Distribution channel can be defined as the passage of goods or services from the producers or providers to the target customers through a plethora of modes or channels.
In other words, flow of goods from producers to consumers is called the channels of distribution. The distribution channel is the movement of goods and services, between the point of production and the point of consumption through organization that performs a variety of marketing activities.
The major participants in the distribution channel are; producers, intermediaries and consumers. The distribution channel increases cost to the company, but it also plays a huge and important role in making the company’s products available in the areas where they can be bought by the customers very fast.
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1. Introduction to Distribution Channels 2. Meaning of Distribution Channel 3. Types 4. Functions 5. Factors Affecting 6. Distribution Channel Design 7. Distribution Channel Management
8. Systems 9. Common Routes 10. Channel Members and Levels 11. Choice of Distribution Channel 12. Decisions 13. Selection of Distribution Channel 14. Problems 15. Market Coverage 16. Rural Distribution Channel.
Distribution Channels: Meaning, Types, Functions, Factors Influencing, Design, Decision, Selection and Problems
Contents:
- Introduction to Distribution Channels
- Meaning of Distribution Channel
- Types of Distribution Channels
- Functions of Distribution Channel
- Factors Affecting Choice of Channels
- Distribution Channel Design
- Distribution Channel Management
- Systems of Distribution Channel
- Common Routes in Distribution Channel
- Channel Members and Levels
- Choice of Distribution Channel
- Decisions of Distribution Channel
- Selection of Distribution Channel
- Problems of Distribution Channel
- Market Coverage of Distribution Channel
- Rural Distribution Channels
Distribution Channels – Introduction
For any manufacturing organization, the success of its product in the marketplace depends on how well it is made available to its final consumers. Distribution channels play a very important role in this activity. The channel partners are also called intermediaries, because of the role they play to bring the company closer to its customers. The company must establish strong distribution channel to make the products or services available to its customers and to forge stronger relationships with them.
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The distribution channel increases cost to the company, but it also plays a huge and important role in making the company’s products available in the areas where they can be bought by the customers very fast. In the absence of an appropriate distribution channel, all the promotion efforts (e.g. advertising, telemarketing etc.) will fail, because the demand generated by such efforts will not be fulfilled if our products are not made available in the market.
In case of services also, the distribution channel networks play a very crucial part. (E.g. telecom, insurance, mutual funds etc.). To build strong relationships with its customers, the company must also pay attention to build equally stronger relationship with its channel partners. A weak channel can’t build or support a strong customer base. These channel partners help the company in the execution of many marketing initiatives locally.
Along with supporting the company with enhanced customers contact and service, distribution channel also can provide very valuable market information about the trends in the industry, consumer preferences and competition activities. This information can be very useful to the company in shaping its own marketing strategy and tactics.
If a company sells through its distribution channel, the company’s sales organization must be aligned to support the channel. These distributors or dealers may be exclusive channel partners of our products or they may be distributing other competitors’ products as well. Both require different type of handling.
Distribution Channels – Definition by Eminent Authors: Philip Kotler, Mc Carthy, Stern and El Ansary, Morris and Sirgy and a Few Others
Channel of Distribution refers to the chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. A distribution channel can include wholesalers, retailers, distributors and even the internet.
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According to Philip Kotler – “Every producer seeks to link together the set of marketing intermediaries is called the marketing Channel also Trade Channel or Channel of Distribution”.
According to Mc Carthy – “Any sequence of institution from the producer to the consumer including one or any number of middlemen is called Channel of Distribution”.
Distribution channels have been defined in different ways by different authors. The most popular definition is given by Stern and El Ansary (1992), according to them ‘distribution channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption.’ If the process of ‘exchange’ is the essence of marketing, then channels, by facilitating the process of exchange, perform a critical role in the overall marketing function.
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Several authors have given fairly insightful definitions to explain the existence of a distribution channel. Pitt et al (1999) argue that intermediaries essentially exist to perform three functions- (i) to adjust the discrepancy of assortment through the process of sorting, accumulation, allocation, and assorting; (ii) to minimize the distribution costs through routinizing and standardizing transactions, which makes the exchange more efficient and effective; and (iii) the intermediaries facilitate the searching process of both buyers and sellers by structuring the information network essential to both the parties, as well as providing a place and opportunity for both parties to meet each other, and reduce uncertainty.
Another set of researchers gives other reasons regarding the emergence of distribution channels. Rubinstein and Wolinsky (1987), for instance, attribute the emergence of distribution channels to the need for facilitating exchanges by speeding up the time-consuming matching process between buyers and sellers.
Biglaiser (1994), on the other hand, traces the emergence of middlemen to two reasons- (i) since they buy more goods than a normal buyer, they have a higher incentive to invest in skills that enable them to detect the true quality of a good; (ii) because they are in the market for a longer time they may place a higher value on maintaining reputation and thus, be more likely to report the true quality of a good. The second explanation gives undue weightage to the intermediaries’ ability to signal quality to the customers.
According to Morris and Sirgy (1985), the channel members alter their functions and adjust their organizations and programmes to cope with the changing environment. Therefore, the evolution of a channel system is an ongoing adaptation of organizations to economic, technological, and socio-political forces both within the channel and in the external environment.
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From the point of view of making available products and services, the existence of intermediaries between the products and the ultimate end-users is inevitable. This inevitability is primarily due to the fact that producers can exploit the economies of scale only if they produce in bulk, which in turn results in the production function getting concentrated in a single location.
However, consumers can consume products or services only in small quantities and are too dispersed. Wore Alderson, one of the earlier writers on channel management justified the existence of intermediaries between the producer and the consumer in terms of four logically related steps.
They are:
(a) Intermediaries exist in the process of exchange because they can improve the efficiency of the process.
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(b) Channel intermediaries arise to adjust the discrepancy of assortment through the performance of the sorting process.
(c) Marketing intermediaries hang together in channel arrangements to provide for the routinization of transactions.
(d) Channels facilitate the searching process.
The economic efficiency rationale for the existence of intermediaries is based on the unsustainably large number of interactions that any producer will have to maintain with the large number of customers in the absence of an intermediary. Such interactions are not only considered to be unsustainable, but are also believed to create inefficiency in the transaction process.
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Intermediaries reduce the complexities of the exchange system, thereby facilitating efficient transactions. The second argument in favour of intermediaries is borne out of the discrepancy which exists between the assortment of goods and services generated for the consumers. The discrepancy results from the fact that manufacturers typically produce a large quantity of only a limited variety of goods, whereas consumers usually desire only a limited quantity of a wide variety of goods.
Therefore, intermediaries are required to smoothen the flow of goods and services by engaging themselves in the sorting function. The sorting function performed by the intermediaries includes – (i) breaking down a heterogeneous supply into separate stocks that are relatively homogeneous called ‘sorting out’; (ii) bringing similar stocks from a number of sources together into a larger homogeneous supply called ‘accumulation’; (iii) breaking a homogeneous supply into smaller and smaller lots called ‘allocation’; and (iv) building up of an assortment of products for resale in association with each other called ‘assorting’.
Further, each transaction involves ordering, valuation of, and paying for goods and services. The buyer and seller must agree to the amount, mode, and timing of the payment. The cost of distribution can be minimized if the transactions are routinized; otherwise every transaction is subject to bargaining, leading to loss of efficiency. This is the rationale behind the third argument.
The fourth justification is based on the need for facilitating the search process. According to Alderson (1965), in any market, the producers are constancy in search of the customers who could buy their products, and the customers in turn are constancy searching for the products or services which could satisfy their needs and wants. Intermediaries are necessary to shorten the searching process by linking the customers to the producers.
Distribution Channels – 4 Major Types: Zero Level, One Level, Two Level and Three Level Distribution Channel
Channels of distribution can be classified under direct and indirect channels of distribution. Direct channel refers to direct distribution system in which products/ services are delivered directly to the consumer without using intermediaries while indirect channels use intermediaries to deliver the products/services.
Direct and indirect channels of distributions can be further categorised as follows:
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1. Zero-Level Channel:
Zero-level channel is the most direct, shortest, cost-effective and simplest channel wherein products/services are directly sold by the producers to their respective customers without involvement of intermediaries i.e., wholesalers and retailers. Produces have full control over the distribution process and can sell these products by door-to-door sales, direct mail or through their own retail stores (physical and /or online).
2. One-Level Channel:
This distribution channel involves only one intermediary i.e., retailer. A producer sells their products / services through big retailers who in turn sell it to the final or end-consumer. This channel reduces the cost of selling goods to the end customer and is often suited for distribution of consumer durables and high-valued products.
3. Two-Level Channel:
This distribution channel involves two intermediaries i.e., wholesaler and retailer. As the most commonly used and traditional distribution process, this channel involves a wholesaler who purchases products from the producer and sells it to the retailers. The retailers sell the product (possibly along with many other products) to the final or end-consumer.
4. Three-Level Channel:
The three-level channel involves three intermediaries i.e., agent, wholesaler and retailer. A producer who would prefer to offload the cost of distribution sells his products to selling agents. These agents distribute the product among few wholesalers and each of them distributes the products across many retailers reaching out to many end-consumers. This channel is suitable for wider distribution of various industrial and agricultural produce.
Distribution Channels – 7 Important Functions: Sorting, Accumulation, Assorting, Allocation, Promotion, Negotiation and Risk Taking
Distribution channels have various significant functions that affect the workings of the producers of products / services.
These functions are discussed as follows:
Function # 1. Sorting:
Distribution channels can sort out large heterogeneous products produced by businesses into smaller and manageable homogenous units (i.e., according to quality, size and price). They aim at ensuring that varieties of products produced in large amounts are eventually converted into products / services consumed by their customers at targeted markets across different locations.
Function # 2. Accumulation:
Accumulation is a significant function of distribution channels which involves recognising changes in demand for products/services across several markets. Accordingly, these channels accumulate inventories and/or unsold products to maintain quality and price stability in the market.
Function # 3. Assorting:
Distributors also assort various products by collecting different products in small volumes for retail distribution. Assorting by distributors directly caters to customers wants for variety of products but in small volume. For example, shampoos, toothpaste, soaps, detergents, etc., are produced in bulk but assorted in retail shops in small volumes for customers.
Function # 4. Allocation/Packing:
The assorted products are again allocated into smaller packages and distributed to customers across different regions depending upon the demand for the assorted products.
Function # 5. Promotion:
As they have an advantage of being in proximity to the demand and supply forces of the market they can strategically contact and promote the products to the end-customers. Depending on the product, distribution channels can promote through special displays, sale or discount prices, inclusion in advertisements on television, Internet, etc.
Function # 6. Negotiation:
Negotiation among distribution channels is a unique way of maintaining relationships between vendors, distributors and producers. Relationships are maintained by mutually acceptable rules on pricing (tariffs), delivery time and methods, payment methods and schedules to avoid conflicts and maintain cost-effective costs of distribution.
Function # 7. Risk Taking:
Distribution channels undertake risks by making advance payments to producers for products that have not been sold to customers. They undertake risks associated with possible damage during transportation, assortment, packaging, possibility of low demand, shortages in supply, etc. for products.
Distribution Channels – Factors: Product Related, Company Related, Competitive, Market Related and Environmental Factors
The possible channels of distribution can include one or a combination of railways, roadways, airways and / or waterways. Factors affecting choice of channels include :
1. Product-Related Factors:
Product-related factors for selecting choice of channels are associated with the characteristics of product like durability, tangibility, use or utility, etc.
Some considerations are discussed below:
(a) Value of the product – A highly expensive products like premium watches, gold jewellery, etc., will use a small distribution channel, while relative inexpensive products like readymade garments, soaps, etc. may use a longer distribution channel.
(b) Standardised or customised product – Standardised products have uniform characteristics and can be produced in bulk, and can require a long distribution channel. Customised products are custom-made as per customer needs and will require a direct-sales approach channel than standardised products.
(c) Perishability – Perishability in marketing is related to products which can be easily stored for distribution at any time frame. Fruits and vegetables are highly perishable and usually have a short distribution channel while durables like FMCG goods (shampoos, soaps, body deodorants, etc.) have a longer distribution channel.
(d) Technical nature – Products that are technical in nature and bulkier than most consumer durables would require a distribution channel that is closer to the customers. For example, refrigerators, automobiles, etc.
2. Company-Related Factors:
Company-related factors are related to the internal environment in which a business operates:
(a) Goodwill – A business that experiences a good reputation will not necessarily involve middlemen.
(b) Controlling distribution – Businesses that control distribution either to control costs, quality or pricing products do not rely on middlemen.
(c) Financial strength – Businesses with strong financial base can develop their own channels of distribution. However, businesses with weaker financial base usually rely on middle-men.
3. Competitive Factors:
The nature and extent of competition also determines the choice of channels. Producers may either imitate their competitors and use middlemen or rely on direct-sales to show a competitive edge over their competitors.
4. Market-Related Factors:
Market-related factors are associated with the characteristics of the relevant target customers.
(a) Number of buyers – Markets with large number of buyers will require the involvement of intermediaries to reach out to all the customers.
(b) Types of buyers – If there are more buyers to purchase goods that are widely available items then middlemen can get involved. However, buyers purchased specialised goods like industrial products or premium products then direct- customer trading is a convenient option.
(c) Buying quantity – Products which are purchased in smaller quantities require the involvement of middlemen.
(d) Size of the market – If the market area is scattered across regions, then the producers should consider middlemen for distribution.
5. Environmental Factors:
Environmental factors are associated with the surrounding external environment in which a business operates.
(a) Economic conditions – Economic conditions which reflect stability like low inflation, higher incomes, etc. can lead producers to have longer distribution channels. During economic slowdowns like higher inflation, high interest rates, etc. the length of distribution channels can be reduced.
(b) Legal restrictions – Legislative restrictions can determine the choice and extent of distributions channels for producers. For example, the Monopolies Restrictive Trade Practice (MRTP) Act restricts businesses from monopoly in supply and distribution of products or controlling production and prices of distribution.
(c) Competitors’ channels – Businesses prefer to imitate their competitors’ approach of distribution to avoid risks of higher costs of distribution.
(d) Fiscal structure – Fiscal structure of a country reflects the structure of taxes and the overall financial size of the government that can possibly fuel economic growth. Fiscal structures across states may vary and accordingly affect the costs of distribution.
Distribution Channels – Design: Analyzing Customer Needs, Establishing Channel Objectives, Identifying Major Channel Alternatives, Evaluating Major Channel Alternatives
A new firm typically starts as a local operation on selling in a limited market, using existing intermediaries. The number of intermediaries in any local market is apt to be limited- a few manufacturers’ sales agents, a few wholesalers, several established retailers, a few trucking companies, and few warehouses.
In smaller markets, the firm might sell directly to the retailers; in larger markets, it might sell through distributors. In rural areas, it might work with general-goods merchants; in urban areas, with limited-line merchants. In short, the channel system evolves in response to local opportunities and conditions.
In managing intermediaries, the firm must decide how much effort to devote to push versus pull marketing. A push strategy involves the manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end users.
Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item and product benefits. A pull strategy involves the manufacturer using advertising and promotion to induce customers to ask intermediaries for the product, thus inducing the intermediaries to order it.
Designing a channel system involves four steps:
1. Analyzing customer needs
2. Establishing channel objectives
3. Identifying major channel alternatives
4. Evaluating major channel alternatives.
These decisions regarding channels are important due to the following reasons:
(i) Distribution Channel is an important element in marketing mix of a firm. Other elements in marketing are interdependent and interrelated with the decision of channels of distribution.
The choices of channel affect the pricing, physical distribution and promotion decisions to a considerable extent. A mistake in the selection of the channels of distribution may upset the whole market mix.
(ii) Cost involved in the use of distribution channel enters the price of the product that is ultimately to be paid by the consumers. If the cost is high the sales will be adversely affected.
Thus, if decision regarding the channel is wrong, the cost of distribution will be high and the sales of the product might be limited. On the other hand a sound channel decision will reduce the cost of distribution and ultimately the price of the product. It will maximize sales.
(iii) A product or service is really useful only when it is available to end users at the right time and right place. The channel decision determines where and when the product will be available to the consumers.
(iv) The channel decision involves long term commitment of the firm. The relations between manufacturer and the middlemen depend largely upon the choice of channel of distribution changes in channel are not easy.
The right choice of channels of distribution will reduce the fluctuations in the production due to continuous and effective distribution. The stability in demand and supply will ensure steady employment and proper budgetary control. The manufacturer can continuously monitor the sales and stock position of his middlemen to exercise effective control over distribution network.
In this way, channel decision is very important in maximizing sales and profits. The decision is also important from consumer’s point of view as they can get the required goods at proper time and place, in the right quantity at a reasonable price.
So, the producer should be very cautious in selecting the channels of distribution for his products because any change in the channel will be very difficult and costly.
Distribution Channels – Decisions on the Part of Supplier: Channel Membership, Channel Motivation, Monitoring and Managing Channels and Multichannel Systems
The channel decision is very important. In theory at least, there is a form of trade-off – the cost of using intermediaries to achieve wider distribution is supposedly lower. Indeed, most consumer goods manufacturers could never justify the cost of selling direct to their consumers, except by mail order. In practice, if the producer is a big ship, the use of intermediaries (particularly at the agent and wholesaler level) can sometimes cost more than going direct.
Many of the theoretical arguments about channels, therefore, revolve around cost. On the other hand, most of the practical decisions are concerned with control of the consumer. The small company has no alternative but to use intermediaries, often several layers of them, but large companies ‘do’ have the choice.
However, many suppliers seem to assume that once their product has been sold into the channel, into the beginning of the distribution chain, their job is over. Yet that distribution chain is merely assuming a part of the supplier’s responsibility; and, if he has any aspirations to be market-oriented, his job should really be extended to managing, albeit very indirectly, all the processes involved in that chain, until the product or service arrives with the end-user.
This may involve a number of decisions on the part of the supplier:
(1) Channel Membership:
(i) Intensive Distribution – Where the majority of resellers stock the ‘product’ (with convenience products, for example, and particularly the brand leaders in consumer goods markets) price competition may be evident. It involves placing the service with as many different agents or third parties as possible. Credit card companies such as VISA, Mastercard, Discover, and American Express use intensive distribution in terms of consumption. Many retail outlets honour all four major credit cards.
(ii) Selective Distribution – This is the normal pattern (in both consumer and industrial markets) where ‘suitable’ resellers stock the product. It involves the use of a few intermediaries but not all who would like to carry the brand. Some insurance companies will sell their services through independent insurance agents. Aetna and Fairland are two companies which use independent insurance agents. Both are selective in their process of choosing agents. Using this strategy reduces costs for Aetna and Fairland and allows their services to be offered by more agents than if they choose an exclusive distribution strategy.
(iii) Exclusive Distribution – The third option is exclusive distribution strategy. Only specially selected resellers or authorized dealers (typically only one per geographical area) are allowed to sell the ‘product’.
(2) Channel Motivation:
It is difficult enough to motivate direct employees to provide the necessary sales and service support. Motivating the owners and employees of the independent organizations in a distribution chain requires even greater effort. There are many devices for achieving such motivation.
Perhaps the most usual is ‘incentive’ – the supplier offers a better margin to tempt the owners in the channel to push the product rather than its competitors; or a competition in form of (reward) is offered to the distributors’ sales personnel, so that they are tempted to push the product.
At the other end of the spectrum is the almost symbiotic relationship that the all too rare supplier in the computer field develops with its agents; where the agent’s personnel, support as well as sales, are trained to almost the same standard as the supplier’s own staff.
(3) Monitoring and Managing Channels:
In much the same way that the organization’s own sales and distribution activities need to be monitored and managed, so will those of the distribution chain.
In practice, many organizations use a mix of different channels; in particular, they may complement a direct sales force, calling on the larger accounts, with agents, covering the smaller customers and prospects.
(4) Multichannel Systems:
One of the most dramatic trends in the shopping environment has been the proliferation of channels through which customers can interact with firms. The Internet, Kiosks, ATMs, call centres, direct marketing, home shopping networks, and catalogues, as well as bricks- and-mortar stores, are now commonplace means by which consumers do shopping. This proliferation has created a challenge for firms to manage this environment effectively and opportunities for academics to produce insights that can help address these challenges.
To increase the sales coverage, some service companies use telemarketing firms. This strategy allows the firm to reach more potential customers. Telemarketers are trained in telephone sales techniques and they usually obtain better results than company representatives.
“Multichannel marketing” can refer either to distribution or to advertising—or both. A multichannel marketer may be a supplier that uses more than one means to distribute its products and complete sales transactions (both wholesale and retail, for instance; or, via stores, catalogues, call centres and e-commerce sites). Or the term can refer to a supplier that advertises and promotes a product via more than one media channel (TV, radio, print, internet), regardless of whether customers actually can buy the item by one means or several. On the distribution side, the advent of e-commerce has opened an enormous new channel for direct sales. Multichannel marketing has to do with reaching customers wherever they may be, and allowing them to buy from you in any way they like.
Distribution Channels – Systems
By convention channel of distribution included only merchant middlemen, agents and brokers. Facilitating agencies such as banks, common carriers, advertising agencies, warehousing companies were excluded from the channel concept as these would not take title to or negotiate the purchase and sale of products.
Under the systems approach the channel is now recognised as a system involving flow of:
1. Information,
2. Marketing communications (promotion),
3. Materials,
4. Manpower,
5. Capital equipment and money.
It is no longer merely a collection of independent business establishments.
It is a system of flows:
1. Flow of goods and people,
2. Flow of ownership and risk of loss,
3. Flow of information,
4. Flow of promotion, ordering payment and financing,
5. Flow of negotiation and transaction.
Ownership, possession and promotion move forward. Ordering and payment move from consumers backward. Risk of loss, negotiating activity and information move forward as well as backward.
Distribution Channels – Common Routes: Manufacturer-Consumer-Channel, Manufacturer-Retailer-Ultimate Consumer and a Few Others
The most common routes used for bringing the products in the market from producer to consumer are as follows:
1. Manufacturer-Consumer-Channel (Direct Sale):
There are three alternatives in direct sale to consumers:
(a) Sale through advertising and direct methods (mail order selling),
(b) Sale through travelling sales force (house to house canvassing),
(c) Sale through retail shops of manufacturer, e.g., mills cloth shops, Bata Shoe Company Shops.
This is a shortest channel a product can follow to the market. Business goods may be sold directly to business buyers. Usually we have numerous and scattered consumers who buy in very small quantities. Hence, this channel is not popular for a wider market.
2. Manufacturer-Retailer-Ultimate Consumer:
This channel option is preferable when buyers are large retailers, e.g., a department store, discount house, chain stores, supermarket, big mail order house or co-operative stores. The wholesaler can be by-passed in this trade route. It is also suitable when products are perishable and speed in distribution is essential.
Automobiles, appliances, men’s and women’s clothing, shoes are sold directly to retailers. However, the manufacturer has to perform functions of a wholesaler such as storage, insurance, financing of inventories, and transport.
3. Manufacturer-Wholesaler-Retailer-Consumer:
This is a normal, regular and popular channel option used in groceries, drugs, drug goods, etc. It s suitable for a producer under the given conditions – (a) He has a narrow
product line, (b) He has limited finance, (c) Wholesalers are specialised and can provide strong promotional support, (d) Products are durable and not subject to physical deterioration or fashion changes.
The best means of transport and communications, growth of big retailers, computer handling of small innumerable orders of retailers, advances in automatic data processing, information explosion, etc., may reduce the need and importance of wholesalers in future.
4. Manufacturer-Agent-Wholesaler-Retailer-Consumer:
In this channel the producer uses the service of an agent middleman such as a sole selling agent, for the initial dispersion of goods. The agent in turn may distribute to wholesalers, who in turn sell to retailers. Many textile mills have sole agents for distribution.
We may have a large national distributor such as Voltas, acting as sole sales agent for many manufacturers. Agent middlemen generally operate at the wholesale level. They are common in agricultural marketing.
In marketing manufactured goods, agent middlemen are used by manufacturers to make themselves free from marketing tasks. An agent middleman sells on commission basis directly to wholesaler or large retailer.
5. Manufacturer-Wholesalers-Consumer/User:
Wholesaler may by-pass retailer when there are large and institutional buyers, e.g., business buyers, government, consumer co-operatives, hospitals, educational institutions, business houses.
Distribution Channels – Channel Members and Levels
Distribution channels include retailers, wholesalers, and agents, or direct distribution via a sales force or mail order. Channels are not restricted to physical products; they may be just as important for moving a service from the producer to the consumer. Hotels, for example, may sell their services directly or through travel agents, tour operators, airlines, or centralized reservation systems.
Distribution channels have a number of levels. The simplest is the zero-level channel, in which the contact between the manufacturer and the end user is direct and no intermediaries are involved. Traditionally, this type of channel is most frequently encountered in an industrial or business-to-business setting where few customers acquire big-ticket items. For consumer goods, channels typically have two levels, leading from producer to wholesaler and retailers.
At the extreme end of the spectrum are the very elaborate distribution systems in Japan, with many levels of channels even for the simplest of consumer goods. Such differences in channels are typically the result of tradition, geography, culture, and consumer purchasing patterns.
For example, during the feudal period of Japan, the country consisted of many small provinces that were largely self-contained. As a result, each province developed its own distribution system. Because Japan consisted of about 500 regions, many manufacturers needed to develop wholesalers for each territory, some of which survive today.
In recent years the channel picture has been complicated by rapid changes driven by technological capabilities and the emergence of new power structures. The traditional channels of distribution have become scrambled. Some distribution processes, so essential when information and quality control were poor, are being bypassed and eventually eliminated.
The increasing ubiquitousness of Internet Web sites is promising to significantly alter the way large parts of our distribution system are managed. Internet merchants like Amazon(dot)com are engaging in head-to-head battles with conventional retailers and seem to be gaining in advantage. They are unencumbered by the overhead of physical stores, have larger trading areas, carry less inventory, work closely with producers, and can offer an almost unlimited selection of merchandise.
Internet merchants are also increasingly sophisticated in leveraging customer information. As a result, products and promotions can be targeted much more efficiently than through conventional media. In many ways, the Internet empowers firms, often through automation, to regain the one-on-one relationship with their customer, without having to bear prohibitive cost.
In addition, Internet merchants can offer the benefits of speed, which increasingly differentiate firms. As stated by Larry Carter, chief financial officer of Cisco Systems, a company that sells most of the routers that power the Internet, “It’s no longer about the big beating the small, it’s about the fast beating the slow.”
Both in industrial as well as in consumer marketing, electronic business is accepted with great speed in the United States, but it is also growing rapidly internationally.
Distribution Channels – Choice of Distribution Channel
Channel of distribution is the route taken by the ownership right to the goods as the goods move from the primary producer to the ultimate consumer in the process of marketing.
Distribution channel represents a chain of middlemen (merchants and agents) participating in the distribution of goods, i.e., in the flow or movement of goods in the process of marketing. The route or channel includes both the manufacturer or primary producer and the ultimate consumer as well as all middlemen in distribution such as merchants, mercantile agents, banks, transport agencies, insurance companies, advertising agencies, warehousing companies and so on. All channel members are interrelated and form the total distribution system.
Marketing institutions in the machinery of distribution perform five important marketing functions:
1. Contacting or searching out of buyers and sellers,
2. Merchandising or matching goods to the market demands,
3. Creating demand or persuading and influencing the prospective buyers to favour a certain product and its sponsor (promotion),
4. Pricing the product or service in such a manner that it is acceptable to the buyers and it can ensure effective distribution, and
5. Physical distribution or transport and warehousing of goods at each stage in the process of distribution (physical distribution).
Please note that each of the aforesaid marketing function is expected to facilitate the process of exchange.
Sub-Divisions of Distribution System:
Distribution system has two subdivisions:
1. Channels of distribution.
2. Physical distribution.
The channel members such as mercantile agents, wholesalers and retailers are middlemen in distribution and they perform all marketing functions. Such middlemen are specialised in one or a few marketing functions.
These middlemen facilitate the process of exchange and create time, place and possession utilities through matching and sorting process. Sorting enables meeting or matching the supply with consumer demand.
Physical distribution looks after physical handling of goods, and assures maximum customer service. It aims at offering delivery of right goods at the right time and place to customers.
Physical distribution activities cover:
1. Order processing,
2. Handling of goods,
3. Packaging,
4. Warehousing,
5. Transportation,
6. Inventory control, and
7. Customer service.
All middlemen in distribution perform these functions, and they assure putting the product within an arms length of customer desire and demand.
Distribution Channels – Decisions: Channel Route, Method of Distribution and Middlemen Selection
In the marketing process, a manufacturer or producer has to make three decisions:
1. Channel Route:
It deals with selection of the general channel or route to be used for sale.
2. Method of Distribution:
It deals with extensive or intensive distribution involving numerous outlets, selective distribution involving a few outlets, and exclusive distribution have only one outlet of sale.
3. Middlemen Selection:
Manufacturer will have to make actual selection of a particular middleman at each level of distribution i.e., authorised wholesale and retail dealers.
Under the systems approach the channel is now recognised as a system involving flow of- 1. information, 2. marketing communications (promotion), 3. Materials, 4. Manpower, 5. Capital equipment, and money. It is no longer merely a collection of independent business establishments.
It is a system of flows- 1. flow of goods and people, 2. flows of ownership and risk of loss, 3. flow of information, 4. flows of promotion, ordering, payment and financing, 5. flow of negotiation and transaction. Ownership, possession and promotion move forward. Ordering and payment move from consumers backward. Risk of loss, negotiating activity and information move forward as well as backward.
Distribution Channels – Selection
The problem of selecting the most suitable channel of distribution for a product is complex. The most fundamental factor for channel choice and channel management is economic criteria, viz., cost and profit criteria. Profit organisations are primarily interested in cost minimisation in distribution and assurance of reasonable profit margin.
However, channel decisions are not made entirely on the basis of rational economic analysis. We have to consider a number of factors such as the nature of the product, market trends, competition outlook, pricing policies, typical consumer needs, as well as needs of the manufacturer himself.
The following are other critical factors:
1. Product:
(a) If a commodity is perishable or fragile, a producer prefers few and controlled levels of distribution. For perishable goods speedy movement needs shorter channel or route of distribution (b) For durable and standardised goods longer and diversified channel may be necessary, (c) For custom made product direct distribution to consumer or industrial user may be desirable,
(d) Systems approach needs package deal and shorter- channel serves the purpose, (e) For technical product requiring specialised selling and serving talents, we have the shortest channel (f) Products of high unit value are sold directly by travelling sales- force and not through middleman.
2. Market:
(a) For consumer market, retailer is essential, whereas in industrial market we can eliminate retailer, (b) If the market size is large, we have many channels, whereas in a small market direct selling may be profitable, (c) For highly concentrated markets, direct selling is enough but for widely scattered and diffused markets, we must have many channels, (d) Size and average frequency of customer’s orders also influence the channel decision. In the sale of food products, we need both wholesaler and retailer.
Market means people with money and willing to purchase want-satisfying goods. Age, income group, sex, vocation, religion of customers will have to be studied to secure adequate information of market segments or target markets. Buying habits of customers and dealers will also influence our channel choice.
Consumer and dealer analysis will give us data on the number, type, location, buying habits of consumers and dealers. Channel choice needs this information. For example, desire for credit, preference for one- stop shopping, demand for personal services, amount of time and effort the customer is willing to spend—all are important factors in channel choice.
If ultimate buyers are numerous, the order is small, order frequency is great and buyers insist on the right to choose from a wide variety of brands/goods, we must have three or even more levels of distribution. Market considerations also govern mass distribution (through multiple channels) or selective/exclusive distribution through few or even one dealer. When service after sale is required, e.g., TV Sets, Refrigerators, etc., selective distribution is profitable.
3. Middlemen:
(a) Middlemen who can provide wanted marketing services will be given first preference. Of Course, they must be available. (b) The selected middlemen must offer maximum co-operation particularly in promotional services. They must accept marketing policies and programmes of the manufacturers and actively help them in their implementation, (c) The channel generating the largest sales volume at lower unit cost will be given top priority. This will minimise distribution cost.
4. Company:
(a) The company’s size determines the size of the market, the size of its larger accounts and its ability to get middlemen’s co-operation. A big firm may have shorter channel, (b) The company’s product mix influences the pattern of channels. The broader the product line, the shorter will be the channel. If the product mix has greater depth or specialisation, the company can favour selective or exclusive dealerships,
(c) A company with substantial financial resources need not rely too much on the middlemen and can afford to reduce the levels of distribution. A weaker company has to depend on middlemen to secure financial and warehousing reliefs, (d) New companies rely heavily on middlemen due to lack of experience and ability of management. (e) A company desiring to exercise greater control over channel will prefer a shorter channel as it will facilitate better co-ordination communication and control.
(f) Heavy advertising and sales promotion can motivate middlemen to handle displays and join enthusiastically in the promotion campaign and co-operative publicity. In such cases even a longer chain of distribution can be profitable. Thus, quantity and quality of marketing services provided by the company can influence the channel choice directly.
5. Marketing Environment:
Marketing environment can also influence the channel decision. During recession or depression, shorter and cheaper channel is always preferable. In times of prosperity, we have a wider choice of channel alternatives. Technological inventions also have impact on distribution. The distribution of perishable goods even in distant markets become a reality due to cold storage facilities in transport and warehousing. Hence, this led to expanded role of intermediaries in the distribution of perishable goods.
6. Competitors:
Marketers closely watch the channels used by rivals. Many a time, similar channels may be desirable to bring about distribution of your products also. However, sometimes marketers deliberately avoid customary channels (dominated by rivals) and adopt different channel strategy. For instance, you may by-pass retail store channel (usually used by rivals) and adopt door- to-door sales (where there is no competition).
Distribution Channels – Problems for Channel Design
The first problem of channel design is whether you want direct sale to consumer or indirect sale i.e., sale through middlemen. Under the direct sale the channel problems become problems in company operations as most of the system’s components are parts of the company organisation. If the firm chooses the indirect route, it must consider such problems as the type and number of middlemen and the methods to be employed in motivating and controlling them.
The selection of these middlemen begins with the knowledge of ultimate customers—his needs and desires for distribution services. The number of middlemen employed will be determined by customer conveniences and economies of exclusive distribution. The company must choose whether to attempt extensive, selective or exclusive distribution or combination of all the three types. The decision is made after a careful analysis of product, consumers, dealers, company objectives and policies, and the conflict within the competition and any other relevant factors. The company must resolve channels and bring the product profitably to the market.
Once the company has determined its basic channel design and levels of distribution, it has to select middlemen, appoint them, motivate their efforts, evaluate their utility periodically and, if necessary, it has to reorganize the channels in the light of experience.
Comments:
1. Each channel of distribution is responsible to perform the typical marketing functions assigned to it exclusively.
2. Retailing, wholesaling and physical distribution (transport, storage and inventory control) are treated as separate entities in distribution for purposes of easier understanding. From marketing management viewpoint, the whole process is continuous one and it constitutes the distribution system in which the ownership and possession of goods flow to consumers.
3. Locating customers, serving their demand and offering them service and satisfaction are the basic tasks of the manufacturers, wholesalers and retailers who combine to form an integrated channel of distribution. Joint cooperative and united efforts alone will ensure successful distribution.
Distribution Channels – Market Coverage
Once, the company decides the general channels to be used, it has to decide on the number of middlemen in each channel, i.e., intensity of distribution. There are three alternatives.
1. Extensive or Mass Distribution:
We have maximum number of retail outlets for mass distribution of convenience goods as consumers demand immediate satisfaction and that too at the most convenient retail shops. Extensive or broadcast distribution is essential when the price is low, buying is frequent and brand switching is a common phenomenon.
Extensive distribution secures rising sales volume, wider consumer recognition and considerable impulse purchasing. But it creates problem of motivation and control and it may generate unprofitable sales due to higher marketing costs.
2. Selective or Limited Distribution:
When special services are needed, e.g., TV sets or a right prestige image is to be created, e.g., certain cosmetics to be sold only through chemists, we have selective distribution. The number of outlets at each level of distribution is limited in a given geographic area. When we have limited number of middlemen, they can spend more on sales promotion and offer maximum co-operation in the company’s promotion campaign. If the product has long useful life and consumer brand preference can be established, selective distribution will be more profitable.
3. Exclusive Distribution:
When final buyers do not need any product service, mass or extensive distribution is adopted. If the amount of product service expected by final buyers is considerable, exclusive distribution is preferable. Here, we have one wholesaler or one retailer for a given market to handle the right of distribution in that market. Similarly, if your brand has not only brand preference but also brand insistence and consumers refuse to accept substitutes, selective or even exclusive distribution is feasible.
Exclusive distribution creates a sole agency or sole distribution ship in a given market area. Such types of distribution are very useful in the sale of consumer specialty goods, e.g., expensive men’s suits. Exclusive distribution privileges offer tremendous loyalty of dealers and substantial sales support from dealers. However, the main sacrifice involved is the rising sales volume that might be obtained through wider or extensive distribution. The manufacturer can have greater control over prices and markets and he can get maximum Co-operation from middlemen. Exclusive dealer can carry complete stock and offer after-sale-service to the buyers of products-
Legal Aspects of Exclusive Distribution:
There are three major aspects of exclusive distribution:
(i) Exclusive dealing contracts- They prohibit the dealer from selling products of rivals.
(ii) Tying contracts- They compel the dealer to carry full line of a manufacturer.
(iii) Closed sales territory- It limits each dealer to sell only to buyers located within the assigned area.
An exclusive dealing contract is not illegal in all situations. It is not allowed to a monopolist. For a new and small manufacturer, it is permitted. If there is no compulsory limitation on competitive products, exclusive dealing is legal.
Tying contracts are also legal as long as the dealer is not prohibited from selling competitive goods. However, this agreement cannot be made compulsory. Closed sales territories may be illegal because it is an agreement restricting the right of the dealer. It may tend to create monopoly.
4. Franchise Selling:
Franchise means a privilege or exceptional right granted to a person. Franchise selling is a term to describe in effect selective or exclusive distribution policies. Franchise selling is any contract under which independent retailers or wholesalers are organised to act in close co-operation with each other or with manufacturers to distribute given products or services.
Franchise selling is a system under which a manufacturer grants to certain dealers the right to sell his product or service, in generally defined areas, in exchange for a promise to promote and sell the product in a specific manner. The franchiser provides equipment, the products or services for sale, and also managerial services to franchise.
Under this system, the owner of the product issues a license to independent dealers in certain areas and encourages them to make profit for themselves. The owner retains control over the technique or style with which the goods or services are sold.
The soft-drink manufacturer, e.g., Coca Cola Company licensed bottlers (wholesalers) in various markets who used to buy its concentrate and then carbonate, bottle and sell it to retailers in local markets. By 1974 there were 22 bottling plants franchised to Coca Cola Company in India.
The concentrates were manufactured locally. This American enterprise was required to wind up its business in India recently as it declined to abide by the new regulations under Foreign Exchange Regulation Act, 1974.
Distribution Channels – Major Issues of Rural Distribution Channels with Trends
With more than two thirds of the country living in rural areas, completely ignoring this segment in any distribution effort is no longer a possible option for firms. Agriculture still provides employment to more than 70 per cent of the population and any mass marketing strategy would require bringing these customers into the fold of a firm’s distribution channel.
There are more than 6.3 lakh villages in India and serious problems related to inadequate physical infrastructure and commercial viability pose immense challenges in reaching this segment of customers. Some companies may have to grapple with issues related to rural distribution, but several firms and agencies already have a well-oiled network required to reach rural hinterlands.
The public distribution system which operates ration shops in the rural areas, for instance, operate about 5 lakh ration shops for distribution of essential commodities such as rice, wheat, and kerosene. Most of the fertilizer companies also have fairly well established networks that cover swathes of rural India. Most of these networks have been in the making for decades and had followed a gradual organic growth model.
These networks, though large have been often criticized for inflexibility and inefficiency. Firms which have striven to tap the rural markets in the past decade are therefore not quite interested in those models of distribution. Instead, mass- market firms ITC and Hindustan Unilever are trying innovative methods at expanding the size of the network and achieving penetration of the rural hinterland.
Rural Distribution Channels—Major Issues:
Unlike expansion in urban India, rural areas pose several difficulties. The problems associated with distribution expansion are mostly neutralized by their immense sales growth potential. Most rural areas are yet to be covered by major branded consumer goods firms and often require very little effort tap, once a’ distribution network and the right products are put in place.
Typical problems faced by rural distribution efforts in India are as follows:
While the rural market comprises of almost 800 million customers, most have low spending ability. It is estimated that out of the 1,200 million Indians, hardly 50 million live on more than 5$ a day and more than 80 per cent of the Indian population survive on less than $2 a day.
Such low income customers can only afford products that are priced at the lowest possible point. Since distribution cost is a major component of the cost structure of any product rural distribution requires cost-efficient operations.
A shampoo sachet to be ,sold at to a rural customer can only take into account a cost of distribution of not more than 50 p. Achieving such cost efficiency is difficult, considering the area to be covered. Further, reaching across rural India would require several tiers of distributors and retailers, all of which add to the cost. Tackling this issue requires innovation and out-of-box solutions. ITC’S e-chauplas and HUL’s Shakti programmes can be held as examples.
Rural India faces the problem of infrastructure such as transportation and electricity supply. While there is a definite movement towards increasing the road network, as well as improving availability of electricity, there is more to be covered. The lack of physical infrastructure increases costs of rural distribution.
With greater penetration through mobile telephones and Internet connectivity, some of these problems are being tackled, but more needs to be done for problems related to transportation and storage.
With constraints of cost and availability of physical infrastructure, firms are not in a position to deliver the same level of service outputs as in urban areas. Waiting time is the critical factor in this regard. Due to non-availability of effective storage facilities, especially for perishable commodities, such as chocolate or ice cream, rural distribution can become an impossible task.
Solutions have been found through unconventional, innovative methods, but large-scale adoption of such technologies has not yet been achieved. Another issue is after-sales service. Electronics goods, such as television sets or automobiles (or even tractors), require a reliable network of after-sales service stations, which are relatively difficult to establish in the rural areas. Microsoft’s innovative approach for rural reach through Saksham is an interesting case study.
Based on a franchise model, the project enables small entrepreneurs to establish rural Internet kiosks for servicing, training, and Internet access.
Compared to urban India, there is greater level of diversity in rural areas. Rural India speaks a multiplicity of languages, varied trading practices, customs, festivals, and consumption patterns, even within a 10 km radius. This leads to challenges towards optimizing distribution models and cost cutting for economies of scale.
Different festivals would mean different patterns of consumption for products such as edible oils, sugar, and cloth. Forecasting the demand becomes complex for subsequent stocking and coordination of logistics in such fragmented and diverse markets.
Rural Distribution Channels—Trends:
The size of the market and the gradual growth in rural incomes over the past decades make them attractive. Firms are therefore trying out different models to gain access and develop a sustainable distribution system. Rather than using the public distribution system (PDS) model which involves an inflexible, standardized network design, firms are experimenting with innovative models in both logistics and relationship networks.
An important concern is the need to manage decentralized activities efficiency and effectively. Vast and diverse areas utilize decentralization, but up to a point. Beyond that it becomes unviable due to the difficulty in coordination and control. Hence, most new initiatives involve developing a viable franchise model that can be sustainable.
Franchise models work by tapping into the local knowledge of the village and franchisee’s area without significant loss of control. One of the most successful efforts at rural distribution is project Shakti launched by Hindustan Unilever Limited (HUL).
Another interesting case study is that of mahamaza(dot)com which developed a model similar to that of Hindustan Unilever, but which is more commercially oriented. Mahamaza(dot)com targets both rural areas and underdeveloped urban areas. The mahamaza(dot)com model involves appointing agents in such small localities who scout for orders.
Once these orders are passed on to mahamaza(dot)com, it consolidates the orders, negotiates directly with manufacturers for discount, and passes on a part of the discount to customers.
Present mahamaza(dot)com employs more than 200,000 agents in its network. Agent recruitment is sought after payment of Rs.5000 to mahamaza(com)com. Through this model, mahamaza(dot)com sells products such as bicycles, motorbikes, TVs, and mobile phones. Given the difficulty in reaching far-flung areas, such an aggregation-oriented model has proved successful.
New rural distribution models involve utilizing the reach achieved by self-help groups, nongovernmental organizations (NGOs), or cooperatives. Post offices and bank branches have been tried out as possible means of reaching the vast rural network of customers. However, as economic development reaches rural customers, and physical infrastructure such as roads and electricity connectivity improve, the trend is to implant urban-area based distribution models in rural areas.