Marketing

Exclusive vs. Intensive Distribution Strategies

Many manufacturers initially offer distributors exclusive or highly selective distribution of their products for a given geographic or business-related territory. In fact this is one of the most common approaches manufacturers just launching their indirect channel strategies use to gain a foothold in distribution. The benefits to the distributor are many, including a complete lack of pricing and availability competition on the identical product(s) from the same manufacturer, no channel conflict, and a virtual monopoly on sales of that specific product in the region given. Of course there are competitive products often carried by the same distributor, yet a newly released or launched products often has the latest product attributes and features, and therefore can command higher gross margins or profits.

Often as manufacturers grow and realize that either existing distributors they have are not fully selling to the potential the manufacturer sees in their specific regions, or believes that another distributor in the same area can sell into a slightly different area of the same segment, then additional distributors are added. Adding additional distributors in the regions that were once exclusive and highly selective leads to price cutting, a quick loss of gross margin, channel conflict, and over the long-term, one or more distributors refusing to carry a given manufacturers' products due to a lack of profits being available ion their sale. This is what happened with certain PC manufacturers during the 1990s when over-distribution was a common problem, spurred by cross-channel conflict and rounds of severe price cutting (McKinsey 2003). When manufacturers add in distributors to areas previously exclusive, the entire dynamic of selling across all indirect channels changes, specifically in the area of distributor loyalty as well. It is a best practice to specifically stay focused on one distribution strategy and work to increase distributor loyalty first before ever adding additional distributors to cover the same markets.

References

McKinsey (2003) - Marn, Michael; Roegner, Eric; Zawada, Craig. "The Power of Pricing," 2003 Number 1. Boston, MA McKinsey Quarterly. Pages 27-36.