Channels of Distribution

Channel Members
 Distribution

 The process of deciding how to get goods in

customer’s hands.
 One of the 4 P’s of marketing-place.
 Example of item being an industrial and consumer
product-Shampoo.
 Manufacturers sell their product to customers
through retailers or to hair salons and hotel chains
for business use.
 Distribution

 Channels of Distribution- the path a product

takes from its producer or manufacturer to the final
user.
 Industrial user-final user when a product purchased
for business use
 Consumer-final user when a product purchased for
personal use
 Direct and Indirect Channels

 Direct distribution:
 When the producer sells goods or services directly to the
customer, with no intermediaries.

 Indirect distribution:
 Involving one or more intermediaries.
 Channel Members

 Intermediaries- (middlemen); businesses

involved in sales transactions that move
products from the manufacturer to the final
user.
 Reduces number of contacts required to reach the
final user
 Classified by whether they take ownership of goods
and services
 Customer Marketing Channels
Customer Marketing Channels

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
 Channel Members and Their Functions

 Wholesalers
 Businesses that buy large quantities of goods from
manufacturers, store the goods, and then resell them to other
businesses.
 Take title to goods they buy for resale.
 Rack jobbers-wholesalers who manage inventory and
merchandising for retailers by counting stock, filling it in when
needed and maintaining store displays.
 Drop shippers-own the goods they sell but do not physically
handle the actual products.
 Channel Members

 Retailers
 Sell goods to final consumer for personal use.

 Brick-and-mortar retailers-sell goods to the customer from

their own physical stores.
 Buy products from manufacturers or wholesalers.

 Non-store retailers

 Takes title for goods.

 E-tailing-online retailing; selling products over the Internet

 Channel Members

 Agents
 Intermediaries that bring buyers and sellers together.

 Independent Manufacturer’s Representative

 Work with several related, but noncompeting manufacturer’s in
a specific industry.
 Paid commission on what they sell.

 Brokers
 Negotiate a sell, paid a commission, and look for new
customers
 Channels

 Manufacturer Directly to Consumer

 Selling products at the production site
 Having a sales force call on consumers

 Using catalogs or ads to generate sales

 Using telemarketing

 Using the internet to make online sales

 Manufacturer to Retailer to Consumer

 Used for merchandise that dates quickly or needs
servicing
 Channels

 Manufacturer to Wholesaler to Retailer to Consumer

 Most commonly used for staple goods, which are items
that are always carried in stock and whose styles do not
change frequently

 Manufacturer to Agents to Wholesaler to Retailer to

Consumer
 For manufacturers who wish to concentrate on
production and leave sales and distribution to others
 Channels

 Manufacturer to Agents to Retailer to Consumer

 Used by manufacturers who do not want to handle their own
sales.
Distribution Channel Functions

 Information: gathering and distributing

marketing research and intelligence
information about the marketing environment

 Promotion: developing and spreading

persuasive communications about an offer

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
Distribution Channel Functions

 Contact: finding and communicating with

prospective buyers

 Matching: shaping and fitting the offer to the

buyer’s needs, including such activities as
manufacturing, grading, assembling, and
packaging

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
Distribution Channel Functions

 Negotiation: agreeing on price and other terms

of the offer so that ownership or possession can
be transferred

 Physical distribution: transporting and storing

goods

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
Distribution Channel Functions

 Financing: acquiring and using funds to cover the

costs of channel work

 Risk taking: assuming financial risks such as the

inability to sell inventory at full margin

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
 Distribution Intensity

 Distribution Intensity: how widely a product will be distributed

 Exclusive Distribution:
 Protected territories for distribution of a product in a given
geographic area
 Exclusive: dealers are assured they are the only ones within a certain
geographic radius that have the right to sell the manufacturer’s or
wholesaler’s products.
 Characteristics: prestige, image, channel control, and high profit
margins Example: franchised operations
 Selective Distribution:
 A limited number of outlets in a given geographic area are used to sell
the product
 Selective: intermediaries chosen for their ability to cater to the final
users that the manufacturer wants to attract.
 Select channel members that maintain the image of the product and
are good credit risks, aggressive marketers, and good inventory
planners.
 Distribution Intensity

 Intensive Distribution
 The use of all suitable outlets to sell a product

 Objective/Goal: complete market coverage and to sell to as

many customers as possible
 Franchising
 Granting the right to engage in offering,
selling, or distributing goods or services under
a marketing format which is designed by the
franchisor

 The franchisor permits the franchisee to use

its trademark, name, and advertising

 Higher survival rates

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
 Disadvantages – Franchiser

 Distribution system – other systems can add conflict, Little

Caesars going into K-marts cases conflict with other Little
Caesars in the area.
 Consistency
 Changing operation – Pizza Hut adding delivery
 Advertising expenditures

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
 Franchisee – Advantages

Marketing
Brand Name Support

Contracts

Reservation systems-
Plans and Customers
Systems

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
 Franchisee – Disadvantages

 Value of brand name determined by franchiser

 Introduction of new products determined by
franchiser
 Your reliability tied to the rest of the system

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens
Channel Design Decisions/Channel Selection Process

Designing a channel system include;

1. Analyzing consumer service needs
2. Setting the channel objectives and constraints
3. Identifying the major channel alternatives
4. Evaluating the major alternatives
 Analyzing Consumer Service Needs

 Designing the distribution channel begins with

determining what (e.g. convenient location to buy
the products, immediate delivery, credit, repairs,
long-term warranty…) the consumers want from the
channel.
 The company must balance the consumer service
needs with the feasibility and costs plus prices.
 Setting the Channel Objectives and Constraints

 The company must decide which segments to

target and the best channels to use in each
segment. Here, the objective of the company is to
minimize the total channel cost.
 Besides the target market, the company’s channel
objectives are influenced by;
 the nature of its product, e.g. perishable products require
more direct marketing to avoid delays and too much
handling.
 company characteristics, e.g. the company’s size and
financial situation determine which functions it can
 handle, how many channels it can use, which transportation
can be used…
 characteristics of intermediaries, intermediaries differ in
their abilities to handle promotions, customer contact,
storage and credit e.g. the company’s own sales force is
more intense in selling.
 competitors’ channel, some companies may prefer to
compete in or near the same outlets that carry competitors’
products, some may not e.g. Burger King wants to locate
near McDonald’s
 environmental factors, economic conditions and legal
constraints affect channel design decisions e.g. in a
depressed economy, producers want to distribute their
goods in the most economical way, using shorter channels.
 Identifying Major Alternatives

After the channel objective have been determined,

the company should identify its major channel
alternatives in terms of (1) types of intermediaries,
(2) number of intermediaries, and (3) the
responsibilities of each channel member.
 Types of Intermediaries
A firm should identify the types of channel
members that are available to carry out its channel
work.
 Number of Marketing Intermediaries
Companies must also determine the number of
channel members to use. There are three
strategies;
 Intensive distribution; is a strategy in which
companies stock their products in as many outlets as
possible. Convenience products and common raw
materials must be available where and when consumers
want them e.g. toothpaste, candy… Procter & Gamble,
Coca-Cola distributes its products in this way. Here, the
advantages are maximum brand exposure and consumer
convenience.
 Exclusive distribution; is a strategy (opposite to intensive
distribution) in which the producer gives only a limited number
of dealers the exclusive right to distribute its products in their
territories. Often found in new automobiles and prestige
women’s clothing e.g. Rolls-Royce. Here, the advantages are
establishing image and getting higher markups.
 Selective distribution; (is between intensive and exclusive
distribution) is a strategy in which the company uses more than
one but fewer than all of the intermediaries. Most television,
furniture brands are distributed in this way. Here, the
advantages are; it provides good market coverage with more
control and less cost than intensive distribution + it does not
spread its efforts over many outlets as in intensive distribution.
 Evaluating the Major Alternatives

In order to select the channel that satisfy the

company objectives in the best way, each
alternative should be evaluated by using;
 economic criteria; the company compares the
projected profits and costs of each channel.
 control issues; the company prefers to keep the
channel where it has the highest control.
 adaptive criteria; the company prefers to keep the
channel which is the most flexible to the changing
marketing environment.
 Establishing the Channel Objectives &
Constraints

 Channels objectives vary with product

characteristics.
 Channel design must take into account the strengths
& weaknesses of different types of intermediaries.
 Channel design is also influenced by the competitors'
channels.
 Channel design must also adapt to the larger
environment.
 Identifying the Major Channel
Alternatives

A channel alternative is described by three elements:

 Types of intermediaries.
Depends on the service outputs desired by the target market & the
channel's transactions costs. The company must search for the
channel alternative that promises the most long-run profitability.
 Number of intermediaries.
Exclusive distribution
Selective distribution
Intensive distribution
 Terms & responsibilities of channel members.
The producer must determine the rights & responsibilities of the
participating channel members, making sure that each channel
member is treated respectfully & given the opportunity to be
profitable.