Page 384 - Introduction to Business

358 PART 3 Marketing

percent growth rate. Much of the growth is the result of the industry expanding
beyond gas stations into such new outlets as supermarkets, convenience stores,
discounters like Kmart, and Blockbuster. 15 Ford’s growth strategy has involved
acquiring an impressive array of luxury cars, including Jaguar, Volvo, Land Rover,
Aston Martin, and Lincoln. In a distinct break with tradition, Ford has decided to
sell all five luxury brands in one dealership. While there will be separate sales
departments, the service and back-office functions will be combined. 16
If firms start off using channels of distribution, they often need to eventually
change over to a direct strategy. This is because they may be dissatisfied with the
effort put forth by the channels they have selected or they may have improved their
own marketing skills. Another factor is cost; at some level of revenues, it may be less
costly to go direct than it is to keep using channels. For example, assume a manu-
facturer is using agents and paying them a 10 percent commission. It estimates that
it would require a $100,000 investment to recruit and train a sales force and the
cost, pay, and expenses of maintaining the sales force would be 6 percent of sales.
At what level of revenue should the firm switch from an indirect to a direct strategy?
The equation below shows that, at least for this example, this is $2,500,000.
0.10x 0.06x $100,000
0.04x $100,000
x $2,500,000
If revenues go beyond $2,500,000, it would be less costly to go direct. Let’s see
what the cost would be for both options if revenues were $3,000,000.
Indirect: (0.10) ($3,000,000) $300,000
Direct: (0.06) ($3,000,000) $100,000 $280,000
At revenues of $3,000,000, it would cost the firm $20,000 less to go direct.
In order to gain the cooperation of channels, manufacturers need to offer a
number of concessions to them. They should be provided with salable products for
which there is a strong demand. Demand can often be increased by allocating
funds to help channels advertise or by manufacturers doing the advertising them-
selves. Manufacturers should sell products to distributors at a fair price so that
when they are resold by distributors, distributors can earn a fair profit. Manufac-
turers should furnish distribution channels information about markets. On-time
delivery and emergency shipments need to be provided. Allowing for consignment
sales is helpful; these enable channels of distribution to delay paying for goods until
they have sold them.
Channels of distribution are important segments of the U.S. economy. There are
about 850,000 wholesaler operations in the United States doing over $4 trillion of
business annually. The 3 million retailers have about $2.5 trillion in revenues yearly.
dispersion The channel of Channels of distribution make significant contributors to economic well-being.
distribution function involving the
breaking down of large lots into They may reduce the cost of getting products to consumers—and the price con-
smaller lots sumers pay—because they are specialists who can perform various marketing func-
concentration The channel of tions, like transportation and storage, very efficiently. They take large lots of prod-
distribution function involving the ucts, break them down into smaller lots, and move them on to other channel
pooling of small lots into larger ones
members (dispersion). The opposite is concentration: pooling small lots into larger
place utility The satisfaction for
customers created when products are ones, which are then moved to other channel members. They create place utility by
transported to locations that are transporting products to locations that are convenient for customers. They create
convenient for them time utility by storing products until customers want to purchase them. Because of
time utility The satisfaction for their excellent knowledge of markets, they act as important sources of information.
customers created by products being
stored until customers want to
purchase them

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