Notes chapt 12 - Notes 1 Distribution channel as a set of interdependent organizations The textbook defines distribution channel as a set of

Notes chapt 12 - Notes 1 Distribution channel as a set of...

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Notes 1 Distribution channel as a set of interdependent organizations: The textbook defines distribution channel as “a set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user” (p. 399). Figure 12.2 on page 402 of the textbook displays a few examples of distribution channels. Except in direct marketing channels through which the producer sells the product directly to the consumer or business customer, the producer has to collaborate with at least one other organization to make the product available to consumers. The word interdependent is critical in the above definition because an action taken by an organization within a distribution channel impacts the other organizations involved in the same channel. For example, an increase in the price charged by the producer may lead to an increase in the price charged by the other intermediaries, and this will reduce the demand for the product. Even if the producer does not increase the price charged to intermediaries, a price increase by one of the intermediaries will have an impact on the demand and may contribute to the reduction of the producer’s profits. Another example of the interdependence among channel members is the way in which the service provided by the retailer influences how customers perceive the producer’s product or service. Because of the producer’s reliance on intermediaries to perform specific functions, channel decisions have to be taken seriously to avoid costly mistakes. 2 Coordination in a conventional distribution channel: A conventional distribution channel consists of “one or more independent producers, wholesalers, and retailers, each a separate business seeking to maximize its own profits, even at the expense of profits for the system as a whole” (textbook, p. 404). Typically, in such a system, each channel partner sells directly to the partner below and does not care about what happens afterwards. As you can see in Figure 12.3 on page 404 of the textbook, the producer sells to the wholesaler and the latter sells to the retailer, and each of them wants to maximize its own profits. It is now well established that in such a distribution channel, the retail prices to consumers are generally high and the level of service provided to consumers is rather poor. Therefore, it is suggested that producers with specific goals for their products put in place mechanisms that give incentives to intermediaries to behave in such a way that pursuing their own profits becomes compatible with the improvement of profits for the whole system. In other words, producers take the leadership role and try to coordinate channel members’ decisions. Examples of coordination mechanisms are price discounts offered to intermediaries and cooperative advertising programs with intermediaries.
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