Exclusive Distribution Meaning
In a family where there are two kids and parents bring toys or clothes for elder brother and instruct younger brother not to touch or use them than it implies that elder brother has exclusive right to use those clothes or toys. In case of marketing similar concept called exclusive distribution is there where a company or the supplier ties up with 1 or 2 distributors or retailers to sell the product of the company in the designated area and no one else is allowed to sell the company’s product in that area. In order to understand more about this concept, one should look at some of the advantages and disadvantages of exclusive distribution –
Advantages of Exclusive Distribution
No Risk of Competitors
The first and foremost advantage of this distribution strategy is that as far as retailer or distributor is concerned there is no risk of competition because since the company has entered into exclusive partnership with the distributors there is no chance that any competitor will enter into the area for which company has a tie-up with the distributor or retailer. In simple words just like when your parents have told your younger brother not to touch or use your toys or clothes you can sleep peacefully without worrying in the same way distributor or retailer can have peace of mind when it enters into an exclusive distribution agreement with the company or the supplier.
Economics of Scale
In the case of exclusive distribution distributors or retailers due to the exclusive agreement can stock more inventory and have economies of scale in their operations, besides company can also offer easy credit terms to the distributor due to the big size of the business which distributor or retailer is generating. In simple words, the company, as well as the distributor, can benefit due to exclusive agreement to sell the products of the company.
Better Management
As far as the company is concerned it can have better management because of the low number of distributors or retailers of the products of the company all over the country as it is easy to manage 10 or 20 distributors rather than managing 1000 distributors. Besides, the company can easily control the way products are priced or marketed to consumers due to the low number of distributors or retailers for the products of the company.
Disadvantages of Exclusive Distribution
No Diversification
The biggest disadvantage of exclusive distribution is that company is dependent on few suppliers or retailers for marketing of their products which in a way does not give benefits of diversification to the company because if 1 or 2 distributors are not able to do good sales then it can impact the sales of the company in a big way which is not the case when company has many small distributors or retailers.
Limited Reach
Another problem with this distribution strategy is that due to a limited number of distributors or retailers the reach of the products of the company gets limited which is not the case in extensive distribution where the products of the company are available at every corner of the country. In simple words, this strategy is not a good strategy for low priced products where the profit margin is low and the company requires more sales to offset lower profit margins.
Dependent on Distributors
The success of this strategy is dependent on how aggressive the selected distributor or retailer is because if the distributor or retailer is not keen to promote the product of the company than the sales of the whole area will be affected due to exclusive nature of this strategy which is not the case with extensive distribution where if 10 to 20 retailers are not aggressive or keen to promote the product than it does not affect the company as its retailers loss and not the company’s loss due to a large number of retailers or distributors for the product of the company.
As one can see from the above that exclusive distribution agreement has pros as well as cons and that is the reason why any company or supplier thinking of doing this agreement should carefully read above points and then take the decision regarding entering into an exclusive agreement with distributor or retailer for the products of the company.