers
Upward flow of cash payments for goods from consumers to producers
Flow of marketing information in both downward and upward direction i.e. Flow of information on new products, new uses of existing products, etc from producers to consumers. And flow of information in the form of feedback on the wants, suggestions, complaints, etc from consumers/users to producers.

An entrepreneur has a number of alternative channels available to him for distributing his products. These channels vary in the number and types of middlemen involved. Some channels are short and directly link producers with customers. Whereas other channels are long and indirectly link the two through one or more middlemen.

These channels of distribution are broadly divided into four types:-

Producer-Customer:- This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is fast and economical channel of distribution. Under it, the producer or entrepreneur performs all the marketing activities himself and has full control over distribution. A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial products of high value. Small producers and producers of perishable commodities also sell directly to local consumers.
Producer-Retailer-Customer:- This channel of distribution involves only one middlemen called 'retailer'. Under it, the producer sells his product to big retailers (or retailers who buy goods in large quantities) who in turn sell to the ultimate consumers. This channel relieves the manufacturer from burden of selling the goods himself and at the same time gives him control over the process of distribution. This is often suited for distribution of consumer durables and products of high value.
Producer-Wholesaler-Retailer-Customer:- This is the most common and traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally sell the product to the ultimate consumers. This channel is suitable for the producers having limited finance, narrow product line and who needed expert services and promotional support of wholesalers. This is mostly used for the products with widely scattered market.
Producer-Agent-Wholesaler-Retailer-Customer:- This is the longest channel of distribution in which three middlemen are involved. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents. The agents distribute the product among a few wholesalers. Each wholesaler distribute the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products.

An entrepreneur has to choose a suitable channel of distribution for his product such that the channel chosen is flexible, effective and consistent with the declared marketing policies and programmes of the firm. While selecting a distribution channel, the entrepreneur should compare the costs, sales volume and profits expected from alternative channels of distribution and take into account the following factors:-

Product Consideration:- The type and the nature of products manufactured is one of the important elements in choosing the distribution channel. The major product related factors are:-
- Products of low unit value and of common use are generally sold through middlemen. Whereas, expensive consumer goods and industrial products are sold directly by the producer himself.
- Perishable products; products subjected to frequent changes in fashion or style as well as heavy and bulky products follow relatively shorter routes and are generally distributed directly to minimise costs.
- Industrial products requiring demonstration, installation and after sale service are often sold directly to the consumers. While the consumer products of technical nature are generally sold through retailers.
- An entrepreneur producing a wide range of products may find it economical to set up his own retail outlets and sell directly to the consumers. On the other hand, firms producing a narrow range of products may their products distribute through wholesalers and retailers.
- A new product needs greater promotional efforts in the initial stages and hence few middlemen may be required.
Market Consideration:- Another important factor influencing the choice of distribution channel is the nature of the target market. Some of the important features in this respect are:-
- If the market for the product is meant for industrial users, the channel of distribution will not need any middlemen because they buy the product in large quantities. While in the case of the goods meant for domestic consumers, middlemen may have to be involved.
- If the number of prospective customers is small or the market for the product is geographically located in a limited area, direct selling is more suitable. While in case of a large number of potential customers, use of middlemen becomes necessary.
- If the customers place order for the product in big lots, direct selling is preferred. But, if the product is sold in small quantities, middlemen are used to distribute such products.
Other Considerations:- There are several other factors that an entrepreneur must take into account while choosing a distribution channel. Some of these are as follows:-
- A new business firm may need to involve one or more middlemen in order to promote its product, while a well established firm with a good market standing may sell its product directly to the consumers.
- A small firm which cannot invest in setting up its own distribution network has to depend on middlemen for selling its product. On the other hand, a large firm can establish its own retail outlets.
- The distribution costs of each channel are also an important factor because it affects the price of the final product. Generally, a less expensive channel is preferred. But sometimes, a channel which is more convenient to the customers is preferred even if it is more expensive.
- If the demand for the product is high, more number of channels may be used to profitably distribute the product to maximum number of customers. But, if the demand is low only a few channels would be sufficient.
- The nature and the type of the middlemen required by the firm and its availability also affect the choice of the distribution channel. A company prefers a middleman who can maximise the volume of sales of their product and also offers other services like storage, promotion as well as after sale services. When the desired type of middlemen is not available, the manufacturer will have to establish his own distribution network.

All these factors or considerations affecting the choice of a distribution channel are inter-related and interdependent. Hence, an entrepreneur must choose the most efficient and cost effective channel of distribution by taking into account all these factors as a whole in the light of the prevailing economic conditions. Such a decision is very important for a business to sustain long-term profitability.

Marketing channels of distribution

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Effectiveness of distribution channels

The effectiveness of different types of distribution channel

Direct marketing is where the goods are sold directly from the product direct to the customer. A producer does not have to share its profit with intermediaries and so it is a low cost channel. The producer controls the whole marketing process and as a result can protect and maintain its brand image. Customers are increasingly using direct sales though the Internet and can purchase from the comfort of their own home

However, it can be expensive to set up these channels and all the cost of distribution such as storage and damage rest on the producer. In addition, a recent trend is for customers to search online for products and then purchase them physically from outlets after making comparisons on price.

Wholesaler

A wholesaler is normally an intermediary between the producer and the retailer; although some wholesalers have their own outlets. Wholesalers are prepared to buy in considerable bulk from a producer. They break bulk by distributing smaller quantities to individual retailers. Goods are normally stored in regional warehouses where they are distributed using the wholesaler's vehicles to retailers.

Wholesalers, like major retailers, may have international networks and distribute worldwide. Examples of multinational wholesalers are Makro and Costco.

The advantage for a producer of using a wholesaler is that the wholesaler will:

store the producer's output so freeing up space for new products
improve the producer's cash flow by purchasing in bulk
market the products to retailers
bear the cost of storage
bear the risk of storage such as theft, fire and damage
ensure that the distribution process is cost effective.

However, in return for the costs and risks they bear, wholesalers will expect a significant discount from the producer to allow a mark-up when they sell the products on to retailers. Producers cannot be sure that the wholesalers will maintain the brand image.

Agents/Brokers

Agents and brokers are intermediaries between the producer and the wholesaler and/or retailer. They are experts in certain markets and bring buyers and seller together in return for a commission on the value of the sales. They very rarely take possession of any physical items; they just a facilitate negotiations and the selling process.

Agents and brokers are particularly useful when a firm is selling into a market or geographic region, of which they have little knowledge and experience. Brokers and agents will know the local market and, if it is in an overseas location, will help with the language and the legal requirements. They may also negotiate joint ventures with local firms.

Agents and brokers are probably best known in the buying and selling of land and travel services, but virtually all markets require employ such intermediaries.

Retailers

A retailer is an intermediary, which buys products either from manufacturers or from wholesalers and resells them to consumers. They come in all shapes and sizes from the corner shop to the hypermarket. The advantage of manufacturers using retailers is that they:

are prepared to buy in bulk
accept responsibility for storing stock and for any unsold items
may have strong customers loyalty which may is an attractive proposition for the brands that they stock.

Clearly the disadvantage for the producer is that the retailer will demand a share of the profits and they will also decide how, and where, to display the product. With considerable competition for shelf space in multiple retailers, this placement of a product is a key element of the purchasing decision.

Retailers themselves may choose to use the services of distribution specialists. Marks and Spencer, for example, do not distribute their own products to individual stores. This is done for them by a subsidiary of British Oxygen. M&S prefer to concentrate on presentation at the point of sale.

Channels of distribution

There is considerable debate about how long distribution channels should be. Some years ago the basic rule of thumb was that industrial goods had shorter routes than consumer products, but this is now changing. Many of the traditional routes have seen casualties as wholesalers and specialists have gone out of business.

Modern technology allows goods to be tracked along their distribution route and the next buyer in the chain can remain fully informed of just where the products are.

Most producers will use a range of channels to distribute their products; this approach is known as a multichannel distribution.

Distribution Strategies

For taking your products to the end-users i.e. consumers, you certainly need a distribution channel. Choosing a distributor is a proven way that helps in the growth of your business and vital to attain targets. While selecting distributors, observe the prospective distributor: if he has the characteristics to become a capable distributor, if he would be able to help you in accomplishing your business expansion goal.

We present the three types of distribution business models to be adopted by companies. The differences are based upon the size of the market the distributor targets and breadth of services offering. Some partnerships are new while others have evolved for many years. Some distributors handle many categories and channels where others focus against a specific market segment. Let’s take a sneak peek of them:

Intensive Distribution

This is a marketing strategy under which a company sells through the widest possible channels and cover as many outlets as possible so that the customers come across the product virtually wherever they go- drug stores, gas stations, supermarkets, and the like.

Mostly common for: This strategy is common for snacks, soft drinks and juices, foods, basic supplies, magazines.

Profit Margin: Intensive distributors work with many manufacturers and generally sell high volumes of goods at lesser prices and earn lower margins.

Pros:

· Increased sales

· Wider customer recognition

· Impulse buying

Cons:

· Characteristically low price

· Low-margin products that require a fast turnover

· Difficult to control large number of retailer

Selective Distribution

This strategy is usually observed for more specialized products which are carried through specialist distributors covering a specific geographic location. The firm chooses some outlets for distributing its products. This option helps focus the selling of manufacturers on selected outlets rather than dispersing it over numerous marginal ones.

It Covers:

Product distribution here basically considers high-end items such as prestige or designer goods e.g. Puma, Fila, Nike, Adidas.

Pros:

· Save expenses

· Improve marketing efficiency

· Control the marketing

Cons:

· Difficult to attain a variety of business objectives in relaxed conditions of the marketing environment

· Lack of adaptability to goods that are not selective

· A certain risk as firm has to provide more services to selected middlemen

Exclusive Distribution:

Exclusive distribution is an intense form of selective distribution in which only one distributor is appointed in each territory. Taking exclusive distributorship opportunity is not tough but need few steps to follow. This type of distributor is used where channel control is important to maintain brand image, brand integrity, and often higher pricing points.

When the manufacturing firm distributes its products through just one or two major outlets in the market that are exclusively dealing in it, it is said that the firm is using an exclusive distribution strategy.

Apple had an exclusive distribution deal with AT&T to provide the iPhone to consumers.

It caters to:

Exclusive distributors usually cover designer ware, major domestic appliances, and the most luxurious items & brands like Gucci, Prada.

Pros:

· More control over the market

· More aggressive middleman

· High brand loyalty

Cons:

· Difficult to maintain a high level of brand image

· Betting on one dealer in each market

· Only suitable for high priced & low volume products

Source - http://blog.getdistributors.com/the-trio-of-distribution-intensive-selective-and-exclusive-distribution/