Distribution Channels

Differentiation by Technology

A subset of industrial distribution is technological differentiation marked by the employment of sales engineers on the one side and highly skilled technical buyers on the other. The vast spread of computer use in every institution, for example, produced a brand new category of intermediaries, the so-called VARs or value-added resellers, sometimes called integrators. These organizations came into existence as independent entities because the complexity of adapting computer systems and networks into the operations of a buying establishment require many complex skills in the absence of which no product could actually be sold. Very few producers of computers or peripherals are able (never mind willing) to master the intricacies of competing products in order to sell their own. The VARs took on this challenge. The emergence of VARs is an excellent example of the manner in which products and services shape and transform distribution channels.

Recurring Trends

In the cyclical relationship between the original producer and the "channel," the existence of a distribution "margin" produces recurring attempts by both sides to capture more of that margin by down- or upward integration or by cutting out the middleman. Producers frequently attempt to eliminate distributors by establishing a wholly-owned "branch" structure—making themselves distributors. Distributors, in turn, attempt to buy manufacturing operations so that they come to own the products that they sell. A similarly recurring trend is to eliminate the retailer by "selling at wholesale" in large, bare discount operations—usually somewhat below the retail level but not quite at the wholesale price. Yet another perennial is represented by the well-established machinery seller who distributes through "servicing dealers" and who, thinking of having it both ways, suddenly shifts a large part of his or her sales to a big discount house that does not offer services. The dealer channel will find itself undersold and burdened by new service business which is notsubsidized by original equipment sales. The reaction is usually violent, eventually forcing the producer to abandon discount sales. An intermediate position is presented by powerful retailers who offer their customers "home brands" cheaper; these, typically, are of a lower quality than branded merchandise. Such recurring gyrations are accompanied by the ever new (but ancient) practice of starting up membership stores where customers pay a fee to have access to lower prices; eventually membership becomes ever cheaper; in due time no check of membership is made.

DISTRIBUTION AND SMALL BUSINESSES

Small businesses typically inherit a distribution channel. The founding owner may be quite expert in distribution by having worked in the industry before. In the absence of personal knowledge, the best approach to learning about the channel rapidly is by immersion in the trade literature. Trade magazines will rapidly teach the business owner such fundamentals as major shows where the industry regularly meets. Visiting such a show and talking to competitors, buyers, and sellers will soon reveal the opportunities open to the business. The owner will probably encounter sales rep organizations, see retail and wholesale distributors at work, and will learn the one or two major preferred means of reaching the market used by the industry.

The owner will rapidly discover that choices are few and the channels already well developed. Learning exactly how to fit the business's products or services into existing channels will become the primary task. Effective entrance may necessitate a different way of packaging the product than initially envisioned, different methods of pricing, the use of incentives not imagined before but common in the industry, and so on.

Special difficulties face the new business which enters an activity for which distribution channels are poorly developed. Such will often be the case where the business is a new kind of service not yet "commodified." An extreme example might be decorating ceilings with original art. The business owner may have to discard his or her original intent to sell the service through art stores but discover that very high-end furniture dealers are the right distribution venue—and the mode of contact will be to decorate the ceilings of such dealers free of charge to attract the eyes of wealthy shoppers. Another venue may be by working closely with stores that sell special lighting equipment—which would, of course, be an element in ceiling art. Consulting businesses with abstract product, e.g. futures studies in support of marketing strategy, may similarly have to create their own distribution channel by the sheer rock-breaking methods of trial and error. Communication being a central element in the distribution of goods and services, such businesses may attempt to create industry specific futures projections and attempt to publish them in industry journals. This may lead to invitations to a conference. Where there is a will, there is a way '¦ These examples illustrate how finding the distribution channel arises, gradually, from exploring the product or service itself.

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