Where’s the Best Spot for Your Lemonade Stand?

When I began studying marketing in the 1970s, the framework for understanding the discipline was the classic Four Ps: product (what you will sell); promotion (how you will tell the customers about the product); price (how you will exchange value for the product); and place. If you’ve read my columns the last few months, you noticed that they’ve followed the framework I outlined above. This month, I’ll discuss the final segment of the four Ps–place. Place deals with where you sell your products and services and how you get them there, but it’s also much more than that. The central concept in place is the distribution channel, which is a network of businesses that moves a product from manufacturer to end user. Consider the following example:

Down the road from my house is a small apple orchard. Every fall, the owner sells apples to anyone who drives up to his door. He produces the raw materials (apples), processes them (picks the apples), packages the product (in grocery bags), and retails directly to the end user. There are only two nodes on his distribution channel–manufacturer (grower) and consumer. Few businesses have a distribution channel that short. A distribution channel typically consists of a manufacturer, a wholesaler, a retailer, and the end user. More than one wholesaler may be involved. Many retailers are usually involved. Agents also may function in the channel.

The structure of a distribution channel may change depending on your point of view. If you print on T-shirts, you probably consider your business to be the starting point for the product. But those T-shirts didn’t drop from trees in your back yard, sewn, dyed, and ready to decorate. There also is a distribution channel that moves from cotton fields to sewing and knitting mills to wholesalers–the ones who provide the T-shirts to you.

Visualize the distribution channel as a river of money, originating at the end user and flowing all the way back to the business that creates the raw material. Along the way, various businesses put money into the channel and take money out. Most novice business managers think the fewer businesses along the bank between them and the end user, the fewer people there will be dipping out of that river of money. If a screen-printed T-shirt retails for $12.50 plus tax, wouldn’t it be best for the screen printer to collect the entire sum? It’s a nice dream but not much of a way to grow a business.

The function of the middleman

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Any business whose purpose requires them to stand between you and the end user has historically been called a middleman. Wholesalers, warehousing firms, buyers’ and sellers’ agents, and most types of retailers function by standing between the manufacturer (that’s us) and the end user (the money). Why do we put up with it? Why don’t we just sell direct?

This brings us to the first rule of designing a distribution channel. You can eliminate the middleman, but you cannot eliminate the functions he (or she) performs. I learned this rule when I started in screen printing nearly 30 years ago, printing short-run posters for local non-profit organizations. I sold everything I printed directly to the end user. I branched out to include signs and bumper stickers for local political candidates. (My wrists still ache every biennium.) I sold to a respectable percentage of the total market in my area, but the total market was so small that even if I captured 100% of the market, I still wouldn’t have a viable business.

One of my customers was an ad-specialty salesman whose territory covered most of Maine and some of New Hampshire. He offered to sell my products to his customers. He only had three requirements: I had to supply him with a catalog, I had to provide him with a discount price list, and I had to agree that I would never sell direct to any of his customers. I thought about his offer for a long time, and then I accepted. It was the right decision.

On the down side, I had to give him a whopping discount off my retail price list. On the other hand, he found the customers, he made the sale, and he ran the risk if the customer paid late or never. True, I could have gotten in my car, driven all over a sales territory 300 miles in diameter, then spent weeks or months cold calling, introducing my products, making the sale, and doing the follow up to collect on delinquent accounts. But I had a screen-printing business to run. If I planned to expand my market area past a 20-mile radius around my business, I had to incur distribution expenses. Whether I did it myself or paid someone else, the expenses were there and had to be paid. And my friend, the ad-specialty guy, was much better organized to perform those business functions than I was. I could screen print better than he could, but he could distribute my product better than I could. Together, we made more sales and earned higher profits than either of us could alone. He, of course, knew that from the start, and it took me about a week to come to the same conclusion.

If you’re going to have more than a very small business, such as selling apples to passing traffic six weeks a year, you’ll need a distribution channel. You can do the work yourself or pay others to do it for you, but it makes good sense to hire someone in the distribution business that is efficient and can handle distributing for you.

Designing distribution channels

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Most distribution channels grow organically over time. That’s fine, as long as it works. However, you’re running your business according to the Cheshire Cat’s rule: If you don’t care where you’re going, any path will take you there. (See Alice in Wonderland for this and other good business principles.)

A well-planned distribution channel will leverage the special skills of middlemen to help cut costs, improve cash flow, conserve resources, enter new markets, and use outside expertise. Doesn’t the middleman sound like a great asset to your business? It’s the simple truth. Before you design a distribution channel, you might want to consider what a well-planned distribution channel can bring to your business.

The wholesalers, agents, and retailers who distribute your products do more than move the goods, collect the money, and remit some to you. The information and marketing support that you can receive from them is at least as important as the revenue stream they provide. Your distribution channel can help you with market research, pricing, customer service, promotion, and buying, as well as making your product.

Your distribution channel should be designed in concert with your over-all marketing strategy. (If you don’t have a marketing strategy, read some of my old columns.) Generally, there are three steps in designing your distribution channel. First, select the type of channel you want. Do you want to sell through agents, direct, or to retail outlets or wholesalers? Using a combination of these methods is typical, depending on the product and the market you’ll serve.

The second step in designing your distribution channel is to select the intensity. How many businesses will you deal with in a geographical area or market segment? Do you want to sell through a limited number of accounts in a given area or to anyone who wants to buy? Will you use agents to whom you have to guarantee exclusive territories? A lot rides on the answers you come up with to these questions. There may not be one right answer, but there may be several wrong ones. If you have a marketing plan, this is a topic that will have to mesh very well with your overall strategy.

The final step in designing your distribution channel is to select the specific channel members. In the first step, you created an overall framework for your distribution channel. The second step helped you define goals for the type and number of members your distribution channel will have. The final step takes you from plans to reality. You’ll go scouting to find businesses and individuals that you think will fit your needs and attempt to sign them up.

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As I noted earlier in this article, distribution channels are rarely simple, direct, manufacturer-wholesaler-retailer setups. You will soon find that distribution channels are idiosyncratic. There is no one-size-fits-all approach. You’ll also discover that the distribution channel that works for product A in a given market won’t work for moving product B in the same market. You will also find that there are times when it makes sense to have more than one distribution channel into the same market. Only experience will show you how to manage these issues.

You are part of the distribution channel of every business that you purchase supplies and equipment from, so conflicts may arise from time to time. By its very nature, membership in a distribution channel produces a certain amount of friction. Conflicts start easily and can damage your business now and in the long run. Think about the irritating things that your suppliers have done to you–excluding shutting off your credit when your account was 65 days overdue–and resolve never to do those things to your distribution-channel members. The most powerful and profitable thing that your distribution channel can do is to communicate. Make sure that the members of your distribution channel know, in advance, everything that you expect of them. Make sure that you understand exactly what they expect of you. Keep your promises. Make all your surprises pleasant ones. Live long and prosper. (Those Vulcans are great business people.)

The fifth P?

Now that you understand the Four Ps in classic marketing theory, I’m going to pull the rug out from under you. While this framework for understanding marketing is good, I feel it doesn’t go far enough. The Four Ps certainly cover all the activities that happen within your organization, and that’s important, but is that all there is? Could there be a fifth P? How about the people and organizations outside of your business–your customers?

In this series of columns, I’ve focused more on the business side than on the consumer side and the customers who buy your products. Just keep in mind that all marketing planning must begin and end with a thorough understanding of your customers. Once you know your customers, putting together the other pieces of your marketing puzzle will become much easier.