CHANNELS OF
DISTRIBUTION

Lars Perner, Ph.D.
Assistant Professor of Clinical Marketing
Department of Marketing
Marshall School of Business
University of Southern California
Los Angeles, CA 90089-0443, USA
(213) 740-7127

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Firm, Brand, and Product Line Objectives

Firm level objectives:  It is not enough to simply state a firm’s goal as maximizing the present value of total profit since this does not differentiate it from other firms and says nothing about how this objective is to be achieved.  Instead, a business and marketing plan should suggest how the firm can best put its unique resources to use to maximize stockholder value.  A number of resources come into play—e.g.,

Market balance: It is essential that different firms in the same business not attempt to compete on exactly the same variables.  If they do, competition will invariably degenerate into price—there is nothing else that would differentiate the firms.  Thus, for example, in the retail food market, there are low price supermarkets such as Food 4 Less that provide few if any services, intermediate level markets like Ralph’s, and high-end markets such as Vons’ Pavillion that charge high prices and claim to carry superior merchandise and offer exceptional service

Risk:  In general, firms that attempt riskier ventures—and their stockholders—expect a higher rate of return.  Risks can come in many forms, including immediate loss of profit due to lower sales and long term damage to the brand because of a poor product being released or because of distribution through a channel perceived to carry low quality merchandise.

Brand level objectives: Ultimately, brand level profit centers are expected to contribute to the overall maximization of the firm’s profits.  However, when a firm holds several different brands, different marketing and distribution plans may be required for each.  Several variables come into play in maximizing value.  Profits can be maximized in the short run, or an investment can be made into future earnings.  Product profit can be measured in several ways.  If you sell a computer that cost $950 to make for $1,000, you are making only a 5% gross profit.  However, selling a product that cost $5 to make for $10 will result in a much higher percentage profit, but a much lower absolute margin.  A decision that is essential at the brand level is positioning.  Options here may range from a high quality, premium product to a lower priced value product.  Note here that the same answer will not be appropriate for all firms in the same market since this will result in market imbalance—there should be some firms perceiving each strategy, with others being intermediate.

Distribution issues come into play heavily in deciding brand level strategy.  In order to secure a more exclusive brand label, for example, it is usually necessary to sacrifice volume—it would do no good, for Mercedes-Benz to create a large number of low priced automobiles.  Some firms can be very profitable going for quantity where economies of scale come into play and smaller margins on a large number of units add up—e.g., McDonald’s survives on much smaller margins than upscale restaurants, but may make larger profits because of volume.  Some firms choose to engage in a niching strategy where they forsake most customers to focus on a small segment where less competition exists (e.g., clothing for very tall people). 

In order to maintain one’s brand image, it may be essential that retailers and other channel members provide certain services, such as warranty repairs, providing information to customers, and carrying a large assortment of accessories.  Since not all retailers are willing to provide these services, insisting on them will likely reduce the intensity of distribution given to the product.

Product line objectives: Firms make money on the totality of products and services that they sell, and sometimes, profit can be maximized by settling for small margins on some, making up on others. For example, both manufacturers and retailers currently tend to sell inkjet printers at low prices, hoping to make up by selling high margin replacement cartridges.  Here again, it may be important for the manufacturer that the retailer carry as much of the product line as possible.