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9609 · 3.3.6

Place (channels of distribution) — practice questions

Practice and worked examples for 9609 Place (channels of distribution). Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A premium cosmetics brand, 'LuxeBeauty', sells its foundation exclusively through department stores. The foundation retails for $50. The department store takes a 40% margin. LuxeBeauty is considering launching its own e-commerce website to sell direct to consumers. Evaluate this decision.

Show solution outline

Step 1: Analyse the current channel's profitability per unit.

  • Retail Price: 5050
  • Department Store Margin: 40% of retail price = 0.40 * 50=50 = 20
  • Revenue per unit for LuxeBeauty (Indirect Channel): 50−50 - 20 = **30∗∗30**

Step 2: Analyse the proposed direct channel's profitability per unit.

  • LuxeBeauty sells at the same retail price of $50 on its website.
  • Assume direct channel costs (e.g., marketing, payment processing, shipping) are $8 per unit.
  • Revenue per unit for LuxeBeauty (Direct Channel): 50−50 - 8 = **42∗∗42**
  • Margin Improvement: The profit margin per unit increases by 42−42 - 30 = 12.12.

Step 3: Qualitative Evaluation.

  • Arguments for (Pros): The higher profit margin is a major financial incentive. It also allows for direct collection of customer data for CRM and gives full control over brand presentation.
  • Arguments against (Cons): The risk of channel conflict is significant; department stores may react negatively. LuxeBeauty would also face high investment costs for the website, digital marketing, and logistics (fulfilment, returns). A key issue for cosmetics is the lack of physical trial ('touch and feel') online.

Step 4: Recommendation. LuxeBeauty should adopt a multi-channel strategy. Launching the website is financially attractive and aligns with modern consumer behaviour. To mitigate channel conflict, it could offer exclusive products or bundles online. It should maintain its partnership with department stores, as they are crucial for customer acquisition, brand prestige, and allowing customers to physically test products. This approach balances the benefits of direct sales with the reach and services of the established retail channel.

Worked example 2

'FarmFresh Juices' produces organic fruit juice. It is considering two distribution options. Using the data below, calculate which channel is likely to be more profitable over a year and recommend a course of action.

Data:

  • Production cost per bottle: 1.501.50
  • Option 1 (Indirect - Supermarket):
    • Sells to supermarket at $2.50 per bottle.
    • Annual sales volume: 200,000 bottles.
  • Option 2 (Direct - Online Subscription):
    • Sells to consumer at $4.00 per bottle.
    • Estimated annual sales volume: 60,000 bottles.
    • Additional annual fixed costs for e-commerce platform, marketing, and logistics: 40,000.40,000.
    • Variable cost per bottle (packaging & shipping): 0.50.0.50.
Show solution outline

Step 1: Calculate the total annual profit for the Indirect Channel (Supermarket).

  • Contribution per unit = Selling Price to Supermarket - Production Cost
  • Contribution per unit = 2.50−2.50 - 1.50 = 1.001.00
  • Total Annual Contribution = Contribution per unit × Annual Sales Volume
  • Total Annual Contribution = 1.00×200,000=1.00 \times 200,000 = 200,000
  • Since there are no specific fixed costs mentioned for this channel, the total contribution is the profit.
  • **Annual Profit (Indirect) = 200,000∗∗200,000**

Step 2: Calculate the total annual profit for the Direct Channel (Online).

  • Contribution per unit = Selling Price to Consumer - Production Cost - Variable Direct Costs
  • Contribution per unit = 4.00−4.00 - 1.50 - 0.50=0.50 = 2.00
  • Total Annual Contribution = Contribution per unit × Annual Sales Volume
  • Total Annual Contribution = 2.00×60,000=2.00 \times 60,000 = 120,000
  • Total Annual Profit = Total Annual Contribution - Annual Fixed Costs
  • Total Annual Profit = 120,000−120,000 - 40,000 = 80,00080,000
  • **Annual Profit (Direct) = 80,000∗∗80,000**

Step 3: Compare results and make a recommendation.

  • Comparison: The existing indirect channel through supermarkets generates $200,000 in annual profit, whereas the proposed direct online channel is forecast to generate only $80,000.
  • Recommendation: Based purely on these financial projections, FarmFresh Juices should not abandon its supermarket channel. The supermarket provides significantly higher volume and overall profit, despite the lower margin per unit. However, the business could consider a multi-channel approach. It could start the D2C service to build brand loyalty and gather customer data, while still relying on the supermarket for the bulk of its revenue. The higher per-unit contribution (2.00vs2.00 vs 1.00) of the direct channel is attractive if the sales volume can be increased over time without excessive marketing spend.
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