Relationship between producer and consumer channel of distribution

Channels of Distribution

relationship between producer and consumer channel of distribution

Based on this relationship, we define a channel of distribution, also called a marketing channel, Direct Channel: Producer flows to consumers, consumers flow. Distribution issues come into play heavily in deciding brand level strategy. Recommend the product to the customer and thus sell large quantities;; Carry larger .. A large number of links may be desirable to consumers, but they tend to draw. Read this article to learn about the classification of distribution Channels: consumer, Wholesalers buy in bulk from producers and sell smaller quantities to due to closer relationship between the manufacturer and the customer, as well as.

The extent to which a firm should seek narrow exclusive vs. For example, most consumers will switch soft drink brands rather than walking from a vending machine to a convenience store several blocks away, so intensity of distribution is essential here. However, for sewing machines, consumers will expect to travel at least to a department or discount store, and premium brands may have more credibility if they are carried only in full service specialty stores.


On the surface, Compaq passed up the opportunity to sell large numbers of computers directly to large firms without sharing the profits with dealers. On the other hand, dealers were more likely to recommend Compaq since they knew that consumers would be buying these from dealers.

Distribution provides a number of opportunities for the marketer that may normally be associated with other elements of the marketing mix. Placement is also an opportunity for promotion—e. Similarly, it may be useful to give away, or sell at low prices, certain premiums e. Partnerships and joint promotions may involve distribution e. Deciding on a strategy. In view of the need for markets to be balanced, the same distribution strategy is unlikely to be successful for each firm.

The question, then, is exactly which strategy should one use? It may not be obvious whether higher margins in a selective distribution setting will compensate for smaller unit sales. Here, various research tools are useful. In focus groups, it is possible to assess what consumers are looking for an which attributes are more important. Scanner data, indicating how frequently various products are purchased and items whose sales correlate with each other may suggest the best placement strategies.

It may also, to the extent ethically possible, be useful to observe consumers in the field using products and making purchase decisions.

Here, one can observe factors such as 1 how much time is devoted to selecting a product in a given category, 2 how many products are compared, 3 what different kinds of products are compared or are substitutes e.

Channel members—both wholesalers and retailers—may have valuable information, but their comments should be viewed with suspicion as they have their own agendas and may distort information.

What Is a Direct Channel of Distribution? |

Most grocery products are most efficiently sold to the consumer through retail stores that take a modest mark-up—it would not make sense for manufacturers to ship their grocery products in small quantities directly to consumers. Intermediaries perform tasks such as Moving the goods efficiently e.

Direct marketers come in a variety of forms, but their categorization is somewhat arbitrary. Some firms sell directly to consumers with the express purpose of eliminating retailers that supposedly add cost e. Others are in the business not so much to save on costs, but rather to reach groups of consumes that are not easily reached through the stores. Telemarketers operate by making the promotion in integral part of the process—you are explained the benefits of the program in an advertisement or infomercial and you then order directly in response to the promotion.

Finally, some firms combine these roles—e. There are certain circumstances when direct marketing may be more useful—e. Direct marketing offers exceptional opportunities for segmentation because marketers can buy lists of consumer names, addresses, and phone-numbers that indicate their specific interests. For example, if we want to target auto enthusiasts, we can buy lists of subscribers to auto magazines and people who have bought auto supplies through the mail.

We can also buy lists of people who have particular auto makes registered. For example, to reach the above-mentioned auto-enthusiasts, we buy lists of subscribers to several different car magazines, lists of buyers from the Hot Wheels and Wiring catalog, and registrations of Porsche automobiles in several states. We then combine these lists the merge part.

However, there will obviously be some overlap between the different lists—some people subscribe to more than one magazine, for example. The purge process, in turn, identifies and takes out as many duplicates as possible. This is not as simple task as it may sound up front.

Jones could also be written as J. Jones, or it could be misspelled Jon J. Simply picking a consumer out of the phone-book would yield even lower responses—much less than one percent. Keep in mind that a relevant comparison here is to conventional advertising.

The response rate to an ad placed in the newspaper or on television is usually well below one percent frequently more like one-tenth of one percent. More than one percent of people who see an ad for Coca Cola on TV will buy the product, but most of these people would have bought Coke anyway, so the marginal response is low. Online marketing can serve several purposes: Actual sales of products—e. Customers can be quite effectively targeted in many situations because of the context that they, themselves, have sought out.

The site may contain information for those who no longer have their manuals handy and, for electronic products, provide updated drivers and software patches. Data can be collected relatively inexpensively on the Net. However, the response rates are likely to be very unrepresentative and recent research shows that it is very difficult to get consumers to read instructions. This is one of the reasons why the quality of data collected online is often suspect.

First of all, the desired domain name may not be available—e. It is crucial for a firm to have its site indexed favorably in major search engines such as Yahoo, AOLFind, and Google.

Marketing channel

These animations have proven very unreliable. However, in most cases, selling online will probably be more costly than selling in traditional stores due to the high costs of processing orders and direct shipping to the customer. Some products may, however, be economically marketed online. Some factors that are relevant in assessing the potential for e-commerce to be an effective way to sell a specific products are: Products that have a lot of value squeezed into a small volume e.

Some products may have a rather high percentage margin—e. This allows the merchant to spend money on processing, packaging, and shipping the order.

relationship between producer and consumer channel of distribution

Ten dollars, in contrast, can only cover a small amount of employee time and very limited packaging and shipping. Some online merchants do charge for shipping, but doing so will ultimately make the online merchant less competitive. Extent of customization needed. Some products need to be customized—e. Here, online processing may be useful because the customer can do much of the work.

relationship between producer and consumer channel of distribution

Willingness of customers to pay for convenience. Some consumers may be willing to pay for the convenience of having products delivered to their door. For example, delivering high bulk, generally low value groceries is generally not efficient. However, for some customers, it may be worthwhile to pay to avoid an inconvenient trip to the grocery store. Geographic dispersal of customers. Electronic commerce, when value-to-bulk ratios and absolute margins are not favorable, is often not viable when customers are located conveniently close to a retail outlet.

However, for some products—e. Vulnerability of inventory to loss of value. Some products—especially high tech products—have a very high effective carrying costs. It has been estimated that because of the rapid technological progress made in the computer field, computer parts may lose as much as 1.

In such a situation, then, trying to reach the customer directly may make sense, even if the direct costs of distribution are higher, because of the inventory value issue.

There are a number of economic realities of online competition: As discussed, costs of handling online orders is often higher than that of distributing through traditional stores. By the forces of supply and demand, online prices will then be driven down so that the profit from selling online will be no greater than that from traditional retailing. Any reduced costs would then be expected to go to customers.

Competition will be greater for products that have large markets than for those where markets are smaller and more specialized. Higher prices—closer to the list price—can be charged for specialty books, but for a large part of the market, competition will be intense. A new online merchant will face competition from established traditional merchants. These will often have the cash reserves to stay in business for a long time even with temporary competition.

The web designer must make various issues into consideration: As we saw, some of the fancier sites have serious problems functioning practically. Consumers may be impressed by a fancy site, or may lack confidence in a firm that offers a simple one. Keeping users on the site: One problem here is that many consumers are drawn away from a site and then are unlikely to come back. A large number of links may be desirable to consumers, but they tend to draw people away. Taking banner advertisers on your site from other sites may be profitable, but it may result in customers lost.

In principle, it is fairly easy to search and compare online, and it was feared that this might wipe out all margins online. More recent research suggests that consumers in fact do not tend to search very intently and that large price differences between sites persist.

The content of a site should generally be based on the purposes of operating a site. For most sites, however, having a clear purpose be evident is essential. The site should generally provide some evidence for this position. For example, if the site claims a large selection, the vast choices offered should be evident. Sites that claim convenience should make this evident.

A main purpose of the Internet is to make information readily available, and the site should be designed so that finding the needed information among all the content of the site is as easy as possible. Since it is easy for consumers to move to other sites, the site should be made interesting. To provide the information and options desired by customers, two-way interaction capabilities are essential. One method is search engine optimization, a topic that will be covered below.

For example, Hotmail attaches a message to every e-mail sent from its service alerting the recipient that a free e-mail account can be had there. Google offers a free e-mail account with a full gigabyte of storage. This is available only by invitation from others who have such e-mail accounts. If the friend bought any of the same items, both the original customer and the friend would get a discount.

Another method of gaining traffic is through online advertising. Occasionally, a firm may advertise their sites in traditional media. Geico, Dell Computer, and Progressive Insurance do this.

Conventional advertising may also contain a web site address as part of a larger advertising message. Viral marketing is more suitable for some products than for others. To get others involved in spreading the word, the product usually must be interesting and unique.

It must also be simple enough so that it can be explained briefly. It is most useful when switching or trial costs are low. Viral marketing does raise some problems about control of the campaign. For example, if a service is aimed at higher income countries and residents there spread the word to consumers in lower income countries, people attracted may be unprofitable.

Advertisers, however, may not be willing to pay for targets who cannot afford their products. Measuring the effectiveness of a campaign may be difficult. When a viral campaign relies on e-mail, messages received may be considered spam by some recipients, leading to potential brand damage and loss of goodwill.

One way to generate traffic is promotions. Many sites often offer new customers discounts or free gifts. This can be expensive, but sometimes, the gifts can be ones that have a low marginal cost. For example, once the firms pays for the development of a game, the cost of letting new users download it is modest. On Google, the default screen size is ten sites, so being in the top ten is essential. Because of the importance of search engines, getting a good ranking or coming up early on the list for important keywords is vitally important.

There are several types of sites that are similar to search engines. Directories involve sites that index information based on human analysis. The Open Directory Project at http: Some sites contain link collections as part of their sites—e. The product will then be delivered by courier.

Direct Online Selling In a way, this method subsumes the other, because the power of the internet is that you can directly market to many consumers, without leaving your office or open a retail store.

Simply advertise online, either via your own website, via Google Ads, or via social media ads. Your customers can then place a direct order on your site or via email, and then you ship the goods to them via post, courier, or via your own vehicles. Direct selling is pretty much the shortest channel of distribution, and it is also the simplest.

Direct selling makes it easy to move your goods to the customer pretty quickly to ensure their satisfaction. You also get to contact consumers directly and build their trust in your brand. Advantages of Direct Channels of Distribution Numerous benefits exist that you can have by using a direct channel of distribution to get your product to the consumer.

Since there are no intermediaries, you get to enjoy higher profit margins on your products. If you choose to do direct marketing on the internet, then you provide your customers with a convenient solution that's available 24 hours.

  • Classification of Distribution Channels : Consumer, Industrial and Service
  • What Is a Direct Channel of Distribution?

Your customers will appreciate that. Many customers appreciate the opportunity to deal directly with the manufacturers of a product. They also get the opportunity to be more familiar with your brand, which builds their loyalty. Disadvantages of Direct Channels of Distribution There are also quite a few disadvantages of direct channels of distribution that you should consider, before you use them for your products. Indirect channels of distribution have extensive global networks that involve numerous wholesalers and retailers.

It is difficult for a direct distribution channel to compete with such an extensive network. Retailers order products directly from the manufacturer, then sell those products directly to the consumer. A fourth level is added when manufacturers sell to wholesalers rather than to retailers.

In a four-level structure retailers order goods from wholesalers rather than manufacturers. Finally, a manufacturer's agent can serve as an intermediary between the manufacturer and its wholesalers, making a five-level channel structure consisting of the manufacturer, agent, wholesale, retail, and consumer levels. A five-level channel structure might also consist of the manufacturer, wholesale, jobber, retail, and consumer levels, whereby jobbers service smaller retailers not covered by the large wholesalers in the industry.

Intermediaries, however, provide several benefits to both manufacturers and consumers: The improved efficiency that results from adding intermediaries in the channels of distribution can easily be grasped with the help of a few examples. In the first example there are 5 manufacturers and 20 retailers. If each manufacturer sells directly to each retailer, there are contact lines—one line from each manufacturer to each retailer. The complexity of this distribution arrangement can be reduced by adding wholesalers as intermediaries between manufacturers and retailers.

If a single wholesaler serves as the intermediary, the number of contacts is reduced from to 25—5 contact lines between the manufacturers and the wholesaler, and 20 contact lines between the wholesaler and the retailers. Reducing the number of necessary contacts brings more efficiency into the distribution system by eliminating duplicate efforts in ordering, processing, shipping, etc.

In terms of efficiency there is an effect of diminishing returns as more intermediaries are added to the channels of distribution. If, in the example above, there were 3 wholesalers instead of only 1, the number of essential contacts increases to Of course this example assumes that each retailer would order from each wholesaler and that each manufacturer would supply each wholesaler.

relationship between producer and consumer channel of distribution

In fact geographic and other constraints might eliminate some lines of contact, making the channels of distribution more efficient. Intermediaries provide a second benefit by bridging the gap between the assortment of goods and services generated by producers and those in demand from consumers. Manufacturers typically produce many similar products, while consumers want small quantities of many different products. In order to smooth the flow of goods and services, intermediaries perform such functions as sorting, accumulation, allocation, and creating assortments.

In sorting, intermediaries take a supply of different items and sort them into similar groupings, as exemplified by graded agricultural products. Accumulation means that intermediaries bring together items from a number of different sources to create a larger supply for their customers. Intermediaries allocate products by breaking down a homogeneous supply into smaller units for resale.

Finally, they build up an assortment of products to give their customers a wider selection. A third benefit provided by intermediaries is that they help reduce the cost of distribution by making transactions routine. Exchange relationships can be standardized in terms of lot size, frequency of delivery and payment, and communications.

Seller and buyer no longer have to bargain over every transaction.

relationship between producer and consumer channel of distribution