Before a product reaches a consumer, it makes a journey. Raw goods flow to a producer, which transforms the materials into products that move on to retailers, often passing through wholesalers first. From retailers, finally, the product comes to rest in the hands of the consumer. Those working within this channel of distribution are marketing intermediaries, and they’re important. The retailer, for instance, has expertise in dealing with consumers that a manufacturer likely lacks. Without such expertise, it’s understandable that a business would work with marketing intermediaries. Yet, there are also reasons to instead control the distribution channel.
Vertical Integration
-
One way to control a channel of distribution is through vertical integration. A business must replace some or all of the marketing intermediaries down the line by taking over their activities. The range of intermediaries between producer and consumer includes wholesalers, retailers, agents and brokers. Some of their activities include representation, transportation, storage, customer service and advertising. Besides adding these jobs to an existing organization, a business can achieve integration by merging with or acquiring the middlemen within the channel. Doing this may remove competitors’ available channels, thus hampering their distribution efforts.
Reduce Cost
-
Intermediaries add costs. After all, each must make money on the product or service. Just because intermediaries add costs, though, doesn’t mean a business can automatically save through eliminating an intermediary. However, if a business does find that it can take over the activities of an intermediary and save, controlling that part of the distribution channel might be advisable. The end consumer might enjoy a less expensive product, while the business gains expertise and control over the process. For instance, some businesses would rather sell directly to consumers via the Internet than go through a retailer.
Cooperation
-
Structuring the distribution channel so that all the intermediaries work as a unified system results in a vertical marketing system. One part of the system exerts control over the others, either through ownership of the rest, contracts or power and market influence. By controlling the system, a business can ensure cooperation among the intermediaries. Additionally, no one intermediary can put its own self-interest ahead of the good of the whole system. The resulting stability and cooperation benefits the business.
Protection
-
Without controlling the channels of distribution, a business owner has no way of knowing how any of the intermediaries will treat the product. A retailer intermediary, for instance, with an assortment of goods to sell, might not even properly display the product. Protecting a brand’s image and its relationships with consumers also becomes easier to regulate if a business controls distribution.
