Photo Credit: Will Hutchinson
Place, or the distribution channel, is the path through which goods and services flow in one direction (from vendor to customer), and the payments generated by them flow in the opposite direction (from consumer to the vendor).
A distribution channel can be as short as being direct from vendor to consumer or may include several inter-connected intermediaries such as wholesalers, distributors, agents, and retailers. When there are multiple parties involved, each intermediary generally receives the item at one price point, adds a small markup, and then sells to the next person in the chain until it finally reaches the end consumer. Minimizing the number of parties in the chain can reduce the final cost to the end consumer.
Building a distribution strategy is one of the greatest challenges for an organization. Providers for social goods have a product or service with substantial social benefits, such as improved maternal health clinics or a household water treatment system. However, figuring out how to get the product to the target segment, educating the sales force and ultimately the end consumers, and providing follow-up servicing are tasks that are generally not within the core competencies of non-profit organizations. Organizations who are attempting to sell their product in a new area will need to decide on an appropriate distribution strategy based on the product characteristics, their relationships with distributors and other NGOs in the community, and the speed with which they want to roll out the product.
We can simplify this planning process to the decision tree depicted here.
We can learn a lot from the stories of others. Check out a few case studies that highlight effective promotional marketing tactics.
Most companies use a combination of distribution channels to reach their customer. Try to plan your distribution methods to be as efficient as possible in terms of investment, time and labor. Review the profitability of different channels from time to time, as well as their convenience to customers. Could you learn anything from your competitors or even collaborate with them in distribution? Be cognizant of your internal organizational capabilities and consider partnerships when it does not make sense to do it in-house.
Key Distribution Issues in Emerging Markets
- Selection criteria – companies need to understand the key components of a successful distribution partnership. Many distributors fail because critical components of the selection criteria are overlooked. The selection criteria will likely include important components such as capital, infrastructure, warehousing, transportation and required organizational structure.
- Territory – is the territory well defined and does the distributor have the ability to service the territory? Companies must build distributor capability and schedule joined training sessions. Companies must also ensure they have detailed territory maps and a clear understanding of the outlet density.
- Outlet base – are traditional and non-traditional channels well defined? In most emerging market, determining the outlet base can be a challenging undertaking. Companies need to understand both the existing and potential outlet base. A well defined every dealer survey (EDS) is a key component of any successful distributor roll-out.
- Customer service frequency – Are they over or under servicing their customers? Companies must have a clear understanding of the service frequency that both the distributor and the customers require.
- Channel strategy – companies must map out a clear channel strategy and identify which channel the selected distributor will service. A poorly defined channel strategy can severely damage any distributor roll-out. It is critical that companies understand how channels function and operate. One size does not fit all.
For more, check out Tielman’s blog post over at The Supply Chain lab.
Pros and Cons of Different Channels
At a high level, we can summarize the pros and cons for each distribution channel as follows:
Build Own Channel
- Higher control over the customer environment (level of service, product display, availability of complementary offerings)
- Greater cost efficiency from eliminating intermediaries
- Closer contact with end user, thereby allowing first-hand information about their needs and their reaction of offerings
- Establishing a direct distribution channel takes time
- Difficult to achieve the same scale of outlets as distribution with intermediaries
- Launching and managing a distribution channel requires a different type of people and skillsets
- Require a large upfront fixed cost investment
Use Existing Channel
- Rapid distribution that can be implemented instantly
- Specialist knowledge of the region and customer buying habits
- Broad coverage that enables the company to reach majority of target customers, including deeper penetration into rural and inaccessible areas
- Greater effectiveness of entire process due to specialization of intermediaries
- Potential economies of scale because intermediaries perform similar activities for variety of companies
- No large upfront investment
- More complex channel structure can have negative impact on efficiency of distribution system
- Intermediaries can add extra layer of profit margins, thus increasing total costs
- Loss of control over selling environment
- Less flexibility with changing strategy
- Greatly diminished ability to communicate with and collect information directly from customers
- Potential for vertical channel conflicts resulting from different strategic goals and profit-optimization strategies of each intermediary
It is important to remember that place is not the same as the communications channel (e.g. brochures, radio ads, news stories, etc.). However, the promotional communications medium and the distribution channel can be highly interlinked as it often critical to accompany the product sale with marketing and informational material.
Chernev, Alexander. Managing Distribution Channels. Kellogg School of Management. http://marketingcases.com/download/notes/tactics/ManagingDistribution_0639R.pdf
Kotler, Philip and Nancy Lee. Social Marketing: Influencing Behaviors for Good, 3rd edition. SAGE Publications.
Nieuwoudt, Tielman. Key distribution issues in emerging markets. http://www.thesupplychainlab.com/blog/africa/key-distribution-issues-in-emerging-markets-updated/