Managing Channels of Distribution

The Marketing Executive's Complete Guide

Kenneth ROLNICKI

• Publisher: AMACOM
• Year: 1998
• Print ISBN: 9780814431795
• eBook ISBN: 9780814416037
• Topic: Business
• Subtopic: Sales
• Index: Business

"Channels of distribution is one of the hottest areas in marketing and sales today. And no one understands the subject better than Ken Rolnicki! Managing Channels of Distribution supplies a much-needed source of knowledge and expertise that professionals can rely on. Based on case studies and real-life experience, the book explains the complexities of managing multiple channels -- distributors, dealers, manufacturer's reps, VARs, private labels, brokers, wholesalers, retailers, and all the rest. In the process, Rolnicki explores both macro and micro business influences that affect channel effectiveness. Special attention is paid to the frustrating areas of channel power and conflict, the dangerous issue of legalities, and the most critical topic of all -- the channel design sequence."

Chapter 1

Pivotal Marketing Channel Concepts

This is a book about indirect marketing channels. It is designed to help you become a “channelmaster,” one who can build and manage a strong, profitable network of channels that sell products and services for you and your company.

From an operational standpoint, a marketing channel is the path a product or service takes as it moves from the manufacturer to its end user or consumer. The very basic channel structure shown in Exhibit 1-1 was the rule in the years following World War II. In those days, the path between manufacturer and consumer was a straight one. A manufacturer faced only one decision: whether to use a direct or an indirect channel of distribution (COD).

If the manufacturer selected a direct channel, it hired a sales force to get the product on the shelves or into the hands of consumers. In the 1950s, for example, the only way to buy an IBM typewriter was to order one from IBM salespeople who called on offices. If the manufacturer was too small to hire a proprietary sales force, it opted for an indirect channel and hired a distributor to sell to end users. In the 1950s, sales agents, not employees, invited housewives to parties to purchase Tupperware products. Tupper ware sales agents and their parties were their indirect channel.

As time passed, the path between manufacturer and end user developed a thousand twists and turns. In fact, today it is less like a path and more like a wheel, with the manufacturer at the “hub” connected to the end user at the “tire” by dozens of direct and indirect channel “spokes.”

Exhibit 1-2 shows how the number and complexity of indirect channels has multiplied. Today, IBM's hub-spokes-wheel sales channel includes a direct sales force that sells mainframe computers; system integrators and value-added resellers that handle its minicomputers and midrange systems; and value-added resellers, dealers, resellers, and retailers that sell personal computers. The sheer number of choices makes creating and managing these channels challenging—even frustrating!

Exhibit 1-1. Basic channel structure.

Why Manufacturers Use Indirect Channels

The traditional, direct sales route offers a number of advantages to the manufacturer. For one thing, the manufacturer controls its sales force. The manufacturer's management can tell its salespersons where to sell, what to sell, how to sell, and how much to charge. Management can dictate activities that support the company image. And, of course, the sales force is completely committed to its employer. It sells the manufacturer's products and no one else's.

But a direct-employed sales force is not appropriate for every company and certainly isn't appropriate for every stage in a company's evolution. A small company may not be able to afford its own sales force. It may need to utilize an indirect channel until its sales and profit performance improve enough to afford the fixed expense of a direct sales force in the field. In addition, it would be unprofitable to have your direct salespeople spend time on smaller customers. Indirect channels of distribution can afford to engage the smaller customer by selling many other manufacturers’ product lines to that same customer group. By doing so, they spread the same cost of sales over several product lines.

Generally speaking, when a specific territory produces between $2 million and $2.5 million in annual sales, the expense of an employed salesperson can be justified. Of course, product line profitability has to be at an acceptable level. (Each company sets its own profit standards.) As a company increases in sales revenue and profit size, so do the commensurate channel choices available. Most companies eventually conclude that they must pursue indirect channels of distribution in order to survive and grow.

Exhibit 1-2. A chronicle of distribution marketing showing how the number and complexity of channels has multiplied.

Manufacturers also use indirect channels because they save money. After all, distribution is a cost transfer business. By using distribution channels, the manufacturer can transfer some of the costs of doing business to distributors and resellers. Marketing costs are most typically transferred down through the channel, as Exhibit 1-3 shows (although you always incur some marketing costs for national and international efforts). These passed-down expenditures are typically apportioned as follows:

Inventory	40%
Sales	30
Order Handling	20
Credit	10
	100%

Because many distributors are fragile, entrepreneurial businesses, it is essential to consider this expense mix when you create sales and marketing strategies and internal channel support systems. Selling via indirect channels can be justified by the number and importance of the assigned business tasks transferred to the distributor channel.

Why Customers Buy From Indirect Channels

End users purchase products and services from indirect channels because they offer a number of benefits:

The convenience of one-stop shopping. Imagine having to call a different manufacturer whenever you wanted to buy a saw, a hammer, or a box of nails. That's what life would be like if there were no indirect channels of distribution. A retail outlet like The Home Depot lets a consumer meet all of his or her hardware needs, because it sells several products from many different manufacturers. A customer can save time and money by choosing from a wide selection of products instead of items from only one manufacturer's line.

Exhibit 1-3. Transferring market costs down through the channel.

Source: Frank Lynn Associates, Chicago.

Customer service and technical support. Indirect channels can provide service and technical support promptly and locally. Where required, this can be provided on a quick reaction, local market basis. For example, a small computer store can offer inexperienced computer users everything they need to use a new computer with confidence. It can set up the computer, install the software, and offer postsale training—all services that manufacturers like Compaq or IBM do not make available to the individual computer user. This kind of rapid, competent, and nearby technical and customer service assistance is often highly desired and demanded by the customer.

Logistical support. Channels of distribution that carry inventory can supply a local market with close-by physical inventory. They also have the ability to “break bulk” down to smaller, customer-requested amounts. Thus, a small company stocking up on cleaning compounds deals with an industrial supply distributor instead of a manufacturer. The distributor buys in bulk and breaks that bulk down to the level desired by the end user.

Ease of doing business. Consumers can rely on indirect CODs to conduct tasks that manufacturers do not, cannot, or are not interested in performing locally. Sears, for example, provides credit, collection, billing, emergency service, local product or service consultation, order processing, physical inventory, sales and application engineering, and sales and marketing to consumers—so manufacturers don't have to.

Community presence. Many consumers faithfully support and buy from their local neighborhood resellers, dealers, and retailers because of professional association, friendship, social ties, or other deeply rooted relationship factors. Whether they live in a big city, a small town, or something in between, most people would rather deal with someone who lives around the corner than a power direct mail retailer that lives at the other end of an 800 number.

Greater channel efficiency. Many corporations are cutting back the number of suppliers they use and demanding higher quality from those they keep. This is a channel concept commonly referred to as “Diminishing Supplies.” More efficient channels of distribution are helping these companies accomplish their cost-savings goals. In response, distributors are bundling several manufacturers’ products into a single purchase proposal with additional discounts for increased purchases. The customer usually makes a blanket order commitment over an extended period of time that effectively blocks any competitive...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• List of Exhibits
• Preface
• Acknowledgments
• Chapter 1 - Pivotal Marketing Channel Concepts
• Part I: Crafting your Channel
• Part II: Managing Your Channels
• Appendix A. Channel of Distribution Words of Wisdom Glossary
• Appendix B. International Laws Affecting Channel of Distribution Relations
• Index