Abstract This chapter discusses the benefits and value of distribution or place in marketing planning. Product availability and its relationship to market share, and the effects and costs of an out-of-stock situation are discussed with related algorithms and visuals. The concept of distribution elasticity and inventory control models are also discussed with graphs from the theory. Distribution-related brand awareness concepts and measures are investigated and illustrated in light of the theoretical discussions.
Keywords Product availability • Out of stock • Distribution elasticity • Inventory control • Bullwhip effects
Place, or what is also called distribution and/or product availability, mostly functions as a service to the other marketing-mix elements of product, promotion, and price. Place helps these three Ps to reach their strategic marketing goals. Simply put, without being in the right place, at the right time, and in the right quantity, no product or marketing plan can succeed. A company can have the best price and value in the market with a matching message supported by promotion techniques. But if the product is not there when consumers need it, consumers and revenue are lost. Thus, place’s role in marketing activities is paramount even though it is the most silent element and its effects can only directly be realized and appreciated if the product is not there.
© The Author(s) 2017
S.U. Kucuk, Visualizing Marketing,
In general, production can happen in one place (manufacturer’s factory) while consumption happens in millions of places (various retail stores, vending machines, etc.). Furthermore, production happens at one time, but consumption happens over a long period of time in millions of places. These major differences between production and consumption can be normalized and balanced by a third function: place.
Manufacturers’ expertise is to develop products/services and make the product ready for consumption; however, this does not necessarily translate into distribution expertise. As indicated by Rosenbloom (1999) “the economies that are necessary for efficient production do not necessarily make for efficient distribution” (p. 36). It does not make economic sense, although some manufacturers occasionally become involved in the distribution of their own products in traditional marketing.
The first graph of Fig. 5.1 displays the average cost curve (AC) indicating that production of Q amount of product incurs a cost of C1. This is around the optimum point on AC—where the company reaches economies of scale in production. However, such economies of scale cannot be reached if the company attempts to distribute these products itself, as indicated in the second graph in Fig. 5.1. The company tries to distribute each order itself directly to consumers. In order to handle this new function, the company needs to build a new system (order processing facilities, delivery vehicles, warehousing and inventory control systems, etc.) to handle a huge amount of orders. This in turn could be so costly that the company could not sell enough to compensate for these costs (especially fixed costs). In other words, if Qi amount of product is distributed, the costs of distribution will be C2 at a point that is not even close to the optimum point of AC. The only way to keep the costs at an optimal level is to shift the distribution function to other channel members.
In other words, assume that there are a total of three manufacturers and three consumers in a market. If each consumer visits each manufacturer one by one to find the best product, three times three (equals nine) visits to and/or transactions with manufacturers are required. However, if there is one outlet in the middle where each consumer can go and compare all the products, this reduces the total visit numbers to six (three visits from both manufacturers and consumers to the outlet). Creating one major shopping stop between consumers and manufacturers where all the desired products are stored and introduced to sales (known as a distribution channel member), reduces the shopping hassle for consumers while manufacturers benefit from reduced transaction costs. Furthermore,
Fig. 5.1 Production, distribution and average costs (Rosenbloom) Source: Rosenbloom (1999) manufacturers save on inventory and storage costs by shifting the products to the distribution channel members. On the other hand, shifting potential inventory costs to retailers means less control over how to represent and sell the product to the consumers. Retail stores, in this context, are the places where consumers first come into contact with products in the real world. This delegation of product representation is of paramount importance as the first impression of the product may ultimately affect consumers’ future purchasing habits.
In other words, although manufacturers can use distribution channels to shift the inventory costs to middlemen, this can also change the structure and length of the distribution-channel and product-handling processes. Manufacturers desperately need to share the costs of holding products where inventory costs are high, such as cars. As they cannot store all the cars they manufacture, they shift the products to car dealers which carry the retailing function for manufacturers. Similarly, foodstuffs need to be shifted as soon as possible to markets for consumption before they deteriorate, avoiding high costs such as cold storage facilities. Thus, there is a great need for what is called the retailer channel for perishable goods, but for low-cost items, such as candy, chewing gum, canned goods, etc., that are easy to store and handle, the wholesaler channel is also possible. Furthermore, if there are many small producers in the markets spread over a wide geographical area, then agents or brokers are required to convey the products to wholesalers/retailers. This occurs in meat and grocery markets, as somebody needs to go into the market (producers), talk with each producer/farmer and pick the best products for the wholesaler/ retailer. The insurance industry, where insurance agents try to reach these fragmented and small markets, is another example of distribution channels involving a middleman, conceptualized as agent channels. However, the inclusion of each new member in a distribution channel system makes the coordination between channel members difficult and increases the price of the final product as each member’s costs are reflected in the final price. Thus, the solution is either to establish vertical integration with all channel members, or what is known as disintermediation by eliminating as many middlemen as possible and replacing them with advance information systems in order to be able to sell the products to consumers directly. Nowadays, consumers can easily order products from the manufacturer’s website and have them delivered directly using ordinary mailing systems. So in today’s digital markets, distribution systems are being replaced by delivery and mailing systems.