1.3.4 Distribution

Distribution

Key Definitions

Distribution: The process of getting the good or service from the producer to the consumer, including the physical or online distribution avaliability and visibility.

Marketing Mix: A tool that consists of the '4 Ps' of marketing, which are the Price of the product, Product, Promotion of the product, and Place that the product is sold. This is important to consider when building a successful brand.

Distribution Channels: The 5 main paths goods and services follow to get from the producer to the consumer.

Barrier to Entry: The factors that make it difficult for new entrants to break into an existing market, such as strong brand loyalty. 

E-Commerce: Stands for "electronic commerce", and it is another term used for online shopping. 

Impulse Purchasing: The process of buying something in an unplanned manner. 

Long Tail: The huge number of tiny businesses that appeal to the minority tastes that can find a profitable existence online as they can target the whole world, not just specific locations. 

Opportunity Cost: The cost of missing out on the next best alternative when making a decision regarding the business. 

Wholesaler: The middleman between the producer and the retailer who breaks the bulk down from the container load of goods into manageable parcels, such as a case of 12 goods.

Choosing Appropriate Distributors

When a new business wants to launch its first product, a key question they need to consider is the distribution channels it will utilize. The decision on the distribution channel will affect every aspect of the business, especially its profit. Manufacturers must decide which outlet is right for their products, however the producer cannot always control the distribution as it often transfers to the retailer. To the retailer every foot of floor space in the shop has an actual cost and an opportunity cost of missing out on the profits that could be generated. 

Distribution Channels

There are 5 main distribution channels used by businesses:

1. Traditional Physical Channel

Small producers find it hard to achieve distribution in big chain stores, so they usually sell to wholesalers who in turn sell to small independent shops. The profit mark-up applied by the middleman adds to the final retail price, but a small producer cannot afford to deliver individually to multiple small shops. 

2. Direct to Retailer

Larger producers cut out the middleman and sell directly to large retail chains. This is more cost-effective to a business, but it exposes the seller to tough negotiations from the retail chains on prices and credit terms. Large retailers also demand that manufacturers pay for special offers and price promotions. 

3. Be Your Own Retailer

Large companies sometimes like to control their own distributions, displays, and sales by running their own large stores. Companies can sometimes do this by buying out their own retail partner in order to get closer to the market.

4. Direct Online

By using this channel the producer is selling directly to the consumer. This can be done through mail order by the manufacturers, or more commonly now through a website. This ensures that the producer keeps 100% of the revenue earned from selling the product. The benefit of this is that the higher profits can be used to finance more internal improvements, such as advertising, website development or new product development. 

5. Online Retail

Small businesses often lack the ability and the finance to business a successful e-commerce sales platform. This means that a lot of businesses tend to piggyback on an established sales platform such as eBay. This is a quick way of producing additional revenue and also enhancing the brand image and getting more publicity. 

Changes in Distribution to Reflect Social Trends

Online Distribution

A company may have retail outlets in many countries all over the world, but not all of them. They sell products to a local wholesaler, and the wholesaler then sells the goods to the public in their local areas on behalf of the company. If the retail price needs to be the equivalent to £100, then the goods would need to be sold to the wholesaler for £35, meaning that they would only get the £35 from the goods, and the rest of that money goes to the wholesaler and the retailer. However, if the good is bought directly from the company for £100 the company would get the whole £100 back. 

From the consumer's point of view, there are many huge benefits to buying online direct from the producer. As most retailers only stock a limited range of goods that are aimed at approximately 65% of the population, buying online gives the consumer direct access to the full range of stock of products from a company. 

Buying online also reduces the opportunity cost the company faces. There is conflicting interests in the stocking of goods in a retailer, as the wider range of products kept in the stockroom, the less customers will see and want to buy. Another opportunity cost the company could see is the fact that the more products they have on display, the less space there is to stock a higher variety of products and the less opportunity there is to sell more of the goods. 

An online seller is able to avoid this, as they don't have to worry about a store to display the goods. All they need is a warehouse to stock the goods they sell, and an online platform to market the products. This means that they are able to increase their profitability

Changing from Product to Service

There is little to no difference in the distribution of products and services. The sales of services, like the sale of goods, has been massively impacted by the increasing prevalence of online sales and online trends. However, of course, not all services will be impacted by the increasing prevalence of online activity due to the nature of the services, such as nightclubs and hotels. The only things that have changed for these is the nature in which they are booked.