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Marketing Basics - Kotler Philip

The nature of distribution channels

Most manufacturers offer their products to the market through intermediaries. Each of them seeks to form its own distribution channel.

Distribution channel - a set of firms or individuals that take over or help transfer to someone else the ownership of a particular product or service on their way from the producer to the consumer.

Why do we need intermediaries?

Why is the manufacturer ready to shift part of the sales work to intermediaries? After all, this means that to some extent he loses control over how and to whom the goods are sold. Nevertheless, manufacturers believe that the use of intermediaries brings them certain benefits. These benefits will be discussed.

Many manufacturers lack the financial resources for direct marketing. General Motors, for example, sells its cars with the help of 18 thousand independent dealers. Even such a corporation would be very difficult to raise money to buy all these dealer enterprises.

In order to achieve the efficiency of the mass distribution system through direct marketing, many manufacturers would need to become intermediaries in the sale of goods from other manufacturers. For example, the company "U. Wrigley would have thought it impractical to open small chewing gum stores across the country, or to sell their own gum by salespeople or to sell it by mail order. She would have to sell chewing gum along with many other little things, which in the end would turn her into the owner of either a chain of drugstores, or a chain of grocery stores. So, according to the company, it is much easier for her to work through an extensive network of private distributors.

But even if a manufacturer can afford to create his own distribution channels , in many cases he will earn more if he increases his investment in his core business. If production provides a profit margin of 20%, and retail trade gives, according to estimates, only 10%, the company will not want to engage in retail on its own.

The use of intermediaries is mainly due to their unsurpassed effectiveness in ensuring the wide availability of goods and bringing them to target markets. Due to their contacts, experience, specialization and scope of activities, intermediaries offer the company more than what it usually can do alone.

In fig. 66 presents one of the main sources of savings provided through the use of intermediaries. Part A shows how three manufacturers try to reach three customers using direct marketing. This option requires nine separate contacts. In Part “B”, the work of three manufacturers through one distributor who establishes contacts with all three customers is also shown. With such a system, only six contacts are required. This is how intermediaries help reduce the amount of work that needs to be done.

distributor reduces the number of direct contacts neededReduction by distributor direct contacts

P - manufacturer K - client D - distributor

A. Number of contacts (P x K = Z x Z = 9)

b. The number of contacts (P + K = 3 + 3 = 6)

Fig. 66. How the distributor reduces the number of direct contacts needed