12-5a Channels of Distribution

Publicity provides a number of benefits. It helps firms to prospect for new customers, paves the way for sales calls (a favorable press release being sent to prospects ahead of a sales call), helps sell minor products and stretches the promotional budget. The most important benefit is that favorable stories provide objective, unbiased, third-party endorsement for a company. This is highly desirable in the eyes of foreign customers and prospects who may be skeptical of doing business with an overseas vendor.

Reality Che C k lO-4

Look at the advertisements in an issue of a business magazine (e.g., Forbes, BusinessWeek) or newspaper (e.g., Wall Street Journal). How many of them are from companies based in foreign countries? How well do the ads appeal to potential customers in the United States?

12-5 Developing the International

Distribution Mix

International distribution includes two major aspects: channels of distribution and physical distribution. Each needs to be effectively performed if the international marketer wants to be successful.

12-5a Channels of Distribution

Companies that conduct business in overseas markets have two options when it comes to channels of distribution. They can use distribution channels that are located in foreign markets, which is called an indirect strategy, or they can bypass those channels of distribution and market their products and services through marketing or sales offices that they establish and maintain in the foreign markets served, called direct strategy.

The indirect strategy, using channels of distribution existing in the foreign location, offers several advantages. Channels can introduce products into international markets more quickly than the company can by using a direct strategy. Channels often have excellent knowledge of foreign markets. Unlike the direct strategy that requires recruiting and training a sales force for the marketing or sales office, the indirect strategy does not require an up-front investment. If channels of distribution are paid on commission, such as 10 percent of sales, the firm does not incur a cost until the channel sells the marketer’s product.

There are, however, some disadvantages in using channels of distribution. Channels frequently carry competitive products, meaning that they may not devote much attention to the marketer’s products. Using channels means that the company relinquishes control over much of the marketing effort, whereas a direct strategy allows a firm to maintain control over the marketing effort—the major reason why firms elect the direct strategy.

A company that is beginning to sell to overseas markets will often elect to use channels of distribution. As its business grows, it may conclude that the indirect approach may be more costly than a direct one. In order to find out, it will calculate the sales volume above which the total cost of an indirect approach will exceed that of a direct strategy. Suppose a company is paying a channel company a 10 percent commission on sales. If it believes that its investment cost for the direct option will be $200,000 and that the sales force would be paid a commission of 6 percent of sales, the following formula can be used to calculate the level of sales at which the channel should be supplanted by the company’s own sales force:

LO-5

Define channels of distribution and physical distribution and indicate the role of each of these for marketing products internationally.

indirect strategy

the use of channels of distribution to market products and services to international markets

direct strategy

bypassing channels of distribution by using marketing and sales offices located in foreign countries