Although the principles remain the same, the practice of distribution has changed dramatically in the past 100 years, and even more so since the advent of the ‘Internet of Things’. A seismic shift has been the introduction of affiliate partners and programs in the strategy of distribution channel marketing and channel sales management.
It’s about bringing product to market
When life was a lot simpler, tradesfolk would bring their goods to a central market where the local villagers would come to either buy the goods or trade them for their own wares. The tradesmen would then return home with the revenue generated. The cycle would then repeat itself. As long as people had something of value, they could ‘get into the market’ to have their needs met.
Although Marketing Channels and Distribution Channels are terms that are often used interchangeably, for the purposes of this article, they will be distinguished as follows:
- Marketing Channels refer to the entire ecosystem required for getting products (tangible goods and intangible services) from the point of production to the point of consumption; this includes people, organizations and all the required activities. Channel Management is defined as the process where the company develops various marketing techniques and sales strategies to reach its customer base.
- The Distribution Channel is a more focused term that refers to the chain of intermediaries through which the product passes until it reaches the end consumer.
The rise of the affiliate
Affiliate Marketing (also sometimes referred to as Affiliate Programs) is a type of performance-based marketing in which a business rewards the affiliate partner for a specific metric (actual sales or virtual clicks) when the outcome is due to the affiliate’s efforts. Before the Internet, this was referred to as referral marketing.
To say that the Internet has dramatically changed the referral marketing platform would be an understatement. With the advances in technology, this is a dynamic element of the channel mix with new features constantly emerging that allow for various forms of affiliate partnerships. This sector has grown in complexity, even resulting in an additional channel tier of specialized ‘affiliate management agencies’.
Eighty percent of affiliate programs use PPS (pay per sale) as a compensation method, 19% use CPA (cost per action) and the balance uses other methods, predominantly CPC (cost per click) or CPM (cost per thousand views).
Traditional channel strategies
Strategic channel marketing and distribution is about getting the product to the end user in the most effective way. Depending on the nature of the product and the market, numerous intermediaries may be involved.
Take for example the manufacturer of an FMCG such as a chocolate bar. It would be highly impractical for the manufacturer to sell it to the final consumer; some intermediaries are involved. In this case:
- Retailer, and finally
- The consumer
The above is a traditional distribution channel, but many variations might exist. For example, there are ‘distributors’ who would take product directly from the manufacturer, and then use their distribution network to supply the retailers. So the channel would resemble:
Manufacturer – distributor – retailer – consumer
For very large retailers who have relatively few stores (such as the mass discounters), consumers could be supplied directly:
Manufacturer – retailer – consumer
For someone manufacturing an item on a small scale from their home, we have the simplest form of distribution:
Manufacturer – consumer
The above refers to the B2C (business to consumer) market. There is also the B2B (business to business) sector which caters specifically for organizations as customers. For example, the sugar required in the manufacture of the chocolate bar in the example above would come straight from the manufacturer of the sugar, since it would be a bulk order. The channel could then be expanded:
Sugar manufacturer – chocolate manufacturer – wholesaler – retailer – consumer
One size does not fit all
The above channels with the various intermediaries are not set in stone, as many other variations exist. For example, there are also ‘agents’ who can operate in many different ways. Some will purchase the goods directly from the manufacturer and then distribute to their network. It is not only the resources they have (such as delivery trucks) but also the relationship they have with the retailers where they have agreed to payment terms and an efficient billing and collection process.
It is also possible to have hybrid distribution channels. For example, a computer company can use its own salesforce to sell to large accounts, its outbound telemarketing facility to sell to medium sized businesses, and direct internet sales for the end user. They could also use affiliate partners which they can add to the channel ‘mix’.
A manufacturer might also require various channel strategies, which would include the delivery channel, a service channel, as well as a sale channel. For example, the computer company could use FedEx as the delivery channel, the Internet and the telephone as sales channels, and license local technicians for repairs.
Setting channel strategy is a dynamic and often complex process. Technology is just one driver encouraging the firm to adapt their channel strategies. With computerization and enhanced control from a central location now made possible, vertical marketing systems (VMS) are becoming easier to adopt. A VMS enables the producer, wholesaler, and retailer to act as a unified system. In this case, there is one predominant ‘owner’ who is referred to as the Channel Captain.
For example, a food retailer may want to ensure that its produce is organic and farmed sustainably. It may also require that the produce remains in a cold chain from the beginning of the production process to the shelf. In this case, the retailer would either own the other players or have a contract with them to ensure the consumer gets what is promised.
Driven by consumer perception
When designing a marketing channel, there are numerous factors that need to be taken into consideration that relate to the final consumer’s expectations:
- Time expectation of the customer.
If the customer expects to walk into a retail store as a matter of course, then the product would require intensive distribution to make the product as widely available as possible, aiding convenience. Should the customer find it acceptable to wait a few days, then direct sales on the Internet would be a possibility.
- Order size.
The end consumer expects to buy a single item, and retail would in most cases be the appropriate channel. Alternatively, a car hire company like Avis would prefer to purchase their cars en masse and would do so either with a dealer group or a broker who specializes in that type of sale.
- Service required.
If intensive service and backup are required, these need to be provided for in the channel. Car dealerships, for instance, need to offer convenient access to their customers, and that demands a strategic geographical spread. The establishment of a dealer with service capabilities needs to match the location of their targeted customer base.
McDonald’s has an extensive network of stores that makes it a convenient purchase in the fast food category. Ferrari dealers on the other hand, cater to a very select market, and such a luxury goods consumer would accept the fact that there is not a Ferrari dealership on every street corner.
- Cost saving
Consumers are willing to make certain sacrifices in exchange for cost savings. The success of mass-market discount stores is that the consumer expects to make some sacrifices in service for the saving it affords them.
Competition versus cooperation
Although all players are aiming for the same result—customer satisfaction—conflicts do arise. An example of a vertical channel conflict occurs when a car dealer, for instance, does not adhere to the specific guidelines set by the manufacturer.
Channel conflict can also be horizontal, where two of the same brand dealers are in disagreement with pricing models (where the one dealer discounts heavily, setting a benchmark that gives all dealers a lower profit margin).
Conflict can also exist in a multi-channel scenario. This becomes prevalent where there are two or more channels for the distribution of the manufacturer’s product. In this case, an agent could be appointed in a country to serve as a sole distributor, but a retail chain can sell such vast quantities that they demand the manufacturer supplies them directly as well.
The future of channel strategies
With the advent of drone deliveries and driverless cars, the future for distribution is a disruptive one. A consumer may very well be able to purchase on Amazon with a few clicks and the drone could bring the order to their door in a matter of hours. Also, taking into consideration that many products can be digitised – not only computer programs, but movies and music amongst many other products, channels of distribution have already been total disrupted. And then we have 3D printers – if you need a certain component, then the manufacturers just send you the data and you can make the part yourself. Our world has changed and access to product will never be the same again. It’s called progress.
Also, taking into consideration that many products can be digitized – not only computer programs but movies and music amongst many other products—channels of distribution have already been disrupted. And then we have 3D printers; if you need a certain component, then the manufacturer just sends you the data and you can make the part yourself.
Our world is certainly changing, and access to product will never be the same again. It’s called progress!
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