- Explore various product-distribution strategies.
- Explain how companies create value through effective supply chain management.
The next element in the marketing mix is place, which refers to strategies for distribution. Distribution entails all activities involved in getting the right quantity of your product to your customers at the right time and at a reasonable cost. Thus, distribution involves selecting the most appropriate distribution channels and handling the physical distribution of products.
Companies must decide how they will distribute their products. Will they sell directly to customers (perhaps over the Internet)? Or will they sell through an intermediary—a wholesaler or retailer who helps move products from their original source to the end user? As you can see from Figure 9.7 “Distribution Channels”, various marketing channels are available to companies.
Selling Directly to Customers
Many businesses, especially small ones and those just starting up, sell directly to customers. Michael Dell, for example, started out selling computers from his dorm room. Tom First and Tom Story began operations at Nantucket Nectars by peddling home-brewed fruit drinks to boaters in Nantucket Harbor. Most service companies sell directly to their customers; it’s impossible to give a haircut, fit contact lenses, mow a lawn, or repair a car through an intermediary. Many business-to-business sales take place through direct contact between producer and buyer. Toyota, for instance, buys components directly from suppliers.
The Internet has greatly expanded the number of companies using direct distribution, either as their only distribution channel or as an additional means of selling. Dell sells only online, while Adidas and Apple sell both on Web sites and in stores. The eBay online auction site has become the channel of choice for countless small businesses. Many of the companies selling over the Internet are enjoying tremendous sales growth. The largest of the online retailers—Amazon—was founded by Jeff Bezos in 1995 as an online bookstore. In its fifteen-plus years in business, the company has experienced tremendous success, generating more than $34 billion in revenues during 2010. With sales soaring by 51 percent, the future looks bright for the company (Yahoo!, 2011; Los Angeles Times, 2011).
The advantage of this approach of selling direct to the customer is a certain degree of control over prices and selling activities: you don’t have to depend on or pay an intermediary. On the other hand, you must commit your own resources to the selling process, and that strategy isn’t appropriate for all businesses. It would hardly be practical for Wow Wee to sell directly to individual consumers scattered around the world.
Selling through Retailers
Retailers buy goods from producers and sell them to consumers, whether in stores, by phone, through direct mailings, or over the Internet. Best Buy, for example, buys Robosapiens from Wow Wee and sells them to customers in its stores. Moreover, it promotes Robosapiens to its customers and furnishes technical information and assistance. Each Best Buy outlet features a special display at which customers can examine Robosapien and even try it out. On the other hand, selling through retailers means giving up some control over pricing and promotion. The wholesale price you get from a retailer, who has to have room to mark up a retail price, is substantially lower than you’d get if you sold directly to consumers.
Selling through Wholesalers
Selling through retailers works fine if you’re dealing with only a few stores (or chains). But what if you produce a product—bandages—that you need to sell through thousands of stores, including pharmacies, food stores, and discount stores. You’ll also want to sell to hospitals, day-care centers, and even college health centers. In this case, you’d be committing an immense portion of your resources to the selling process. Besides, buyers like the ones you need don’t want to deal directly with you. Imagine a chain like CVS Pharmacy negotiating sales transactions with the maker of every single product that it carries in its stores. CVS deals with wholesalers (sometimes called distributors): intermediaries who buy goods from suppliers and sell them to businesses that will either resell or use them. Likewise, you’d sell your bandages to a wholesaler of health care products, which would, in turn, sell them both to businesses like CVS, Kmart, and Giant Supermarkets and to institutions, such as hospitals and college health care centers.
The wholesaler doesn’t provide this service for free. Here’s how it works. Let’s say that CVS is willing to pay $2 a box for your bandages. If you go through a wholesaler, you’ll probably get only $1.50 a box. In other words, you’d make $0.50 less on each box sold. Your profit margin—the amount you earn on each box—would therefore be less.
While selling through wholesalers will cut into your profit margins, the practice has several advantages. For one thing, wholesalers make it their business to find the best outlets for the goods in which they specialize. They’re often equipped to warehouse goods for suppliers and to transport them from the suppliers’ plants to the point of final sale. These advantages would appeal to Wow Wee. If it sold Robosapien’s to just a few retailers, it wouldn’t need to go through a distributor. However, the company needs wholesalers to supply an expanding base of retailers who want to carry the product.
Finally, intermediaries, such as wholesalers, can make the distribution channel more cost-effective. Look, for example, at Figure 9.8 “What an Intermediary Can Do”. Because every contact between a producer and a consumer incurs costs, the more contacts in the process (panel a), the higher the overall costs to consumers. The presence of an intermediary substantially reduces the total number of contacts (panel b).