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2016-07-07 Distribution System Goals of Distribution Distribution system is a set of subsequent links (people or institutions) taking part in realization of one/many functions (streams) Place (Distribution) • Narrowing the demand-supply gap • Specialization and work division • More sales effectiveness May consist of one or many channels Essential element of marketing-mix • Crucial to reach customers • Takes time to create • Takes effort to maintain Producer intermediary customer 2 3 Sales Effectiveness Demad-Supply Gap direct sales Assortment Quality Quantity Time Space Information Service S1 indirect sales Basic • Sale S1 C1 S2 Distribution Functions I S2 C2 – – – – C1 C2 Customer identification & selection Demand stimulation Sales negotiation Passing ownership • Purchase S3 S3 C3 9 sales contacts – – – – C3 6 sales contacts Defining purchase needs Seller identification & selection Purchase negotiation Receiving ownership Complementary Market information Product adjustment • • • System support Risk-taking Logistics • • • indirect 4 Number of transactions Cost of transaction Total costs direct 9 100 900 Packing Standardization Sorting Transport Storage Paperwork result 6 100 600 50% 5 6 1 2016-07-07 Participants of Distribution System Suppliers producers intermediaries • Width Transporting companies Warehouses Merchandising companies Financial institutions Marketing agencies • Integration Number of Channels Final customers Clothes maker Own stores Online store • Product can be used in various ways • Differentiated customer segments • Numerous customers • Spread customers 9 Advantages: Multiple channels are preferred when: Multiple channels Chain stores Offer value Control level Costs 8 7 Own stores Final customers Channel selection • Length buyers facilitating organizations Clothes maker Type of product • Number of channels wholesalers retailers Single channel Channel Selection Determinants and Effects Designing Distribution System Single: • Decision clarity • Fewer conflicts • Ease of control and coordination Multiple: Market penetration Greater market adjustment Less dependence on 1 channel Final customers 10 11 12 2 2016-07-07 Multiple Channels - Coke Coca-Cola Direct distribution Indirect Direct Coca-Cola Bottlers Wholesalers Advantages: Channel Length • • • • • Producer Producer Cash & Carry Wholesalers Wholesalers Better awareness of customers’ preferences and needs Faster adjustment to market changes All profit stays in the company Usage of active sales techniques Better control Indirect distribution Tradition retail Chain stores Gastronomy Chain restaurants Vending machines Retailers Final customers Final customers Final customers 13 14 Channel Width Length of a Channel Depends on: • The channel is shorter if: higher product value per unit less frequent purchases bigger concentration of buyers fewer potential buyers less durable goods more functional complexity • Reaching geographically dispersed buyers • Lower fixed costs • Focus on company’s core competence PS1 PS2 Wide Narrow Producer Producer PS3 PS4 Final customer PS n Width of a Channel • Intensive distribution • Selective distribution • Exclusive distribution PS Final customer 17 3 2016-07-07 Width of a Channel Depends on: Integration of Channels Conventional system Integrated system Product price Product complexity Product standardization Advantages: Whole saler Wholesaler Frequency and amount of purchase Integrated: • Marketing decisions Stable situation Fewer marketing costs • Quick reactions Good information flow • Fewer conflicts Unified marketing independence Producer Producer Conventional: Retail • no additional costs of Retailers integration activities Higher competitiveness Final customers Final customers 20 Marketing Concept Of Price Integration in Channels • Capital-based integration (acquisition, merger, joint-ventures) • Contract-based integration 21 PRICE • Price: value of a subject (product or service) of market transaction compatible with the expectations of a seller and buyer, expressed in money (cooperation, licensing, franchising) • Informal integration • Must be oriented towards the market! (gentleman's agreement, consent, syndicate) • The most flexible marketing tool • The only one that produces revenue 4 2016-07-07 Price-Quality Strategies Stages of Pricing Decisions Price Determinants price • Establishing pricing strategy • Basic price calculation • Establishing modifications to the basic price Quali- high ty BASIC PRICE+/- MODIFICATIONS = FINAL PRICE high medium low Premium value (1) High value (2) Super value (3) medium Overcharging (4) Medium value Good-value (5) (6) low False economy (8) Rip-off (7) Market skimming Acceptable Price Range Upper level Acceptable price range Lower level Economy(9) • • • • • Demand Costs Competition Intermediaries Government Market penetration Demand Price Elasticity of Demand • Demand: amount of goods requested by a group of Value of a product customers at a certain price, certain time, certain place and certain market circumstances. Taxes Profit margin of intermadiaries Other costs Variable cost per unit 28 28 5 2016-07-07 Price Elasticity of Demand Customer Sensitivity to Price Depends On: 1. Product uniqueness 2. Share in customer Elasticity of Demand and Companies Activities Demand Elasticity Index PE: it gives the percentage change in quantity of products demanded in response to a 1% change in price expenditures 3. Share of other buyers 4. Sank money effect 5. Switching costs 6. Presence of substitutes Elastic demand counter-elasticity inelastic demand PE=0 price perfect elasticity PE=∞ proportional demand PE=1 elastic demand Decrease the price Proportional demand Increase the price Increase of total income Keep the price Decrease of total income Inelastic demand Decrease the price No change in total income Increase the price Decrease of total income Increase of total income quantity 33 Costs • Monopoly • Oligopoly (homogeneous and heterogeneous) Total costs = fixed costs + variable costs Fixed costs – the same amount regardless the production size (rent, depreciation, insurance, etc) Variable costs – depend on production size (wages, material, electricity, etc) Competition Types of Competitive Environment • Monopolistic competition • Perfect (market) competition • Market position of competitors market leader pretender follower nicher • Pricing behavior price leader price cooperation avoidance of price competition adjustment to external prices taking advantage of price opportunities aggressive pricing strategy 6 2016-07-07 Government’s Regulations • • • • • • • • • Official prices (min&max) Price freeze-up Information about price changes No vertical/horizontal agreements No: false shortage No: too low prices No: hidden fees No: price discrimination Visibility of prices Price Calculation • Cost-based method – E.g. profit margin/markup added to total cost per unit Product Varying demand elasticity Buyers cannot re-sell products Costs < benefits Buyers don’t feel discriminated Price Value Customer • Demand-based method – E.g. products priced according to their perceived value Product Value Price Cost Customer types PRICE MODIFICATIONS • Competition-based method – Setting prices based at prices charged by competitors for similar products When Should Price Modifications Be Applied? • • • • Cost Price Modifications Benefits of Price Modifications • • • • • • Change in buying pattern Market segmentation Market expansion Building customer loyalty Cooperation with intermediaries Facing competition 1. Amount of products bought 2. Customer location 3. Time of purchase 4. Time of payment 5. Psychological aspect 6. Customer type 7. Functions performed by customers 7 2016-07-07 Amount Discount Time of Payment – Cash Discount Geographical Prices Price discount given when customer purchases big amount of goods • Base points • Same price regardless the location • Zone price Encourages customers to prompt payments Benefits: Benefits for the seller: • Better cash flow • Lower operational risk • Lower costs of execution of overdue payments – Lower costs of sales, transport and storage – Fewer contacts with customer – Higher customer retention (non) accumulated 43 45 Type of Customer Psychological Prices Time of purchase – Sesonal Discount Price adaptation to seasonal changes (lower of higher) Benefits: • Stable operation • Lower risk • Lower costs of storage 46 • • • • • • • • • Prestige price Uneven price Loss leader Fixed price Promotional price Comparison discount Coupons Refunds Demand probing • • • • • • • Wealth of customer Age Purchasing power Profitability Position in distribution channel Opinion-leading Acquaintance (assurance) 48 8