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The
place relates to the distribution of the product.
The firm must get the product to the consumer at the right place and
at the right time. The consumer
must be able to purchase the good easily.
The
channel of distribution is the route taken by the producer to the consumer.
The diagram below shows some of the most popular channels of
distribution.
It
is possible that the channel of distribution is a very simple one.
For example a bakery; the bread is produced in the same place that it
is sold. Consumers buy direct
from the producer, this is shown as channel 1 in the diagram above.
The channel is becoming used more and more as companies sell their
goods direct to the customer over the internet.
Many
companies produce their goods in large central units so they can take
advantage of economies of scale. Their
consumers may be located over a large geographical area, thus selling the
product via channel 1 would be impossible.
It is therefore commonplace for companies to use intermediaries.
Intermediaries
WHOLESALERS
They
are often used as the link between the producer and retailer.
They buy in bulk, then break it down into smaller quantities and then
sell it onto retailers.
Wholesalers
offer benefits to the manufacturer:
- Their channels of
distribution are well established and they have strong links with
retailers.
- They allow the
manufacturer to concentrate on producing the good, rather than worrying
about the channels of distribution.
- They will bear the
cost of storage.
They
also benefit the retailers:
- They offer the
choice of goods from many different manufacturers.
- Small retailers can
buy in smaller quantities from wholesalers than manufacturers.
Wholesalers
will sometimes sell directly to customers, e.g., Makro and Netto.
Wholesalers are sometimes criticised for not marketing goods in the
manner the manufacturers would like, therefore using wholesalers can be a
risky business. Wholesalers also
take profit away from the producer and retailer.
RETAILERS
Because
of the problems with retailers, a number of manufacturers choose to deal with
the retailers direct. Large
retailers such as Sainsburys and Tesco buy produce straight from the
producer.
AGENTS
AND BROKERS
Agents will sell on behalf of the seller, they will
usually take a percentage commission. Agents
never buy stock, they simply sell stocks that the owner already possesses.
This frequently occurs in travel agencies and ticket brokers.
Modern Channels of Distribution
Nowadays we look at three main channels of
distribution, these are shown in the diagram below.
We can look at an
example of the channels of distribution for a bank:
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