Today we'll talk about another element of the marketing mix, the distribution channel, commonly called place. First, we will discuss what a channel is and what functions it serves. Then we'll discuss the decisions that need to be made when designing a channel. We will also examine issues related to channel management. Finally, we'll talk about how existing channels are being disrupted through disintermediation, like the use of drones to create new methods of distribution. Have you ever wondered what it would be like to have burritos delivered by drone? Virginia Tech, created a Google using Chipotle, and they have been working on drone testing and they were able to deliver 10 burritos in 30 minutes, 10 times they missed. That's the test. Think about this. About 2, 3 years from now, you can have so many products delivered by drone. If it can deliver a burrito, what else could they deliver? Through disruption in the distribution system, channels are changing. Once a manufacturer has created a product, one of the important decisions to be made is how to get the product to the final consumer. How do we get from here, the manufacturer, to there, the consumer? How that decision is made impacts of final product received by the consumer as the intermediaries between those stages perform different functions that the manufacturer does not always perform. This could sometimes impact satisfaction since the different ways of getting the product from here to there could add value for the final customer. As of now, regular drone delivery is still in our future. Amazon is determined to make this a reality sometimes soon with the future service called Amazon Air. Sounds great, doesn't it? With this service, Amazon promises delivery within 30 minutes in some metro areas. Drone delivery is not yet a common method of distribution. However, here are some different ways that products are currently distributed to the final consumer. Avon is a British company that deals in personal care, house hold, and beauty products. It's the fifth largest organization dealing in beauty products with sales figures averaging $5.5 billion between 2016 and 2018, that's 5.5 billion a year. Avon's distribution channel was exclusively a direct to consumer model, DTC. They use sales reps who are independent contractors, are not employees of Avon. At its peak, there were more than 6 million Avon sales reps worldwide. Once a person signed up to become an Avon rep, the district manager who was an employee of Avon, called on them to explain the process of selling the products. Direct selling has been Avon's co-channel since its inception in 1886, and was responsible for the majority of Avon's growth. However, they have since diversified their channel strategy. They have entered department and specialty stores through a joint venture with Liz Claiborne, the designer. Also, in 1997, Avon became the first cosmetic company to sell its products online. However, the direct to consumer channel, this direct channel still remains central to Avon's distribution strategy. On one end, we have the direct to consumer model of Avon. Then there are companies like Sony. Sony uses multiple levels in their distribution channel, is not just direct to consumer. This occurs since these intermediaries can add value in the channel as a product is moved through each level to the final consumer. For instance, Sony uses intermediaries such as retailers like Best Buy. This is necessary since several of its products is somewhat complex and require some expertise when selling to the consumer. Best Buy's employees appear to be trained electronics experts, so they are an important channel intermediary for electronics manufacturers like Sony. Of course, both Sony and Avon also make use of online resources. This allows these companies to enhance their reach and target a greater number of consumers. In Sony's case, about 20 percent of their product line is sold outside of brick-and-mortar retail stores. One point to note though, as a product becomes even more risky and more complex or more expensive, then direct to consumer sales forces would tend to be used. This is so since a manufacturer would have to overcome more barriers to adoption and their own sales force might be better trained to do so. How would we define a distribution channel? A channel comprises of all the elements that help the manufacturer deliver products to the final consumer. In so doing, providing the consumer with more value. How do we get from here to there? Where does place fit in the marketing process? Let's look at that again. Once a value decision has been made, the firm can begin to work out its action plan known in marketing as the four P's of the marketing mix. Of course, and we said this before. We use the two mix because the elements only need to work together to form a cohesive plan. Distribution or Place, plays a critical role in the process since this is our value is delivered to the consumer. Why are channels important? What benefit can be derived from using intermediaries? Well, intermediaries increase the efficiency with which companies get products to the final consumer. This is called transaction efficiency. One of the most basic values provided by intermediaries is reducing the number of exchange relationships needed to complete transactions. Without channel intermediaries, each buyer would have to interact directly with each seller. This interaction will be extremely inefficient. Image is impacted on the total cost of all these exchanges. Let's assume you wanted to have breakfast consisting of bacon, eggs, bread and milk. Without channel intermediaries, you'd have to go straight to the source. This required trip to the baker, the butcher, and the farmer who raises cows for the milk. Truly an inefficient use of any consumer's time. Now, you could go to a grocery store and purchase all of these items with just one stop. That's transaction efficiency. An important aspect of distribution channels, is understanding the distinction between upstream and downstream activities in the channel. If you envision the distribution channel as a river, upstream refers to the material inputs needed for production, while downstream is the opposite end where products get distributed. Upstream production refers to all the activities needed to gather the materials required to create a product and supply them to the company. This stage of the production process involves searching for an extracting raw materials. In contrast, the downstream production process involves processing the materials collected during the upstream stage and crafting them into a finished product. Also, the downstream stage includes actual sale of the product to other businesses, government agencies, or to private individuals. The type of end-user will vary depending on the finished product, of course. Regardless of the industry involved, the downstream process has direct contact with customers through the finished products.
