Distribution policies are important determinants of the functions of the sales department. The choice of a particular marketing channel, or channels, sets the pattern for sales force operations, both geographically and as to the customers from whom sales personnel solicit orders. The decision on the number of outlets at each distribution level affects the size and nature of the sales organization and the scope of its activities. Related decisions concerning cooperation extended to and expected from the intermediaries influence sales operations and salespersons’ jobs.
1. Policies on Marketing Channels
One of the most basic of all marketing decisions is that on marketing channel(s). Figure 4.1 shows the principal choices available. Manufacturers selling to the consumer market have a choice of five main channels, and those selling to the industrial market have four main options. Few manufacturers use only one marketing channel; most use two or more. Firms that sell to both the consumer and industrial market are in this classification, as are the many who sell through both chain and independent outlets. Recognize, of course, that the actual situation is more complex than that depicted in the diagram. The toothpaste manufacturer, for instance, sells through both chain and independent outlets in the drug, grocery, variety, and department store fields.
Decisions on marketing channels are required to be taken more often than is commonly supposed. The obvious occasions are those following the initial organization of the enterprise, and when making additions to the product line. At these times, the desirability and appropriateness of different channel options are evaluated.
At other times—even though the product line is unchanged— reappraisals are advisable. Shifts occur in the nature and importance of the factors that governed the original selection. New institutions appear, marketing innovations develop, characteristics of markets change, and so on. Marketing is dynamic, and the effectiveness of different marketing channels is always changing. The sales executive keeps higher management apprised of changes in the factors affecting marketing channels (both those used and those available) and points out attention to the need for policy decisions.
The initial selection, or reevaluation, of marketing channels is a matter of determining which channel, or channels, affords the opportunity for the greatest profit. Channels, in other words, should be so chosen as to obtain the optimum combination of profit factors. This is no simple task. Neither maximum sales volume, nor minimum cost, should be considered alone; the most profitable combination of both must be sought. Furthermore, the time dimensions must be considered—management must look to the long-run effect as well as to the short-term impact upon net profits. The policymakers keep in mind all three profit factors—sales volume, costs, and resultant net profits—and they consider the effect of different channel options and combinations on each factor over both short and long periods.
Sales volume potential. For each channel option, the key question is: Can enough potential buyers be reached to absorb the desired quantity of product? The answers are found through market analysis. Raw data are secured from the company’s own records, external sources of market statistics, and field investigations. When these data are analyzed, and after allowances are made for the strengths of competitors, the potential sales volume of each channel option is estimated.
Among the most important factors influencing any channel’s sales potential are the ability of sales management, the excellence of its planning, and its skill in implementing sales programs. In appraising the sales potentials of alternative channels, one must assume that, regardless of the channel chosen, the sales management functions will be performed with the same degree of managerial competence. Otherwise, comparisons of alternative channels have little meaning. It makes little sense, for instance, to compare a well-designed and skillfully executed plan for selling through wholesalers with a poorly designed and awkwardly executed plan for selling direct to retailers.
Comparative distribution costs. Distribution cost studies show that the costliest channels are the shortest ones. When a manufacturer decides to sell directly to the consumer, it assumes responsibility for the additional performance of marketing functions. It incurs higher costs as it steps up performance of selling, transportation, storage, financing, and risk bearing. If the manufacturer chooses to use the door-to-door direct-selling method, it faces problems on the selection, training, supervision, and general management of this class of sales personnel. If the manufacturer decides to open its own retail outlets, it has problems in selecting store locations and buildings, negotiating leases, designing store fronts, obtaining equipment, arranging store layouts, managing retail personnel, conducting retail adver-tising, and procuring retail-minded executives. The manufacturer using short channels has a higher gross margin to compensate for additional selling costs, but its net profits are often lower, because it may perform these functions less efficiently than the intermediary. Most intermediaries carry a broader line of merchandise, and their fixed costs are spread over more products. However, direct distribution has important nonfinancial advantages—more intimate contacts with consumers and closer control over the conditions of product sale. The manufacturer selecting direct-to- consumer selling must recognize that it will face a broad range of problems and incur additional distribution expenses. Furthermore, the shorter the channel, the more the manufacturer’s selling costs tend to be fixed rather than variable in nature. This is important, especially with fluctuating sales volumes, because the break-even point is almost always higher when short marketing channels are used.
Direct sale is more common in the industrial than in the consumer field. But the costs of selling directly, even to large buyers, are still high. In the industrial market, it is common for direct-to-user sales personnel to need considerable technical education, their training is long and expensive, and necessarily their compensation is high when compared with that of less qualified persons. Nevertheless, selling directly to industrial users enables the manufacturer to provide special attention to each customer’s needs. In many cases, this more than offsets the additional expenses.
Longer marketing channels result in lower selling costs for the manufacturer. When intermediaries are used, they perform some functions that the manufacturer would otherwise perform. It is necessary to compensate intermediaries for performing these functions. Consequently, when a manufacturer switches from short to longer channels, its own gross margins are reduced. However, there usually is a reduction in selling expense more than offsetting the loss in gross margin. Thus, the result of using indirect distribution is often higher profit per unit of product sold. In addition, the manufacturer shifts a wide range of problems to the intermediaries and, in most situations, operates with a lower break-even point. The disadvantages of indirect distribution are (1) greater remoteness from final consumers and (2) less control over the conditions of product sale.
Net profit possibilities. Sales volume potentials are meaningful only when considered in relation to distribution costs. A channel with high sales potential may involve high distribution costs, causing low net profit. A second channel might not produce a worthwhile sales volume, even though it involves low distribution costs.
Those formulating policy on marketing channels must keep in mind the relationships among gross margin, expenses, and net profit. High gross margins, such as those obtained through using short channels, do not always mean higher net profits. Expenses of distribution are incurred for performing marketing activities. Choosing marketing channels is a matter of determining the extent to which the manufacturer should perform these activities and the extent to which their performance should be delegated to intermediaries. The rule should be: determine which agency—the manufacturer or the intermediary—can perform this particular activity most efficiently. If this rule is followed, the manufacturer’s total costs of moving the product to final buyers should be lower, and its net profits should be higher.
Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.