30 Distribution channels

P.G. Padma Gowri

epgp books

 

 

 

Introduction:

 

Marketing is the key aspect of a business. Government policies, competition, consumer behavior, fashion change, quality aspects are causing a threat to manufacturer nowadays. Entrepreneur with sufficient knowledge in the marketing only succeed in his business venture. Proper selection of distribution channel, identification of buyers and quality consciousness are essential elements are of a viable marketing strategy. The entrepreneur must know to the select the profitable channel and provide the quality marks to his product for easy penetration into the market.

 

The following section deals with the marketing channels, selection of them and the various quality standards required for a successful product apart from the institutions, that are assisted the entrepreneur in this contacts-“Look before u leap” is one of the planning premises. Product selection requires diligent approach by the entrepreneur. Salesmanship and advertisements are necessary elements for the products to reach the destination.

 

Objectives:

  • To know the distribution channel.
  • To understand components in the distribution channel.
  • To identify channel for different products.

Channel:

 

The word “channel” has its origin in the French word used for canal. Thus a channel is a medium through which goods are made to move as smoothly as possible to the desired places. In other words, the route through which goods move from the place of production to the place of consumption is termed as “Channel of distribution”.

 

Channel of distribution:

 

Every producer seeks to link together a set of marketing intermediaries that fulfil the firm’s objectives. This set of marketing intermediaries is called the marketing channel. The American marketing association defined as term marketing channel as “The structure of intra company organization units and extra company agents and dealers, wholesalers and retailers through which a product are service is marketed”.

 

This definition includes two aspects:

  1. The firm’s internal marketing organizations units and the outside business units which a firm uses in its marketing work.
  2. That channel structure of the individual firm and the entire channel complex available all firms.

Channel Objectives

 

To decide Channel for distribution of goods are included as a part of strategy rather than as a part of the marketing organizations. Generally, the channel objectives may be numerous depending upon the marketing and corporate objectives.

 

Objectives of Channels are mentioned below:

  1. Increasing sales by establishing distribution in new markets. (Growth strategy)
  2. Improving and sustaining the market share. (Stability strategy)
  3. Creation of an efficient channel system.

Functions of channel

 

There is an increasing emphasis on specialization and the division of labour in any developing company. Due to this division of labour, a ‘gap’ gets developed between producers and users. The primary purpose of a distribution channel is to bridge this gap by resolving spatial (geographical distance) and temporal (relating to time) discrepancies in supply and demand. Essential functions are to be performed to fill the gap between producers and users. They are:

  1. Transfer of title to the goods involved
  2. Physical moments from the point of production to the point of consumption.
  3. Storage functions
  4. Communication of information concerning the availability, characteristics and prize of the goods in transit, inventory and on purchase
  5. Marketing creates various utilities to the products.

 

Most of the utilities are, in fact, created by performing the functions of physical distribution promptly and efficiently. Channels of distribution help to move from the goods from one place to another, hence, they add places utility. They bring goods to the consumer where the consumer wants them; hence, they add time utility also.

 

They transfer goods to the consumer in a convenient shape, unit, size, style and package; hence, they add convenience value. They it possible for the consumer to obtain goods at a prize he is whiling to pay, and under conditions which bring him satisfaction and pride of ownership; hence, they add possession value.

 

Channel members:

 

The channel of distribution includes the original producer, the final buyer and any middlemen-either wholesaler is retailer. The term middlemen refer to those institutions or individuals in the channel which either takes title to the goods or negotiate or sell in the capacity of an agent or broker. Thus, from the marketing point of view the middlemen and intermediaries are the same.

 

On the bases of taking title to goods, these middlemen are divided into Merchant middlemen and Agent middlemen. On the basis of the position of middlemen in the channel of distribution, they are also classified into wholesalers and retailers.

 

The various kinds of middlemen are:

  • Agents
  • Brokers
  • Dealers
  • Distributors
  • Jobbers
  • Rack Jobber
  • Retailer
  • Wholesaler
  • Commission house
  • Discount House
  • Branch House
  • Facilitating Agencies
  • Industrial Store

Agents:

 

They are the middlemen who do not take any title to goods they are active part in the marketing mechanism rendering also service required. They do not usually represent both the buyer and the seller in the same transaction. Commission agents, Manufacture’s agents, selling agents of this agents, etc. are examples of this type.

 

Brokers:

 

They are the agents who do not have direct physical control of the goods in which the deal. They represent either the buyer or the seller in negotiating purchase or sales for the principle. The brokers’ powers have to prices and terms of sale are usually limited by their principals.

 

Dealers:

 

They are the firms who buy or resell products at either retail or wholesale base.

 

Distributors:

 

A real certified wholesale distributor is a company who handles the wholesale shipments for the manufacturer of a product. They are known as wholesalers.

 

Jobbers:

 

They are also known as wholesalers or distributors. The term is also used in certain rates and localities to designate special type of wholesalers. They are usually found in stock markets.

 

Rack Jobber:

 

It means a wholesaling business unit that markets specialized lines of merchandise to certain types of retail stores and provides special service such as agreement, maintenance and stocking of products in display racks. Rack jobbers are most common in food business.

 

Retailer:

 

He is a merchant, or occasionally an agent, those businesses is selling directly to the ultimate customer.

 

Wholesaler:

 

Wholesaler are the business units which buy and resells merchandise to retailers and the other merchants and/or to industrial, institutional and commercial user but which does not sell in significant amount to ultimate consumers. Generally these merchants render a wide variety of services to their customers.

 

Commission house:

 

These are known as commission agents. The agents usually exercise physical control over the goods and negotiate the sale. The commission house usually enjoys broade powers over the prices, methods, and terms of sales than the brokers.

 

Discount House:

 

A discount house is a retailing business unit offering durable consumer items, competing on the basis of price appeal and operating on a relatively low mark-up and with a minimum of customer service.

 

Branch House:

 

It is an establishment maintained by a manufacturer detached from the head office and used for the purposes of stocking, selling, delivering and servicing his product. A branch office is also similar to a branch house.

 

Facilitating Agencies:

 

These agencies perform or assist in the performance of one or a number of marketing functions, but they neither take title to goods nor negotiate purchase or sale. Common types are banks, railways, warehouse, commodity exchanges, insurance companies, advertising agencies, etc.

 

Industrial Store:

 

It means a retail store owned and operated by a company to sell primarily to its employees. Non-governmental establishments are often to as “Company Stores”.

 

Factors to be considered in selecting channel members:

 

The integrated marketing concept has prompted many manufacturers to employ several kinds of channels.

 

There are various factors that are to be considered before deciding channel. They are,

 

Selling direct to customers:

 

Industrial chemical, machinery installations, heavy equipments are generally sold on a direct basis. Direct sale is also undertaken in the case of small production. In the case of other consumer goods, however direct selling constitutes very small part of total retail selling.

 

Channel policy:

 

Before selecting a particular type of Channel the entrepreneur has to consider the policy regarding the distribution. The ultimate aim of a channel policy is to serve the consumer most efficiently and economically. There are four major policy decisions that must be considered. They are as follows:

 

  1. Length of the Channel: What is the channel to be used? Whether wholesaling middlemen, retailers or some combination.
  2. Channel Number: To take a decision as to how many different marketing channels are to be employed?
  3. Types of Channel: What kind of wholesaling middlemen and retailers are to be chosen?
  4. Width of the Channel: How many outlets or individual firms to employ at each level of the channel.

The channel width is chosen from among the alternatives:

 

  1.  Intensive distribution (it is a policy where an entrepreneur uses many outlets).
  2. Selective distribution (it is a policy where an entrepreneur uses few outlets).
  3. Exclusive distribution (it is a policy where an entrepreneur allots exclusive area to a distributor).

Channel for Consumer Products:

 

  • Producer – Consumer : This is the shortest and simplest channel where no middleman is involved
  • Producer – Wholesaler – Consumer: Where the merchandise require elaborate outlets and are sold in bulk, this channel would be suitable.
  • Producer – Retailer – Consumer: Thousands of small retailers and small manufacturers find this channel most economical.
  • Producer –Agent – Retailer -Consumer: Instead of using wholesalers the producer may have his own exclusive agents.
  • Producer –Agent – Wholesaler -Retailer – Consumer: To reach small retailers, the producers use this channel. This is only an extension of the above described channel and is needed when elaborate distribution arrangements are required.

 

Most of the consumer goods are sold indirectly through the traditional channel from manufacturer to wholesaler to retailer to consumer. The direct channel from manufacturer to consumer is ordinarily used when the manufacturer sells through his salesman (house –to-house selling), or through the manufacturer’s own retails stores.

 

The use of Mail order system is effective for marketing some stores. The use of Mail orders system is effective for marketing some lines of men’s clothing, sports goods, specialty and healthy foods. Durable consumer products are usually sold through departmental stores.

 

Channel for Industrial Products:

 

The channels of distribution of industrial or business goods are usually short. They also show more or less fixed patterns and less complicated. Industrial goods are generally bought in large quantities by the industrial user directly from the factory or source of supply.

 

In contrast to the distribution of consumer goods, retailing is eliminated, only few middlemen are used, and the marketing process is comparatively simple. Four types of channels are widely used in reaching industrial users.

 

Major Channels:

 

  • Producer – Industrial User: This is the most commonly used channel in the distribution of industrial goods.
  • Producer – Industrial distributor User: This channel is used in the distribution of necessary equipments which are frequently required by users.
  • Producer –Agent -User: Small manufacturers who do not have their own marketing departments find it convenient to have agents at different selling points.

    Nature of products:Products features also will exert influence on the decision of suitable channels:

 

Perishability: Products subject to physical or fashion perishability must be speeded through short channels so perishable products require more direct marketing.

 

Size: Products that are bulky (e.g Iron and steel, cotton, etc.) usually need short channels so that distance and number of handlings from producer to ultimate consumers may be reduced.

 

Style: Manufactures prefer selling direct to retailers, especially when goods are subjected to fast style changes.

 

Unit value:    The lower the unit value, t he longer are the changes of the distribution.

 

Newness of the products: When the new products are introduced, new channels are preferred.

 

Buying Habits of the consumer: Long channels are preferred to convenience goods. Shopping and specialty goods are sold directly. This difference in channels is due to differing buying habits of the buyers.

 

Quantum of sale: If the quantity sold is small the channels should be elaborate, for example, Cigarette and Matches. If direct selling is followed in this case marketing cost will tend to become high.

 

Seasonal requirements: Though, the seasonal goods (e.g, woolen clothes) will have only seasonal markets, the distribution must be arranged on a continuous basis.

 

Concentration of customers: When the market for a product is fully concentrated and localized, direct selling is advised for decision of suitable channels.

 

Competition

 

Competitors influence the decision of producer to decide on the channel to be selected. This factor needs through examination and careful consideration. In practice, similar types of channels used by the competitors are advised for decision of suitable channels.

 

Financial Resources:

 

Financial strength of the channel members also is considered when selection of channels is made. A business with accurate finances can establish its own sales force, grant credit, or warehouse its own products. A financially weak firm would have to depend upon middle men for the services.

 

Channel cost:

 

The cost of distribution is said to be channel cost. Direct selling is costlier and distribution arranged through middlemen is more economical. Moreover, direct selling would involve manufacturer to always keep sufficient funds for moving the products to the markets.

 

The Success of the entrepreneur to compete with the market depends on his ability to find out the most economical form of distribution and to develop a continued profit. There are two major choices available to an entrepreneur who wants to send goods from the factory to the consumer: they are selling through middlemen and direct selling.

 

Selling through Middlemen

 

The entrepreneur may entrust the selling job to someone else, like selling agents. They are independent businessmen who operate on a commission basis and whose main function is to sell the entire output without taking the ownership.

 

Distribution through an Agent who stands between the Manufacturer and the wholesaler

 

In this channel, there are brokers, manufacturer’s agents, commission merchants and export merchants. Usually, the entrepreneur uses this channel when he cannot afford to invest the amount required to develop a sales force of his own For example : An automobile entrepreneur found that he could operate a sales branch at a cost of 7.7.% of sales and having his own salesmen would cost him an additional 11% on sales.

 

Selling through Wholesalers to Retailers:

 

Selling to wholesalers is often referred to as the ‘traditional channel’. The term wholesaler is used to denote very specific functions of buying in large quantities, receiving and storing, selling in smaller quantities to a large number of retail buyers.

 

Selling Direct to Retailers of Dealers:

 

This is a short trade channel where the entrepreneur simultaneously assumes then functions of the broker and wholesaler. This channel had its origin in the idea of eliminating wholesalers from the channel of distribution. It is pointed out that this channel is very popular especially after the creation of Super Markets, Departmental Stores, etc. However this channel is advised only when:

 

  • The entrepreneur has financial strength to make up marketing functions,
  • There is a large-scale production,
  • The product is normally bought by the customers in large quantities,

Conclusion:

 

A channel of distribution should be determined by customer buying patterns, the nature of the market, product, the middlemen and the company itself. To select a channel of distribution, a company should follow mainly – three ‘C’s – Channel control, market Coverage and Cost of the distribution.

 

The producers usually consider which distribution channel would be effective and efficient. The selected channels must have lowest cost with maximum profit. It should also be remembered that there is no single channel of distribution that will always result in optimum profit.

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