February 14, 2022

Part 3 - Getting More From Less: How small budgets can achieve more by eliminating waste

Part 3: How Distribution Can Be Used To Improve Sales Revenues

Introduction

Previously we discussed how a firm might use pricing to increase sales revenue. We broke down the problem of increasing revenue by looking at Price x Volume.

In this report (Part three of six), we move to the volume side of the logic tree; starting with Distribution.

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The Theory

Firms likely need no introduction to the growth opportunities presented by expanding distribution. Especially considering tools like the Ansoff Matrix have been in use since 1957. The matrix is used to identify the strategic direction for growth in a firm by serving new or current markets with new or current products. 

Source: Mindtools

Professor Byron Sharp and his colleagues at the Ehrenberg Bass Institute have found that the two most essential ingredients for brand growth are mental and physical availability.[i] This means that brands not only need to be present in the buying situation but also need to come to mind easily at that time. The distinction is also made that availability is not only about being present but making the brand as easy to buy as possible. 

A prime modern example would be the Coca Cola Company. Since its inception in 1886, Coca Cola has grown from selling products in Atlanta to having a global presence. Today, Coca Cola always seem to be within arm’s reach. Similarly, Amazon has been steadily growing its global presence both online and offline.[ii] Their pursuit of an omnichannel strategy is perhaps a testament to the benefits of capitalising on the synergies between online and offline distribution channels.

Sharp’s findings are also supported by Steenkamp, Kushwaha and Rajavi. Through their research, they found that regardless of macroeconomic trends, brand expensiveness or category involvement; expanding a brand’s distribution is one of the most effective marketing activities.[iii] On top of these direct benefits of increased distribution, their research also found that it leads to an increased trust in the brand, improved quality perceptions and greater long term brand equity.

Additionally, Say's Law in classical economics implies that some level of demand is generated simply by the fact that supply exists. ie. a small number of people will buy the product simply because it’s on the shelf. Considering all these factors, we can clearly see that distribution is one area of the marketing mix that firms would want to pursue. 

In this age of eCommerce, Amazon, and online advertising, firms have more channels at their disposal than ever. However, being present on a specific channel does not necessarily mean a brand is physically available. Prof. Sharp proposes 3 specific components of physical availability that drive its effectiveness: Presence, Prominence, and Relevance:

  1. Presence is primarily concerned with where your brand and its products are placed. Is it available for buyers of the category in a broad range of buying situations? This requires an understanding of where your customers buy, what they look for and how they view the category. An increasingly important channel here is Google Search. With the rise of eCommerce, consumers and industrial buyers alike are using search engines like google to find what they are looking for. This means that firms need to have a presence on these channels in order to be considered during the purchase.
  1. Prominence is about how easily potential buyers can find or recognise your products in the buying environment. Considering the channels you use for putting your brand and products out in the market, how easily can potential buyers find it? In an increasingly competitive environment, more firms are trying to reach the same buyers. This means that usually the familiar brand, or the brand that is easiest to find, will get the sale.
  1. Relevance is about offering customers what they want and need in the moments that they want and need it. It's about being at the right place at the right time. If your products are always out of stock, there is of course no way of increasing volume without also addressing production and operations; just as there is no way of making a sale if you’re trying to sell diapers to people looking for dog shampoo. It doesn't matter if your products are always present and prominent if it's not there at the moment that it matters most.

Managerial Implications

Based on the research, there are 6 major implications managers need to consider:

  1. Expanding distribution has a high probability of paying off, but due diligence is necessary to in order ensure that the current product portfolio is suitable for the new market.
  2. When using several distribution channels together, the firm needs to pay attention to how different channels can be merged or better aligned to take advantage of synergies.
  3. In order to optimise availability, the brand needs to be present, prominent and relevant.
  4. With the technology currently available, there are several channel options to look into including eCommerce, direct to consumer, online or offline retailers, partner distributors, etc…
  5. Every channel could potentially require different operational adjustments to make them feasible. eg. Direct to consumer initiatives often lose profitability on the back end of the purchase (delivery and returns). Without a clear strategy on how to address these challenges, firms could find themselves worse off than before.[iv]
  6. As with any endeavour to increase volume, product or service delivery needs to be able to keep up with the increase. i.e If the firm expects a 10% increase in volume they still need to be able to deliver and provide adequate customer support.

In the next report, we’ll dive further into the Ansoff Matrix by looking at Product. How can a firm increase sales revenue by innovation or product development?

References

i. Buy Byron Sharp’s book: How Brands Grow

ii. Read this article on Amazon's omnichannel plans

iii. The Effect of Marketing Mix Instruments on Brand Equity in Good versus Bad Times; K. Rajavi, T. Kushwaha, J.B. Steenkamp

iv. Read this article on the profitability of D2C brands

Some of the links above may be affiliate links (in the case of paid books or reports). We may earn a small commission on purchases made using such links.

Acknowledgements

This report was a collaborative effort and without the aid of our colleagues, it might've looked very different. The following individuals have made significant contributions to this series of reports: J.Moolman, I.Barnard, S.Brealey, and E.Gentle. We thank you all for being so generous with your time.