For engineering companies operating in the consumer marketing field distribution can be accomplished through a variety of ways. This can include wholesalers, retailers, mail order or direct selling through the company’s own retail outlets. Some companies may use all of these methods. We will examine the wholesale and retail systems, as well as the pricing aspects.
Retail outlets sell direct to the consumer. Most of these are shops or mail order businesses. Retailers fall into several types, hypermarkets, supermarkets, multiple shops, departmental stores, cooperative retail societies, independent retailers, voluntary retail chains, franchise outlets, discount stores, etc.
The purpose of retailing is to provide for the availability of goods close to where consumers live. Retailers also study consumer preferences and stock goods accordingly. They also keep manufacturers informed of what it is that consumers want so that supply matches demand.
If a retailer requires a large range of goods in relatively small quantities it is not very convenient to buy direct from manufacturers. Think of the number of different manufacturers that a small independent hardware store would have to deal with if it did deal direct with each manufacturer. Hence the continuing need for wholesalers, who stock goods from many manufacturers and can supply smaller quantities to retailers.
The wholesaler is a middle man and it is said that his presence puts up prices. This is not necessarily the case, since manufacturers can sell to him in bulk quantities and save on transport and administration costs. In effect wholesalers operate as intermediate storage depots for retailers and therefore provide a useful service. They can usually provide retailers with credit terms of trading, often enabling small businesses to sell before they have to pay for goods, or at least to reduce the impact of the cost of carrying a large range of stock items.
They can also act as a buffer to smooth out demand for manufacture. If demand is seasonal they can buy regularly through the year, thus making it easy for manufacturers to make goods in economic runs and then store stock to meet heavy demand, but which does not place excessive loads on the manufacturer’s capacity.
Wholesalers as such have been in decline in recent times, thus many manufacturers have started to deal direct, especially with large retailers, such as the supermarkets. However, they have had to take over the functions of storage, transport and dealing directly with retailers. Companies may decide to deal directly with the public through mail order, thus bypassing the wholesaler and retailer. Mail order depends on a good postal service or the existence of transport operators who can provide a similar service. It has the advantage of being nationwide or even international, thus extending the potential market enormously.
In some cases there are very large mail order retailers who buy from manufacturers and sell on to consumers. These companies sometimes operate normal retail outlets as well.
It is common for distributor prices to be expressed at a percentage discount from the price to be paid by the consumer. Thus manufacturers give discounts to wholesalers as an incentive to stock their goods and to provide a profit margin for them. A similar system will be used by the wholesaler when dealing with the retailer. However, if a price to the final consumer is not envisaged or fixed, then the situation is less clear and each party must charge a price, which his particular market will stand and depending on what quantities he needs to sell and what his actual costs are going to be.
In addition to wholesale and trade discounts, quantity discounts may be offered to encourage distributors to buy in large quantities, which may be more economical to supply and deliver, since there are economies of scale to be had, such as lower manufacturing, administrative and transport costs.
Further incentives may be offered in giving cash discounts. Cash payment. This may enable the manufacturer or wholesaler to reduce his need for working capital and reduce credit collection and control costs.
Discount structures are therefore used for many purposes. Firstly to increase sales, secondly to influence the pattern of sales and thirdly to reduce the costs of production and distribution. Sometimes discounts can produce more sales but have very little effect on profits since higher volumes and lower costs may not compensate for lower margins.
You should be aware that price is influenced by many factors:
(a) actual cost of manufacture
(b) what the market will stand
(c) what others are charging for similar products
(d) consumers’ perceptions of quality and value.
The interaction of supply and demand is complex and outside the scope of this course. However, if supply exceeds demand, in general this exerts a downward pressure on prices, as manufacturers and distributors seek to sell goods they have made or bought. The costs of storage and distribution may so high as to force sale at prices that might be below average cost. This is especially true of perishable goods and foodstuffs.
Alternatively, if demand exceeds supply that tends to bid up the price as consumers search for supplies. In some cases the increase in price then serves to limit demand since some potential buyers drop out when the price goes too high, this then acts to dampen demand again and tends to bring equilibrium between supply and demand.
As you can appreciate this can get very complicated when manufacturers, wholesalers and retailers start to offer different discounts to try to influence events in their favour. Sometimes the competition is so cut throat that the only winner is the consumer. In some cases the weaker players go under, leaving the more efficient firms to operate in a less hostile environment. Sometimes the bigger stronger firms deliberately cut prices so low as to force others out of business and then exploit the consumer when they can dominate the market. However, this can go in reverse again if then prices go too high and this attracts new players into the market who will then increase supply, which will then produce a downward pressure again on prices, and so it goes on.