34 MARKET DISTRIBUTION CHANNELS

C. Thilakam

epgp books

 

 

 

 

 

 

Learning Objective

 

To understand how products flow to the market through the distribution network.

 

INTRODUCTION

 

The movement of goods and services from the place of producer through middlemen to the ultimate consumer has been thought of as a channelized flow. Marketing channels are the distribution networks. Products flow to the market through the distribution network.

 

A channel of distribution is the process through which the products are transferred from the producers to the ultimate users.

 

According to Richard M. Clewelt, “A Channel is the pipe line through which a product flows on its way to the consumer. The manufacture puts his product into the pipe line or marketing channel and various marketing people move it along to the consumer at the other end of the channel.”

 

IMPORTANCE OF CHANNELS OF DISTRIBUTION

 

The channel of distribution is very important to the producer and the consumer. The consumers are scattered in many places. The producer is situated in one place. There is a big gap between the producer and the consumer. The gap between the producer and the consumer is minimized by the channel of distribution. Hence the channel of distribution is the connecting link between the producer and the consumer to sell the products.

 

The middleman in the channel of distribution will collects the outputs of various products, subdivides the products according to the needs of the consumers and gathers this in the assortment wanted, and disperses the assortment to consumers or industrial buyers.

 

GENERAL FUNCTIONS OF CHANNELS OF DISTRIBUTION

  • To distribute goods and services, with minimum losses
  • To establish market for new product
  • To offer after sale services to consumers
  • To facilitate maximum exposure of goods in the market
  • To establish brand loyalty
  • To maintain competitive advantage to producers
  • To match goods and to the requirements of markets
  • To persuade and influence the prospective buyers
  • To undertake all physical distribution functions
  • To provide feedback information
  • To conduct market research
  • To increase customer confidence
  • To help in sorting processes
  • To care all the flows involved in the distribution

The channel of distribution helps in making products available at the right time in the right place and in the right quantity.

 

TYPES OF CHANNELS OF DISTRIBUTION

 

The two main types of channels of distribution are Non-integrated and Integrated.

 

1. Non-Integrated

 

In Non-Integrated or Conventional Marketing channels there are two types of channels and they are Direct and Indirect channel.

In Direct or short Channel– the company sells the products to consumers directly. There are no intermediaries.

In Indirect channel or long channel the company uses intermediaries to channelize its products to the consumers.

 

2.  Integrated channels are networks in which channel components participate in a co-ordinated manner. Integrated channels may be vertical or horizontal.

 

a.Vertical distribution channels are professionally managed and centrally programmed networks, pre-engineered to achieve operating economies and maximum market impact.

 

There are three types of Vertical integrated marketing channels:

 

i. Administered vertical channel– In administered vertical channels, one of a limited number of firms use developed programmes to achieve the coordination of marketing activities. A manufacturer controls the marketing of a particular line of merchandise.

 

ii. Contractual vertical channel– Independent firms are employed on a voluntary basis to develop a more efficient system on a contractual basis, so as to achieve systematic economies and increased market impact

 

iii. Corporate vertical channel– Under corporate vertical distribution channel, channel components are owned and operated by one organization. The firm own both production and distribution facilities. e.g. Bata, Tata, etc.,

 

b. Horizontal marketing system

 

Horizontal marketing system, also known as symbiotic marketing, occurs when two or more related or unrelated companies are working at the same level come together to exploit marketing opportunities. By coming together they have the option to combine their capital, production capabilities and marketing strengths to gain substantial advantage by each company working alone. This kind of joining forces is viewed as symbiotic relationship and can be between non-competition as well as competitors. For example Auto manufactures have joined hands with finance institutions to finance customers, TVs. Whirlpool and Onida hands to market washing machines etc.,

 

MULTICHANNEL MARKETING SYSTEM

 

Multichannel system, also known as hybrid channel, involves different group of intermediaries. The system is also known as dual distribution, when a company uses two or more channels to distribute same products, use telemarketing to reach medium size customers, direct mail selling to small customers; retailers sell to personal customers, and also use online selling.

 

The companies can gain benefits because of adding more channels by increased market coverage, lower channel cost and more customized selling.

 

The numbers of intermediary levels indicate the ‘length’ of a channel. The channel level is short if there is only one intermediary; and long if there are more levels. The following are the types of alternative channels:

 

1.      Zero – level channel

2.      One – level channel

3.      Two – level channel

4.      Three – level channel

 

1.      Zero – level channel

 

A zero level channel consists of a producer and his customers / consumers. This is also called direct marketing. Here the producer or the manufacturer sells products directly to the consumers. For examples, (a) door to door sales, (b) sale by mail order method, etc. Further, Bata shoes, Titan watches etc. are sold through the manufacturers’ own show-room.

 

2.  One – level channel

 

It consists of one selling intermediary in the distribution.

 

3. Two – level channel

 

It consists of two selling intermediaries in the distribution.

 

4. Three – level channel

 

It consists of three selling intermediaries in the distribution.

 

The different channel choices are

 

A.    Manufacturer-Consumer

 

This is the direct channel. Products are transferred directly to consumers by the manufacturers. It is the shortest and simplest channel.

 

Direct channel is conveniently adopted under the following circumstances.

 

1. Producer of perishable goods aims to avoid physical distribution, but tries to sell directly e.g., bakery products, ice cream, etc.

2. Manufacturers of fashion goods enter into direct sales for quick sales, before the fashion disappears.

3. When the plant is located near the customers, it is easier to sell the products.

4. Direct channel is widely used wherever new products are introduced into the market for aggressive sales.

5. Articles, which are of technical nature and need demonstration, may be marketed directly.

6. When production is in small quantity, a direct sale is employed.

7. Certain articles are sold directly, when the goods belong to special segments of customers.

8. When the manufacture wants to have a close control over the price, the channel is good

9. The manufacturer is able to undertake various functions of marketing, by employing his own sales force or by retail shops. The system is good.

10.  It aims to reach the specific target markets.

 

The drawbacks of this direct channel are:

 

1. It is uneconomical to have a direct contact with the customers, who are countless and scattered all over.

2. It is not possible for a direct contact with the multi-millions of potential customers for the products.

3. Manufacturers, generally, may not have talent of salesmanship.

The following are the methods used by the producers, under the direct channel.

 

(a)    Opening sales counter at manufacturer plant

(b)   Door to door sales

(c)    Sales by mail order method

(d)   Sales by opening own shops.

(e)    Sales through mechanical devices

 

(a) Sales Counter at Manufacturer’s Plant: Manufacturers of non-durable goods generally dispose off their products to customers who call on them; for example, bakery products, ice cream, cool drinks etc.

 

(b) Door to Door Sales: Salesman employed by the manufacturers call at the door of customers. They move from door to door. This system works better when a new product is introduced into the market. To the customers it is easy to conclude a purchase, get personal service of the seller etc.

 

(c) Sales by Mail Order Method: It is a system by which products are sold to customers. The post-office plays a significant role. This system is also known as shopping by post or mail order business or selling by post. It is an impersonal selling, branding, grading, standardizing, packaging etc., facilitating the growth of this system. Customers are approached by sending catalogues, price lists, pamphlets etc., by post. Advertising adds further speed in the selling; for example, books, drugs, watches, toys, small appliances, clothes, seeds, jewellery etc.

 

The mail order system is suitable and profitable, when:

  1. The goods are standardized and graded
  2. The goods are known to the customers
  3. The goods can be advertised precisely
  4. Wide publicity is made
  5. The price is low
  6.  An improved system of post-office
  7. Merchandising is effective
  8.  Goods are capable of being put into immediate use on buying
  9. Goods are not damaged in transit
  10. Goods are non-perishable
  11. Manufacturers have earned a good reputation

Advantages of Mail Order system

 

1.      Business can be housed in any place, by looking at the economy of rent.

2.      Capital requirement is less

3.      The buyer gets home delivery

4.      The market is unlimited

5.      Bad debts can be avoided to a great extent

6.      Consumers get the products without shopping

Disadvantages

 

1.      Buyers cannot inspect or select the goods

2.      Demonstration is not possible

3.      After sales service is not extended

4.      No credit facilities are provided

5.      Generally high prices are charged

6.      Honesty of the seller is questionable

7.      Cheating is common

 

(d)   Sales by Opening Own Shops: It is common that producers of perishable and non-perishable goods sell their products to customers, by opening their own retail shops. It is also common that manufacturers of clothes, footwear, certain electrical equipments etc., can push the goods quickly through retail shops and can offer satisfactory service to customers, thereby building goodwill. It also facilitates the producers to study the market trends, fashion preferred by buyers and style trend of people. This system offers a two way communication and the price is regulated.

 

(e)    Sales through Mechanical Devices: In advanced countries like Germany, the U.S.A., Japan etc., mechanical devices are employed to sell the goods directly to the customers. Commodities like coffee, soft drinks, newspapers, milk etc., are sold by mechanical devices. These devices eliminate sales personnel and economy in space with the help of automatic selling machines; sales are done on cash basis.

 

B.     Manufacture-Retailer-Consumer

 

In the channel there is an intermediary retailer. A manufacturer sells goods to consumers through these retailers. There is a gap between the manufacturer and the consumer. If the buyers are large, this channel is preferable. For perishable articles which need speed in distribution, this channel is suitable. Large retailers are: departmental store, chain store, supermarket, big mail order house, co-operative store etc. manufacturer acts as a wholesaler and performs the function of storage, insurance, financing and transport. Automobile appliances, clothing, shoes are sold directly to retailers. Bata India Ltd. Use this channel. It sells products through the large number of its retail shops. It is established in cities. Under the channel, the wholesalers are by-passed and it is because of growth of many retailing institutions in and around the big cities.

 

To by-pass the wholesalers the following are the reasons:

 

1.      Wholesalers lack interest in aggressive selling

2.      Wholesalers offer poor facility to store the products

3.      They demand higher amount of discount on sales

4.      It shortens the journey time to the consumers

5.      Retailers prefer to have a direct dealing with the producers

6.      They may adopt hand to mouth buying

7.      Wholesalers, in many cases, start their own brands, competing with the manufacturer’s brand.

 

Retailers offer the following services to customers:

 

1.      They supply the goods in small quantities to customers

2.      They stock variety of goods which facilitates proper selections

3.      They anticipate the consumer demand

4.      They guide the consumers in buying

5.      They offer credit facility to customers

6.      Replacement provision is offered.

7.      They create time and place utility

8.      They undertake guarantee over the goods

9.      They act as specialists in selling

10.     They help the producers in display and demonstration

 

Services to Producer and Wholesaler

 

1.  They assist in the efficient distribution of goods

2.  They act as a market researcher

3.Information of likes and dislikes of the customers is passed on to producers and thus changes in production are adjusted

4. Sales promotion is strengthened only with the help of retailers

 

Essential requirements of Retailers

 

1.They must know the market position and the up-to-date trend in the selection. The unsold or unsaleable products and its stocks will be failure to retailing.

2. They must stock those goods which can be sold to customers

3. They must compete in price and quality of goods to be sold

4. They must be financially sound to keep an average stock so as to avoid overstocking or under stocking.

5. They must have good facilities to display the goods

6.The shops must be in places where customers are attracted

7.They must show courtesy, friendliness, honesty etc., towards the customers in their dealings

8. The staff must be polite, and attractive to customers

 

Failure of Retailers

 

1.      Lack of knowledge and experience in work

2.      Limited finance

3.      Competition with others

4.      Fraud in dealings

5.      Lack of business care

6.      Keeping incorrect credit accounts

7.      Dishonesty in retailing

8.      Improper and careless credit system offered

9.      Unattended complaints by buyers

10.  Personal extravagance

 

C.    Manufacturer-Wholesaler-Retailer-Consumer

 

Wholesaler and retailers are the two types of intermediary in this channel. A manufacturer channels his products to consumers through these intermediaries. The gap between the manufacturer and the consumer is widened due to these intermediaries

 

D.    Manufacturer-Agent Middlemen-Wholesaler-Retail-Consumer

 

Agent Middlemen, wholesalers, retailers are the three types of intermediaries in this channel. The gap between the manufacturer and the consumer is very great. In this channel the manufacturer uses the services of the agent middleman (sales agent) for the dispersal of goods. The agent distributes the goods to the wholesaler who sells the goods to retailer and who in turn sells to the consumers.

 

THE CHOICE OF DISTRIBUTION CHANNEL IS AFFECTED BY THE FOLLOWING FACTORS:

 

1.  Market consideration

2.  Product consideration

3.  Company consideration

4.  Middleman consideration

5.  Consumer consideration

 

1. Market consideration

 

a. The nature of the market- Consider whether the products which is meant for consumer or the industrial buyer. If the product is for consumer retailers will be employed. If the product is meant for consumer market and industrial market long channel distribution will be employed

b. The number of potential customers– Middleman service is needed if the number of potential customers is large and on the other hand if small means direct selling is recommended.

c. Geographic Concentration of the market-Direct selling is suggested if the customers are concentrated in few places. If customers are dispersed all over the country large middlemen will be employed and the company will have more number of branches.

d. Order Size– If the sales volume is large direct selling is suitable

e. Customer buying habit-If the consumers’ purchase is impulsive, use indirect channel or if it is deliberate, use direct channel.

 

II.  Product consideration

 

a.Unit sale value of a product-When the unit value of the product is high, direct channel is adopted. When the product value is low, large and cheaper channel will be better. Short and costly channels are used if the product is of high value. e.g. small equipments are sold through agents while industrial installation type products are sold directly.

 

b. Bulk and weight– To minimize the freight, heavy or bulky goods may be sent by train or truck.

 

c.Perishable Nature-perishable products such as milk, dairy products, bread, meat etc., are sent by shorter channel or direct channel to prevent product deterioration, while long channel is used for non- perishable products.

 

d.Technically- The technical nature of products such as computers, machines etc., require service. The sales and servicemen are needed to explain the use of the product to the customers. Hence the direct channel is more advantageous.

 

e. Nature of Product line– If the product line is narrow, longer channel must be adopted. If the product line is broader, shorter channel can be adopted.

 

f. Product made to order– if the product is made for customers, the shorter channel may be used. Products can be directly distributed to the customer.

 

g.Seasonal- For the sales of seasonal products such as woolen clothes intermediaries are needed. Direct selling is ineffective.

 

h. Standardization-For standardized products and ISI marked products indirect channel is more suitable.

  1. Newness and market Acceptance– For new products with high degree of market acceptance, the indirect channel is necessary. Aggressive selling can be possible by these intermediaries.
  1. Style Obsolescence-Fashionable dresses must be sold considerably in a short time. This can be achieved by direct selling or to retailors who are specialists in selling fashionable goods.
  1. Price Stability-Direct channel is useful if the price of the company’s product is stable.
  • Company Consideration
  1. Financial strength– Financially sound companies are in a better position to select and design their distribution channel. They adopt direct channel. Whereas financially weaker companies select indirect channel, they depend on the intermediaries.
  1. Reputation- Goods of reputed companies are preferred by the customers. Many intermediaries are eager to have connection with such companies. For e.g. Huge queues for securing distributorship in standard firms like Tata, Bajaj scooters etc., . In this condition it is necessary to adopt indirect channel.
  2. Market control-When a firm wants to exercise control over the price, the way in which customers are served etc., direct channel is suggested.
  3. Middleman Consideration The middleman who is able to offer a good facility of storage may be considered. The channel which facilitates maximum sales and the type of channel which gives a low unit cost of marketing may be considered.
  1. Consumer Consideration

The characteristics of buyers as to their number, location, frequency of the purchase, quantities bought by them etc., influence the channel selection. Customers may wish to have the product at a convenient place, for example daily consumption items like milk, paper, and bread etc., consumers may like to have them at their door. The channel adopted must facilitate the commodities produced to be available to the consumer in time.

 

Summary

 

Marketing channel or distribution channel is the path between producers and users that goods and services follow. The importance of channels of distribution, general functions of channels of distribution; types of channels of distribution, multichannel marketing system were discussed.

you can view video on MARKET DISTRIBUTION CHANNELS

 

References

  • Pillai R.S.N.,Bagavathi,2009,Nodern Marketing Principles and Practices,4thEdn.,S.Chand and company Pvt. Ltd New Delhi
  • Tapan K. Panda ,Marketing Management: Text and Cases Indian Context, 2 nd edition, Excel books, New Delhi.
  • Anne T. Coughlan ,Marketing Channels, Pearson Education
  • John A Quelch,Marketing Management,Tata Mcgraw Hill

 

Web links

 

  • http://beta.tutor2u.net/business/reference/marketing-distribution-intermediaries
  • https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/marketing-channels-11/marketing-channels-in-the-supply-chain-76/types-of-marketing-channels-387-4051/