Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

11. Place and Development
    of Channel Systems

Text © The McGraw−Hill

Companies, 2002

Place and Development of Channel Systems 321

Selective distribution is becoming more popular than intensive distribution as

firms see that they don’t need 100 percent coverage of a market to justify or sup-

port national advertising. Often the majority of sales come from relatively few

customers—and the others buy too little compared to the cost of working with

them; that is, they are unprofitable to serve. This is called the 80/20 rule—80 per-

cent of a company’s sales often come from only 20 percent of its customers until it

becomes more selective in choosing customers.

Esprit—a producer of colorful, trendy clothing—was selling through about 4,000

department stores and specialty shops nationwide. But Esprit found that about half

of the stores generated most of the sales. Sales analysis also showed that sales in

Esprit’s own stores were about 400 percent better than sales in other sales outlets.

As a result, Esprit cut back to about 2,000 outlets and opened more of its own stores

and a website—and profits increased.^21

When producers use selective distribution, fewer sales contacts have to be

made—and fewer wholesalers are needed. A producer may be able to contact

selected retailers directly. Hanes sells men’s underwear this way.

Selective distribution can produce greater profits not only for the producer but

for all channel members—because of the closer cooperation among them. Whole-

salers and retailers are more willing to promote products aggressively if they know

they’re going to obtain the majority of sales through their own efforts. They may

carry more stock and wider lines, do more promotion, and provide more service—

all of which lead to more sales.

In the early part of the life cycle of a new unsought good, a producer’s market-

ing manager may have to use selective distribution to encourage enough middlemen

to handle the product. The manager wants to get the product out of the unsought

category as soon as possible—but can’t if it lacks distribution. Well-known middle-

men may have the power to get such a product introduced but sometimes on their

own terms—which often include limiting the number of competing wholesalers and

retailers. The producer may be happy with such an arrangement at first but dislike

it later when more retailers want to carry the product.

Exclusive distribution is just an extreme case of selective distribution—the firm

selects only one middleman in each geographic area. Besides the various advantages

of selective distribution, producers may want to use exclusive distribution to help

control prices and the service offered in a channel.

Retailers of shopping products and specialty products often try to get exclusive

distribution rights in their territories. Fast-food franchises often have exclusive

distribution—and that’s one reason they’re popular. Owners of McDonald’s fran-

chises pay a share of sales and follow McDonald’s strategy to keep the exclusive

right to a market.

Unlike selective distribution, exclusive distribution usually involves a verbal or

written agreement stating that channel members will buy all or most of a given

product from the seller. In return, these middlemen are granted the exclusive rights

to that product in their territories. Some middlemen are so anxious to get a pro-

ducer’s exclusive franchise that they will do practically anything to satisfy the

producer’s demands.

When Honda introduced its Acura luxury car in the U.S., marketing managers

decided to set up a completely new dealer system. In return for the right to sell the

car, each new dealer agreed to focus exclusively on Acura and its target market.

Acura also required its dealers to build expensive new showrooms. The cars sold

well with this strategy, but after three years nearly half of Acura’s dealers were still

losing money or making only a small profit. Steady sales of a few models of just one

make of car were not enough to offset the big investment in new facilities. To help

Get special effort from

channel members

Selective often moves

to intensive as market

grows

Exclusive distribution

sometimes makes

sense