Value creation through time and space. Between the consumer or end user and the manufacturer or service provider there are usually one or more intermediaries that add value to the exchange transaction.
Direct contact between client and supplier is almost impossible given the large number of sellers and buyers, the variety of products and services, the geographic dispersion of both, and the asynchrony of purchase.
In very simple terms, imagine a market made up of three manufacturers and three customers. If the contact between them was direct, it would require 9 exchanges in total for all possible transactions to take place.
The intervention of an intermediary reduces the number of exchanges to 6, an improvement of 33% that initially does not seem very attractive. It would be with a greater number of clients, let's say, about 300. We would go from 900 to 303 exchanges, with an improvement of 66% that seems much better.
Decreasing the number of contacts is not the only reason the broker is there. Let's consider what happens when these 300 customers are in a different city, they do not buy all the products or services that each manufacturer offers and also, when they buy they do so at different times of the year. The intermediary normalizes relations between them, thanks to its own geographical location, inventory, logistics and sales work.
Conceptually, we can define a distribution channel as the set of intermediaries, related to each other, that cover the distance between supplier and customer, adding value to the transaction in terms of place, time and possession.
The key word is value, of course. If an intermediary does not add value, the cost it represents for the transaction is unjustified and quite possibly artificial.
In Mexico, for example, we call individuals who apparently facilitate certain exchanges, in much the same way that ticket resellers artificially increase the cost of admission to a show.
Courage, however, is also the key to justifying the work of coyotes and resellers. That is, as long as someone appreciates the function they perform, they justify the surcharge charged to the transaction.
Operationally, we could describe how these values are added thanks to functions as diverse as:
- Information generation Promotion work Negotiation with clients Purchase order preparation Financing working capital Risk absorption Physical possession of goods Management of payments Issuance of property titles Customer advisory Sales and post-sale services Guarantee procedure
Do the exercise yourself in relation to ticket resellers. Which of these functions does it perform? How much cost and how much value do they add to the ticket? Do the exercise considering the place and time of the transaction, as well as the real possibility of getting a ticket.
A review of the elemental aspects of the distribution phenomenon helps to understand many things, especially when considering the role of 'transport costs', many of which we end up paying the general public, even without realizing it. It also allows us to better understand what we now call the Value Chain and the evolution of Electronic Commerce. (See the second part of this article)
Since two of the great values provided by the distribution channel are the place and time of the transaction, it is convenient to think about the implicit costs of distribution, especially in those situations where they are hidden from the customer.
Where you live you can possibly buy some things from your car, while waiting for the green light at the intersection of an avenue. Some of them are offered by informal, non-established merchants. Others, by formal companies. Neither pay to be there. And that does not mean that there is no distribution cost.
In my city, for example, the spokespersons run among the cars offering and delivering newspapers, charging and giving change. There could be a newspaper store with parking, even with a car service window, but the publishing company, or its distributor, would have to cover the investment in the premises, the commercial permit, the rent, the payment of public services, etc.
Instead, what the company does is put its spokespersons on the street and the cost of time and space is paid by all motorists who must be careful not to run over a spokesperson and wait for the transaction to finish. who is before us. The cost per motorist is extremely low and is therefore overlooked. In general, we don't see it as a problem, but as a convenient way to buy.
In some areas informal merchants invade the sidewalk with their stalls and pedestrians walk in the first lane of the street, which is also used as parking; urban transport goes up and down passage in the second lane and passes through the third, leaving the fourth to motorists. The truth is that there is no fifth lane and sometimes there is not even a third.
This road problem means an economic and emotional cost for society and we would not have to pay it if the merchants covered their distribution costs, instead of prorating them among the general public. The same is the case for mobile markets, taxi sites, street vendors, and even public demonstrations.
Imagine the low cost that it would represent for citizen life by the fact that a union, political party or organization of any kind rented a sports stadium, with all its facilities, to make its manifestation.
A convenience store together with its soft drink supplier devised a container system to store those or their empty containers outside the store. The store manager supplies the coolers with soft drinks from the container, which is towed by a truck once a week and left there with the door locked. Occupying a parking space!
There is one less place and customers cover the cost of not being able to park, because the store does not want to spend on warehouse space and the bottler does not want to spend on visitation frequency.
These transportation costs, prorated among hundreds of people, go unnoticed and allow the price to be kept low.
A review of the elemental aspects of the distribution phenomenon helps to understand many things, especially when considering the role of 'transport costs', many of which we end up paying the general public, even without realizing it. (See the first part of this article).
It also allows us to better understand what we now call the Value Chain, the evolution of Electronic Commerce and some other things.
Today the term Value Chain seems to replace the traditional expression Distribution Channel, in the same way that the use of other terms such as distribution logistics and others that refer to some particular aspect of said chain is favored.
At the beginning of the 90's the simple but powerful idea was developed that companies should not be seen in functional, divisional or product and market terms, but in terms of processes. The elements of the Value Chain are those related to the operational effectiveness process.
Still, the importance of using the traditional term Distribution Channel lies in the fact that it allows us to realize that a two-way flow of physical goods, services, money, property titles, information, promotion and risk occurs through this channel.
Normally some of these flows occur in one direction only: goods and services move from the company to the customer, while money moves in the opposite direction. However, we must consider that all the opposite flows occur in the case of a return.
Information is something that decisively flows both ways through the distribution channel. And the risk. For example, the customer runs the risk that the product will not be delivered in the way and time that he expects, while the provider runs the risk that the customer does not pay him in the way and time in which the price was agreed.. Or you run the risk that the product or service he offers is not even requested.
It is thanks to these flows and the performance of activities related to them that it becomes possible for a person to acquire possession of something through an exchange that happens conveniently in terms of place and time for both parties.
And it is thinking of these flows and activities that we must design a distribution channel that is effectively a bridge between client and supplier, responding to the needs and requirements of both. The dealer or intermediary, then, plays an important role.
It is logical to think that the price of the product increases through the channel in terms of the cost of these activities, risks and flows, but also as a consequence of a higher added value in terms of the utility of time and place, as well as in terms of the real possibility of owning the good or service.
The use of intermediaries results not only from the impossibility of selling directly to the client, but also from the lack of resources to do so or from the possibility of earning more through intermediaries than selling directly. In general, we should generalize that the use of intermediaries is a direct function of the added value that they can bring to those involved in a commercial exchange.
Home delivery, own stores and factory outlets are valid options to bring products directly from the factory to the customer, but few companies are willing to invest time, money and effort to develop direct contact when someone can do it properly. more efficient and effective, if not for another reason, at least for the fact of dedicating to distribute multiple products.
The truth is that there may or may not be intermediaries and although Bill Gates describes e-commerce as frictionless capitalism and Philip Kotler today uses the term m-marketing, in relation to mobile marketing resulting from wireless connection, both referring At the disappearance of intermediaries, it is worth looking back first.
First of all, we can see that different types of store have evolved over the years. Perhaps we could list them in an order that allows us to visualize the change that their evolution has meant for both urban development and our lifestyles:
- General store (only store in the center of town) Popular market (mainly perishable goods) Corner store (small general store) Specialty store in the center (clothing, furniture, etc.) Department store (in the center of the city) Self-service (food and household items) Convenience stores (limited assortment, extended hours) Suburban shopping malls (department stores next to specialty stores) Factory outlets (away from urban centers) Hyper or Mega stores, price club, etc.
Without a doubt our shopping habits have changed substantially since we used to go shopping in the city center, up to the visit and walk to the shopping center of our days.
Before considering the changes that electronic commerce has brought to our lives, we must visualize the evolution that storeless sales have had over the years, since the phenomenon itself is not new, since there are different types of sales without shop:
- House to house (encyclopedias, household items) From person to person (cosmetics, jewelry), or to a group (plastic containers) Selling by mail order, courier or mail order Sales made by mail order or by phone Selling on television, delivering by mail or courier orders made by phone Vending machines (sweets, soft drinks, cigarettes, ATMs) e-commerce with electronic delivery e-commerce without delivery of goods
The first two types of storeless sales do not require technological tools. Hardware and Software make their appearance from the mail and the telegraph. From this, a reflection is derived, since at the time neither the mail, nor the telephone, nor the television, nor even the fax, led to a redefinition of the business world like the one we are living with on the internet. There was no mail - commerce, phone - commerce or fax - commerce.
Draw your own conclusions, but it seems to me that what we should be concerned about is not electronic commerce as such, but the correct definition of business models that operate successfully, regardless of their technological platform.
