Distribution Channels for Beginners

About the Presenter

• Jim Elder

– President of Allegra Design Web Print, an integrated marketing

services agency

– Local work

• Board member Missouri Venture Forum

• Board member Children’s Home Society

• Board member Creve Coeur Olivette Chamber of Commerce

• Board member Maryland Heights Chamber of Commerce

– Past lives

• Asst. Professor at Lindenwood University

– Chair, Dept of Entrepreneurial Studies

– Marketing, pricing and channel strategies

• Former SVP Marketing at healthcare services & biotechnology

companies

Distribution Channels

There is no one “Best” way to get

products to your target market

What’s best for your Company or Product?

Direct vs. Indirect, Intensive vs Selective vs Exclusive

It depends upon

Competitors

Costs

Human and financial resources

How your audience wants to or is comfortable buying

Why Utilize an Indirect Channel?

• Gather information on target market shopping patterns

• Promote product availability in the target markets

• Maintain inventory storage to assure timely availability

• Compile information about product features

• Break bulk

• Process and fill specific customer orders

• Provide product warranty service

Or,

• Offer credit

• Allow for absorption of size and grade obsolescence

• Offer return provisions

• Train/educate

• Include packaging and special handling

Middlemen: From Their Perspective

• Middlemen act as purchasing agents for their customers, not as

sales agents for you the manufacturer

• Middlemen don’t consider themselves to be a “hired link” for a

manufacturer

• Middlemen view all the products they offer as a family of items

they sell as a packaged assortment for their customers. They

direct their efforts primarily at obtaining orders for this packaged

assortment, not for your single product

• Unless given some incentive to do so, middlemen will not

maintain separate sales records by brands sold. Information that

might be useful to manufacturers such as pricing, packaging, or

promotion is “buried” in the middleman’s records

• The more work they perform, the more risk they take, the more

they expect to be paid

Wholesalers,

Distributors

Direct-Buy

Retailers

Distressed

Merchandisers

Online

Marketplaces

Logistics

Partners

Agents, Mfr Reps,

Brokers

Direct Marketing,

Catalog Retailers

Direct Corporate

Sales

Website Sales

Direct Mail,

Tele-Marketing

Value-Added

Resellers

End

-Bu

yer

Seg

men

ts

Retailers

Retailers

Retailers

Retailers

Corporate

Direct

Channels

Specialty

Retail

Channels

Wholesale

Retail

Channels

Discount

Channels

Channel Structure

Manufacturer,

VendorValue

The Place Element of the Marketing Mix

Examples of Channels of Distribution

White Castle FordDel

MonteProcter &Gamble

Wholesaler

Wholesaler

Retailer

Consumer

Wholesaler

RetailerRetailer

International Market Example

Basic Product Producer

General Wholesaler

Basic Product Specialty Wholesaler

Basic Product Processor

Specialty Wholesaler

Regional Wholesaler

Local Wholesaler

Retailer

Finished Product Processor

Typical Japanese Channel of Distribution for a Consumer Product

Even powerful P&G

ran into trouble

launching baby

diapers into Japan

A story of desktop computers & channels

How the Market Buys

1. Large quantities

2. Self-service

3. One-stop shopping

4. Impulse buying

5. Cash

6. Shopping at home

7. Expending substantial effort

through comparison shopping

8. Demanding extensive service

1. Small quantities

2. Assistance by salespeople

3. Buying from several stores

4. Extensive decision making

prior to purchase

5. Credit

6. Shopping at stores

7. Expending little effort

8. Demanding little service

Versus

Push vs Pull Strategies

Push Channel Strategy Pull Channel Strategy

Manufacturer

Economics

Wholesale discounts and

promo fees are “variable

costs” favoring small brands

Heavy advertising and mass

marketing create high “fixed costs”

favoring high-volume brands

Channel Member

Economics

High margins, high cost of

sales, advertising, services

shared by multiple brands

Low margins require making money

by moving volume at minimum cost

Market Types, Ease of

Communication

Niche/diffuse markets difficult to

target with mass

communication

Mass-market appeal or easily targeted

markets with mass communications

On-Site Augmentation

Required by Channel

Moderate to high Low to none

Distribution Intensity Selective Intensive

Cooperative Arrangements

Cooperative programs

provided by Manufacturers to channel members

• Cooperative advertising allowances

• Payments for interior displays

• Contests for buyers, salespeople, etc.

• Allowances for warehousing functions

• Payments for window display space

• Detail men who check inventory

• Demonstrators

• Coupon-handling allowance

• Free goods

13

Tools to Drive Volume Through the Channel

Pull Tools(End-User)

Push Tools(Trade)

Rebates

Bonus Packs

Price Packs

Coupons

Sweepstakes

Premiums

Sampling, or Trial Sizes

Trade-in Allowances

Financing Incentives

Off-invoice Allowances

Quantity Discounts

Slotting Fees

Displays & Selling Aids

Dating

In-store Promotions

Contents & Incentives

Floor Planning

Sales Force Incentives (spiffs)

Benefit end-customer, not retailer

End-customer perceive as

special deal, not lower quality

Direct special price to first

time buyers, not repeat

buyers

Temporary discount to

achieve short-term objective

Encourage retailer to sell

more product vs. competitor

Enable retailers to carry floor

demonstration products

Help finance inventories

Anatomy of Pricing Channel Structure

Cost to produce

strings = $2.50Manufacturer

Wholesale trade

discount = 66%Cost of strings to

wholesaler = $3.40

Retail Trade

discount = 50%

Cost of strings to retailer =

$5.00

Consumer discount

= 25%Cost of strings to

consumer = $7.50

Wholesaler

Retailer

Consumer

$0.90 = Gross Margin to Manufacturer on sale to Wholesaler

$1.60 = Gross Margin to Wholesaler on sale to Retailer

$2.50 = Gross Margin to Retailer on sale to Consumer

Suggested Retail Price = $10.00

Set of Guitar Strings

Price calculations all start

with discounts off of Retail

Cooperative Advertising

Typical

Strategy:

• A sharing in the cost on a 50–50 basis up

to some percentage of the retailer’s

purchases from the manufacturer

Administration:

• Effective administration by manufacturer

is necessary to avoid abuses & to help

secure cooperation from channel

members

• Channel manager must be sensitive to

channel members’ primary concern

about this strategy

Promotional Allowances

Typical

Strategy:

• Manufacturer offers channel

member a direct cash payment or a

certain percentage of the purchases

on particular products

Administration:

• Manufacturer should conduct

research to determine whether it is

getting its money’s worth in terms

of retailer cooperation and follow-

through

Slotting Fees

Typical

Strategy:

• Payments by manufacturers to

persuade channel members, especially

retailers, to stock, display, and support

new products

Administration:

• Joint sponsorship of research between

retailers and manufacturers on effects of

slotting fees on various topics could help

alleviate conflict

Displays & Selling Aids

Typical

Strategy:

• Include point-of-purchase (POP)

displays, dealer identification signs,

promotional kits, special in-store

displays, & mailing pieces

Administration:

• Channel manager should make the

effort to see whether the firm’s selling

aids and displays are serving any useful

purpose

In-Store Promotions

Typical

Strategy:

• Short-term events designed to

create added interest and

excitement for the manufacturer’s

products

Administration:

• The planning of a successful in-

store promotion should always

include considerations of the

potential benefits for the retailers

involved.

Contests & Incentives

Typical

Strategy:

• Techniques that manufacturers use to

stimulate channel member sales efforts for

their products

Administration:

• Manufacturer should put much effort into

the view of channel members toward this

form of promotion

Promotional Deals & Merchandising Campaigns

Typical

Strategy:

• Include a variety of push-type

promotional deals such as discounts to

channel members to encourage them to

order more products

Administration:

• Manufacturers need to develop carefully

planned strategies that are based on

knowledge of channel member needs

and that take a long-term perspective on

promotion through the marketing

channel

Negotiating With Power Buyers

1. Make power buyers compete

2. Quantify the value of your offering

3. Eliminate unnecessary costs

4. Segment the product offering

5. Offer exclusive rights (not price)

6. Resist “Divide-and-Conquer” tactics

Jim Elder

Allegra Design Web Print

314.429.4848

Jime@Allegrastlouiswest.com

www.Allegrastlouiswest.com