Distribution channels

INTRODUCTIONINTRODUCTIONChannels Of Distribution describes the varieties of Channels Of Distribution describes the varieties of intermediaries (i.e., agents, wholesaler and retailers) intermediaries (i.e., agents, wholesaler and retailers) involved in moving products between countries as involved in moving products between countries as well as within countries. The tasks and functions of well as within countries. The tasks and functions of the various intermediaries will be examined. It the various intermediaries will be examined. It should be kept in mind that certain types of should be kept in mind that certain types of intermediaries do not exist in some countries and intermediaries do not exist in some countries and that the pattern of use as well as the importance of that the pattern of use as well as the importance of each type of intermediary varies widely from country each type of intermediary varies widely from country to countryto country. . A manufacturer is required to make several decisions A manufacturer is required to make several decisions that will affect its channel strategy, including the that will affect its channel strategy, including the length, width, and number of distribution channels to length, width, and number of distribution channels to b used. b used.

DEFINITIONDEFINITIONTHE AMERICAN MARKETING ASSOCIATION THE AMERICAN MARKETING ASSOCIATION

DEFINES:--DEFINES:--CHANNEL OF DISTRIBUTION AS—CHANNEL OF DISTRIBUTION AS—

““An organized network of agencies and An organized network of agencies and institutions which in combination perform all institutions which in combination perform all the activities required to link producers with the activities required to link producers with

users to accomplish the marketing task.”users to accomplish the marketing task.”DISTRIBUTION:- DISTRIBUTION:-

Is the physical flow of goods through Is the physical flow of goods through channels andchannels andCHANNELS:-CHANNELS:-

Is coordinated groups of individuals or firms Is coordinated groups of individuals or firms that perform functions adding utility to a that perform functions adding utility to a product or services. product or services.

OBJECTIVES OF CHANNELSOBJECTIVES OF CHANNELS

TO CREATE UTILITY FOR CUSTOMERSTO CREATE UTILITY FOR CUSTOMERSCHANNEL UTILITY ARE:-CHANNEL UTILITY ARE:- PLACEPLACE TIMETIME FORMFORM INFORMATIONINFORMATION

Ex:-COKE’S LEADERSHIP:-Ex:-COKE’S LEADERSHIP:- due to PLACE UTILITYdue to PLACE UTILITY

The most effective channel arrangement is a The most effective channel arrangement is a clear focus of the company’s marketing clear focus of the company’s marketing effort on a target market and a effort on a target market and a determination of its needs and preferences.determination of its needs and preferences.

Channel strategy in global marketing must Channel strategy in global marketing must fit the company’s COMPETITIVE POSITION fit the company’s COMPETITIVE POSITION and MARKETING OBJECTIVE in each national and MARKETING OBJECTIVE in each national marketmarket

If a company wants to enter a competitive If a company wants to enter a competitive market,it has two basic choices:-market,it has two basic choices:-

DIRECT INVOLVEMENT (sales DIRECT INVOLVEMENT (sales force, retail stores etc.)force, retail stores etc.)

INDIRECT INVOLVEMENT INDIRECT INVOLVEMENT (independent agents, distributors, (independent agents, distributors, wholesalers)wholesalers)

Distribution Channel Functions

Distribution Channel Functions

OrderingOrdering

PaymentsPayments

CommunicationCommunicationTransferTransfer

NegotiationNegotiation

FinancingFinancingRisk TakingRisk Taking

PhysicalDistribution

PhysicalDistribution

InformationInformation

ROLES OF CHANNEL ROLES OF CHANNEL MEMBERSMEMBERS

1. 1. Facilitate the search process of Facilitate the search process of buyers & sellers:-buyers & sellers:-

Lower the uncertainty among end-usersLower the uncertainty among end-users

In their absence, manufactures would also In their absence, manufactures would also be confuse about how to approach be confuse about how to approach customerscustomers

2. 2. Sorting:-Sorting:-

Channel members eliminate the Channel members eliminate the differences in the collection of goods & differences in the collection of goods & services offered by companyservices offered by company

CONTDCONTD..3. 3. Making transactions routine:-Making transactions routine:-

Transactions involve ordering of goods or Transactions involve ordering of goods or services, fulfilling orders & paying for services, fulfilling orders & paying for goods & services purchased.goods & services purchased.

i.e., Manufacture-Wholesaler-Retailer-i.e., Manufacture-Wholesaler-Retailer-CustomerCustomerHelp in making transactions routine Help in making transactions routine through standardizations & automationsthrough standardizations & automations

4. 4. Contractual efficiency:-Contractual efficiency:-Channel Intermediaries have to optimize Channel Intermediaries have to optimize the number of exchange relationships the number of exchange relationships required to complete a transaction.required to complete a transaction.

DESIGNING MARKETING DESIGNING MARKETING CHANNELSCHANNELS

Dimensions to choose a channel design:Dimensions to choose a channel design:

The channel lengthThe channel length – Number of – Number of intermediaries between the producer and intermediaries between the producer and customerscustomers

The channel breadthThe channel breadth – Number of outlets – Number of outlets available to consumersavailable to consumers

The The cost involvedcost involved in selecting a particular in selecting a particular channelchannel

CONTDCONTD.. A channel decision depends on the A channel decision depends on the

following considerations:-following considerations:-1.1. CHANNEL STRUCTURE:-CHANNEL STRUCTURE:- It refers to the number of levels of It refers to the number of levels of

channels intermediaries (Distributor, channels intermediaries (Distributor, Wholesaler, Retailer).Wholesaler, Retailer).

It depends on the number of It depends on the number of intermediaries uses to distribute its intermediaries uses to distribute its product to end-usersproduct to end-usersThe channel levels are zero level, one The channel levels are zero level, one level, two level & three level.level, two level & three level.

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Retailers

One-level channel

Wholesalers Retailers

Two-level channel

Wholesalers Agents Retailers

Three-level channel

CONTDCONTD..2. 2. CHANNEL INTENSITY:-CHANNEL INTENSITY:- It refers to the number of intermediaries present It refers to the number of intermediaries present

in a distribution or marketing channel.in a distribution or marketing channel.

Intensive distributionIntensive distributionProducers of products stock their goods in as Producers of products stock their goods in as many outlets as possible as possible by many outlets as possible as possible by considering time & place utility.considering time & place utility.

Exclusive distributionExclusive distributionProducers of some products limit the number of Producers of some products limit the number of intermediaries handling their product to deliver intermediaries handling their product to deliver maximum service quality to customers, try to maximum service quality to customers, try to develop a superior brand image for their product.develop a superior brand image for their product.

CONTD.CONTD.Selective distributionSelective distribution

It is adopted when the manufacturer It is adopted when the manufacturer lacks the resources to adequately lacks the resources to adequately influences the policies of all the influences the policies of all the intermediaries who can carry a intermediaries who can carry a particular product.particular product.

The manufacturer distributes products The manufacturer distributes products only to specific retailers selected on the only to specific retailers selected on the basis of defined criteria.basis of defined criteria.

CONTD.CONTD.3. 3. TYPE OF CHANNEL INTERMEDIARIES AT EACH TYPE OF CHANNEL INTERMEDIARIES AT EACH

LEVELLEVELManufacturer’s representativesManufacturer’s representatives

They sell the manufacturer's product to the They sell the manufacturer's product to the wholesalers, retailers, other businesses & also to wholesalers, retailers, other businesses & also to institutions such as hospitals, libraries & school.institutions such as hospitals, libraries & school.They may represent more than one manufacturer.They may represent more than one manufacturer.Also called account executives or sales engineers.Also called account executives or sales engineers.

Manufacturer’s sales forceManufacturer’s sales forceIt comprises the salespersons who are on the It comprises the salespersons who are on the company’s rolls & received a fixed salary.company’s rolls & received a fixed salary.Devotes their entire time & effort to selling that Devotes their entire time & effort to selling that product or service of that manufacturer.product or service of that manufacturer.

CONTD.CONTD.Industrial distributorsIndustrial distributors

These are independent firms consisting These are independent firms consisting of sales & support personnel.of sales & support personnel.

They differ from manufacturer's in that They differ from manufacturer's in that they take possession of the products they take possession of the products they sell & have a partnership they sell & have a partnership arrangement with the manufacturer.arrangement with the manufacturer.

Examples:Examples: Norton, Pfizer & 3M. Norton, Pfizer & 3M.

FACTORS AFFECTING SHAPING FACTORS AFFECTING SHAPING OF CHANNELSOF CHANNELS

CUSTOMERSCUSTOMERS PRODUCTSPRODUCTS MIDDLEMEN ANDMIDDLEMEN AND ENVIRONMENTENVIRONMENT

CUSTOMER CUSTOMER CHARACTERISTICSCHARACTERISTICS

Customers number, geographic distribution, Customers number, geographic distribution, income, shopping habits and reactions to income, shopping habits and reactions to different selling methods all vary from country to different selling methods all vary from country to country and therefore require different channel country and therefore require different channel approaches.approaches.

The need for multiple channel intermediaries The need for multiple channel intermediaries increases as the customers increases.increases as the customers increases.

EX:- 10 customers must be directly contacted by EX:- 10 customers must be directly contacted by

either by manufacturer or an agent,either by manufacturer or an agent,For mass market products bought by millions of For mass market products bought by millions of

customers, retail distribution outlets or mail order customers, retail distribution outlets or mail order distribution is required.distribution is required.

Product characteristicsProduct characteristics

Degree of standardization.Degree of standardization. PerishablityPerishablity Bulk/QuantityBulk/Quantity Services (requirements and facilities)Services (requirements and facilities) Unit priceUnit price

Types of productsTypes of products Product with high unit price rely on controlled Product with high unit price rely on controlled

sales force,(Ex. mainframes computers) since sales force,(Ex. mainframes computers) since selling cost of this expensive distribution method selling cost of this expensive distribution method is small part of the total SP.is small part of the total SP.

Cosmetics products and other consumer products Cosmetics products and other consumer products rely on wide gross selling margins to compensate rely on wide gross selling margins to compensate salespeople (Ex. Amway and avon)salespeople (Ex. Amway and avon)

Perishable products need relatively direct Perishable products need relatively direct channels to ensure proper conditions at the time channels to ensure proper conditions at the time of purchase by customers. (bread and eatables)of purchase by customers. (bread and eatables)

Bulky products/large quantity (Ex.soft drinks, beer Bulky products/large quantity (Ex.soft drinks, beer )of product requires minimum shipping )of product requires minimum shipping distances,charges and minimum amt. of distances,charges and minimum amt. of transactions between intermediaries. transactions between intermediaries.

Middleman characteristicsMiddleman characteristics Cherry picking. Practice of taking Cherry picking. Practice of taking

orders from manufacturers whose orders from manufacturers whose product require less efforts to product require less efforts to promote.promote.

Bypassing of cherry picking can be Bypassing of cherry picking can be done by going alternatives options done by going alternatives options like:like:•Setting own distribution organizations.

•Going for cooperative arrangements/direct selling supports and distribution support systems. ( Rely on distributors own sales force by subsidizing the cost of the sales representatives the distributer had assigned to the company’s products).

Middleman characteristicsMiddleman characteristics

•Selection- finding most efficient and compatible distributers. (Ex. The local chamber of commerce or local trade associations in country can provide lists.)

•Before signing make sure the presence of one key person in the organization who will make it a personal objective to achieve success with your product.

•Distributer must be capable of assisting of providing necessary information about customers .

•Distributer/agent should have core competency in related products.

•Motivation in form of commissions is appreciable.

•Clause of termination on the account of performance should be clearly expressed. (Ex. despite of mentioned clause foreign agent might sue you on basis of his native country norms.)

Environmental Environmental characteristicscharacteristics

•Economic

•Social

•Political

Consumables and eatables are highly sensitive towards environment. Success of Supermarkets is classical example of this factor.

StructureStructure• Consumer products Designed to directly put in the hands of end user.

•Industrial products Designed for manufacturers and organizational use.

Consumer product :• Door to Door selling

•Manufacturer- owned store

•Franchise Operations

•Combination Structures

Industrial products

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M M M M MM

Agents/ Brokers MSF MSF MSF

W W W

RR R R R

Customers

M = Manufacturer MSF = Manufacturer’s Sales ForceW = Wholesaler R = Retailer (including online e-commerce

Figure :- Marketing Channel Alternatives – Consumer Product

Marketing channels alternatives for industrial product

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