digital and physical distribution

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3.3 The Marketing Mix – Place (Distribution)

Learning Objective

Students will be able to:

  • Explain the five standard objectives of distribution (market coverage, cost efficiency, service level, control, brand image).
  • Distinguish between physical and digital distribution channels and evaluate which is most appropriate for a given product or service.
  • Apply the seven channel‑selection criteria set out in the Cambridge 9609 syllabus.
  • Identify and manage channel‑power dynamics, vertical and horizontal conflict, and contractual issues for both physical and digital channels.
  • Describe how an omni‑channel (integrated) system works and use simple performance metrics to assess its effectiveness.

1. What does “Place” mean in the Marketing Mix?

“Place” refers to the set of activities that make a product or service available to the target market when and where the customer wants it. It covers:

  • Distribution‑channel structure (direct, indirect, hybrid).
  • Market‑coverage strategy – intensive, selective or exclusive.
  • Logistics – physical flow of goods and information.
  • Use of technology for ordering, tracking, after‑sales service and data collection.

2. Physical Distribution

2.1 Objectives of Physical Distribution (Cambridge wording)

Objective Why it matters for physical distribution
Market coverage (intensive, selective, exclusive) Ensures the product is available where the target customers shop – e.g., intensive coverage for FMCG, selective for premium fashion.
Cost efficiency Minimises total distribution cost by choosing the optimal number of intermediaries, transport modes and inventory levels.
Service level Provides the speed, reliability and after‑sales support expected by the market (e.g., same‑day delivery for electronics).
Control Maintains brand image, price consistency and service standards through direct channels or tightly‑managed intermediaries.
Brand image Aligns the channel with the desired brand positioning – exclusive boutiques for luxury, discount outlets for value brands.

2.2 Types of Physical Distribution Channels

Channel Type Typical Structure Key Role / Example
Direct Producer → Customer Company‑owned stores or web‑shop; full control, higher margins.
One‑level (Retailer) Producer → Retailer → Customer Supermarkets, department stores; broad coverage, retailer expertise.
Two‑level (Wholesaler + Retailer) Producer → Wholesaler → Retailer → Customer Fast‑fashion supply chains; efficient for large volumes.
Franchising Franchisor → Franchisee → Customer Fast‑food chains; rapid expansion, local market knowledge.
Agents Producer → Agent → Customer Insurance, industrial machinery; agent sells on behalf of producer, holds no inventory.
Brokers Producer ↔ Broker ↔ Customer Financial services, commodities; match supply and demand, earn commission.
E‑tailers (online retailers) Producer → E‑tailer → Customer Amazon, ASOS; combine digital ordering with physical delivery.
Hybrid / Dual‑distribution Producer → (Direct + Intermediary) → Customer Apple sells via its own stores and authorised dealers.

2.3 Logistics and Physical Flow

The physical flow of goods consists of four inter‑related components:

  1. Transportation – road, rail, sea or air; choice depends on cost, speed and product nature.
  2. Warehousing – centralised (single hub) vs. decentralised (regional depots) storage.
  3. Inventory management – safety stock, reorder point, Economic Order Quantity (EOQ). Example formulas:
    • Reorder point (ROP) = Demand during lead time = D × L
    • EOQ = √[ (2 × D × S) / H ] where D = annual demand, S = ordering cost per order, H = holding cost per unit per year.
  4. Order processing – manual paperwork vs. automated ERP or cloud‑based order‑management systems.

2.4 Channel‑Selection Criteria (Physical) – Checklist (Cambridge wording)

  1. Cost – total distribution cost versus expected margin.
  2. Control – degree of brand, price and service control required.
  3. Reach – geographic coverage and ability to reach the target market.
  4. Product characteristics – size, weight, perishability, need for after‑sales service.
  5. Customer preferences – desire for in‑store experience, immediacy or convenience.
  6. Competitive pressure – what channels do rivals use?
  7. Strategic fit – does the channel support the overall business objectives?

2.5 Channel Management Issues (Physical)

  • Channel power – which member (producer, wholesaler, retailer) holds the most bargaining power?
  • Channel conflict –
    • Vertical conflict (producer vs. retailer or wholesaler).
    • Horizontal conflict (retailer vs. retailer in the same level).
  • Co‑operation mechanisms – joint promotions, shared data systems, co‑branding.
  • Contract terms – length, exclusivity, performance clauses, price‑setting arrangements.
  • Performance monitoring – sales data, Service‑Level Agreements (SLAs), stock‑turn ratios, audit of inventory levels.

2.6 Simple Performance Metrics (Physical)

Metric Formula / Interpretation
Coverage ratio Number of outlets carrying the product ÷ Total potential outlets (expressed as %).
Cost‑per‑unit delivered Total distribution cost ÷ Units sold.
Service level Orders delivered on‑time ÷ Total orders (target ≥ 95 %).
ROD (Revenue from distribution ÷ Distribution cost) Indicates profitability of the channel.

3. Digital Distribution

3.1 Key Digital Distribution Models

  1. Direct download – producer’s website or app store (e.g., Adobe Creative Cloud).
  2. Streaming – subscription platforms delivering content in real time (Netflix, Spotify).
  3. Software as a Service (SaaS) – cloud‑based access (Salesforce, Microsoft 365).
  4. Marketplace platforms – third‑party sites that host many producers (Apple App Store, Steam, Amazon Kindle).
  5. Digital‑physical bundles – e‑books sold with a printed copy, video games with a console.

3.2 Objectives of Digital Distribution (same five as physical)

Objective Why it matters for digital distribution
Market coverage Internet reach allows worldwide availability; platform choice influences demographic coverage.
Cost efficiency Marginal cost of an extra unit is near zero; main costs are platform fees and technology investment.
Service level Uptime, download speed and user‑experience directly affect customer satisfaction.
Control Direct digital channels give full price and branding control; marketplace channels involve shared control.
Brand image Choice of platform and presentation (e.g., premium app store vs. discount marketplace) influences perception.

3.3 Channel‑Selection Criteria (Digital) – Checklist

  1. Cost – platform fees, transaction charges, technology development and maintenance.
  2. Control – ability to set price, manage branding and collect customer data.
  3. Reach – internet penetration in target markets, platform user base.
  4. Product characteristics – file size, need for regular updates, security requirements.
  5. Customer preferences – willingness to download vs. stream, subscription vs. one‑off purchase.
  6. Competitive pressure – which digital channels do rivals dominate?
  7. Strategic fit – does the channel support the firm’s long‑term digital strategy?

3.4 Channel Management Issues (Digital)

  • Channel power – dominant platforms (e.g., Apple, Google) can dictate terms and fees.
  • Channel conflict –
    • Vertical: producer vs. marketplace over pricing or promotional rules.
    • Horizontal: multiple producers competing for the same platform “shelf‑space”.
  • Co‑operation mechanisms – joint marketing campaigns, API integrations, data‑sharing agreements.
  • Contract terms – revenue‑share percentages, exclusivity clauses, termination rights, DRM requirements.
  • Performance monitoring – download/stream counts, churn rate, average revenue per user (ARPU), SLA compliance (uptime %).

3.5 Simple Performance Metrics (Digital)

Metric Formula / Interpretation
ARPU (Average Revenue Per User) Total revenue ÷ Number of active users.
Churn rate Customers lost ÷ Customers at start of period (lower is better).
Cost‑per‑acquisition (CPA) Total marketing & platform fees ÷ New customers acquired.
ROD (Revenue from distribution ÷ Distribution cost) Same formula as physical – allows direct comparison of channel profitability.

4. Choosing Between Physical and Digital Distribution

Decision‑making involves weighing product characteristics, market expectations and strategic objectives.

Consideration Physical Distribution Digital Distribution
Product tangibility Required for goods that must be touched, tried or consumed physically (e.g., apparel, food). Suitable for intangible or digitised products (software, music, e‑books).
Customer buying behaviour Preference for in‑store experience, immediate possession, or tactile inspection. Preference for convenience, instant access, on‑the‑go consumption.
Cost structure High fixed costs (warehousing, transport) plus variable handling costs. Low marginal cost per unit; higher upfront technology and platform‑fee investment.
Geographic reach Limited by logistics network, customs, and distribution centre locations. Potentially worldwide, constrained only by internet penetration and regional regulations.
Control over brand & price Direct channels give maximum control; indirect reduces control. Direct digital channels give full control; marketplace channels may dilute it.
Regulatory / legal issues Custom duties, health & safety standards, product‑labelling laws. Data protection (GDPR), licensing, Digital Rights Management (DRM), platform‑specific rules.
Channel‑power dynamics Power often lies with large retailers or wholesalers. Power frequently rests with dominant platforms (e.g., Apple, Google, Amazon).

5. Integrated (Omni‑Channel) Distribution

Most modern firms combine physical and digital routes to give customers a seamless experience. Key management points:

  • Real‑time inventory visibility across stores, warehouses and e‑commerce sites.
  • Consistent pricing, promotions and brand messaging on every touch‑point.
  • Unified customer service – call‑centre, live‑chat, in‑store help desks share the same CRM data.
  • Data integration – ERP and CRM systems capture both online and offline transactions for accurate forecasting.
  • Channel‑specific fulfilment options – click‑and‑collect, ship‑from‑store, home delivery, digital download.
Suggested diagram: Flow of an omni‑channel distribution system showing interaction between physical stores, e‑commerce website, mobile app, central warehouse and third‑party logistics provider.

6. Case Study Snapshots

Case 1 – Physical – Fast‑Fashion Retailer

  • Channel: Two‑level (manufacturer → wholesaler → own‑brand stores).
  • Logistics: Central hub replenishes stores twice weekly; mix of road and rail transport.
  • Objectives: Intensive coverage, low cost per unit, rapid turnover.
  • Performance metric: Stock‑turn ratio = Cost of goods sold ÷ Average inventory (target > 12).

Case 2 – Digital – Music‑Streaming Service

  • Channel: Direct streaming via subscription platform.
  • Revenue: Monthly fees + targeted advertising.
  • Key advantages: Instant global delivery, rich usage data for personalised playlists.
  • Performance metric: ARPU = £9.50; churn = 4 % per month.

Case 3 – Hybrid – Consumer‑Electronics Brand

  • Channels: Direct online store, authorised e‑tailers (Amazon, Currys), and flagship physical stores.
  • Management focus: Consistent pricing, shared inventory system, joint marketing campaigns.
  • Performance metric: ROD = 1.8 (revenue from distribution is 1.8 × distribution cost).

7. Summary Checklist (Exam‑Ready)

  1. Identify whether the product is tangible or intangible.
  2. State the five standard distribution objectives (coverage, cost, service, control, brand image).
  3. List the physical channel types (direct, one‑level, two‑level, franchising, agents, brokers, e‑tailers, hybrid).
  4. List the digital channel models (direct download, streaming, SaaS, marketplace, bundles).
  5. Apply the seven selection‑criteria checklist to the chosen channel.
  6. Explain channel‑power dynamics and the two forms of channel conflict (vertical & horizontal).
  7. Identify at least three contractual or cooperative mechanisms (e.g., exclusivity, revenue‑share, joint promotions).
  8. Describe how an omni‑channel system integrates inventory, pricing and customer service.
  9. Use a simple performance metric (e.g., ROD, ARPU, stock‑turn) to evaluate channel effectiveness.

8. Examination Practice Question

“Explain the advantages and disadvantages of using a direct digital distribution channel for a new educational software product. In your answer, discuss at least three factors that would influence the company’s choice of channel.”

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