In this article we will discuss about:- 1. Channels of Distribution – Meaning and Definition 2. Objectives of Channels of Distribution 3. Role 4. Factors Influencing 5. Role of Intermediaries 6. Distribution Intensity 7. Types of Intermediaries 8. Need of Channels of Distribution 9. Functions 10. Strategies 11. Management Decisions 12. Factors to be Considered.
Channels of Distribution – Meaning and Definition:
The Distribution of product is a major element of marketing mix. A right product at right price will not have any value if it is not made available at the right place. Distribution is the process of moving the product from the producer to the ultimate consumer. It provides place utility to the product. The increasing complexity of the modern production process has created a wide gap between the manufacturer and the ultimate consumer.
At the same time mass production, decentralisation of the market and small buying requirement of the consumers has made it difficult for the manufacturer to deal directly with the customers. Channel of distribution helps in bridging the gap between the manufacturer and consumer. It includes a number of intermediaries like wholesaler, retailer, brokers, sales agents, etc.
It has two important aspects – Channels of distribution and Physical distribution. A channel of distribution refers to the pathway through which the goods move from the producers to the consumer. This is done through a number of intermediaries. Physical distribution, on other hand, is concerned with the physical movement of the product to the target market so as to provide time and place utility to it. The physical distribution activities include transportation, warehouse, inventory maintenance, order processing, etc.
Channels of distribution have been defined in different ways by different authors.
According to Philip Kotler, “Every produces seek to link together the set of marketing intermediaries that best fulfil the firms’ objective. This set of marketing intermediaries is called marketing channel also trade channel and channel of distribution.”
According to William J. Stanton, “A channel of distribution for a product is the route taken by the title of the goods as they move from the producer to the ultimate consumer or the industrial user.”
According to American Marketing Association,” The structure of intra company organisation units and extra company agents and dealers, wholesaler and retailer, through which a commodity, product or service is marketed.”
In other words, a channel of distribution is a pathway directing the flow of goods and services from producer to consumer consisting of number of intermediaries. It is an organised network which performs all the activities required to link producers with users to accomplish the marketing task.
Objectives of Channels of Distribution:
Objectives are the starting point of any activity. They are the intended goals which prescribe scope and suggest direction to the efforts of the manager. Channel objectives also suggest direction for framing channel policies and strategies, selection of distribution channels etc. They flow out of the overall objective of the firm. The main objective of any distribution system is to make available the product at right place in right quantity and at right time.
It makes available the goods to the consumer as per his requirement. Apart from the main objective, distribution channel has other objectives like production and safety of the product, quick disposal of the product at the low cost, low inventory control of the channel and marketing intelligence. It is important to note that channel objectives vary in different environmental conditions and market conditions. It also varies form one time period to another.
Role of Distribution Channels:
In order to move product from producer to consumer, it is necessary that the product is properly handled, packed, stored and transported. All these activities involve high amount of cost and are performed by intermediaries of the channels in accordance with their efficiency and specialisation. Channel of distribution has thus become a very important link between the producers and the consumers.
The producers who do not have sufficient fund to carry out direct marketing can easily take advantage of the service of middleman. Channels of distribution fill the gap between the producer and consumer in the form of title, place and possession utilities. The presence of intermediaries between producer and consumer improve the efficiency of exchange process. Distribution without the presence of intermediaries becomes more complicated and costly.
Channel of distribution is not only concerned with the physical movement of the product from manufacturer to consumer but also concerned with other type of flows like transfer of ownership, financial transaction, communication and transfer of risk. Transfer of ownership is concerned with the transfer of title to the goods from producer to consumer via intermediaries.
Financial flow means flow of funds from consumers to producers. Communication is concerned with dissemination of all concerned information to the consumer while transfer of risk is concerned with all the risk that are experienced while carrying out the channel work, like perishable nature of product, product obsolescence, etc.
Factors Influencing Distribution Channels:
Channels of distribution form an important part of the marketing mix. Decision relating to it involve decisions regarding type of channels, type of intermediaries, channel strategies, motivation to channel members, physical distribution etc. These decision affect and are affected by various factors. There are various factors which influence channel of distribution decision.
They can be categorised as:
(A) Product Characteristics.
(B) Market Characteristics.
(C) Middleman Characteristics.
(D) Manufacturer’s Characteristics.
(E) Environment Considerations.
(A) Product Characteristics:
Product factors have significant influence on the channel selection.
They are concerned with:
i. Nature of the Product – Nature of the product is the primary factor in channel selection. If the product is perishable in nature, small channel (less number of intermediaries) should be used, to save them from physical deterioration. Durable goods can be transferred through longer channels.
ii. Technical Nature of the Product – Product Technical products require greater explanation Characteristics and training. For such products exclusive dealers may be used. For other products which are not highly technical, intensive distribution may be selected to make the product available.
iii. Length of the Product Line – Product line consists of group of closely related products. Length of the product line influences the channel selection. Short product line is more apt to sell through middleman than a long product line. Manufacturers have to decide whether to sell all the products through single channel or use multiple channels.
iv. Unit Value – The unit value of the product also influences the selection of distribution channels. Higher unit value products are preferred to be sold directly or through shorter channels. On the other hand, low unit value unit product are preferred though longer channels, as they require intensive distribution.
v. Market Position – Established product and products of the reputed manufacturers can be easily sent through various channels. However, new products may face difficulties.
(B) Market Characteristics:
Market factors includes following factors which influence channel decisions:
i. Size of the Market – If the market is large in size, more number of middlemen will be required to sell the product. For small markets, direct selling may be preferred.
ii. Area or the Market – National and international markets require wide and long channels while local and regional market markets may be served through shorter channels.
iii. Concentration of Buyers – When buyers are concentrated in few areas only, short channels will be sufficient. However, if the buyers are scattered over a wide geographical area, then shorter channels become uneconomical and longer channel should be opted for.
(C) Middlemen Characteristics:
These factors relate to:
i. Availability of Middlemen – The existing channel system may not be interested in selling the products of the manufacture. In such case, marketer has to find out other channel members and work in a compromising manner.
ii. Competitors’ Channels – The distribution channels used by the competitors also influence firms channel selection. When the competitors is using a particular channel and have been successful, the concerned manufacturer may also use it in similar manner, provided it suits his requirements. It is not always necessary to go for separate channel system.
iii. Type of Middleman – Choosing the right middleman is important for smooth distribution of the goods. The efficiency of the middlemen to perform various functions (standardisation and grading, branding and packaging, after-sale services, etc.), his financial standing in the market, his market influence and penetration, are important factors which affects the choice of channels.
(D) Manufacturer’s Characteristics:
A manufacturer’s own strength and weaknesses also significantly influence channel selection.
i. Size of the Company – A very significant factor influencing channel selection is the size of company. Large companies prefer shorter channels and small companies use longer channels.
ii. Financial Strength of the Company – Companies having substantial financial resources need not depend upon intermediaries for assistance and can use shorter channels. However, financially weak companies use indirect channel.
iii. Experience and Ability – Long established companies have good experience and ability; therefore they do not go to intermediaries but only maintain good relations. However, new companied rely heavily on middlemen, as they lack working experience.
(E) Environmental Considerations:
Changes in the marketing environment also influence channel selection. The prevailing economic conditions in the country may force companies to change its channel policies. Slump periods may force the manufacturers to go for less expensive distribution channels. Similarly technological development and innovations also influence distribution strategies.
Role of Intermediaries:
Intermediaries are the important link between the producer and the consumer. A part of indirect channel system, these intermediaries, and help in several types of flow functions between producer and consumer.
These flow functions are:
Flow of possession is the physical flow of goods from producers to consumers through intermediaries.
Flow of title is from manufacturer to the intermediary or middlemen and from intermediary to the final consumer. Many middlemen take title of the goods and then trade it on their own risk.
Intermediaries play an important role in promoting their goods in their territory. They have their own sales programmes to attract the consumers.
Numbers of middlemen are there due to stiff competition. As a result intermediaries have to negotiate the various activities of business.
The payment flows backwards i.e. from the consumer to producer. Middlemen help the manufacturer by providing advance payments to meet their working capital requirement for goods and services.
Information flow takes place from intermediary to manufacturer. Since middlemen are in close contact with the consumers they provide valuable information about the market to the manufacturer.
Once the channel level is decided by the firm, the next task is to choose the number of intermediaries i.e. specifying distribution intensity. It is concerned with the market exposure to be given to the product to meet the target consumers’ needs and wants. There are three types of distribution intensity-Intensive distribution, exclusive distribution and Selective distribution.
(1) Intensive Distribution:
Under this type of distribution, seller sells his product through all possible outlets. The emphasis here is to flood the market with the product so that customer automatically goes for that product. Seller here widely advertises his products so that consumers are well aware about the product. This naturally leads to high cost. This type of distribution is commonly used for convenience goods like-soft drinks, stationery, etc. The main demerit of this distribution system is that manufacturer has very less control over channel members.
(2) Exclusive Distribution:
This is opposite of intensive distribution. An extreme method of distribution, here the firm selects a very few middlemen (not more) to sell its product in each geographical area. These middlemen are granted exclusive rights to sell the product in their territory. It is most suitable for expensive speciality goods. Here the firm has great deal of control over the channel members.
(3) Selective Distribution:
Selective distribution is a mid-way between the intensive and exclusive distribution. It refers to the selection of few middlemen for selling the product so that the product is available at more than one outlet but not at every outlet. Through this, firm tries to create selective demand for the product. This method enables the seller to enjoy the benefits of selective distribution while still having adequate market coverage. Firm has moderate control over the channel members.
Types of Intermediaries:
Intermediaries are the middlemen who specialise in performing various functions or rendering services involved in the process of moving the product from the producer to the consumer. These intermediaries may be individual or organisation, who helps the manufacturer in reaching to the final consumers. Intermediaries are of two types – Agent middlemen and Merchant middlemen.
Agent middlemen are those intermediaries who do not take title of the goods but only specialises in the negotiating the buying or selling transactions. Unlike merchant middlemen, they negotiate the purchase or sale or both without acquiring the ownership of these goods for example – Brokers, commission agents, auctioneers, resident buyers, factors, selling agents, etc.
Merchant middlemen, on other hand, are those intermediaries who take title to the goods and involve in buying and reselling of the goods. These include wholesaler and retailers.
Need of Channels of Distribution:
Channels of Distribution are required for the follow reasons:
(i) Channels of Distribution Help in the Production Function:
The producer can concentrate on the production function leaving the marketing problem to middlemen who specialize in the profession, their services best utilized for selling the product.
(ii) Marketing Demand and Supply:
The chief function of intermediaries is to assemble the goods from many producers in such a manner that a customer can make effective purchases with ease.
(iii) Financing the Producer:
Middlemen orders and purchases products in bulk from the producers to undertake large-scale production and in adopting better techniques of production because they have no problem for finance.
(iv) Aid to Communication:
The middlemen are connecting link between the producer and the buyer. Middlemen have complete knowledge of consumer behaviour and the market and they communicate the necessary information to the producer so that they may produce according to the needs of the consumers.
(v) Stabilizing the Prices:
The middlemen help to stabilize the prices. By stocking goods, constant flow of goods to the market is assured at a place where they are wanting and at a proper time. Thus middlemen create place, time, and possession utilities to the products and maintain the prices.
(vi) Promotional Activities:
Middlemen also perform various promotional activities like advertising, personal selling and sales promotion. Sometimes wholesaler does it alone for the producer. Retailer also performs such activities by displaying the product in his window which attracts the customers.
In pricing the product, the producer should invite the suggestions from the middlemen who are very close to the ultimate users and who know the consumer behavior aptly. Pricing may be different for different markets or products depending upon the channel of distribution.
5. Functions of a Distribution Channel:
Important functions of a Distribution Channels are:
(i) The primary function of a distribution channel is to bridge the gap between production and consumption.
(ii) A close study of the market is extremely essential. A sound marketing plan depends upon thorough market study.
(iii) The distribution channel is also responsible for promoting the product. Awareness regarding products and other offers should be created among the consumers.
(iv) Creating contacts or prospective buyers and maintaining liaison with existing ones.
(v) Understanding the customer’s needs and adjusting the offer accordingly.
(vi) Negotiate price and other offers related to the product as per the customer demand.
(vii) Storage and distribution of goods.
(viii) Catering to the financial requirements for the smooth working of the distribution chain.
(ix) Risk taking for example by stock holding.
6. Different Channel Strategies:
Channel Strategy is the decision about the allocation of roles within a channel of distribution, and the way in which the channel is formally or informally managed and administered.
Various channel strategies are:
(i) Push Strategy:
Push strategy is a manufacturing strategy aimed at other channel members rather than the end consumer. The manufacturer attempts to entice other channel members to carry its product through trade allowances, inventory stocking procedures, pricing policies, etc. Under this strategy the communications and promotional activities by the marketer to persuade wholesale and retail channel members to stock and promote specific products.
(ii) Pull Strategy:
A manufacturing strategy aimed at the end consumer of a product. The product is pulled through the channel by consumer demand initiated by promotional efforts, inventory stocking procedures, etc.
Under this strategy the communications and promotional activities by the marketer to persuade consumers to request specific products or brands from retail channel members.
7. Channel Management Decisions:
Channel management is a term that refers to the way that a business or supplier of products uses various marketing techniques and sales strategies to reach the widest possible customer base. The channels are all of the various outlets by which the product is marketed and sold to customers.
When done properly, channel management motivates those channels to sell the product and ultimately develops a better relationship between customer and product. This is achieved by identifying the goals for each distinctive channel and then implementing various marketing strategies to make sure that those goals are attained, all while staying consistent to the overall brand of the business.
Channel management, as a process by which a company creates formalized programs for selling and servicing customers within a specific channel.
It customizes a channel management program that includes:
At first define the specific goals for each channel segment. Consider the goals for the channel as whole as well as individual accounts. And, remember to consider the goals for both acquisition and retention.
Construct well-defined polices for administering the accounts within this channel. Be sure to keep the unique characteristics of each segment in mind when defining policies for account set up, order management, product fulfillment, etc.
Identify which products in offering are most suited for each segment and create appropriate messaging. Also, determine where the up sell opportunities lie.
(iv) Sales/Marketing Programs:
Design support programs for the channel that meet their needs, not what idea of their needs are. The standard considerations are product training, co-op advertising, seasonal promotions and merchandising.
While choosing an appropriate channel of distribution the following factors should be considered:
1. Nature of Market:
Criteria like nature and location of buyers, size and frequency of purchase, buying habits and preferences of consumers, scope of distribution and competition etc., are to be considered.
(i) Perishability – Perishable products require more direct marketing because of dangers associated with delays and repeated handlings.
(ii) Size – Products that are bulky (for example, Iron & steel, cotton etc.) usually need short channels so that distance and number of handlings from product to ultimate consumer may be reduced.
(iii) Style – This is a dangerous element and often necessitates frequent changes in the channels. Manufacturers prefer selling direct to retailers, especially when goods are subjected to fast style changes.
(iv) Unit value – Products of high unit value are often sold through company’s own sales force.
(v) Newness of the product – When new products are introduced, new channels are preferred.
3. Consumers’ Buying Habits:
Factors like size of average sales, seasonal character of sales; concentration of customers etc. play a vital role in deciding a distribution channel. As far as convenience goods are concerned, long channels are preferred. Shopping and speciality goods on the other hand, are marketed more directly.
Generally the same channels which are preferred by the competitors are used since the channel partners are familiar with the customers and they are more approachable. Also trying out a totally new set of channel members will lead to rise in cost and risk.
5. Financial Limitations:
They are always taken into consideration before making a selection.
Selection of Distribution Channels Requires a Compromise between Cost and Control:
The cost involved in the use of a distribution channel enters the price of the product that the ultimate consumer has to pay. Due to a wrong decision regarding the channel, distribution cost may be very high and sales might be very limited. A sound channel decision enables the firm to cut down costs and maximise sales revenue.
Thus, the distribution channel influences sales volume and profits. If the choice of the channel is proper, fluctuations in production can be reduced due to continuous and effective distribution. The manufacturer can continuously monitor the sales and stock of his distribution partners to exercise effective control over distribution network.
Factors Affecting the Choice of a Channel:
The manufacturer has to find out the most effective and efficient channel of distribution for his product. The selected channel must have the lowest cost with maximum overall profit.
There is no single channel of distribution that will always result in optimum profit. The integrated marketing concept has prompted many manufacturers to employ several kinds of channels.
There are various constraints that are to be considered before deciding a channel of distribution:
1. Nature of Market:
i. Number and location of buyers,
ii. Size and frequency of purchase,
iii. Consumer or industrial market, and
iv. Buying habits and preferences.
2. Nature of Product:
i. Size of product —bulk and weight,
ii. Unit value,
v. Technical nature, and
vi. Age of product, i.e., when new products are introduced, new channels are preferred.
3. Nature of Firm:
i. Market standing,
ii. Financial resources,
iii. Volume of output,
iv. Degree of control desired, and
v. Managerial competence.
4. Nature of Distribution:
i. Availability of middlemen,
ii. Attitude of middlemen,
iii. Services provided by middlemen,
iv. Sales potential,
v. Cost of the channel, and
vi. Legal considerations.
As far as convenience goods are concerned, long channels are preferred. Shopping and speciality goods are marketed more directly. Industrial goods of high value are also marketed directly. When the quantity sold is small, the channels should be elaborate.
Factors Taken into Consideration while Planning the Distribution Network for a Product:
The management should carefully consider the following factors while planning the distribution network for a product:
A. Market considerations;
B. Product considerations;
C. Company considerations; and
D. Middlemen considerations.
Following features of the market should be analysed:
(i) Consumer or industrial market;
(ii) Number of potential customers;
(iii) Size of order;
(iv) Buying habits of customers; and
(v) Geographical concentration of the market.
Important factors with regard to the product are to be analysed carefully:
(i) Unit value;
(ii) Product line;
(iii) Standardised product – It can be distributed through longer channels because their brand names are quite popular.
(iv) Technical nature – Industrial products which are highly technical, are often distributed directly to the industrial users.
(v) Bulk and weight – Bulky and heavy goods are distributed directly to users in order to minimise the physical handling of the product.
(vi) Perishability – The producers of perishable products usually sell their products directly to consumers or sell through the middlemen who have the special storage facilities.
C. Company Considerations:
Following factors are important with regard to nature and size of the business firm:
(i) Volume of production;
(ii) Financial resources;
(iii) Experience and competence of management;
(iv) Desire for control of channel – A manufacturer who wants to control the distribution of his product will select a short channel of distribution.
Following factors relate to the middlemen:
(i) Availability of desired middlemen;
(ii) Financial ability;
(iii) Attitude of middlemen;
(iv) Sales potential;
(v) Cost; and
(vi) Competition and legal constraints.
It is a distribution policy which needs to be decided by the manufacturer in which he decides about the number of outlets or individual channels.
The channel width is chosen from among three alternatives:
1. Intensive Distribution:
(i) The manufacturer seeks to use as many outlets as possible, in as many places as possible.
(ii) Also referred to as “Maximum expansion”.
(iii) Usually adopted in case of convenience goods, like cigarettes, sweets, toffees etc.
2. Selective Distribution:
(i) The manufacturer selects a limited number of wholesalers or retailers and works closely with them to further the sale of his products.
(ii) It is suited in case of shopping goods like washing machines, computers etc.
(iii) Requires lots of planning and strategizing from the manufacturer’s end so that he can choose the best distributor and leave the unimportant ones.
(iv) The control on the dealer is limited.
(v) Best strategy for goods which require after sales service and carry a high net price.
3. Exclusive Distribution:
(i) It refers to the practice of selecting and allocating a distributor an exclusive area of sales called as “Territory”. Herein, the manufacturer also agrees in exclusive selling agreement that he will not sell to anyone else in that territory.
(ii) The distributor will, in return agree to be exclusively retailing only that particular product.
(iii) Gives prestige to the product as having an exclusive dealer.
(iv) The Exclusive Distributor will have a monopoly in his territory and will thus be protected from any price cuts or markdowns.
Trends in Marketing Channels:
1. Vertical Marketing System.
2. Horizontal Marketing System.
3. Multi-Channel Marketing System.
1. Vertical Marketing System:
It comprises the producer, wholesaler and retailer operating as an integrated arrangement. Under this either one channel member owns the others or gives franchise to them or has such an arrangement that they all work together.
(i) Vertical organization provides clear lines of authority and a tight span of control;
(ii) Offers high operating efficiency;
(iii) Combination of relatively small departments;
(iv) Facilitates close monitoring and control;
(v) Direct reporting by each level to upper level.
(i) Lower level members feel less valued;
(ii) Some members may not relish the accompanying culture of politics;
(iii) It is time consuming.
2. Horizontal Marketing System:
The Horizontal marketing system is a channel in which few companies operating at the same level jointly and mutually agree to pursue a fresh marketing prospect. Its major advantage is that businesses merge their assets, resources, production potentials, and therefore realize more.
This collaboration may be temporary or permanent. For example, Nestle and Coca-Cola created a joint venture where Coke offered its all-inclusive expertise in marketing and distribution of beverages and Nestle contributed for two established brand names — Nescafe and Nestea.
(i) Employees attain greater satisfaction;
(ii) Offers greater freedom and autonomy;
(iii) High levels of cooperation throughout the organization because of the use of cross-function teams.
(i) Loss of control;
(ii) High level of responsibility but low level of authority;
(iii) Not always favourable.
3. Multi-Channel Marketing System (MMS):
Under this system, the company gets its products sold not only from their own showrooms or authorized dealers but the product is made available through the retailers who keep various brands. This way the product gets maximum exposure in the market.
Channels of Distribution Add Convenience for Consumers and Help make the Product Available at Right Place:
“Channels of distribution add convenience for consumers and help make the product available at right place.” This statement aptly explains the important and significant role played by channels of distribution in passing the ownership of the goods produced from the producer to ultimate consumers in the most efficient and cost effective manner.
The channel of distribution consists of a set of people and firms involved in the transfer of title to a product as the product moves from producer to ultimate consumer or business users.
The above statement can be explained by highlighting the various functions performed by distribution channels in this regard:
(i) Procurement and sorting – They procure the supplies of merchandise from a number of sources and sort them on the basis of different qualities, nature or size. For example -wholesaler of almonds procures large quantities of almonds from different sources and sorts them on the basis of size or quality and packs them accordingly.
(ii) Maintains flow – They maintain the continuous flow of supply of goods by accumulating them in large numbers.
(iii) Repacking in convenient lots – They repack the bulk quantity of goods purchased by them in convenient small packs of 1 kg, 2 kg, 5 kg.
(iv) Assortment – They take up the work of assorting the goods to make them into a kit or package. For example – a bookseller sells a complete set of books to school children in a kit comprising books, notebooks, stationary items, project files, art and craft files, folders, crayons, etc.
(v) Risk taking – They also assume a risk on account of price and demand fluctuations.
(vi) Promotion – They carry out promotion of goods by doing window displays, demonstrations, etc.
The Middleman are doing nothing but Simply Robbing the Customers:
Channels of distribution are hired to perform the function of transferring goods from the place of manufacture to the place of consumption. These functions are not performed free of cost and this additional cost is borne by the customers. But there is a severe criticism that charges made by the middlemen are more than what is due to them. Hence the statement.
Thus gradually there is a feeling to do away with middlemen and bring the producers and consumers in direct touch, which will benefit both because of the following reasons:
(i) Wholesalers do not take interest in increasing sales inspite of large incentives given to them.
(ii) Most of the middlemen do not actually perform the marketing functions such as storing, transportation etc. They simply help in changing the ownership without shouldering any responsibility.
(iii) The present manufacturer is desirous of establishing closer contacts with the consumers.
If a manufacturer wants to use a distribution channel then he has three ways of doing it:
(i) Distribution through an agency that stands between the manufacturer and the wholesaler. Usually the manufacturer uses this channel when he cannot afford to have a sales force of his own. Herein, the channel, i.e., the distributor has brokers, agents, commission merchants and export merchants etc.
(ii) Selling to wholesalers, who will sell to retailer – This channel is referred to as “Traditional Channel”. Wholesaler performs different functions like bulk purchasing, receiving, storing, selling in smaller quantities to large number of retailers.
(iii) Selling direct to retailers – This is a short trade channel working on the idea of removing wholesalers and brokers from the middle of the chain. It is gaining more attention in recent times after the formation of so many super markets, departmental stores like Big Bazar etc.
This channel is adopted where:
i. The manufacturer has enough financial resources to take up marketing functions;
ii. There is large scale production;
iii. The product is normally bought by the customers in large quantities;
iv. There is a full line of goods; and
v. The demand of the goods is constant.