PRODUCT AVAILABILITY

The most important objective for any distribution channel is to make the product conveniently available for customers who want to buy it. For consumer goods, two aspects of availability must be considered. The first is to attain the desired level of coverage in terms of appropriate retail outlets. Because retailers differ in their sales volume, manufacturers need to weight the relative importance of each retailer on the basis of its percent of sales within the product category in question. The resulting figure is referred to as the percent of all commodity volume (ACV). For example, a packaged food item may be carried by only 40 percent of an area’s food stores. But it may have 70 percent ACV because it is handled primarily by supermarkets accounting for a large proportion of the total sales of such products. The second important aspect of availability for consumer products is the item’s positioning within the store. One way to measure performance here is the percentage of available shelf or display space devoted to the brand, weighted by the importance of the store.

For industrial products—and for assessing channel performance at the wholesale level for consumer products—the relevant issue of availability is whether the industrial cus- tomer or retailer has the opportunity to place an order and obtain the product when it is needed. This is a question of the adequacy of market coverage. Firms can assess coverage by measuring how often customers in a territory are called on by company or distributor salespeople and by the time required to fill and deliver an order (i.e., order cycle time). Cycle time measures are particularly relevant when dealers are able to purchase their requirements directly from a firm’s Web site, or when they are linked to a manufacturer via an electronic reorder system.

Product availability is an important objective for all distribution channels. The appropriate degree of availability varies with the characteristics of the product and the target customers, particularly the product’s importance to those customers and the amount of time and effort they will expend to obtain it. For example, consumer convenience goods, such as packaged foods and health products, demand immediate availability since most customers are unwilling to devote much effort to obtaining a particular brand. At the other extreme, immediate availability is less critical for unique and important products such as consumer specialty goods or major industrial equipment and installations.

Market and competitive factors also influence a firm’s ability to achieve a desired level of availability for its product. When demand is limited or when the brand holds a small relative share of the total market, wholesalers or retailers willing to carry it may be difficult to find. The firm may have to offer extra incentives and inducements to achieve an adequate level of product availability. On the other hand, a brand’s strong competitive position makes it easier to attain extensive retail coverage and shelf space. Also, as we’ll discuss in more detail later, firms can enhance at least some aspects of availability through effective use of the Internet.

CUSTOMER SERVICE REQUIREMENTS

A second channel objective, which is closely related to availability but broader in scope, is to achieve and maintain some target level of satisfaction in meeting the service requirements of target customers. This tends to be a particularly crucial objective for analyzer and defender businesses attempting to differentiate themselves from competitors on one or more service dimensions. Some service requirements that might be targeted for consumers, industrial end users, or other members of the distribution channel (e.g., the firm’s “intermediate customers” such as distributors or retailers) include:

1. Order cycle time, which refers to how long it takes the manufacturer to receive, process, and deliver an order.

2. Dependability, which relates to the consistency/reliability of delivery. This is probably the most important element of distribution service, especially for those using just-in-time delivery systems.

3. Communication between buyer and seller, which enables both parties to resolve problems at an early stage.

4. Convenience, meaning that the system is sufficiently flexible to accommodate the special needs of different customers.

5. Postsale services, which help the customer attain full benefits over the life of the product. Such service might include installation, user training, help lines to resolve technical glitches, repair, and spare parts availability. Such services can be particularly important in the distribution of consumer durable goods and technically complex industrial products, such as computer systems, major software applications, manufacturing machinery, and the like.

Monitoring customer complaints, and the ongoing measurement of customer (or channel member) satisfaction, retention, and loyalty levels are all appropriate measures of whether the firm is meeting its customer service targets. Monitoring customer complaints can also provide useful guidance for improving a firm’s product and service quality levels in the future. For example, Dell Computer monitors blogs criticizing the firm’s products or service and attempts to correct the problems discussed. The company also started Idea-Storm where customers offered more than 8,500 suggestions for improvement in the first year, voted on those suggestions 600,000 times, and left 64,000 comments. More than a dozen of those ideas have been implemented so far.

PROMOTIONAL EFFORT

Another common channel objective is to obtain strong promotional support from channel members for the firm’s product, including the use of local media, in-store displays, and cooperation in special promotion events. Gaining broad retailer support for in-store promotions is particularly important for low-involvement, convenience goods. Both the amount and quality of personal selling effort that channel members devote to particular products can be critical. Strong selling support is particularly important when (1) firms are marketing technically complex and expensive consumer durables or industrial goods, (2) the market is highly competitive, or (3) a differentiated defender is trying to sustain a competitive advantage based on superior product quality or customer service.

MARKET INFORMATION

Because of their proximity to the marketplace, middlemen are often relied on for fast and accurate feedback of information about such things as sales trends, inventory levels, and competitors’ actions. A high level of channel feedback is particularly important for firms in highly competitive industries characterized by rapid changes in product technology or customer preferences, such as the computer and fashion industries. Feedback is crucial for firms pursuing prospector business strategies since they depend on the early identification of new product and market development opportunities for their success.

COST-EFFECTIVENESS

Channels must be designed to minimize the costs necessary to attain the firm’s channel objectives. The cost-effectiveness of the distribution channel is of particular concern to businesses pursuing low-cost analyzer or defender strategies. However, there is often a trade-off between channel costs, particularly those associated with physical distribution activities such as transportation and inventory storage, and achieving high levels of performance on many of the other objectives we have examined, such as product availability and meeting customer service requirements. We will examine these trade-offs in more detail when we examine the pros and cons of alternative channel designs.

CHANNEL FLEXIBILITY

As Hallmark discovered, well-entrenched channels where the members have long-standing commitments or substantial mutual investments can be hard to change in response to shifting market or competitive conditions. Consequently, some firms, particularly those pursuing prospector strategies in new or rapidly growing or technically turbulent product categories, consider channel flexibility an important goal. A flexible channel is one where it is relatively easy to switch channel structures or add new types of middlemen (discount retailers and a direct-sales Web site in Hallmark’s case) without generating costly economic or legal conflicts with existing channel members

Designing Distribution Channels: What Kinds of Institutions Might Be Included?

There are four broad categories of institutions that a manager might decide to include in the distribution channel: merchant wholesalers, agent middlemen, retailers, and facilitating agencies. Each of these categories is defined in Exhibit 12.3 and discussed below.

Exhibit 12.3

MERCHANT WHOLESALERS

Some types of merchant wholesalers engage in a full range of wholesaling functions while others specialize in only limited services. But both buy goods from various suppliers (that is, they take title) and then resell those goods to their commercial customers, either industrial buyers or other resellers such as a retailer. They are compensated by the margin between the price they pay and the price they receive for the goods they carry. Approximately 400,000 merchant wholesalers are operating in the United States, including sales branches maintained by manufacturing firms.

AGENT MIDDLEMEN

The primary role of agent middlemen is to represent other organizations in the sale or purchase of goods or services. Agents do not take title to, or physical possession of, the goods they deal in. Instead, they specialize in either the buying or selling function. There are about 45,000 agent middlemen in the United States, of which manufacturer’s agents and sales agents are the two major types used by producers.

Manufacturer’s Agents or Manufacturer’s Reps These usually work for several manufacturers, carry noncompetitive, complementary merchandise in an exclusive territory, and concentrate only on the selling function. They are important where a manufacturer’s sales are not sufficient to support a company salesperson in a particular territory. Manufacturer’s reps are common in the industrial equipment, automotive supply, foot- wear, and toy industries.

Sales Agents In contrast, sales agents usually represent only one manufacturer and are responsible for the full range of marketing activities needed by that producer. Because they have a wider range of responsibilities, their commissions are much larger than those of manufacturer’s reps. Sales agents are used primarily by small firms or start-ups that have limited marketing capabilities. They are particularly common in the electronics, apparel, and home furnishing industries.

Brokers These are independent firms whose purpose is to bring buyers and sellers together for an exchange. Unlike agents, brokers usually have no continuing relationship with a particular buyer or seller. The producers of seasonal products such as fruits and vegetables and the real estate industry use brokers extensively.

E-Hubs These emerging forms of business-to-business Internet sites serve the same major function as brokers; they help bring potential buyers and sellers together for an exchange. Also like a broker, the e-hub is usually compensated by commissions from one or both parties. Some hubs focus on broad product categories of frequently purchased goods and services that are not industry specific, such as office supplies, airline tickets, or janitorial supplies, and add value by giving buyers in a range of industries access to a “virtual catalog” of offerings from an array of suppliers. While the hub is not directly responsible for per- forming any of the physical distribution functions, such as transportation or storage, it may maintain relationships with third-party facilitating agencies such as UPS to help ensure that buyers get what they pay for in a timely manner. Examples of this kind of hub include W.W. Grainger and www.BizBuyer.com.

Other hubs are more industry-specific, bringing buyers and sellers together within a single product category. They create value by enabling one-stop shopping by purchasers. For example, www.PlasticsNet.com allows plastics processors to issue a single purchase order for hundreds of plastics products sourced from a diverse set of suppliers. Because the products they offer tend to be specialized, industry-specific hubs often work with established merchant wholesalers (distributors) in their industry to ensure product availability and reliable delivery. Other examples include SciQuest in the life sciences industry and Chemdex in specialty chemicals.

RETAILERS

Retailers sell goods and services directly to final consumers for their personal, nonbusiness use. Because retailers usually take title to the goods they carry, their compensation is the margin between what they pay for the merchandise and the prices they charge their customers. Retailing is a major industry in the United States, with over 1.6 million retail establishments.

Retail stores can be categorized in many different ways, such as by the type of merchandise carried (supermarkets, drugstores), breadth of product assortments (specialty or department stores), pricing policies (discount or specialty stores), or nature of the business’s premises (e-tailers, mail-order retailers, vending-machine operators, traditional stores). One useful classification scheme groups stores according to their method of operation— low margin/high turnover versus high margin/low turnover.

The former compete primarily on a price basis. To keep volume high while minimizing inventory investments, low-margin/high-turnover stores usually concentrate on fast- moving items—such as food, health and beauty aids, basic clothing items, and housewares—and carry a relatively limited selection in each product category. Examples of such retailers include mass-merchandise discounters, wholesale clubs, most supermarket and drug chains, and some specialty chains in such areas as women’s clothing, shoes, hardware, office supplies, and building supplies (e.g., Home Depot and Lowe’s).

To profit, low-margin/high-turnover retailers must minimize their costs. Their focus on standardized, prepackaged merchandise helps lower personnel costs by reducing or elimi- nating in-store sales assistance. It also enables them to centralize many purchasing and store operating decisions, thus reducing the number of administrative personnel needed. Many such operations—particularly the mass merchandisers—also minimize their capital investment by operating out of freestanding, no-frills facilities near major traffic arteries; locations where land costs, rents, and taxes are low. Many specialty store chains, however, operate out of sizable malls.

At the other extreme, high-margin/low-turnover retailers differentiate themselves with unique assortments, quality merchandise, good customer service, and a prestigious store image. They focus on shopping or specialty goods, usually carrying a narrow range of product categories but offering deep assortments of styles and sizes within each category. They also emphasize prestigious national brands or exclusive goods unavailable elsewhere. Tiffany’s, for example, carries many one-of-a-kind crystal and jewelry items. This category includes most department stores and upscale specialty stores.

NONSTORE RETAILING

These institutions fit the definition of a retailer, but we discuss them separately because they don’t have a fixed bricks-and-mortar physical location and most do not enable customers to personally inspect the merchandise or take immediate possession. This category includes direct selling (e.g., door-to-door sales and telemarketing), mail-order catalogs, TV shopping, vending machines, and Web sites.

There are several varieties of retail Web sites, including Web start-ups like Amazon .com and iTunes.com that exist solely on the Web and do not have any physical stores, Web sites developed by large catalog retailers (Lands’ End, L.L. Bean) to leverage their direct-delivery operations, and Web sites developed by established bricks-and-mortar retailers like Target and Tesco to leverage their brand names and customer service skills.

Historically, an established brand name and customer base typically enabled the catalog and bricks-and-mortar retailers to attract customers to their Web sites at lower cost than the Web start-ups. However, survey results suggest that retail Web sites in general have not done a great job of satisfying customers, particularly on basic customer service dimensions, although the bricks-and-mortar sites have been more successful at keeping those buyers coming back for repeat purchases than the start-ups.

Many of the start-ups began life as “virtual” businesses that outsourced many of the physical distribution functions such as inventory storage and delivery. But because of the critical importance of good customer service for developing a satisfied and loyal customer base, some of those start-ups have begun developing their own physical distribution and fulfillment competencies to gain tighter control over those activities. For instance, Amazon.com has invested hundreds of millions of dollars in warehouses and inventory to help ensure fast, reliable delivery. As a result, repeat customers now account for the vast majority of Amazon.com ’s orders.

Similarly, bricks-and-mortar stores have sought more creative uses for their Web sites and other communication channels as their customers have changed the way they shop. A summary of survey results detailing some of these changes in shopping behavior is presented in Exhibit 12.4 The bottom line is that many customers who make their purchases within a store rely on the retailer’s Web site—as well as those of manufacturers and competing retailers and bloggers—to compare features, brands, and prices before they make a purchase.

To help in-store salespeople remain relevant as their customers use the Internet to become increasingly savvy, some retailers have revamped their job descriptions, training programs, and incentives. At Best Buy, for instance, 30 percent of store staff have been redeployed from specific departments to roam the entire store. Their job is to understand all the electronic gadgets in the store, how they work together, and how a customer can get the best performance from a product when she or he gets it home. To get those salespeople up to speed, the company has them meet with manufacturers’ reps, attend frequent training programs, and—when customers are scarce—play with the products.

Auction Sites Facilitate Retail Start-ups Auction sites like eBay and China’s TaoBao not only provide a convenient way for consumers to sell possessions they want to get rid of, they also enable entrepreneurs to start new retail businesses with minimal capital and red tape. In the United States, nearly 500,000 people now make 25 percent or more of their annual incomes as retailers on eBay. But eBay-based start-ups are becoming even more popular in Europe where government regulations and scarce venture capital have historically posed problems for small retailers. Starting an eBay business is relatively easy for anyone with broadband and inventory and shipping software, which is readily available for a few thousand dollars. And European logistics companies such as Deutsche Post offer services tailored to small e-commerce operations. Consequently, more than 60,000 entre- preneurs in both Germany and Britain, 15,000 in France, and nearly 10,000 in Italy earn at least 25 percent of their income as eBay merchants. As a result, the diversity of products available to consumers and their price competitiveness are increasing rapidly.

Channel Design Alternatives

Deciding which channel members to include when designing a distribution system depends in part on whether the good or service is to be sold to Individual Consumers or organizational customers. Therefore, we begin our examination of alternative channel designs by enumerating the options available for distributing consumer versus industrial goods. But the choice also depends, as we’ll see in subsequent sections, on the firm’s competitive strategy and resources and therefore on the relative importance of the various channel objectives we discussed earlier.

Exhibit 12.4 How In-Store Purchasers Use the Internet

Percent of in-store shoppers . . . who:

69 Research products online before going to a store to make a purchase.

62 Have looked at least once at an online peer review before making a purchase.

61 Want to be able to scan bar codes and access information on other stores’ prices.

39 Compared a product’s features and price across retail outlets before buying.

9 Used a cell phone to text-message a friend or relation about a product while shopping.

INTENSIVE DISTRIBUTION

Consumer Goods and Services For consumer goods and services, achieving a desired level of product availability is largely a matter of gaining the cooperation of appro- priate numbers and types of retail outlets. A manufacturer can pursue three basic strategies of retail coverage—intensive, exclusive, or selective distribution (see Exhibit 12.7 ). The best strategy for a given product depends on the nature of the product, the target market pursued, and the competitive situation.

Intensive Distribution Such a strategy uses the maximum possible number of retailers and is most appropriate for low-involvement, frequently purchased convenience goods such as candy, soft drinks, deodorants, and razor blades. This strategy maximizes product availability, which generates greater product recognition and more impulse buying. However, firms that adopt intensive distribution often experience implementation and cost problems. Individual retailers may be more reluctant to carry the product or to cooperate fully with the manufacturer’s marketing program than if they were given an exclusive right to carry the product in their territory. This was the problem Hallmark ran into with its traditional specialty retailers when the firm attempted to increase the intensiveness of its distribution by adding discounters and a Web site. Also, gaining cooperation from a large proportion of available retailers is a problem when total demand for the product is relatively small or when the brand is not the share leader in its product category.

Exclusive Distribution This strategy relies on only one retailer or dealer in a given geographic territory. It is most appropriate when the product is a high-involvement specialty or shopping good. Exclusive distribution is also useful when a firm wants to differentiate its product on the basis of high quality, prestige, or excellent customer service. The main advantages of exclusive distribution are that the manufacturer can choose retailers whose clientele match its target market, and that there will be close cooperation in implementing the producer’s merchandising and customer service programs. Examples of products that are exclusively distributed include Ethan Allen furniture and Rolls-Royce automobiles. The major disadvantage of exclusive distribution is the risk involved in relying on a single retailer in a given territory.

Selective Distribution This is a compromise between the other two extremes since it uses more than one but fewer than all available retailers in a geographic area. It is an appro- priate strategy for shopping goods. Most brands of automobiles are distributed this way.

Implications for Channel Design In general terms, the greater the strategic importance of availability and the more intensive the desired level of retail coverage, the more likely wholesalers and/or agents are to be used. Intensive distribution requires large numbers of retail outlets, many of which are small, independently-owned operations. The personal selling, order processing, inventory storage, and delivery costs involved in servicing such a large network of retailers would be prohibitive for most manufacturers. Therefore, channel designs such as B and C in Exhibit 12.5 are most common for large, deep-pocketed firms seeking intensive distribution, while channel designs D and E are used by smaller firms needing intensive distribution. Firms with exclusive or selective distribution goals are likely to employ channel design B in order to interface directly with their retailers.

Industrial Goods and Services In organizational markets, availability and customer service objectives tend to go together because it is order cycle time (the time it takes for customers to place orders and have the goods delivered to their plants or offices) and delivery dependability that tend to be most important for keeping customers satisfied. Historically, firms that wanted to provide fast and reliable delivery had to design channels with a relatively large number of “distribution points”—either wholesale distributors or company- owned warehouses and sales branches. Many distribution points were necessary to ensure adequate inventories would be available to avoid out-of-stock conditions and that those inventories would be close enough to the customer to allow quick delivery. Consequently, firms that tried to differentiate themselves on the basis of excellent customer service tended to rely on channels with substantial numbers of wholesale distributors, such as Channel B in Exhibit 12.6 (for companies that could afford a field salesforce) or Channel D (for those that could not). The reason, once again, had to do with the trade-offs between good customer service and physical distribution costs. Unless the producer was pursuing only a few very large customers or had sufficient sales volume and resources to make substantial invest- ments in warehouses and field salespeople, the selling, storage, and transportation functions necessary to provide quick and reliable service could usually be performed more efficiently by independent distributors. As we’ll see later, however, this historical trade-off between customer service levels and physical distribution costs is changing as the result of improved communication technologies and the logistical alliances they have made possible.

The Impact of the Internet on Availability and Customer Service Some analysts argue that the Internet will lead to the “death of distance”; the geographic locations of sellers and their customers will no longer be relevant when they engage in transactions in cyberspace. Consequently, they argue that the Internet will facilitate the availability of all sorts of goods and services—both consumer and industrial. Keep in mind, though, that there are two aspects of availability from the customer’s point of view. The first has to do with product search: identifying available alternatives, collecting information about them, and placing an order. The second concerns product acquisition or order cycle time: how long it takes to gain physical possession of the product at the location where it is to be used or consumed.

Web sites, whether sponsored by the manufacturer (as is the case with Hallmark’s site) or by wholesalers, retailers, or e-tailers who are members of the distribution channel, have clearly enhanced the search aspect of availability. Potential customers can learn about available brands, compare features and prices, and make purchases any time of the day or week without ever getting up from their computer. And in many product categories, “aggregator” sites, or e-hubs, bring together many buyers and sellers under one virtual roof, enabling potential customers to compare alternatives and decide on a final purchase all at one site.

On the other hand, the Internet is not much help with the acquisition or physical distribution aspects of availability, at least not in most product categories. While it can help coordinate inventories and delivery schedules among channel members, it can’t help move the physical product from the producer to the customer’s home or plant, unless the product, like music or books, can be delivered in digital form. In fact, many e-tailers, such as RedEnvelope, outsource inventory storage and delivery activities to an established wholesaler or order fulfillment specialists. Therefore, channels incorporating traditional bricks-and-mortar wholesalers and retailers with the ability to provide quick delivery likely have a competitive advantage on the acquisition/order cycle time dimension, particularly for consumer convenience and impulse items, fashion goods and big-ticket durables that need to be tried out or tried on before purchase, and industrial components where quick and reliable delivery are critical.

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