Marketing Mix | Place in Four P’s
The last element of the marketing mix is the place. Also called placement or distribution, this is the process and methods used to bring the product or service to the consumer.
In this section we will take a look at 1) an introduction of place, 2) distribution channels and intermediaries, 3) making channel decisions, 4) managing distribution channels, 5) the impact of the marketing mix on place, and 6) an example of Dell Computers’ distribution strategy.
PLACE – AN INTRODUCTION
In the marketing mix, the process of moving products from the producer to the intended user is called place. In other words, it is how your product is bought and where it is bought. This movement could be through a combination of intermediaries such as distributors, wholesalers and retailers. In addition, a newer method is the internet which itself is a marketplace now.
Through the use of the right place, a company can increase sales and maintain these over a longer period of time. In turn, this would mean a greater share of the market and increased revenues and profits.
Correct placement is a vital activity that is focused on reaching the right target audience at the right time. It focuses on where the business is located, where the target market is placed, how best to connect these two, how to store goods in the interim and how to eventually transport them.
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DISTRIBUTION CHANNELS & INTERMEDIARIES
What is a Distribution Channel?
A distribution channel can be defined as the activities and processes required to move a product from the producer to the consumer. Also included in the channel are the intermediaries that are involved in this movement in any capacity. These intermediaries are third party companies that act as wholesalers, transporters, retailers and provide warehouse facilities.
Types of Distribution Channels
There are four main types of distribution channels. These are:
In this channel, the manufacturer directly provides the product to the consumer. In this instance, the business may own all elements of its distribution channel or sell through a specific retail location. Internet sales and one on one meetings are also ways to sell directly to the consumer. One benefit of this method is that the company has complete control over the product, its image at all stages and the user experience.
In this channel, a company will use an intermediary to sell a product to the consumer. The company may sell to a wholesaler who further distributes to retail outlets. This may raise product costs since each intermediary will get their percentage of the profits. This channel may become necessary for large producers who sell through hundreds of small retailers.
In this type of channel, a company may use a combination of direct and indirect selling. The product may be sold directly to a consumer, while in other cases it may be sold through intermediaries. This type of channel may help reach more consumers but there may be the danger of channel conflict. The user experience may vary and an inconsistent image for the product and a related service may begin to take hold.
The last, most non tradition channel allows for the consumer to send a product to the producer. This reverse flow is what distinguishes this method from the others. An example of this is when a consumer recycles and makes money from this activity.
Types of Intermediaries
Distribution channel intermediaries are middlemen who play a crucial role in the distribution process. These middlemen facilitate the distribution process through their experience and expertise. There are four main types of intermediaries:
The agent is an independent entity who acts as an extension of the producer by representing them to the user. An agent never actually gains ownership of the product and usually make money from commissions and fees paid for their services.
Wholesalers are also independent entities. But they actually purchase goods from a producer in bulk and store them in warehouses. These goods are then resold in smaller amounts at a profit. Wholesalers seldom sell directly to an end user. Their customers are usually another intermediary such as a retailer.
Similar to wholesalers, distributors differ in one regard. A wholesaler may carry a variety of competition brands and product types. A distributor however, will only carry products from a single brand or company. A distributor may have a close relationship with the producer.
Wholesalers and distributors will sell the products that they have acquired to the retailer at a profit. Retailers will then stock the goods and sell them to the ultimate end user at a profit.
Importance of Distribution Channels
It may seem simplistically possible and smarter for a company to directly distribute its own products without the help of a channel and intermediaries. This is especially so because the internet allows sellers and buyers to interact in real time. But in actual practice it may not make business sense for a company to set up its own distribution operation. Large scale producers of consumer goods for example, need to stock items of basic necessity such as soap, toilet paper and toothpaste in as many small and large stores in as many locations as possible. These locations may be as close together as two on the same street. They may also be remote rural convenience stores, rest stops and petrol stations. It would be counterproductive and costly for the company to attempt to achieve this without a detailed distribution channel.
Even in cases where a company does sell directly, there remain activities that are performed by an outside company. A laptop may be sold from a company website to a consumer directly, but it will be sent out using an existing courier service. This is why, in some form or the other, all producers must rely on a distribution channel.
MAKING CHANNEL DECISIONS
Setting Goals and Direction
The first step to deciding the best distribution channel to use, a company needs to:
- Analyze the customer and understand their needs
- Discuss and finalize channel objectives
- Work out distribution tasks and processes.
Some key questions to ask in finalizing these three areas include:
- Where do users seek to purchase the product?
- If is a physical store, is it a supermarket or a specialist store? Is it an online store or a catalogue?
- What is the access available to the right distribution channels?
- What are competitors doing? Are they successful? Can best practices be used in making channel decisions?
Selecting Distribution Strategies
A company may need to use different strategies for different types of products. Three main strategies that can be used are:
- Intensive Distribution – This strategy may be used to distribute lower prices products that may be impulse purchases. Items are stocked at a large number of outlets and may include things such as mints, gum or candy as well as basic supplies and necessities.
- Selective Distribution – In this strategy, a product may be sold at a selective number or outlets. These may include items such as computers or household appliances that are costly but need to be somewhat widely available to allow a consumer to compare.
- Exclusive Distribution – A higher priced item may be sold at a single outlet. This is exclusive distribution. Cars may be an example of this type of strategy.
Assessing Benefits of Distribution Channels
While making channel decisions, a company may need to weigh the benefits of a partner with the associated costs. Some potential benefits to look out for include:
- Specialists – Since intermediaries are experts at what they do, they can perform the task better and more cost effectively than a company itself.
- Quick Exchange time – Being specialists and using established processes, intermediaries are able to ensure deliveries faster and on time.
- Variety for the Consumers – By selling through retailers, consumers are able to choose between a varieties of products without having to visit multiple stores belonging to each individual producer.
- Small Quantities – Intermediaries allow the cost of transportation to be divided and this in turn allows consumers to buy small quantities of a product rather than having to make bulk purchases. This is possible when a wholesaler buys in bulk, stores the product in a warehouse and then provides the product to retailers located close by at lower transportation costs.
- Sales Creation – Since retailers and wholesalers have their own stakes in the product, they may have their own advertising or promotions efforts that help generate sales.
- Payment Options – Retailers may create payment plans and options for customers allowing easier purchases.
- Information – The distribution channel can provide valuable information on the product and its acceptability, allowing product development as well as an idea of emerging consumer trends and behaviors.
Assessing Possible Channel Costs
With the benefits in mind, here are some costs that a producer may have to weigh in order to make channel decisions
- Lost Revenue – Because intermediaries need to be either paid for their services or allowed to resell at a higher price, the company may lose out on revenue. Pricing needs to stay consistent, so the company will have to reduce its profit margin to give a cut to the intermediary.
- Lost Communication Control – Along with revenue, the message being received by the consumer is also in the hands of the intermediary. There is a danger of wrong information being communicated to the customer regarding product features and benefits which can lead to dissatisfaction.
- Lost Product Importance – When a product is handed over to an intermediary, how much importance it gets is now out of the company’s hand. The intermediary may have incentives to push another product first at the expense of others.
MANAGING DISTRIBUTION CHANNELS
Channel management is an essential activity for the manufacturer. Intermediaries need to be kept motivated and offered incentives to ensure timely and efficient delivery of products and services. Clear messages regarding products and their functionalities need to be passed on to attempt to keep clear communication regarding a product or brand all the way to the end user.
Just as a customer base is segmented and addressed according to their specific needs and requirements, distribution channels can also be segmented. Now all intermediaries or the markets they serve will be similar. There may be a need to foster stronger relationships with a retailer that sells in a knowledgeable and discerning urban market with high competition. Similarly, if a product is expensive and highly specialized, a retailer may need to be trained and given the relevant information.
Benefits of Channel Segmentation
A company may achieve one of more of the following benefits through channel segmentation:
- Product Management – Relevant products may be provided to the right channel which can help reduce cost of irrelevant stock as well as unnecessary logistical arrangements.
- Price Management – Local price differentiation may be possible.
- Promotion Management – More targeted and relevant promotional activities may be possible with more clear and consistent marketing messages.
- Efficiency in Operations – Time and resource wastage through the channel can be removed. Development needs of every channel segment can be addressed separately, in a more targeted manner.
IMPACT OF MARKETING MIX ON PLACE
No element of the marketing mix works in isolation. Information from each of them acts as input to the others. This is why when shaping a distribution strategy, input needs to be taken from all other elements of the mix and any considerations need to be addressed or incorporated. Product, price and promotion may have the following impacts on the distribution strategy:
Impact of Product Issues
The type of product being manufactured is often the deciding factor in distribution decisions. A delicate or perishable product will need special arrangements while sturdy or durable products will not require such delicate handling.
Impact of Pricing Issues
An assessment of the right price for a product is made by the marketing team. This is the price at which the customer will be willing to make the purchase. This price will often help decide the type of distribution channel. If this price does not allow a high margin, then a company may choose to use less intermediaries in its channel to ensure that everyone gets their cut at a reasonable cost to the manufacturer.
Impact of Promotion Issues
The nature of the product also has an impact on the type of promotions required to sell it. These promotion decisions will in turn directly affect the distribution decisions. Disposable goods or those of everyday use do not require too many special channels. But for a car, there needs to be extensive salesperson and user interaction. For this type of product, a specialist channel may be needed.
EXAMPLE – DIRECT SELLING AT DELL COMPUTERS
Dell Computers was founded by a college freshman Michael Dell. By 1985, the company had developed its unique strategy of offering made to order computers. As a result of this, sales went from 6 million dollars in 1984 to 70 million in 1985. In another 5 years the sales jumped to 500 million dollars and by the end of 2000 they had crossed 25 billion dollars.
A superior supply chain and innovative manufacturing had an important role to play in this phenomenal success. Another important contributing factor was the unique distribution strategy employed by the company. Identifying and capitalizing on an emerging market trend, Dell eliminated the middleman or retailers from their distribution channel. This was done after studying and analyzing the personal computer value chain.
Dell became a strong direct seller, by using mail-order systems before the spread of the internet. After the internet became more mainstream, an online sales platform was established. Early on in the internet era, Dell began providing order status reports and technical support to their customers online. Online sales reached 4 million dollars a day in 1997.
While competitors sold pre-configured and assembled PCs in retail stores, Dell offered something new and attractive to the customers by providing the option to pick desirable features and that too at a discounted price. This was possible because Dell did not have to bear the costs of the middleman.
Another useful aspect of this model was the information available regarding customers and their needs and requirements. This helped the company predict market trends and segment its market. This segmentation helped product development efforts and an understanding of what creates value for each segment.
Through careful analysis of the target market, a study of available channel options and effective use of a novel idea, Dell computers managed to reach early success in its industry.