IB Business Management HLTopic 4 — MarketingPaper 1 & 2Core skill~10 min read
Distribution Channels
Place is about getting the product from where it is made to where it is bought. Every extra business in that chain does useful work — and takes a slice of the price for doing it. That trade-off is the whole topic.
📘 What you need to know
A distribution channel is the chain of intermediaries between producer and customer.
Four stage: producer → wholesaler → retailer → consumer.
Three stage: producer → retailer → consumer. The wholesaler is cut out.
Two stage: producer → consumer. Direct selling, usually online.
Every intermediary adds a mark-up, so the customer pays more or the producer earns less.
Cutting out intermediaries means keeping more margin but taking on storage, delivery and customer service.
Intensive distribution means selling everywhere; exclusive distribution means limiting outlets to protect a premium image.
E-commerce and drop-shipping have made two-stage channels possible for tiny businesses.
The three channels
The wholesaler is not just a cost. It buys in bulk, stores the stock and breaks it into small batches that small shops can afford — work the producer would otherwise do itself.
What each middleman costs
Here is the same product travelling three different routes. The producer’s own price never changes; only the number of mark-ups on top of it does.
Selling direct looks obviously better until you remember the producer now pays for warehousing, packing, delivery and every customer complaint.
WORKED EXAMPLE 1
A producer sells to a wholesaler for $10. The wholesaler adds 25% and the retailer adds 60%. Calculate the price the customer pays. [3 marks]
Step 1: Wholesaler’s mark-up0.25 × 10 = 2.50, so the retailer pays 12.50Step 2: Retailer’s mark-up0.60 × 12.50 = 7.50Step 3: Add it on12.50 + 7.50 = 20.00Customer pays $20.00The second mark-up is applied to the new price, not the original $10. Mark-ups compound, which is why long chains get expensive.
Choosing a channel
Channel
Advantages
Disadvantages
Four stage
The wholesaler absorbs storage costs and breaks bulk into small batches that small retailers can buy
Two mark-ups, so either the producer earns less or the customer pays more. The producer also loses control of promotion at the point of sale
Three stage
The retailer handles customer service, display and some promotion, and absorbs storage costs
The retailer’s mark-up still reduces the producer’s profit, and the retailer may run promotions the producer knows nothing about
Two stage
Low cost, fast, and the producer keeps full control of promotion, merchandising and customer service
All storage and distribution costs fall on the producer, and dealing with customer problems takes attention away from production
Intensive or exclusive?
Intensive distribution puts the product in as many outlets as possible. Right for mass-market goods people buy without thinking — drinks, snacks, batteries.
Exclusive distribution deliberately limits the number of outlets, often to licensed dealers only. Right for luxury goods, where being available everywhere would destroy the premium image.
E-commerce changed the sums. Online marketplaces and drop-shipping let a small business reach a national audience without a warehouse: the order comes in and the producer ships directly. Distribution has stopped being a barrier to entry.
Whenever a case study says “sells directly to customers online”, write down what that means for costs. The margin is bigger, but so is the responsibility — the delivery, the returns and the angry emails are all now the producer’s problem.
WORKED EXAMPLE 2
A small jewellery maker currently sells through gift shops. It is considering selling only through its own website. Evaluate this change. [6 marks]
Step 1: The case for going direct
Cutting the retailer removes a mark-up, so the maker earns more per item or can offer a lower price. It also controls how the brand is presented.
Step 2: The case against
Gift shops bring in customers who were not looking for the brand. A website only reaches people who already know it exists.
Step 3: The hidden cost
Packing, posting, returns and customer service now take the owner’s time away from making jewellery.
Keep the shops, add the websiteA dual channel keeps the discovery the shops provide while building direct sales. Say why “only” was the wrong word in the question.
💡 Exam tip
Mark-ups compound. Always apply the second one to the price after the first.
When a channel is shortened, say who now does the removed work. That is the developed point.
Match the channel to the product: everyday goods need intensive distribution, luxury goods need exclusive.
Remember that retailers do more than sell — they store, display and handle customers.
Consider a dual channel in evaluation questions. It is often the strongest answer.
Link place back to price: a longer chain either raises the shelf price or squeezes the producer’s margin.
⚠ Common mix-up
Place is not just location. It covers the whole route to the customer.
Removing a middleman does not simply save money. It transfers work.
Wholesalers and retailers are different. Wholesalers sell to businesses, retailers to the public.
Direct selling is not always cheapest for the customer. The producer may keep the saving instead.
Exclusive distribution is not accidental. The scarcity is the point.
Mark-up percentages are not added together. 25% then 60% is not 85%.
Up next: People in the Marketing Mix — the first of the three service Ps, and the one that can undo everything else in a single conversation.
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