PRINCIPLES OF MARKETING 1

A. Marketing Overview

Marketing is the business function that deals with satisfying the needs and wants of specific

groups, individuals or organizations through exchange processes. In a nutshell, it is a process in

which companies deliver solutions to customers’ problems in return for payment. Successful

firms are those that consistently satisfy the needs and wants of customers better than their

competitors. The fundamental goal of marketing is to attract new customers by providing

superior value and to keep and grow current customers by delivering satisfaction. This goal can

only be accomplished if the organization embarks on effective marketing activities. Marketing

enables specific groups, individuals or organizations to; understand customer preferences, design

appropriate products for selected customers and to determine appropriate methods for

communicating, delivering, and capturing value in return.

Definition of Marketing

Marketing is defined in several ways by numerous scholars, writers and associations. It has no

universal definition, because it covers a wide range of functions and ideologies. Some scholars

view marketing as a philosophy, an attitude, a perspective or a management orientation that

stresses customer’s satisfaction. The American Marketing Association (AMA) has consistently

reviewed their definition of marketing over the years.

In 1935, AMA defined marketing as the performance of business activities that direct the flow of

goods and services from producers to consumers. The origins of the marketing discipline extend

from the distribution function, in which merchants, that is, intermediaries have historically
played a dominant role. The preoccupation of marketing with distribution can be observed in the

1935 definition of marketing.

In 1985, AMA defined marketing as the process of planning and executing the conception,

pricing, promotion, and distribution of ideas, goods, and services to create exchanges’ that

satisfy individual and organizational objectives. There is a growing consensus that exchange

forms the core phenomenon for the study of marketing when the word “exchange” made it into

the official definition of marketing in 1985.

Correspondingly, in 2004, AMA defined marketing as the organizational function and a set of

processes for creating, communicating and delivering value to customers and for managing

customer relationships in ways that benefit the organization and its stakeholders (AMA, 2004).

The distinctive difference between the 1985 and the 2004 American Marketing Association

definitions of marketing is the lack of exchange. In the new definition, a focus on creating and

delivering value through customer relationships permeates over creating satisfactory exchanges.

Also, in 2013 the American Marketing Association (AMA) defined Marketing as the activity, set

of institutions and processes for creating, communicating, delivering, and exchanging offerings

that have value for customers, clients, partners, and society at large. This revised definition

maintains a stakeholder perspective, and it does not limit the scope of marketing to

organizations. The roles of institutions and processes, as well as marketing’s impact on society,

are clearly acknowledged. Furthermore, the revised definition refrains from stating that

marketing is about “managing” customers or relationships. It incorporates both the traditional

view (the exchange paradigm) and the current one (the value creation paradigm).

B. Basic Marketing Terms

1. Needs: Human needs are states of felt deprivation. They include basic physical needs for food,

clothing, warmth and safety; social needs for belonging and affection; and individuals’ needs for

knowledge and self-expression.

2. Wants: are the form human needs take as they are shaped by culture and individual

personality.

3. Demands: are human wants that are backed by buying/purchasing power (money).

4. Market: is the set of actual and potential buyers of a product. These buyers share a particular

need or want that can be satisfied through exchange relationships.

5. Exchange; is the act of obtaining a desired object from someone by offering something in

return.

6. Market offering: These are combinations of products, services, information, or experiences

offered to a market to satisfy a need or want.

C. Evolution of Marketing

Marketing has changed over the centuries, decades and years. Marketing has taken the modern

shape after going through various stages since last the end of 19th century. The various stages of

the evolution of marketing are as follows;

1. Production Era:

2. Product Era:

3. Sales Era:

4. Marketing Era:

5. Societal- Marketing Era:

The Production Era/Concept

This concept holds that consumers will prefer products that are widely available and affordable.

It is one of the oldest concepts in business. Managers of production-oriented businesses

concentrate on achieving high production efficiency, low costs, and mass distribution. Marketers

also use the production concept when a company wants to expand the market. The prevailing

attitude and approach of the production orientation era was -“consumers favor products that are

available and highly affordable” . The mantra for marketing success was to “Improve production

and distribution”. The rule was “availability and affordability is what the customer wants”.

The Product Era/Concept

The attitude changed slowly and approach shifted from production to product and from the

quantity to quality. The prevailing attitude of this period was that consumers favor products that

offer the most quality, performance and innovative features and the mantra for marketers was ‘A

good product will sell itself’. The product concept proposes that consumers favor products that

offer the highest quality, performance and innovative features. Managers in these organizations

focus on making superior products and improving them over time. This philosophy led a poet

and philosopher called Ralph Emerson to state his philosophy of ‘better mouse-trap fallacy”.

This fallacy states that ‘if a man writes a better book, preaches a better sermon or makes a better

mousetrap than his neighbor, ‘though that man builds his house in a bush, the whole world would

make a beaten part to his house’. This concept can lead to marketing myopia. A new or improved

product must be priced, distributed, advertised and sold properly to be successful.

The Sales Era/Concept

The increased competition and variety of choices / options available to customers changed the

marketing approach and now the attitude was “Consumers will buy products only if the company
promotes/ sells these products”. This era indicates rise of advertising and the mantra for

marketers was “Creative advertising and selling will overcome consumers’ resistance and

convince them to buy”. The selling concept holds that consumers and businesses, if left alone,

won’t buy enough of the organization’s products. The organization must, therefore, undertake an

aggressive selling and promotion effort. The selling concept is practiced most aggressively with

unsought goods, that is, goods that buyers normally do not think of buying, such as insurance,

encyclopedias, and cemetery plots. Most firms also practice the selling concept when they have

overcapacity. Their aim is to sell what they make, rather than make what the market wants.

However, marketing based on hard selling carries high risks. It assumes that customers who are

coaxed into buying a product will like it, and that if they don’t, they not only won’t return or

bad-mouth it or complain to consumer organizations, but they might even buy it again.

The Marketing Era/Concept

The shift from production to product and from product to customers later manifested in the

Marketing Era which focused on the “needs and wants of the customers” and the mantra of

marketers was ” ‘The consumer is king! Find a need and fill it’. The approach is shifted to

delivering satisfaction better than competitors are. The marketing concept states that achieving

organizational goals depends on knowing the needs and wants of target markets and delivering

the desired satisfaction better than competitors do. Instead of a product-centered ‘make and sell’

philosophy, the marketing concept is a customer centered ‘sense and respond’ philosophy.

Therefore, the marketing task is not to find the right customers for a product or service, but to

design the right services and products for the customers.

The Societal Marketing Concept

This concept holds that the organization should determine the needs, wants and interest of the

target market, before delivering superior value to customers in a way that maintains or improves

both the consumer’s and society’s well-being.

D. Marketing Environment

The environment of a firm may be defined as the sum of all the elements and forces present in

its immediate and remote surroundings, which has a potential impact on its ability to achieve its

objectives. A company’s marketing environment affects its ability to build and maintain

successful relationships with target customers. The environment of the firm can be divided into

two, namely; Micro (Internal) Environment and Macro (External) Environment.

Micro (Internal) Environment

The micro environment of business refers to all factors or forces that have a more direct impact

on the daily activities of the company. The main factors in the micro-environment are;

customers, suppliers, competitors, shareholders, financial institutions, and employees.

Customers

The customers expect the management to provide them with quality products and services at

reasonable prices which allow appropriate rates of return to its owners. Management on the other

hand, seeks to win customers’ loyalty through factual information about their products which

have been designed and developed, keeping in view, the customers’ expectations.

Suppliers

Suppliers refer to firms and individuals that provide the resources needed by the company and its

competitors to produce goods and services. Inferior or sub-standard quality of raw materials or

delayed supply of raw materials will obstruct the production process thereby increasing the cost
of finished goods. Management must purchase quality raw materials from reliable suppliers, and

pay them properly when the money is due.

Competitors

These are companies that offer similar or alternative products and services. In pursuit of survival

and growth, organizations must compete with one another. The presence of competition and

rivalry forces each organization to offer quality products at minimum prices. Therefore, to be

successful a company must provide greater customer value and satisfaction than its competitors

do. Competition indeed brings out the best in an organization and requires the management to

constantly strive for excellence.

Shareholders

These are owners of the firm who can influence the policies and procedures of the firm. They do

this by exercising their voting rights. Bearing in mind the degree of the influence of

shareholders, company directors and managers are now becoming more conscious of the

decisions they make and how they carry out their responsibilities.

Financial Institutions

These include banks, insurance companies, and other financial organizations. Firms depend on

these financial organizations to provide them with capital to carry out their business activities.

Employees

The organization’s labor force comprises of all the individuals who are employed by the

organization. Employees are responsible for work in an organization. The firm must take care of

the needs of its employees by providing a work environment that is conducive for them.

Stakeholders
Stakeholders are groups or individual who are directly or indirectly affected by an organization’s

pursuit of its goals. In essence, they are all the people who stand to gain or lose by the policies

and activities of a business.

Macro (External) Environment

The external environment of a business refers to the major forces outside the organization that

have the potential to significantly influence the success of the firm. They consist of primary

forces that shape opportunities and pose threats to the company. These factors include; physical,

political-legal, economic, technological, socio-cultural and demographic factors.

Physical Environment

These include the supply and availability of resources and raw materials. Availability of

resources affects the location of the industries. Constraints in the physical environment

determine the type of business activities that are carried out.

Political-Legal Environment

This is the legal framework within which businesses operate. This comprise of the laws and

regulations that are passed by the government to control the business activities. These laws act as

guidelines within which the business must operate.

Economic Environment

This consists of factors that affect the economic growth and business activities within the

country. Business enterprises, being economic institutions are directly influenced by many

economic factors such as level of unemployment, rate of growth of the economy, level of

investment, level of government and consumer spending, inflation rate etc. These economic

factors can affect the operation of a firm both on the revenue side and the cost side.
Technological Environment

This refers to forces that create new technologies, thereby, creating new products and market

opportunities. Examples include the internet, biotechnology, cellular and mobile services.

Breakthrough in technology can affect a business positively by allowing it to take advantage of

new methods of production and new materials for manufacturing goods. The firm is also able to

provide better services to its clients, using current computer technology.

Socio-cultural and Demographic Environment

The social element of a country has an impact on the business of a firm. The products and

services that a firm provides depend very much on the composition of the population and its

demographics, values and attitudes that people have and the culture of the society. Whether a

product or service succeeds or fails depends on the society’s customs and ways of life. The

attitudes of the society provide a framework within which an organization operates.

E. MARKETING ELEMENTS

PRODUCT

A product can be defined as anything that can be offered to a market for attention, acquisition,

use, or consumption that might satisfy a want or need. Broadly, a product is anything that can be

offered to a market to satisfy a want or need. A product is more than a tangible offering it

includes; physical goods, services, experiences, events, persons, places, properties,

organizations, information and ideas.

Market leaders generally offer products and services of superior quality that provide matchless

customer value. Marketing-mix planning begins with building an offering that brings value to

target customers. This offering becomes the basis upon which the company builds profitable
customer relationships. The product is a key element in the marketing offerings. It is usually the

first and most basic marketing consideration. Product planner needs to address three product

levels, namely; core customer value, actual product and augmented product. Consumers see

products as complex bundles of benefits that satisfy their needs. When developing products,

marketers must first identify the core customer value that consumers seek from the product. Then

they must design the actual product and find ways to augment it, in order to create the customer

value and the most satisfying customer experience.

a. Core Customer Value

This is the fundamental level that points to the service or benefit the customer is really buying.

When designing products, marketers must first define the core, problem-solving benefits or

services that consumers seek.

b. Actual Product

At this level, the product planners must turn the core benefit into an actual product. They need to

develop product and service features, design, a quality level, a brand name, packaging and other

attributes that will deliver the core customer value to customers.

c. Augmented Product

Product planners must build an augmented product around the core benefit and actual product by

offering additional consumer services and benefits. The product planner must prepare an

augmented product that exceeds customer expectations. In developed countries, brand

positioning and competition take place at this level.

Product Classifications

A product can be classified into two broad classes based on the types of consumers that use

them- that is, consumer products and industrial products. It can also be classified based on its

durability and tangibility.

Consumer products: are products and services bought by final consumers for personal

consumption. The vast array of goods that consumers buy can be classified on the basis of their

shopping habits. Consumer products include convenience products, specialty products, and

unsought products.

a) Convenience products: are consumer products that customers usually buy frequently,

immediately, and with a minimum of comparison and buying effort, e.g detergents,

candy, magazines e.t.c Convenience products are usually low priced, and marketers

place them in many locations to make them readily available when customers need them.

b) Shopping products: are less frequently purchased consumer products and services that

customers compare carefully on suitability, quality, price and style. When buying

shopping products, consumers spend much time and effort in gathering information and

making comparisons. Examples include furniture, clothing e.t.c

c) Specialty products: are consumer products with unique characteristics or brand

identification for which a significant group of buyers is willing to make a special

purchase effort. Buyers normally do not compare specialty products. They invest only the

time needed to reach dealers carrying the wanted products. Examples include specific

brands of car, designer clothes, services of legal or medical specialists.

 d) Unsought products: are consumer products that consumers either do not know about or

knows about but do not normally think of buying. Examples include; life insurance, pre-

planned funeral services e.t.c. Unsought products require a lot of advertising, personal

selling, and other marketing efforts.

Industrial products: are products purchased by individuals and organizations for further

processing or for use in conducting a business. The difference between a consumer product

and an industrial product is based on the purpose for which the product is bought. The three

groups of industrial products and services include; materials and parts, capital items, and

supplies and services.

Based on its durability and tangibility, products can be classified into durable goods, non-durable

goods and services. Durable goods: are tangible goods that normally survive many uses. Durable

products normally require more personal selling and service, command a higher margin, and

require more seller guarantees. Nondurable goods: are tangible goods normally consumed in one

or a few uses. Because these goods are purchased frequently, the appropriate strategy is to make

them available in many locations, charge only a small markup, and advertise heavily to induce

trial and build preference. Services: are intangible products. As a result, they normally require

more quality control, supplier credibility, and adaptability.

F. Product Life Cycle (PLC)

Companies products are born, grow, mature, and then decline, just as living things do. To remain

vital, the firm must continually develop new products and manage them effectively through their

life cycles. Product Life Cycle (PLC) is the course of a product’s sales and profits over its

lifetime. It involves five distinct stages, namely; product development, introduction, growth,
maturity, and decline. Product development begins when the company finds and develops a new

product idea. During product development, sales are zero and the company’s investment costs

mount.

The introduction stage: is a period of slow sales growth as the product is introduced in the

market. Profits are nonexistent in this stage because of the heavy expenses of product

introduction. It starts when the new product is first launched. Introduction takes time, and sales

growth is apt to be slow. In this stage as compared to other stages, profits are negative or low

because of the low sales and high distribution and promotion expenses. Much money is needed

to attract distributors and build their inventories. Promotion spending is relatively high to inform

consumers of the new product and get them to try it.

The Growth Stage: is a period of rapid market acceptance and increasing profits. This stage is

characterized by rapid sales growth and strong product acceptance. If the new product satisfies

the market, it will enter a growth stage, in which sales will start climbing quickly. The early

adopters will continue to buy, and later buyers will start following their lead, especially if they

hear favorable word of mouth. Attracted by the opportunities for profit, new competitors will

enter the market. They will introduce new product features, and the market will expand. The

increase in competitors leads to an increase in the number of distribution outlets, and sales jump

just to build reseller inventories. Prices remain where they are or fall only slightly. Companies

keep their promotion spending at the same or a slightly higher level. Educating the market

remains a goal, but now the company must also meet the competition.

Profits increase during the growth stage as promotion costs are spread over a large volume and as

unit manufacturing costs fall. The firm uses several strategies to sustain rapid market growth as
long as possible. It improves product quality and adds new product features and models. It enters

new market segments and new distribution channels. It shifts some advertising from building

product awareness to building product conviction and purchase, and it lowers prices at the right

time to attract more buyers.

The Maturity Stage: is a period of slowdown in sales growth because the product has achieved

acceptance by most potential buyers. Profits level off or decline because of increased marketing

outlays to defend the product against competition. At some point, a product’s sales growth will

slow down, and the product will enter a maturity stage. This maturity stage normally lasts longer

than the previous stages, and it poses strong challenges to marketing management. Most products

are in the maturity stage of the life cycle, and therefore most of marketing management deals

with the mature product. The slowdown in sales growth results in many producers with many

products to sell. In turn, this overcapacity leads to greater competition. Competitors begin

marking down prices, increasing their advertising and sales promotions to find better versions of

the product. These steps lead to a drop in profit. Some of the weaker competitors start dropping

out, and the industry eventually contains only well-established competitors.

Although many products in the mature stage appear to remain unchanged for long periods, most

successful ones are actually evolving to meet changing consumer needs. At this stage product

managers should consider modifying the market, product, and marketing mix. In modifying the

market, the company tries to increase the consumption of the current product. It may look for

new users and new market segments. The manager may also look for ways to increase usage

among present customers. The company might also try modifying the product- changing

characteristics such as quality, features, style, or packaging to attract new users and to inspire

more usage. It can improve the product’s styling and attractiveness. It might improve the
product’s quality and performance- its durability, reliability, speed, and taste. Finally, the

company can try modifying the marketing mix- improving sales by changing one or more

marketing mix elements. The company can offer new or improved services to buyers. It can cut

prices to attract new users and competitors’ customers. It can launch a better advertising

campaign or use aggressive sales promotions. In addition to pricing and promotion, the company

can also move into new marketing channels to help serve new users.

The Decline Stage: is the period when sales fall off and profits drop. Not all products follow this

product life cycle. Some products are introduced and die quickly; others stay in the mature stage

for a long, long time. Some enter the decline stage and are then cycled back into the growth stage

through strong promotion or repositioning. This is the product life-cycle stage in which a

product’s sales decline. Sales decline for many reasons, including technological advances, shifts

in consumer tastes, and increased competition. As sales and profits decline, some firms withdraw

from the market. Those remaining may prune their product offerings. They may drop smaller

market segments and marginal trade channels, or they may cut the promotion budget and reduce

their prices further.

Keeping weak products delays the search for replacements, creates a lopsided product mix, hurts

current profits, and weakens the company’s foothold on the future. For these reasons, companies

need to pay more attention to their aging products. A firm’s first task is to identify those products

in the decline stage by regularly reviewing sales, market shares, costs, and profit trends. Then,

management must decide whether to maintain, harvest, or drop each of these declining products.

Management may decide to harvest the product, which means reducing various costs and hoping

that sales hold up. If successful, harvesting will increase the company’s profits in the short run.
Or management may decide to drop the product from the line. It can sell it to another firm or

simply liquidate it at salvage value.

G. PRICE

Price is the amount of money charged for a product or service, or the sum of the values that

customers exchange for the benefits of having or using the product or service. Price plays a key

role in creating customer value and building customer relationships. Smart managers treat

pricing as a key strategic tool for creating and capturing customer value. Price is one of the most

flexible marketing mix elements. It is the only element in the marketing mix that produces

revenue; all other elements represent costs. Unlike product features and channel commitments,

prices can be charged quickly.

One frequent problem of pricing is that companies are too quick to reduce prices in order to get a

sale rather than convincing buyers that their product’s greater value is worth a higher price.

Other common mistakes include pricing that is too cost oriented rather than customer-value

oriented, and pricing that does not take the rest of the marketing mix into account. Customers’

perception of product value set the upper limit for prices and costs set the lower limit. If

customers perceive that the price is greater than the product’s value, they will not buy the

product and if the company prices the product below its costs, company profits will suffer. In

setting its price between these two extremes, the company must consider a number of other

internal and external factors. Internal factors affecting pricing include the company’s overall

marketing strategy, objectives, and marketing mix, as well as other organizations considerations.

External factors include the nature of the market and demand, competitors’ strategies and prices,

and other environmental factors.

New-Product Pricing Strategies

Pricing strategies usually change as the product passes through its life cycle. The introduction

stage is usually challenging. Companies bringing out a new product face the challenge of setting

prices for the first time. They can choose between two broad strategies namely; market-

skimming pricing and market-penetration pricing.

Market-skimming Pricing: This deals with setting high price for a new product to obtain

maximum revenue layer by layer from the market.

Market skimming can be applied in the following situation;

a) Where the product’s quality and image support its higher price.

b) Where the costs of producing a smaller volume cannot be so high that they cancel the

advantage of charging more.

c) Where competitors are not able to enter the market easily and undercut the high price.

However, rather than setting a high initial price to skim off small but profitable market

segments, some companies use market-penetration pricing.

Market-penetration Pricing: This deals with setting a low price for a new product in order to

attract a large number of buyers quickly and win a large market share.

The high-sales volume results in falling costs, allowing the companies to cut their prices even

further.

Several conditions to be met for this low-price strategy to work include the following;

a) The market must be highly price sensitive so that a low price produces more market

growth.

b) Production and distribution costs must fall as sales volume increases.

 c) The low price must keep out the competition and the company must maintain its low-

price position.

H PROMOTION

Promotion consists of all activities intended to make a company communicate with its present

and potential customers. Marketers do embark on promotional activities in order to communicate

with its actual and potential customers. These promotional activities are also known as

promotional tools or promotional elements. Promotional tools consist of the following;

advertising, sales promotion, personal selling, publicity, public relations among others.

Promotion involves the dissemination of information about a product, product line, brand or

company to a target market. It highlights the marketing activities undertaken in order to increase

the likelihood that consumers will buy and become committed to a product. A well-designed

product that meets customers’ needs is important for effective marketing, but it is not sufficient

for achieving organizational goals and objectives. Therefore, it is equally important that

customers must know that the product is available and understands its benefits, unique qualities

and advantages. Promotion is responsible for informing and reminding existing and prospective

customers of the company’s market offerings and advocating/persuading the customers to

purchase the products/service in preference to competitive offerings. In a nutshell, promotion is

the means by which an organization communicates with its customers.

The Push and Pull Promotional Strategy

The business term “push” and “pull” originated in logistics and supply chain management, but it

is also widely used in marketing. A push-pull system in business describes the movement of a

product or information between two subjects. The consumers usually “pull” the goods or
information they demand for their needs, while the suppliers “push” them towards the

consumers. A promotional push strategy refers to a situation whereby a manufacturer advertises

his product too many times and it gets stamped on the viewers’ minds, while the pull strategy

implies the manufacturer to stop promoting his product for some time so that consumers feel the

need to look for the product or seek information about it. Another dimension of the push and pull

strategy depends on the medium of communication between the seller and the buyer. The

communication can be either interactive or non-interactive. A successful strategy will usually

have elements of both the push and pull promotional methods. Most firms combine the two type

of promotional strategy while only few firms depend entirely on one or the other strategy.

Pull strategy: is define as a promotional effort by the seller to stimulate final-user demand, in

such a way that, the final user or consumers exert pressure on the distribution channel to make

provision for the goods or services; thereby pulling it through the marketing channel. When

marketing intermediaries’ stock many competing product and show little interest in any one of

them, a pulling strategy may be necessary to motivate them to give preference to a particular

product. The objective of the pull strategy is to build consumer demand by motivating consumers

to request for a particular product when they go shopping in retail store. Advertising and sales

promotional tools are mostly used for implementing a pull strategy. The pull strategy has been

viewed as a shift in power from advertisers to consumers. Hence, it requires a more adoptive

approach by marketers.

Push strategy: is defined as a promotional strategy by seller to member of the distribution

channels to stimulate personal selling of the goods and services, thereby pushing it through the

marketing channels. In contrast to the pull strategy, the push strategy relies more heavily on

personal selling promotional strategy. In this case, the objective is to promote the product to the
members of the distribution channel rather than to the final consumers. In a nutshell, it focuses

on how the product will get to the end-user or customer. Similarly, new businesses often adopt a

push strategy for their product in order to generate exposure and a retail channel. This can be

done through co-operative advertising allowances, trade-discount, personal selling effort by the

firms sales-force and other dealer support. Such strategy is designed to gain marketing success

for the firms’ product by motivating wholesalers and the retailers to spend extra time and extra

effort in promoting the product to their customers.

I PLACE

In the early stages of trade, it is possible for producers and their customers to meet face-to-face

to exchange goods and services as in the situation where the farmer takes the produce to the local

market. However, when trade becomes more sophisticated, the services of various intermediaries

along the supply chain may need to be used to ensure that the goods or services reach the

consumer in the right manner at the right place, time and price.

The channels of distribution used within the market place have evolved to match the needs of the

users of these services and they continue to be adapted to meet those needs. The objective of the

channels of distribution is to move the goods or services efficiently, with the lowest possible

number of intermediaries between the producer and the end user. Ideally, the producer aims to

exchange the products directly with the consumer. However, as the physical distance between

the two parties and the volume of goods to be exchanged increases, it becomes necessary for

producers to use the help of others to complete the movement of the goods associated with the

transaction. These are the intermediaries within the channels of distribution, or the ‘value chain’,

as it is termed. This is particularly the situation for producers supplying the consumer mass
market, where it becomes impracticable to exchange products directly between the producer and

the consumer.

Factors That Affect Channel Of Distribution Selection

The selection of the distribution channel, and the intermediaries to use, are influenced by several

factors, such as; the characteristics of the product, customer, company, environment in which the

firm operates, the competitor approaches to distribution and the type of intermediaries that

operate within the channel.

A. Product Characteristics

 Perishability: Products have differing degrees of perishability that influence the type of

storage and warehousing required and the distance that such products can be moved.

Highly perishable products such as fresh food require different warehousing conditions

from products such as vegetable oil, lubricating oil and toilet paper. Some products need

to have temperature controlled chilled or freezing conditions; others are better stored at

room temperature. Safety of dangerous products also necessitates special storage, e.g.

petroleum and gaseous fuels.

 Bulk : Products vary in the weight and volume per unit value, e.g. toilet paper occupies a

high volume for its weight and unit value whereas computer components have much

smaller volumes compared with their weights and unit values. Management will endeavor

to reduce the distances that high-volume products are transported, but for smaller volume

products such considerations are less critical.

 Product standardization: The degree of product standardization will influence the

selection of the intermediaries within the channels of distribution. The more standardized
 the product the more likely it is that a standardized route through the channel

intermediaries can be achieved; conversely, the more individualized the product, the

more likely it is to use a wide range of intermediaries.

 Service support requirements: The degree of service support that a product requires

influences the selection of the channel intermediaries. For example, if limited support is

required, as with the sale of tinned soup, where the purchaser takes the tin and determines

how it will be consumed, then the selected channel has merely to ensure that the product

reaches the end of the channel, the retailer’s outlet, in sound condition. The retailer will

be required to give minimum customer services apart from ensuring availability of the

product for the consumer to purchase. However, should the consumer expect the product

to be supplied with extra service provision, e.g. for a car, a dishwasher or a life assurance

policy, the purchaser will expect such service support from the car dealer, electrical

product retailer or assurance adviser. These intermediaries will be required to have the

resource to provide such services.

 Unit value: Products with higher unit values may require and justify more expensive

channel support than those with lower unit values. The supplier of designer clothes such

finds it is appropriate to instigate a channel system using a global network of prestigious

boutiques located in high-status locations. The supplier of mass market clothes will target

several small shops in any location. The channel intermediaries required to support these

two types of retail clothing outlets would differ.

B. Customer Characteristics
 Number: The number of customers that a producer targets influences the selection of the

intermediaries used within the supply channel. In situations where the producer is serving

the mass market there may be millions of consumers, as in the UK, with up to 60m

individual customers and 24m households. Such numbers make it difficult to resource

personal individual selling to each potential customer. Yet if, as in an industrial market,

the producer is supplying a small number of customers, e.g. a few component suppliers

within the car industry, it is feasible that the component suppliers could use their own

sales and logistics teams to service customer needs.

 Geographical dispersion: As the geographical distance between the supplier and the

consumer increases, the process of moving the goods within the supply chain becomes

more complex. If the distance extends across geographical country boundaries,

challenges related to legal, regulatory and fiscal issues as well as the obvious cultural and

language difficulties complicate the movement of goods between the intermediaries

within the distribution channels.

 Purchasing patterns: Customer purchasing patterns of goods differ. For example, within

the mass consumer market, some people buy foodstuffs on a daily, weekly, fortnightly or

even monthly basis, depending on the needs and the resources of the individual.

Customers vary in the frequency with which they shop and the volumes of products that

they purchase, so that some customers purchase small quantities of products frequently,

while others purchase larger quantities of the same products but on a less frequent

schedule. Customer segmentation can categorize key types of purchasing patterns, e.g.

heavy and light consumers of a particular product. Within the industrial market
 purchasing patterns differ, depending on the organization concerned and its particular

culture.

 Buyer susceptibility to different selling methods: Customers may prefer one form of sales

approach to another and not all customers have the same preferences. For example, older

customers may prefer to purchase banking services through the branch’s bank manager,

but younger customers may find purchasing the same services using the Internet and

telephone sales is more convenient.

C. Company characteristics

 Size of organization: The resources of the supplier of the product or service, influences

the selection of the channels of distribution. Such resources include finance, the number

of employees and the geographical spread of the organization’s operations. For example,

the MNC is likely to have access to a more extensive range of channel intermediaries

than the smaller firm, and the MNC could use a combination of different intermediary

routes to target particular market segments.

 Product mix: The range of products that an organization supplies affects the channel

selection. The organization supplying different product types to different markets, of

necessity, will be likely to operate more complex channel systems than the firm

supplying a more limited range of standard products.

 Past channel mix experience: The channel mix used evolves over time and is influenced

by the experience of past practice. If, traditionally, a product has been distributed by a

supplier using wholesalers and retailers, and that system has worked effectively, then the

supplier will probably continue to use the same system. It is when the system fails, or
 when the cost of using such channels becomes excessive, or the competition becomes

intense, that suppliers consider alternative approaches.

Channel networks take various forms and may use intensive, selective or exclusive

intermediaries along the value chain.

 Intensive distribution

Mass-market products have to be made available in as many outlets as possible to ensure

that consumers have the convenience of being able to purchase the products whenever

they wish. This strategy is used for lower-priced convenience items, e.g. confectionery,

snack foods, tobacco and soap. Producers of these types of goods use a range of outlets of

varying status, including railway kiosks, multiple high-street shops and retail superstores.

Location convenience is the priority in selecting these retail outlets.

 Selective distribution

Rather than intensive distribution, producers may select their preferred outlets to match

their marketing strategies by targeting particular market segments. For example, the

producer of digital cameras may select electrical goods retailers that are located in prime

shopping places and in airport duty-free zones, rather than use all the available electrical

goods retailers. In this way, the digital camera producer can concentrate efforts on

retailers that perform best at selling the cameras.

 Exclusive distribution

Should the producer have an exclusive range of products, e.g. Omega watches or Gucci

fashion clothes, it is appropriate to distribute the products through exclusive retail outlets

and to limit the number of intermediaries handling the company’s goods or services.
Exclusive distribution is used when the producer wants to maintain control over the

service level offered. Frequently it involves exclusive dealer arrangements in which the

retailers agree not to carry competing brands.

While, in principle, the choice of whether to use intensive, selective or exclusive

distribution relates to the nature of the products or services being marketed, and the

distribution methods appear to be mutually exclusive, yet there are pressures to move

towards intensive intermediary coverage. Often the user of exclusive and selective

distribution is under pressure to widen the outlet coverage, especially in times of falling

sales. However, the greater coverage can reduce the image of exclusivity, thereby losing

the advantages associated with the established outlets. The situation has to be monitored

carefully to choose the most appropriate outlet coverage.

Throughout the selection of the most effective distribution network, the channel design

has to consider the demands of the manufacturer, i.e. the need to move the goods or

services from the location where they are produced, through the intermediaries, to the

consumer. At the same time the pressures of the customer on the supplier of the goods or

services must be considered. Compounding this situation, the retailer places pressures on

the channel network, obliging the supplier to meet the retailer’s demands. The demands

of all concerned must be met.

In this way, channel design is affected by ‘push’ and ‘pull’ factors:

_ Push from the manufacturer pushing production on to customers through the channel

intermediaries.
_ Pull from customers exerting product stocking pressure on retailers and manufacturers

through the channel intermediaries.

_ Constraints come from retailers, e.g. stock specifications on suppliers to match

customer database information.