Page 133 - Encyclopedia of Business and Finance

eobf_C 7/5/06 2:57 PM Page 110

Channels of Distribution

The customer focus espoused within the marketing efficiency describes an aspiration shared among channel
concept has a broad, intuitive appeal. Yet the marketing members to move toward the point where the quantity
concept implicitly suggests that information should flow and quality of exchange relationships is optimized. With-
unidirectionally from customers to intermediaries and out channel intermediaries, each buyer would have to
from intermediaries to manufacturers. This unnecessarily interact directly with each seller. This interaction would
restrictive and reactive approach to satisfying customers’ be extremely inefficient. Imagine its impact on the total
needs has been supplanted by the relationship marketing costs of each exchange.
concept. As modern communication and information When only two parties participate in an exchange,
management technologies emerged, channel members the relationship is a simple dyad. Exchange processes
found they could now establish and maintain interactive become far more complicated as the number of channel
dialogues with customers. Ideas and information began to members increases. The number of exchange relationships
be exchanged—bidirectionally—in real time between that can potentially develop within any channel equals:
buyers and sellers. Channel members learned that success
n
comes from anticipating the needs of one’s customers 3 – 2 n+1 + 1
before they do. The earth had moved, again, as the rela- 2
tionship marketing philosophy was widely adopted.
How important is a customer dialogue? Sophisticated where n is the number of organizations in a channel.
database and interactive technologies enable channel When n is 2, only one relationship is possible. When n
members to quickly identify changes in customers’ prefer- doubles to 4, up to 25 relationships can unfold. Increase
ences. This, in turn, allows manufacturers to modify prod- n to 6, and the number of potential relationships leaps to
uct designs nimbly. Relationship marketing allows 301. The number of relationships unfolding within a
manufacturers to mass-customize offerings and to reduce channel quickly becomes too large to efficiently manage
fixed costs associated with production and distribution. when each channel member deals with all other members.
Retailers and wholesalers make better-informed merchan- Channel intermediaries are thus necessary to facilitate
dising decisions. This is yet another lesson in the costs of contractual efficiency. But as the number of intermedi-
carrying unwanted products. Relationship marketing aries approaches the number of organizations in the chan-
yields greater customer satisfaction with the products and nel, the law of diminishing returns kicks in. At that point,
services they acquire and consume. And why not? The additional intermediaries add little new value within the
customer’s voice was heard when the offering was being channel.
produced and distributed.
McKesson Drug Company, the nation’s largest drug
Relationship marketing is driven by two principles wholesaler, acts as an intermediary between drug manu-
having particular relevance to marketing channel strategy: facturers and retail pharmacies. About 600 million trans-
actions would be necessary to satisfy the needs of the
• Long-term, ongoing relationships between channel
members are cost-effective. (Attracting new cus- nation’s 50,000 pharmacies if these pharmacies had to
tomers costs over ten times more than retaining order on a monthly basis from each of the 1,000 U.S.
existing customers.) pharmaceutical drug manufacturers. When this example
is extended to the unreasonable possibility of daily orders
• The interactive dialogue between providers and from these pharmacies, the number of transactions
users of goods and services is based on mutual trust. required rises to more than 13 billion. The number of
(The absence of trust imperils all relationships. Its transactions is nearly impossible to consummate. Never-
presence preserves them.)
theless, introducing 250 wholesale distributors into the
pharmaceutical channel reduces the number of annual
THE ROLE OF INTERMEDIARIES transactions to about 26 million. This reduction in trans-
This progression from a production to a relationship ori- actions is contractual efficiency.
entation allowed many new channel intermediaries to The costs associated with generating purchase orders,
emerge because they created new customer values. Inter- handling invoices, and maintaining inventory are consid-
mediaries provide many utilities to customers. The provi- erable. Imagine the amount of order processing that
sion of contractual efficiency, routinization, assortment, would be necessary to complete millions upon millions of
or customer confidence all create value in channels of dis- pharmaceutical transactions. McKesson offers a com-
tribution. puter-networked ordering system for pharmacies that pro-
One of the most basic values provided by intermedi- vides fast, reliable, and cost-effective order processing. The
aries is the optimization of the number of exchange rela- system processes each order within one hour and routes
tionships needed to complete transactions. Contractual the order to the closest distribution system. Retailers are

110 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION