ArticlePDF Available

Wholesaling, the Role of the Middleman and Marketing Costs: Some Forgotten Concepts in Marketing Thought

Authors:

Abstract

Most introductory or intermediary marketing courses present marketing from a manufacturer's perspective, in which product distribution is treated as one of the marketing mix variables under the complete control of the manufacturer. Product distribution is assumed by a wide range of middlemen and various distribution agencies that operate in a distinct and separate market. Wholesaler-distributors represent one such type of middlemen and their marketing agenda do not always coincide with the one set out by manufacturers. Thus, the need to form partnerships or alliances via the use of marketing programs and other incentives in order to assure smooth product distribution from points of the production to end users. This paper, then, briefly explains the role of wholesaler-distributors in general, and specifically spells out what they actually do for their suppliers based on the types of marketing functions they perform. The functional approach is also used to analyze the various marketing tasks which are assumed by the wholesaler when taking on a new supplier's product line.
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
1
Wholesaling, the Role of the Middleman and Marketing
Costs: Some Forgotten Concepts in Marketing Thought
Dr. Robert Tamilia
École des Sciences de la Gestion
Université du Québec à Montréal (UQAM)
Dr. Sylvain Charlebois
Faculty of Business Administration
University of Regina
3737 Wascana Parkway
Regina, Saskatchewan S4S 0A2
Tel: 306-585-4111 E-mail: sylvain.charlebois@uregina.ca
Abstract
Most introductory or intermediary marketing courses present marketing from a manufacturer's
perspective, in which product distribution is treated as one of the marketing mix variables under
the complete control of the manufacturer. Product distribution is assumed by a wide range of
middlemen and various distribution agencies that operate in a distinct and separate market.
Wholesaler - distributors represent one such type of middlemen and their marketing agenda do
not always coincide with the one set out by manufacturers. Thus, the need to form partnerships
or alliances via the use of marketing programs and other incentives in order to assure smooth
product distribution from points of the production to end users. This paper, then, briefly
explains the role of wholesaler-distributors in general, and specifically spells out what they
actually do for their suppliers based on the types of marketing functions they perform. The
functional approach is also used to analyze the various marketing tasks which are assumed by
the wholesaler when taking on a new supplier's product line.
Keywords: Wholesaling, middleman, Logistics, product life cycle, Role of wholesaler-
distributors, Marketing channels
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
2
1. Introduction
Distribution is not a well understood domain of the marketing discipline, especially by
academics. Pricing strategies, product development and promotional strategies, the other Ps,
seem to have been the main focus for decades. This is quite ironic given that distribution and
the tasks performed by distributors in our market economy was what led to the birth of
marketing as an academic discipline in the early 1900s (Bartels 1962). In fact, prior to the
adoption of the term "marketing" in the literature, marketing was known as "distribution"
(Lichtenthal and Belk 1984).
For purposes of this paper, a distributor, a wholesaler or a wholesaler-distributor is defined as a
merchant middleman who resells products purchased from manufacturers and others to
institutional, commercial or even industrial customers. Industrial distributors are considered
here as merchant wholesalers. In general, a wholesaler or a distributor will carry inventory,
have one or more warehouses, employ sales personnel, and may possess its own transportation
facilities. Wholesaling is also very prominent in the service sector as well.
2. The Marketing Role of Distributors
In general, distributors perform numerous marketing and managerial tasks on behalf of their
suppliers at a much higher level of efficiency and effectiveness than if these tasks were
performed by manufacturers themselves. In other words, distributors are specialized businesses
in the market which can lower operating costs for manufacturers. As specialized middlemen,
they can achieve economies of scale. Their know-how allows a manufacturer to transfer to
them the performance of those channel functions with which they excel. It can even be argued
that a necessary but not sufficient condition for a market to become viable rests upon the
marketing job done by distributors.
An interesting way to understand the role of distributors is to picture a market as being made up
of many buyers and sellers. These buyers and sellers cannot make contact because they are too
many separations which exist between them in the market. These market separations, or what
McInnes (1964) called gaps, need to be resolved if buyers and sellers are to be satisfied. For
example, time, information, space, financing, price, inertia, product performance, service,
product assortment, values and beliefs are some of the market separations which prevent buyers
and sellers from realizing what each want in the market.
These separations may well prevent producers from selling their goods to end users. After all,
manufacturers are geographically separated from their end users. Also, products cannot always
be produced at the exact time, place, quantity and assortment desired by customers. Customers
do not always have all the necessary funds to purchase a product. Distributors, therefore, step in
to close many of these market gaps and realize sales. By performing the marketing functions,
distributors are able to bring products closer to where customers are located, which permit them
to fulfill orders on demand due to the proximity of their warehouses which stock an assortment
of goods.
In general, distributors are better equipped than their suppliers to perform various marketing
tasks not only because they are closer to end users but also because they offer costs advantages
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
3
that their suppliers do not have (Kimanyi 2005). The specialized set of functions they provide
whether in warehousing or extensive market coverage can result in economies of scale that only
they could achieve. For example, a distributor will normally buy in large lots (full carloads or
containers). Transportation, handling and shipping costs are much lower per unit than if the
supplier had to sell a few units to a large number of end users. In fact, a supplier would only
need to process one order instead of hundreds or even thousands if the supplier had to deal
directly with end users. A supplier would only need to make one market contact instead of ten
in order to reach ten customers. The reduction in the number of market contacts due to the
presence of a wholesaler represents major costs savings for each supplier. In addition, product
assortment convenience which characterizes a distributor (and not a supplier) implies that fixed
costs are spread over a wider assortment of products than would be the case for suppliers.
Adam Smith recognized long ago that the division of labor and specialization of tasks increase
market efficiency. That is exactly what distributors do. Specialization makes them better suited
to assume certain marketing tasks. And the job they do helps producers lower their costs of
doing business. Now exactly what do distributors do? That is, what are the types of marketing
tasks normally assumed by distributors? We have already seen that, in general, distributors
make market contacts, handle and store goods, ship and deliver them, provide quantity and
assortment convenience, offer before and after sales service, provide for the informational and
financing needs of their buyers, and, of course, assume the necessary business risks associated
with any transaction.
This list is by no means complete because some full-service distributors may actually offer
more while limited or very specialized distributors may restrict their activities to the
performance of just a few tasks. In general, some authors have suggested that only nine such
functions or tasks exist (Beckman and Davidson 1967). McGarry (1950), on the other hand, has
proposed that there are six major functions of marketing, these being the contactual, pricing,
merchandising, propaganda, physical distribution, and finally, the termination functions. Others
have argued that only twelve such functions exist (Rosenbloom 1987). Ever since distributors
have been recognized as accomplishing marketing tasks, their numbers have ranged from 2 to
over 35. The exact number need not concern us. Exhibit 1 outlines seven such functions. Each
function listed is accompanied by a detail list of activities which are self-explanatory. It is
obvious from the Exhibit that a distributor's job is much more than mere product distribution.
The distributor buys the products from his suppliers in assortment and quantity sufficient to
realize transportation economies. The distributor then becomes completely responsible for
reselling these products in his assigned market. He assumes all the risks involved in reselling
the products given that he now has title to the goods. If the market is all of Canada, then the
distributor needs numerous warehouses strategically located and electronically linked together
for fast order processing, shipping, billing and delivery. The distributor needs to hold sufficient
inventory to avoid stockouts, and lost sales. Reordering from suppliers needs to be made in a
timely fashion: not too late to avoid stockouts and not too early to avoid increase inventory
holding costs. In fact, the distributor's job is more than just being involved in logistics
(Gummesson 2002). The distributor acts as if he was assuming his suppliers' marketing
responsibilities in his assigned territories. He needs to make as many sales contacts as possible
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
4
in order to generate sales. In fact, he becomes much more knowledgeable about local market
conditions, about buyer needs and local competition than the manufacturer could ever hope to
achieve. The distributor needs to have the competence and technical skills not only to advise
end users on how to use and maintain products, but to repair and even modify them in some
cases. It is as if a distributor also needs engineering and research and development facilities in
order to satisfy both end users and suppliers as well.
In summary, distributors provide an essential set of economic services for their suppliers. In the
next section we will review some of the costs related to distributors’ marketing tasks.
3. The Costing of Marketing Tasks
It is easy to understand why distributors are great facilitators in realizing sales because of their
abilities to perform the marketing tasks that a manufacturer could not do or could not afford to
do. It is no wonder that distributors occupy a pivotal role the distribution of suppliers' products.
One could argue that manufacturers could sell direct without the use of distributors. This would
mean that the job of closing all of the market gaps would now be their responsibility. And as a
result, their costs of doing business would increase accordingly.
When selling direct to customers, the various marketing tasks needed to bring products to the
market must now be assumed by manufacturers. The marketing tasks or the closing of market
gaps are not eliminated when there are no distributors. These tasks are merely shifted back to
the manufacturer. The shiftability of marketing tasks from one end in the channel of distribution
to another (i.e., from distributors to manufacturers or vice-versa) makes it very difficult to
calculate their exact costs. Cost accounting procedures designed to allocate specific costs at
every step of the production process cannot be duplicated for marketing or for distributive
activities. The very nature of marketing tasks makes it rather difficult, if not impossible, to
separate into neat accounting categories the various costs components involved in the
marketing and distribution of products. After all, the marketing tasks performed by distributors
are essentially economic services. In a seminal article written by Hollander (1961), he
persuasively argues that the work done by marketing consists of intangibles that resist
quantification... Since many of these (marketing) functions are concerned with intangibles,
facile evaluation of marketing performance seems unlikely, and perhaps impossible even for
the future (p. 24).
An additional point of why the costing of marketing tasks is so difficult is because many of the
functions can be performed simultaneously by the same person. For example, sales people are
involved in one way or another in the performance of all of McGarry's six marketing functions
such as the marketing tasks of contacting a potential buyer, introducing a new product,
providing technical assistance, arranging for financing and delivery, and closing the sale can all
be done at the same time by the same person.
How can a distributor be capable of calculating all of the costs involved in introducing a new
product line to the market when the sales personnel is responsible for a multitude of other
sales-oriented tasks on an on going basis? Such are the realities of costing economic services.
One would need to conduct time and motion studies. But the lack of repetitiveness and the
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
5
great variability of such tasks make such studies very difficult.
4. Logistical Costs
The field of physical distribution (i.e., logistics) is probably the area in marketing which has
achieved the most success in arriving at cost estimates of carrying out the various logistical
functions. This work has been carried out over the last thirty five years and has involved the
Distribution Research and Education Foundation of the National Association of
Wholesaler-Distributors. The literature on the costing of physical distribution tasks reports that
physical distribution activities represent, on the average, twenty percent of sales, with a range
of ten to thirty percent depending on the industry (Hardy and Magrath 1988; Sharman 1984;
Stock and Lambert 1987). The types of firms nearer to the thirty percent level are more likely to
be distributors involved in the reselling of industrial and commercial products. On the other
hand, these same studies report that, on the average, direct selling expenses account for five
percent of sales with a range of one percent to 16 percent. The firms having the highest selling
expenses are those involved in the marketing of specific consumer goods such as perfume or
cosmetics. These studies point out that logistics costs, as a percent of sales, exceed the costs of
direct selling by a factor of four.
The conclusion is that logistics costs represent a very substantial portion of the cost of doing
business for the average wholesaler-distributor. By adding a new product line, the logistics
costs are bound to increase at or near the level of thirty percent of sales. In fact, these costs may
even be higher given the need to integrate the new line within the distributor's physical
distribution system (Manolis, Gassenheimer and Winsor 2004; Webb 2004). After all,
warehouse space has to be made available and modified to meet the physical requirements of
the new line. Parts may require specialized bins and shelf location adjustments for easy access.
The new line may require more or a different type of packing or packaging material necessary
for shipping or handling. Specialized materials handling equipment may be necessary. Special
handling instructions may need to be posted, at least initially, in the warehouse. Finally, if a
wholesaler-distributor has more than one warehouse or has national distribution (instead of
local or regional), these start-up logistical costs may actually need to be repeated for each
warehouse.
By adding a new product line, a distributor is bound to increase not only his logistics costs but
other costs as well, some of which can also be substantial, such as the costs of selling the new
line. Selling costs include advertising and promotional expenses, sales training, manpower
requirements, traveling and lodging, and many other costs as we have already shown in
Exhibit 1.
5. A Distributor's Start-Up Costs in Product-Line Additions
The question one could ask is how much would it cost a distributor to add a new product line to
his present product assortment? It is obvious from our previous discussion that there are costs
but it would be very difficult to arrive at a precise dollar figure.
The food distribution industry is a good reference source towards an understanding of start-up
costs in introducing a new product line to the market (Grunert and Ramus 2005). A food chain
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
6
(i.e., a food distributor) will usually ask a supplier for slotting allowances. These fees are an
outright cash disbursement the supplier must give to the food chain to help pay for the start-up
costs involved in selling and distributing the product (Therrien 1989).
This amount does not include the supplier's costs of promoting and selling the product or the
supplier's physical distribution costs involved in delivering the product to the chain's
distribution center.
Given that the supplier's sales people need to be trained in order for them to convince each
supermarket manager to buy the product, for example by helping to set up store displays or
informing store employees about the product, one can see that the costs of selling a new food
item can be many times more than the slotting fee. If we added all of the slotting fees and other
start-up costs required to sell a new food item across all of Canada, the amount would no doubt
be in the millions of dollars. In fact, some companies have reported paying between $300,000
and $1.5 million per new product and from one-third to almost one-half (Therrien 1989) their
promotion budgets to cover these fees (Gundlach and Bloom 1998).
The practice of a supplier giving a fee to a food chain in order to secure shelf space is not new.
What is new though is that food chains today are in a better position of charging the fee because
shelf space is at premium due mainly to the doubling in the number of items stocked in a
typical supermarket which went from 13 000 to 26 000 items over the last decade (Major
2006).
But the self-space rental fee paid by suppliers does not tell the whole story. These slotting
allowances actually help pay for the many logistical tasks performed by the food chain on
behalf of their suppliers. Following is a list of some of the logistical functions which are
assumed by the entire food chain, from production to retailing. All these functions create
interrelationship amongst organizations involved with supplying goods.
finding space in warehouses
• redesigning store shelves
notifying each selected store about the availability of the new product
recovering the costs for entering the new product information in the chain's computerized
information and retrieval system
assuming all the risks involved in buying a new product
absorbing the logistical order processing and shipping costs involved in distributing the
product to individual stores
recovering the inventory holding costs for the new product
offering quantity and line assortments of the new product to match each store's demand
requirements
recovering sales forecasting costs and the cost of assigning each selected store's product
allotment
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
7
recovering manpower costs involved in all phases of physical distribution
Of course, the distribution requirements of the supermarket industry do not correspond to the
requirements of the industrial wholesaler - distributor industry. For one thing, the supermarket
industry is much more dynamic and competitive with thousands of new products being
introduced in the marketplace every year which is unlike the situation facing a typical
wholesaler-distributor (Gras, N.S. B. 1939). As a result, a wholesaler-distributor does not obtain
slotting allowances from his suppliers when assuming distribution of a new line similar to the
practice which exists in the food distribution business. His start-up costs are, therefore, not
recuperated when handling a new line. Yet the wholesaler-distributor's performance of
marketing functions is very similar to what a food chain does, except that warehouse rental fees
(i.e., space fees) are not collected from the supplier, and neither are product failure fees if the
new line proves to be unsuccessful, or if the supplier decides to change his distribution partners.
6. Start-Up Costs and the Product Life Cycle
Another important feature which characterizes the supermarket industry but not a
wholesaler-distributor has to do with the product life cycle. The product life cycle (PLC) for
new food items, that is, the time period needed for a food item to be displayed on supermarket
shelves, (i.e., the introductory or start-up stage), to gain sales (i.e., the sales growth stage), to
reach a sales plateau (i.e., the maturity stage), and to experience a sales decline (i.e., the decline
stage) does not correspond to the same time periods for an industrial product line handled by a
wholesaler-distributor (Jensen 1982). For example, some items handled by supermarkets may
have a PLC such that the introductory and sales growth stages can occur in less than one year.
In fact, some food chains actually charge suppliers a failure fee if the new product does not
reach a minimum sales target within three months (Therrien 1989).
The nature of the industrial or commercial goods market is such that the start-up phase may last
many years. This is due in part to the complexity of the product itself, the expenses of replacing
currently functioning products with newer ones, and the multiplicity of people involved in
making the purchase decision. All of these factors, and there are many more, can extend the
start-up phase considerably.
Research findings reported by Thorelli and Burnett (1981) have shown that the PLC behavior
of some industrial products varied from three to ten years, the time needed for products to go
from rapid growth to maturity. The length of the start-up phase was not analyzed. However,
these results support the contention that the start-up phase may last anywhere from one to three
years for the following reason. Unit profits only begin to appear during the later part of the
growth phase. On the other hand, the start-up phase is one in which negative unit profits are
generated. From a business investment perspective, there is a time limit on the amount of losses
any firm (a supplier or a wholesaler - distributor) is willing to absorb before deciding to cease
product distribution. It should be understood that this time period takes into account only the
time in which products are actually in the distributor's hand. The time spent negotiating and
arriving at a distribution agreement is not included (Day 1981).
The PLC is a conceptual framework originally developed to show that the sales pattern of
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
8
products over time go through a set of distinct stages or phases in their market evolution. But
what happens in the case when a product is not new? Can such a product be more than in one
stage of the PLC? The answer is yes because the product may occupy a different stage
depending on the market. Thus, a product can be considered in its start-up phase when the
market is redefined. For example, the market may no longer occupy the same geographical
boundaries (i.e., going local to national); or the end users may be in a different segment, that is
they may represent a class of potential customers who are unlike regular customers in terms of
their needs, their supply requirements, or their industrial or commercial affiliations (Day 1981).
Irrespective of how a market is reassessed, one thing is certain: the start-up phase is clearly
evident for a national distributor who takes on a product never handled before. For him, the
start-up costs are real and expensive. The logistics costs alone represent a major start-up cost
component, as we have already discussed (Frazier and al. 1996). If we add all of the sales and
promotional expenses a wholesaler-distributor incurs when introducing a line of products never
handled before and/or introducing the line to a new class of buyers, it becomes evident why
initial sales are insufficient to cover all of the start-up costs. In fact, the PLC supports this
contention that sales achieved during the start-up phase are incapable of recovering the costs
involved in marketing and distributing the product. In other words, during the length of the
start-up phase, losses will be incurred by the distributor.
7. Start-Up Costs and the Supplier - Distributor Partnership
The addition of a line of products represents, in most cases, for a typical distributor a major
investment and commitment. For example, when a distributor adds a product to an existing
assortment of between 500 to 1000, the consequences on his balance sheet are much more
significant than when a food chain adds one product to an already existing assortment which
may reach 26,000 for some supermarkets. Given that the start-up phase may last anywhere
from one to three years (as discussed previously), the national distributor knows beforehand
that he will operate in the red during that period of time. As a result, this period is critical for
the distributor and it requires close coordination and cooperation with his supplier.
It is highly improbable that the distributor would contemplate the possibility that the supplier
would terminate the selling arrangement during the start-up phase. The distributor is far too
busy prospecting, and making sales presentation, training his sales force, arranging for
customer financing, stocking and sorting products and parts throughout the distribution systems,
preparing sales aids, and so forth to even consider the possibility. After all, start-up costs
represent an important marketing investment. And like any other investment, the payoffs can
only be realized sometime in the near future (i.e., in three years or less).
A supplier's decision to terminate the selling agreement during the initial phase of the PLC goes
against the very essence of what a supplier - distributor partnership is all about. After all, if a
break is to occur, it should occur prior to the establishment of the selling and distribution
arrangement. Both parties usually spend a lot of time, sometimes years, negotiating an
agreement which is built on trust and to the mutual satisfaction of both. Breaking the
relationship during the start-up phase makes no business-sense whatsoever. In fact, most
supplier - distributor selling arrangements have a tendency to last a long time. Kotler (1976)
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
9
states that the channel decision process is unlike any other in marketing. For example, while
advertising, pricing, or marketing manpower decisions can be altered in the short-run, channel
ones cannot because they involve the firm in relatively long-term commitments to other firms.
Kotler goes as far as to state that the duration of commitment between a manufacturer and a
distributor may require an initial contract which lasts as long as ten years. Beckman and
Davidson (1967) are also of the same opinion that certain manufacturer - distributor selling
arrangements should have an initial contractual obligation of up to five years, subject to
renewal. Thus, we can easily surmise a situation in which a manufacturer is linked with a
distributor for periods ranging from ten, fifteen, or even twenty years, or longer.
There is a very good reason, among others, why a distribution partnership can last so long. The
switching costs can be so high that it does not pay for either party to seek a new partner. This is
especially true in the distribution of industrial or commercial equipment. In fact, a supplier
-distributor relationship is very much like a marriage. Of course, divorces do occur, and
supplier - distributor relations do break down. For the manufacturer, a decision to terminate an
agreement is very serious business, not only because it disrupts product distribution but the
decision may also have legal ramifications. Hardy and Magrath (1988) state that wrongful
dismissal of a distributor under current US antitrust law can be very costly:
A terminated middleman who takes the manufacturer to court and wins can recover three times
the actual monetary damage, plus attorney's fees, and costs of litigation (p. 490).
A terminated middleman also suffers considerably not only because of the lost "of the equity
they have developed in an area" (Hardy and Magrath 1988, p. 490), but also because the
middleman must preserve its sales volume on the product category by switching its customers
to substitute products and to preserve its reputation (p. 491).
Of course, the search for a substitute supplier involves costs and may never be realized in the
short run. As far as damage to its reputation, a terminated middleman may actually suffer
irreparable harm among certain customers that a substitute supplier, if one is found, could never
hope to remedy.
According to Hardy and Magrath (1988), there is never an ideal time to dismiss a middleman.
They present a number of situations in which it would be unwise to dismiss a middleman
because it would be too disruptive. For example, it is probably unwise to terminate a key dealer
in the midst of the selling season for a highly seasonal item or during the height of a contest to
build sales... the timing of the termination should probably take into consideration the timing of
events such as major industry-association meetings, national trade shows, or the launch of an
important advertising campaign in highly visible media.
A very important situation in which a distributor termination notice should not take place is
during the start-up phase of product distribution. Distributor dismissal during the start-up
phase, therefore, is unwise, unjustified, maybe illegal, and is to be avoided.
8. A Method to Calculate a Distributor's Marketing and Distribution Start-Up Costs
As we have seen, sales and gross margins during the start-up phase are generated in amounts
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
10
insufficient to cover all of the distributor's start-up marketing expenses. Exhibit 1 shows in
detail all of the cost-producing marketing and logistical tasks involved in selling and
distributing a product. In addition, we have discussed other costs that are supplementary to the
routine work done by a distributor when a new line is added to the product assortment. These
costs are incurred during the start-up phase when the warehouses have to be ready to accept the
new line with all of the information and training requirements in place. Finding accurate and
detailed marketing costs estimates for all of the work done would be very difficult as already
discussed. However, it is possible to simplify this task by reducing to five the number of
marketing-related cost components.
The first component deals with administrative expenses. The addition of a new product line for
a distributor means that a certain amount of general and administrative expenses have to be
allocated to it. Using a percentage of sales is not recommended because of low sales during this
phase. A more appropriate procedure is to estimate fixed costs as a percentage of the total
number of products or product lines handled. The second component is the logistics one. As far
as estimating the costs of logistics, there is no reason why the thirty percent of annual sales
already discussed cannot be used. In fact, this figure is entirely reasonable for the start-up phase
because it includes not only the routine logistical work involved in distributing the product but
also the extra costs required for the line's logistical set-up needs. Estimating the third
component, the one which accounts for the direct selling expenses, presents a problem.
Traveling, lodging, and other direct expenses related to sales cannot be estimated because of the
difficulty of allocating such expenses to the new product line relative to the established ones, or
to the new class of buyers relative to regular ones. An appropriate method is to use an amount
corresponding to ten percent of annual sales. This figure is within the middle range for such
expenses as reported earlier.
Before a distributor can start reselling a product purchased from a supplier, both must agree on
the terms of the distribution agreement. That is why pre-market arrangement efforts are always
mandatory when seeking to enter a new market or to add a product line. The costs related to
these efforts, which represent the fourth component, can be very high for they include such
costs as: traveling, entertainment, lodging, communication, costs of seeking and analyzing
market information, cost of legal advice and the use of other experts and specialists involved in
the distributor's decision making process. The time of negotiation and bargaining can go on for
many years before an agreement is reached. Such is the reality for establishing a supplier -
distributor relationship. This is why pre-market development expenses can be very high. A
lump sum is a more appropriate figure to use rather than one based on sales. Finally, other costs
are also involved, and these deal with technical and sales training, setting up the service
facilities for repairs and maintenance, preparing the technical manuals, and so forth. These
costs, referred to as indirect selling expenses, cannot be estimated using a percentage of sales.
Similar to the way pre-market development expenses are estimated, the same method can be
used for arriving at a lump sum total for indirect selling costs incurred during the start-up
phase.
To summarize, the following five expense components normally make up the various costs a
wholesaler-distributor incurs when adding a new product line in his warehouses while also
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
11
assuming the required product distribution tasks.
lump sum for general and administrative expenses based as a percentage of the number of
product lines handled
a percentage of sales for all logistical expenses
a percentage of sales for direct selling costs
lump sum for pre-market development expenses
lump sum for indirect selling expenses and other costs.
The addition of all these costs would no doubt show that the product line would not be
profitable during the start-up phase, as predicted by the PLC. This phase may last anywhere
from one to three years and is dependent, among other factors, on the length of time it took to
arrive at a mutually acceptable selling arrangement (i.e., the initial contact phase up to signing
the distribution agreement).
The costing procedure as outlined above illustrates very clearly that at least forty percent of
sales achieved during the initial introductory phase are needed to cover some, but not all of the
marketing costs involved in product distribution. The addition of the other three cost
components will surely raise that percentage even higher. In fact, a fifty percent figure seems
entirely plausible and probable.
9. Conclusions
This paper has outlined the role played by wholesaler-distributors in the economy, and in
particular, on the marketing work they do for their suppliers. This paper is bringing back
concepts that have been forgotten by the discipline over the years. A detailed list of marketing
tasks was presented which served as the basis to estimate a distributor's start-up costs when
handling a new product line and/or catering to a new class of customers. While no standard
procedure exists in the marketing literature to estimate a distributor's start-up marketing costs,
the use of logistical cost estimates and the PLC provided the means by which such costs could
be calculated. The procedure showed that the marketing work performed by distributors in the
initial phase of product distribution is higher than forty percent of sales, and may reach fifty
percent or more during the first year, and up to and including the third year of business
activity. As demonstrated in this paper, it is important to note that the agreement between the
distributor and manufacturer is an important one and one which could be given more
attention in future studies.
Of course, precise cost calculations of the marketing work done by distributors remains elusive,
as we have already explained. However, the method presented here provides a good
approximation of those true (i.e., theoretical) marketing costs.
References
Bartels, Robert. (1962). History of Marketing Thought, Irwin.
Beckman, Theodore and William Davidson. (1967). Marketing, 8th edition, Ronald Press.
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
12
Berman, B. and A. P. Sharland. (2002). The teaching of relationship marketing concepts in
undergraduate marketing principles and graduate introductory marketing courses, Journal of
Marketing Education, Vol.24 (August), Iss. 2, pg. 125-135.
Brown, S. (2002). Reading Wroe: On the biopoetics of Alderson's functionalism, Marketing
Theory, London, Vol. 2 (3), 243-272.
Day, G. (1981). The product life cycle: Analysis and applications issues, Journal of Marketing,
Vol.45 (Autumn), pp 60-67.
Frazier, Gary L and Walfried Lassar. (1996). Determinants of distribution intensity, Journal of
Marketing, Vol.60 (October), Iss. 4, pg. 39-52.
Gras, N.S.B. (1939). Business and Capitalism, An Introduction to Business History, NY: F.S.
Crofts.
Gummesson, E. (2002). Practical value of adequate marketing management theory, European
Journal of Marketing, Vol.36, Iss. 3, pg. 325-351.
Gundlach, G. and P. Bloom. (1998). Slotting allowances and the retail sale of alcohol beverages,
Journal of Public Policy & Marketing, Vol.17 (Fall), Iss. 2, pg. 173-185.
Grunert, K. and K. Ramus. (2005). Consumers' willingness to buy food through the internet: A
review of the literature and a model for future research, British Food Journal, Vol. 107, Iss. 6, p.
381-404.
Hardy, Kenneth and Allan Magrath. (1988). Marketing Channel Management, Scott, Foresman
and Company.
Hollander, Stanley. (1961). "Measuring the Cost and Value of Marketing", Business Topics, Vol.
9 (Summer), pp. 17-27.
Jensen, William. (1982). "Grocery Products Exhibit Different Life Cycle Curve", Marketing
News, Vol. 16 (August 6), page 6.
Kimanyi, C. (2005). Wholesalers of Pharmaceutical Products: A Vibrant Industry, Canadian
Economic Observer, Vol.18 (December), Iss. 12, pg. 3-11.
Koku, P.R. (2005). Towards an integrated marketing strategy for developing markets, Journal
of Marketing Theory and Practice, Vol.13 (Fall), Iss. 4, pg. 8-22.
Kotler, Philip. (1972). Marketing Management, second edition, Prentice-Hall.
Kotler, Philip. (1976). Marketing Management, 3rd edition, Prentice-Hall.
Kotler, Philip, Gordon Mc Dougall and Gary Armstrong. (1988). Marketing Canadian Edition,
Prentice-Hall Canada.
Lambert, Douglas. (1978). The Distribution Channels Decision, The Society of Management
Accountants of Canada.
Lele, Milind. (1986). "Matching Your Channels to Your Product's Life Cycle", Business
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
13
Marketing, Vol. 71 (December), pp. 61-69.
Lichtenthal, J. David and Leland Belk. (1984). "A History of the Definition of Marketing", in
Jagdish Sheth (ed.), Research in Marketing, Vol. 7, JAI Press, pp. 133-163.
Major, M. (2006). Falling for it, Progressive Grocer. September 15, Vol. 85, Iss. 13, p. 76-81.
Manolis, Chris and J.B. Gassenheimer, R.D. Winsor. (2004). The moderating effect of
solidarity as conduct: a theoretical and empirical perspective, Journal of Marketing Theory and
Practice, Vol. 12 (Summer), Iss. 3, p. 48-61.
Mc Garry, E.D. (1950). "Some Functions of Marketing Reconsidered", in Reavis Cox and
Wroe Alderson (eds.), Theory in Marketing, Irwin, pp. 263-279.
Mc Innes, William. (1964). "A Conceptual Approach to Marketing", in Reavis Cox, Wroe
Alderson and Stanley Shapiro (eds.), Theory in Marketing, Irwin, pp. 51-67.
McVey, Phillip. (1960). "Are Channels of Distribution What the Textbooks Say?", Journal of
Marketing, Vol. 24 (January), pp. 61-65.
Rosenbloom, Bert. (1987). Marketing Functions and the Wholesaler-Distributor: Achieving
Excellence in Distribution, Distribution Research and Education Foundation.
Sharman, Graham (1984). "The Rediscovery of Logistics", Harvard Business Review, Vol. 62
(September-October). pp. 71-79.
Shaw Arch (1912). "Some Problems in Market Distribution", The Quarterly Journal of
Economics, Vol. 26 (August), pp. 703-765.
Stern, Louis and Adel El-Ansary. (1992). Marketing Channels, 4th edition, Prentice-Hall.
Stock, James and Douglas Lambert. (1988). Strategic Logistics Management, second edition,
Irwin.
Therrien, Louis. (1989). "Want Shelf Space at the Supermarket? Ante Up", Business Week,
(August 7), pp. 60-61.
Thorelli, Hans and Stephen Burnett. (1981). "The Nature of Product Life Cycles for Industrial
Goods Businesses", Journal of Marketing, Vol. 45 (Fall), pp. 97-108.
Webb, K. (2004). Multichannel distribution: an exploratory investigation of supplier firms’
strategic motivation opportunities and challenges, American Marketing Association.
Conference Proceedings, Vol. 15, pg 312.
EXHIBIT 1
Marketing and Management Tasks
Performed by Distributors
1. Sales Management Tasks
National sales training sessions given to sales staff
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
14
On-going training to sales staff (local or from the national office)
Sales staff supervision and evaluation
Sales reports filled out by sales staff
Sales reports filled out by sales managers
Management of sales programs such as quotas, sales incentives, and bonuses
Traveling, lodging, entertainment, and other expenses incurred by sales staff and analyzed
by management
Sales staff's routing and itinerary reports
Sales meetings: local, regional, national
Lost customers and complaints reports
Sales staff's marketing kit (catalogs, videos, price lists, technical manual, etc.)
Telemarketing sales personnel
Prospecting new customers
Making sales and sales contacts (negotiation, approval, etc.)
Networking of sales staff
Territorial sales plans
Recruiting, hiring and firing of sales staff
2. Price or Financially-Related Tasks
Leasing contracts and their management
Customer invoice adjustments
Management of discounts such as cash discounts, quantity discounts, seasonal or special
Price schedules and revisions
Payment schedule programs offered to customers
Tax management responsibilities (GST, PST, customs and duties)
Credit procedures for product returns, repairs done under warranty, etc.
3. Logistics Tasks
Customer service requirements (time delays in processing or shipping an order)
Inventory holding
Billing, shipping and delivery
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
15
Order processing
Transportation and routing schedules
Warehousing and warehouse management
Warehouse site location analysis
In-house materials handling
Packing and packaging requirements
Inventory assistance given to suppliers and customers
Establishment of communication systems for quick orders, inventory availability, or order
status (EDI, FAX, 1-800, in house computer links with sales staff)
Quick deliveries for certain customers
Minimum order requirements
Product returns guidelines
Lot quantity, stockouts and reordering responsibilities
Bulk making or bulk breaking tasks
Product assortment availability
Product returns and what to do with scrap, defective or obsolete products
4. Advertising and Sales Promotion Tasks
Product literature, pamphlets, brochures
Price lists
Sales catalogues
Sales aids given to sales staff
Sales promotion material given to customers (calendars, gifts, pens, banners, agendas, etc.)
Trade shows, trade booths requirements, conventions (national, international)
Membership in trade groups, chambers of commerce, etc.
Advertising in trade magazines or elsewhere
Management seminars offered to suppliers or customers
Event marketing (sponsoring activities for charity, goodwill, etc.)
Cross promotional programs involving more than one supplier
Promotional allowances given to end users
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
16
Fax, mail and other communication means to solicit orders
5. Sales and Service
Establishment of repair and testing facilities (local and national)
Repairs done on customers' premises
Repairs done in shop
Technical assistance provided to suppliers and customers
Training of technicians in repairing and maintaining suppliers' products
In-house product testing for durability and performance
Issuance of guidelines as to product maintenance and repair requirements
Warning guidelines issued to customers and suppliers as to defective parts or dangerous
applications
6. Market and Marketing Research
Sales forecasting efforts
Sales staff's information gathering efforts
Analysis of competition and competitive products
Use of experts (consultants, lawyers, accountants)
Interviews with suppliers, customers, and others for information analysis
Industry sales analysis (imports, exports, etc.)
Analysis of customer needs
Analysis of product assortment to meet customer needs
Search for new markets, new suppliers, or new product opportunities
Price and pricing analysis, new leasing arrangements, etc.
7. Sales and Sales Planning Tasks
Routinization of sales transactions with suppliers (direct links, fewer suppliers, etc.)
Market coverage efforts (local and national)
Exclusive dealings with suppliers or customers
Tying sales arrangements with suppliers
On site visits by suppliers
Guaranty and warranty agreements
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
17
Access to product demonstrators, or on site use, product samples
Analysis of customer satisfaction via market research
Sales analysis by territory, product line, customer-type, by supplier
Increased communication links between suppliers, sales staff, warehouses, and end users
Marketing and Management Tasks
Performed by Distributors
1. Sales Management Tasks
National sales training sessions given to sales staff
On-going training to sales staff (local or from the national office)
Sales staff supervision and evaluation
Sales reports filled out by sales staff
Sales reports filled out by sales managers
Management of sales programs such as quotas, sales incentives, and bonuses
Traveling, lodging, entertainment, and other expenses incurred by sales staff and
analyzed by management
Sales staff's routing and itinerary reports
Sales meetings: local, regional, national
Lost customers and complaints reports
Sales staff's marketing kit (catalogs, videos, price lists, technical manual, etc.)
Telemarketing sales personnel
• Prospecting new customers
Making sales and sales contacts (negotiation, approval, etc.)
Networking of sales staff
Territorial sales plans
Recruiting, hiring and firing of sales staff
2. Price or Financially-Related Tasks
Leasing contracts and their management
Customer invoice adjustments
Management of discounts such as cash discounts, quantity discounts, seasonal or
special
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
18
Price schedules and revisions
Payment schedule programs offered to customers
• Tax management responsibilities (GST, PST, customs and duties)
Credit procedures for product returns, repairs done under warranty, etc.
3. Logistics Tasks
Customer service requirements (time delays in processing or shipping an order)
• Inventory holding
• Billing, shipping and delivery
• Order processing
Transportation and routing schedules
Warehousing and warehouse management
Warehouse site location analysis
• In-house materials handling
Packing and packaging requirements
Inventory assistance given to suppliers and customers
Establishment of communication systems for quick orders, inventory availability, or
order status (EDI, FAX, 1-800, in house computer links with sales staff)
Quick deliveries for certain customers
• Minimum order requirements
Product returns guidelines
Lot quantity, stockouts and reordering responsibilities
Bulk making or bulk breaking tasks
Product assortment availability
Product returns and what to do with scrap, defective or obsolete products
4. Advertising and Sales Promotion Tasks
Product literature, pamphlets, brochures
• Price lists
• Sales catalogues
Sales aids given to sales staff
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
19
Sales promotion material given to customers (calendars, gifts, pens, banners, agendas,
etc.)
Trade shows, trade booths requirements, conventions (national, international)
Membership in trade groups, chambers of commerce, etc.
Advertising in trade magazines or elsewhere
Management seminars offered to suppliers or customers
Event marketing (sponsoring activities for charity, goodwill, etc.)
Cross promotional programs involving more than one supplier
Promotional allowances given to end users
1-800, Fax, mail and other communication means to solicit orders
5. Sales and Service
Establishment of repair and testing facilities (local and national)
Repairs done on customers' premises
Repairs done in shop
Technical assistance provided to suppliers and customers
Training of technicians in repairing and maintaining suppliers' products
In-house product testing for durability and performance
Issuance of guidelines as to product maintenance and repair requirements
Warning guidelines issued to customers and suppliers as to defective parts or dangerous
applications
6. Market and Marketing Research
• Sales forecasting efforts
Sales staff's information gathering efforts
• Analysis of competition and competitive products
Use of experts (consultants, lawyers, accountants)
• Interviews with suppliers, customers, and others for information analysis
Industry sales analysis (imports, exports, etc.)
Analysis of customer needs
Analysis of product assortment to meet customer needs
Search for new markets, new suppliers, or new product opportunities
Journal of Management Research
ISSN 1941-899X
2009, Vol. 1, No. 2: E5
www.macrothink.org/jmr
20
Price and pricing analysis, new leasing arrangements, etc.
7. Sales and Sales Planning Tasks
Routinization of sales transactions with suppliers (direct links, fewer suppliers, etc.)
Market coverage efforts (local and national)
Exclusive dealings with suppliers or customers
• Tying sales arrangements with suppliers
On site visits by suppliers
Guaranty and warranty agreements
Access to product demonstrators, or on site use, product samples
Analysis of customer satisfaction via market research
Sales analysis by territory, product line, customer-type, by supplier
Increased communication links between suppliers, sales staff, warehouses, and end
users
ResearchGate has not been able to resolve any citations for this publication.
Article
Full-text available
Considerable controversy and debate surrounds the practice of slotting allowances, or fees, paid by manufacturers for obtaining the patronage of retailers. To date, regulators have yet to agree on public policy toward these practices; at least one federal antitrust agency suggests that slotting fees may be competitive, another has conducted investigations ir these practices, and still another suggests banning them altogether. In this article, the authors examine the recent decision by the Bureau of Alcohol, Tobacco, and Firearms (BATF) to prohibit slotting allowances in the retail sale of alcohol beverages. Focusing on the regulatory environment, industry structure, marketing practices, and consumer consumption behavior in the alcohol beverage industry, the authors analyze the BATF's decision and attempt to reconcile disparate public policy treatment of these practices. Implications for understanding slotting allowances and recommendations for further public policy development and research then are explored.
Article
Full-text available
This article takes a fresh look at a long-standing, meta-theoretical framework: the “Structure Conduct Performance” model. Utilized to understand marketing through organizational economics, this model has exerted a powerful influence on the marketing discipline. After specifying a refined configuration of the model where solidarity is interpreted as both a form of cohesive conduct and a moderator variable, the authors test the proposed model within a franchise setting and discuss their findings. The results offer new insight toward understanding the marketing exchange processes in hierarchical, interorganizational environments.
Article
Full-text available
Article
This study examined the market structures, performance, and strategies of over 1000 industrial businesses to determine whether and to what extent product life cycle forces were at work. The findings indicated that the growth rates of industrial product-markets are but one aspect of the product life cycle. Other variables exhibiting life cycle behavior included market innovation, market concentration, competitive entry, and spending on R & D and marketing.
Article
The world has, during the past three decades, witnessed dramatic changes in the geopolitical landscape that have expanded international trade. Much of academic research during this period focused on such issues as whether global companies should standardize, adapt, and/or the degree to which they should adapt their marketing strategies to international markets. This study takes a different approach; instead of adapting firm-specific factors to the environment that firms encounter in developing markets, it focuses on how global companies can improve the infrastructure, the level of education, and the legal systems in order to improve the standard of living in developing countries while expanding markets.
Article
This study examined the market structures, performance, and strategies of over 1000 industrial businesses to determine whether and to what extent product life cycle forces were at work. The findings indicated that the growth rates of industrial product-markets are but one aspect of the product life cycle. Other variables exhibiting life cycle behavior included market innovation, market concentration, competitive entry, and spending on R & D and marketing.