In this article we will discuss about the distribution channels for product & services in a market! This article will help you to learn about the channels of distribution from A to Z. Also Learn about:- 1. Introduction to Distribution Channels 2. Meaning of Channels of Distribution 3. Characteristics 4. Functions 5. Intermediaries 6. Design 7. Types 8. Determining Channel Requirement 9. Structure 10. Channel Choice 11. Distribution Process 12. Market Coverage 13. Legal Aspects 14. Routes and Other Details. Further this article will also help you to get an in-depth knowledge on: 1. Channels Of Distribution Are Different For Different Products 2. Five Channels Of Distribution 3. Factors Affecting Channels Of Distribution 4. Importance Of Distribution Channels 5. Distribution Channel Strategy 6. Alternative Channels Of Distribution.
- Introduction to Distribution Channels
- Meaning of Channels of Distribution
- Characteristics of Distribution Channel
- Functions of Distribution Channel
- Types of Intermediaries
- Designing Distribution Channels
- Types of Distribution Channels
- Key Issues in Determining Channel Requirement
- The Distribution Channel Structure
- Factors Affecting Channel Choice
- Physical Distribution Process
- Market Coverage of Distribution Channels
- Legal Aspects of Distribution
- Channels of Distribution(Routes)
- Channel Conflict-Types and Causes
- Role of Distribution Channels
- Managing Channel Members
- Distribution Channel Management
Channels of Distribution # 1. Introduction to Distribution Channels:
Distribution decisions focus on establishing a system that, at its basic level, allows customers to gain access and purchase a marketer’s product. However, marketers may find that getting to the point at which a customer can acquire a product is complicated, time consuming, and expensive.
The bottom line is a marketer’s distribution system must be both effective i.e., delivers a good or service to the right place, in the right amount, in the right condition and efficient i.e., delivers at the right time and for the right cost.
Distribution decisions are relevant for nearly all types of products. While it is easy to see how distribution decisions impact physical goods, such as laundry detergent or truck parts, distribution is equally important for digital goods example, television programming, downloadable music and services e.g., income tax services.
In fact, while the Internet is playing a major role in changing product distribution and is perceived to offer more opportunities for reaching customers, online marketers still face the same distribution issues and obstacles as those faced by offline marketers.
The channel of distribution is the pathway taken by goods and services as they flow from the point of production of the point of consumption and includes a sequence of marketing agencies. After production the next problem faced by a producer is that of selling and distributing.
Because production is made to satisfy the needs of the consumers so it must reach to the consumer for whom it is made. Thus a way through which goods flow from the producer to the consumer is called Channel of Distribution. The entire function of getting goods into the hands of the consumer is often referred to as distribution.
The term channel of distribution is ready to denote the middlemen engaged in moving goods from the place of consumption. It is the channel through which goods are made to move as smoothly as possible to the desired places. In other words, the route by which goods move from the place of production to the place of consumption is termed as “Channels of Distribution”.
Distribution channels include wholesalers, e-commerce websites, catalog sales, consultants, a direct sales force who sell over the phone, in person or both, dealers, home shopping networks and retailers. The distribution channel or channels selected can dictate what the rest of the marketing strategy would be, as they influence the buyer directly.
Advertising and other marketing methods would then appeal to the buyer’s demographic. Small businesses with limited resources or financial support must perform a careful market analysis to determine which distribution channel is best suited for their customers.
Marketing logistics involve planning, delivering, and controlling the flow of physical goods, marketing materials and information from the producer to a market as necessary to meet customer demands while still making a satisfactory profit.
Maintaining an organization’s competitive edge means understanding and implementing an effective marketing logistics strategy regarding product, price, place and promotion. These four functions of marketing logistics help the organization to reach the target customers and deliver the products or services sold by the organization to these customers.
Channels of Distribution # 2. Meaning of Channels of Distribution:
Channels of distribution are mainly concerned with distribution of goods and services. It is the distribution network through which a producer puts his products in the hands of the actual user. It is the set of marketing intermediaries or institutions who participate in the distribution of goods and services from the point of production to the point of consumption. In the field of marketing, channels of distribution indicate routes or pathways through which goods and services flow, or move from producers to consumers.
We can define formally the distribution channel “as the set of interdependent marketing institutions participating in the marketing activities involved in the movement or the flow of goods or services from the primary producer to the ultimate consumer.”
Marketing institutions considered as channel components are- (a) All kinds of merchant middlemen, such as wholesalers and retailers, (b) All kinds of agent middlemen, such as commission agents, factors, brokers, warehouse-keepers and so on. The route or channel includes the manufacturer and the ultimate consumer as well as all intermediaries.
These components are linked in the channel system by one or more of the marketing flows, such as transfer of title or ownership, physical movement of merchandise, transmission of marketing information, and the flow of money in the form of payment of prices and other dues. The channel members right from the producer up to the consumer are inter-related and we have the total distribution system which is responsible for distribution of goods or services in order to satisfy consumer needs or desires.
Channels of Distribution # 3. Characteristics of Distribution Channel:
The main characteristics or elements of channel of distribution may be summarized as under:
(1) Route or Pathway – Channel of distribution is a route or pathway through which goods and services flow from the manufacturers to consumers.
(2) Flow – The flow of goods and services is smooth and sequential and usually unidirectional.
(3) Composition – It is composed of intermediaries, such as, wholesalers, retailers, agents, distributors, etc., also called middlemen who participate in the flow voluntarily.
(4) Functions – The intermediaries perform such functions which facilitate transfer of ownership, title and possession of goods and services from manufacturers to consumers.
(5) Remuneration – The intermediaries are paid in the form of commission for the services rendered by them. The same is compensated by the manufacturer in the form of commission allowed by the manufacturer or added in the price of the goods sold.
(6) Time Utility – As they bring goods to the consumers when needed;
(7) Convenience Value – As they bring goods to the consumers in convenient shape, unit, size, style and package;
(8) Possession Value – As they make it possible for the consumers to obtain goods with ownership title;
(9) Marketing Tools – As they serve as vehicles for viewing the marketing organization in its external aspects and for bridging the physical and non-physical gaps which exist in moving goods from the producers to the consumers.
(10) Supply-Demand Linkage – As they bridge the gap between the producers and consumers by resolving spatial (geographical distance) and temporal (relating to time) discrepancies in supply and demand.
Channels of Distribution # 4. Functions of Distribution Channel:
ii. Inventory Management
iv. Order Processing
v. Material Handling
vi. Information & Customer Education
xi. Marketing Intelligence
Channels of Distribution # 5. Types of Intermediaries:
There are two types of intermediaries in the channel. The primary intermediaries in the channels of distribution are the manufacturer, the middlemen i.e. the wholesalers, manufacturers’ agents and retailers. The secondary intermediaries include the facilitating agencies like the financial institution, public warehouses, public carriers and the advertising agencies.
The two types of intermediaries are:
1. Primary intermediaries –
2. Facilitating intermediaries –
(a) Financial Institutions
(b) Public warehouses
(c) Public carriers or transport carriers
(d) Advertising agencies
Channels of Distribution # 6. Designing Distribution Channels:
A company wants a distribution channel that not only meets customers’ needs but also provides an edge on competition. Some firms gain a differential advantage with their channels.
Marketers should keep in mind the following points while designing distribution channels:
i. Specifying the role of distribution
ii. Selecting the type of channel
iii. Determining intensity of distribution
iv. Choosing specific channel members
The last decision is selecting specific firms to distribute the product. When selecting specific firms to be part of a channel, a producer should assess factors related to the market, the product, its own company, and middlemen.
Two additional factors are whether the middleman sells to the market that the manufacturer wants to reach and whether the middleman’s product mix, pricing structure, promotion, and customer service are all compatible with the manufacturer’s needs.
Channels of Distribution # 7. Types of Distribution Channels:
1. Zero Level Channel (Manufacturer – Customer):
This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is fast and economical channel of distribution. Under it, the producer or entrepreneur performs all the marketing activities himself and has full control over distribution. A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores.
2. One Level Channel (Manufacturer – Retailer – Customer):
This channel of distribution involves only one middlemen called ‘retailer’. Under it, the producer sells his product to big retailers (or retailers who buy goods in large quantities) who in turn sell to the ultimate consumers. This channel relieves the manufacturer from burden of selling the goods himself and at the same time gives him control over the process of distribution.
3. Two Level Channel (Manufacturer – Wholesaler – Retailer – Customer):
This is the most common and traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally sell the product to the ultimate consumers.
4. Three Level Channel (Manufacturer – Agent – Wholesaler – Retailer – Customer):
This is the longest channel of distribution in which three middlemen are involved. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents.
The agents distribute the product among a few wholesalers. Each wholesaler distributes the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products.
Channels of Distribution # 8. Key Issues in Determining Channel Requirement:
While a manufacturer faces an agenda of issues related to finance, marketing and industrial relations, attention is focused on selected topics that directly impact the marketing channel arrangement.
The key issues related to this are:
1. Product Proliferation and Dynamics:
A major concern throughout industry is the rapid expansion that firms are experiencing in the number of stock-keeping units that they maintain in their product list. Fully understanding basic customer needs through marketing research is viewed as a key to successful new product launch.
In practice, a few firms have a highly successful new product track record. A large number of new products fail to remove obsolete inventory. The product life-cycle is useful for planning the marketing and distribution strategy.
Numerous examples are available from the food industry to illustrate the product proliferation dilemma. The industry is characterised by a constant effort on the part of manufacturers to introduce new products for distribution.
Retailers and wholesalers want to enter into an agreement with manufacturers in which they agree to buy all unsold inventory back at the retail price if a product fails. Independent of the fairness of such agreements, the fact remains that the inventory mistakes must be cleansed from the channel.
2. Total Quality Initiatives:
Total quality initiatives represent the primary focus of the revitalisation drive. The concept of total quality is “do it right the first time.” The general concept of total quality is to focus managerial attention on key concepts of manufacturing: People, Process, Design and customer service through distribution channel.
3. Manufacturing Strategies:
There are two popular manufacturing strategies- (1) Flexible, and (2) Focused.
The goal of flexible manufacturing is to increase responsiveness of production to consumer demands. Having the capability to manufacture what is needed reduces the amount of inventory. For this strategy to succeed, a manufacturer must have an efficient marketing channel so that the demand of the product can be fulfilled effectively in time.
The goal of focused manufacture is the lowest possible per unit cost and fair quality. The basic idea is to adopt leading-edge manufacturing technology and utilise it to the maximum capacity. Focused manufacturing requires building significant inventories in anticipation of future sale. The operational trick is to plan manufacturing schedules to keep anticipatory inventories balanced to market demand.
Each of these strategies requires a different type of channel management support. The modern concept of manufacturing seeks to involve employees at all levels of the organisation to effect process improvement and to take initiatives related to customer service.
Manufacturers, because of the nature of their brand products, are typically held responsible for performance of the entire marketing channel. Both consumers and trading partners expect manufacturers to maintain a high quality product. It is clear that, with emerging manufacturing strategies, a premium is placed on gaining and maintaining customer’s satisfaction through speed and quality. Quality is somehow based on manufacturers but the speed fully depends upon the channels.
The distribution channel determines how the products reach the end consumer from the manufacturer. The channel structure can have various levels. C & F Agents, Super-Stockists, Stockists, Distributors, Wholesalers, Dealers, Retailers etc. are various types of channel partners, with each having different ways of working and scope of activities.
The structure of distribution channel depends upon the nature of the product, industry practices and priorities of the company. Some companies have Franchisees as channel partners, which are generally exclusive outlets of the company. Different companies choose different combinations of these channel partners as per their requirement.
The geographic focus strategy of a company can guide it to develop its channel network spread across continents or countries divided on the basis of smaller geographic regions, states, districts etc. The distribution channel structure may be altered depending upon the market dynamics.
In today’s changing times, it becomes necessary for a manufacturer to have more than one channel structures working parallel to each other. E.g. a company may be selling through its traditional distributor – dealer network on the one part and on the other end, it may also be selling directly to the organized retail customers, who buy in bulk for requirements at their hundreds of retail outlets spread across a geography.
Answering the following will help in setting up a robust channel partner structure-
How many layers will our distribution channel have?
Who will bill whom within the channel partner network?
Who will buy from the company first and how the product will be routed till it reaches the final customer?
What will be the territory/area covered by each of the channel participant?
What will be the discount structure to all?
Which costs will be fully or partly reimbursed by the company? (E.g. rent, manpower, storage, inventory, marketing activities etc.)
What support will each of the channel partners get from the company?
What will be the responsibilities of a channel partner? What a channel partner should do or should not do?
What are the criteria for selecting a channel partner? (E.g. Turnover? Infrastructure? Manpower strength? Geographic area covered? Experience? Exclusivity? Technical knowledge? Market reputation?)
Will they be our exclusive channel partners or not? If not, what are the guidelines for selling competition products?
How will the conflicts among the channel partners be resolved?
A distribution system is a key external resource, equally important with key internal resources. 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:
(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 salesforce and not through middleman.
(a) For consumer market, retailer is essential, whereas in business 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.
(e) 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. When service after sale is required, e.g., TV Sets, Refrigerators, etc. selective distribution is profitable.
(a) Middlemen who can provide 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.
(a) 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.
(b) New companies rely heavily on middlemen due to lack of experience and ability of management.
(c) A company desiring to exercise greater control over channel will prefer a shorter channel as it will facilitate better co-ordination, communication and control.
(d) Heavy advertising and sale 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.
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 becomes 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.
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).
Channels of Distribution # 11. Physical Distribution Process:
The distribution process begins when a supplier receives an order from a customer. The customer is not too concerned with the design of the supplier’s distributive system, nor in any supply problems. In practical terms, the customer is only concerned with the efficiency of the supplier’s distribution.
That is, the likelihood of receiving goods at the time requested. Lead-time is the period of time that elapses between the placing of an order and receipt of the goods. This can vary according to the type of product and the type of market and industry being considered.
Lead time in the shipbuilding industry can be measured in fractions or multiples of years, whilst in the retail sector, days and hours are common measures. Customers make production plans based on the lead-time agreed when the order was placed. Customers now expect that the quotation will be adhered to and a late delivery is no longer acceptable in most purchasing situations.
Physical Distribution process consists of the following elements:
1. Order Processing:
Order processing is the first of the four stages in the logistical process. The efficiency of order processing has a direct effect on lead times. Orders are received from the sales team through the sales department. Many companies establish regular supply routes that remain relatively stable over a period of time providing that the supplier performs satisfactorily.
Very often contracts are drawn up and repeat orders are made at regular intervals during the contract period. Taken to its logical conclusion this effectively does away with ordering and leads to what is called ‘partnership sourcing’.
This is an agreement between the buyer and seller to supply a particular product or commodity as a when required without the necessity of negotiating a new contract every time an order is placed.
Order-processing systems should function quickly and accurately. Other departments in the company need to know as quickly as possible that an order has been placed and the customer must have rapid confirmation of the order’s receipt and the precise delivery time. Even before products are manufactured and sold the level of office efficiency is a major contributor to a company’s image.
Inventory or stock management, is a critical area of PDM because stock levels have a direct effect on levels of service and customer satisfaction. The optimum stock level is a function of the type of market in which the company operates. Few companies can say that they never run out of stock, but if stock-outs happen regularly then market share will be lost to more efficient competitors.
The key lies in ascertaining the re-order point. Carrying stock at levels below the reorder point might ultimately mean a stock-out, whereas too high stock levels are unnecessary and expensive to maintain.
Marketing texts tend to pay more attention to warehousing. This is mainly because of the relatively longer distances involved in distributing in India, where it can sometimes take days to reach customers by the most efficient road or rail routes.
The logistics of warehousing can, therefore, be correspondingly more complicated in India than in the UK. However, the principles remain the same, and indeed the European Union should be viewed as a large ‘home market’.
Currently, many companies function adequately with their own on-site warehouses from where goods are dispatched direct to customers. When a firm markets goods that are ordered regularly, but in small quantities, it becomes more logical to locate warehouses strategically around the country. Transportation can be carried out in bulk from the place of manufacture to respective warehouses where stocks wait ready for further distribution to the customers.
Transportation usually represents the greatest distribution cost. It is usually easy to calculate because it can be related directly to weight or numbers of units. Costs must be carefully controlled through the mode of transport selected amongst alternatives, and these must be constantly reviewed.
During the past 50 years, road transport has become the dominant transportation mode in India. It has the advantage of speed coupled with door-to-door delivery. The patterns of retailing that have developed, and the pressure caused by low stock holding and short lead times, have made road transport indispensable.
When the volume of goods being transported reaches a certain level some companies purchases their own vehicles, rather than use the services of haulage contractors.
Channels of Distribution # 12. Market Coverage of Distribution Channels:
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 Distribution:
We have maximum number of retail outlets for mass distribution of consumer 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 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 cooperation 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 speciality 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.
Channels of Distribution # 13. Legal Aspects of Distribution:
There are four major legal aspects of exclusive distribution:
(i) Exclusive Dealing Contracts:
They prohibit the dealer from selling products of rivals. 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.
(ii) Tying Contracts:
They compel the dealer to carry full line of a manufacturer. Tying contracts are also legal as long as the dealer is not prohibited from selling competitive goods. However, this agreement cannot be made compulsory.
(iii) Closed Sales Territory:
It limits each dealer to sell only to buyers located within the assigned area. Closed sales territories may be illegal because it is an agreement restricting the right of the dealer. It may tend to create monopoly.
(iv) Franchise Selling:
Franchise means a privilege or exceptional right granted to a person. 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 (the parent company) provides equipment, the products or services for sale, and also managerial services to franchisee (the owner of business unit). Under this system, the owner of the product issues a licence 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.
We have three forms of franchising:
1. The manufacturer-sponsored retail franchise system. For instance, car maker licenses dealers to sell its cars, the dealer meeting conditions of sales/services.
2. The manufacturer-sponsored wholesaler franchise system. For instance, Coca-Cola licenses bottlers (wholesalers) in each market who buys its syrup concentrate and then carbonate, bottle and sell it to retailers in all local markets.
3. The service-firm-sponsored retailer franchise system. For instance, fast-food-service, auto-rental business, motel business.
The most common routes used for bringing the products in the market from producer to consumer are as follows:
1. Manufacturer-Consumer (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 salesforce (house-to-house canvassing), Examples- Eureka Forbes, Modi Xerox and Amway. (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.
This is a normal, regular, and popular channel option used in groceries, drugs, goods, etc. It is 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.
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.
Wholesaler may by-pass retailer when there are large and institutional buyers, e.g., business buyers, Government, consumer cooperatives, hospitals, educational institutions, business houses.
A lengthy marketing channel used by FMCC Companies to penetrate rural and semi-urban markets.
In all commodity markets, whether primary or central, we have a host of middlemen acting as essential functionaries.
Broker is an agent who does not have direct physical possession of goods in which he deals but he represents either the buyer or the seller in negotiating purchases or sales for his principals. Brokers may be organised as individuals, partnership or even companies. They act as agents for their clients — producers, dealers, manufacturers, etc.
They buy and sell specific quantities of specific grades of a commodity on behalf of their masters or employers who undertake all market, credit, transport, and other risks.
2. Commission Agents:
Individuals, firms, or even companies are organised to buy or sell commodities, acting as buying or selling agents of producers, or manufacturers. They may buy or sell on their own account and at their own risk of loss. In that case, they are called commission merchants or factors.
They may receive goods for sale on consignment acting as consignees of their employers and the consignment method is used by manufacturers who wish to maintain resale prices of their goods. They may also act as sole agents of their employers.
Selling agents sell the entire output of their principals or all of given lines of goods; they also often have full authority to finalise prices, terms and other conditions of sale. We have also manufacturer’s agents to sell goods of a number of a non-competing producers or manufacturers.
They are appointed on a continuing agency basis; they often sell within an exclusive area. But they possess limited authority with regard to prices and terms of sale. All commission agents work for a fee or commission, e.g., three per cent to five per cent on sales or purchase.
Manufacturer’s agents are very helpful, in the three circumstances- (1) for a small manufacturer with a few products and having no salesforce, (2) for entering into a new market to be fully developed, and (3) for sale of a new line of product, which the present salesforce is unable to manage or the new market is not within their territory.
3. Sole Selling Agency:
An established firm of good reputation operating in each area may be appointed as a sole agent or distributor exclusively for that locality. When the agent is assured of benefits, he will work hard and with enthusiasm. There should be a regular legal agency agreement covering the mutual rights and obligations of both parties and all questions likely to arise during the agency. The minimum period of an agency should be normally three to five years, with a three months’ notice period on either side for agency termination.
Usually, sales agencies involve exclusive selling rights for a territory. This will prevent competition among agents. Of course, the sole agents must know the area well and must be able to handle the given area effectively. The sole agent is given a special commission.
The stock is held on consignment by the agent and the property remains with the seller until it is sold. The agency agreement will mention the maximum amount of stock to be held by the agent at a time. Within the prescribed limit, the agent is free to select his stock.
Under a consignment sale, the goods are consigned to the selling agent called the consignee on a sale or return basis. When the goods are sold, the agent prepares ‘Account Sale’ and forwards it to the seller. The selling expenses and commission are deducted from the total sale proceeds and the net amount due is remitted by cheque along with the Account Sale. Usually, the selling agent also acts as Del credere agent in which case he assumes full responsibility for bad debts against special Del credere commission.
Sole agents or sole distributors are given reasonable areas for exclusive selling rights. The seller cannot put too much of his business in the hands of one agent. If a large output is sold through one agent only, the goods of the seller may become identified with the agent to such an extent that a change of agent would be difficult in practice without loss of business and prestige. The manufacturer should not rely upon his agent for demand creation. He must conduct a general advertising campaign with co-operation.
Exclusive dealing agreements are illegal if the supplier has a substantial share of the market. However, in India, exclusive dealership or distributorship is regarded as a restrictive trade practice, subject to approval under the M.R.T.P. Act, 1969.
Marketing intermediaries or middlemen in the distribution network are indispensable because they perform specialised marketing functions such as buying, selling, transporting, warehousing, grading, sorting, financing, risk-taking, and dissemination of marketing intelligence. They create time, place, possession, and information utility.
Marketing intermediaries survive and prosper only as long as they perform one or more of these essential marketing functions at costs which are competitive with other intermediaries and at levels matched to market demands.
It should be clearly understood that marketing functions or services can be shifted and shared, but they can never be eliminated. Even if a producer takes goods directly to the user, the channel functions cannot be eliminated. The producer under direct sale must perform all marketing functions such as buying, selling, stocking, pricing, promoting, displaying, delivering, financing, and so on.
The direct sale may reduce the number of times or the frequency of the functions performed. But it cannot eliminate those typical marketing functions. Besides, the direct-route may or may not reduce the cost. Under such circumstances, where is the utility of eliminating middlemen in distribution?
On the other hand, it is preferable to utilise middlemen who specialise in those marketing services and who offer the benefits of specialisation at reasonable cost. Wholesalers and retailers, by practising specialisation and division of labour, reduce their operating expense ratios. They can operate on relatively small profit margin.
Middlemen serve as expert purchasing agents for their customers, and expert sales specialists for their manufacturers. Many a time, they offer financial help to their suppliers and their customers. They also act as risk-bearers. They look after storage and transport. They are the clearing house of information. Hence, they are essential in the machinery of distribution.
Functions of Sales Experts:
(1) Market information.
(6) Feedback of consumer wants.
(8) Sales negotiation a title to goods.
Functions of Purchase Specialists:
(1) Consumer wants anticipation.
(2) Breaking of bulk.
(6) Risk bearing.
(8) Product guarantee.
(9) Products readily available.
To the manufacturer, middlemen are sales experts. To the customers, they are buying specialists.
Wholesalers are individuals or business firms who will sell products to be used primarily for resale or for industrial use. The wholesaler is a bulk purchaser with the object of resale to retailers or other traders after breaking down his ‘Bulk’ in smaller quantities and, if necessary, repacking the smaller lots into lots suitable for his customers, viz. retailers.
Wholesale Vs. Retail Trade:
Wholesalers operate on a large-scale in the central market and act as the first outlet in distribution, usually specialising in one or a group of allied articles. Retailers operate on a small-scale and in the local markets, selling directly to the consumers a wide variety of goods to satisfy numerous and changing wants of customers.
Wholesale business needs large capital. Wholesale prices and margins are relatively lower, and the business can be carried on with or without a showroom. Retail business requires limited capital, the prices and margins are relatively higher and the business requires a shop with or without display.
A middleman in distribution is a specialist in concentration, equalisation, and dispersion. Wholesalers specialise in these three vital functions in the process of marketing. Wholesalers offer typical services as middlemen between producers and retailers in the central market- (1) Maintenance of salesforce, (2) Storage, (3) Delivery to retailers, (4) Financial help to both manufacturer and retailer, (5) Merchandising, i.e., preparations for sale (packing, grading, branding, etc.), (6) Sales promotional work, (7) Product servicing, (8) Marketing information, (9) Risk-bearing, and (10) Finding new retailers.
1. Order Collector:
Retailers are usually scattered, their orders are small and they are too many in number. The wholesaler acts as order collecting and marketing agency for the manufacturer. The manufacturer can, therefore, concentrate on production and need not worry about distribution.
2. Risk Transfer:
A wholesaler usually places huge advance orders on the manufacturer. Thus, the manufacturer is insured for sale or disposal. He need not carry large stocks and can concentrate fully on manufacturing goods as per order of the wholesaler. The manufacturer is, therefore, free from bearing of risk of loss.
3. Financial Relief:
The wholesaler’s organisation can be used by the manufacturer for disposal of his goods. The manufacturer need not maintain huge sales organisation for collection of numerous orders and dispatching many small parcels of goods to scattered retailers. The manufacturer need not grant credit to retailers.
Wholesalers do not demand credit from the manufacturer and sometimes they make advance payment to small manufacturers. Thus, the manufacturer enjoys financial relief and employs his capital for more productive purposes, viz. and expansion of his manufacturing activities.
4. Expert Advice:
The wholesaler knows the pulse of the market. He can secure firsthand information of consumer’s wants through the retailer’s order. The wholesaler’s order on the manufacturer can act as an indicator of trend of demand or of public taste. The manufacturer can regulate his production activity in the light of this trend and can bring about necessary modifications in his product so that it will give the desired satisfaction to the consumer.
1. No Need to Hold Large Stocks of Varied Goods:
A retailer has to maintain adequate stocks of varied commodities especially if his turnover is not quick and he has relatively large number of customers. He encounters two difficulties in holding large stocks of each type of commodity. One is dearth of capital and the other is lack of space. Hence, he cannot maintain adequate stocks of varied articles.
Under such circumstances, the wholesaler’s warehouse acts as reservoir or a constant source for retailers to draw their supplies as and when they require. Thus, the wholesaler gives a retailer definite assurance to replenish or refill his stocks at frequent intervals. The retailer gets considerable financial relief and need not lock up his capital. He can carry on his business with less amount of capital.
2. Prompt Delivery of Goods:
In absence of the wholesaler, the retailer may have to wait for a long time for the execution of his order or he may have to place advance orders on the manufacturer. When the wholesaler is present, supplies to the retailer will be available more quickly as the goods are in his warehouse almost ready for delivery. Thus, the retailer gets prompt delivery of goods.
3. Benefits of Specialisation:
The wholesaler performs marketing functions for the retailer also. A retailer will buy from the best wholesaler who in turn will secure supplies from the best manufacturer. Some of the advantages of specialisation can be passed on to the retailers. A retailer carries varied stocks, therefore, he cannot claim expert knowledge of market conditions for each article.
The wholesaler specialises in one line of goods and knows the pulse of the market. Therefore, he can advise the retailer when to buy, how much to buy at a time. He can also guide him regarding the quality of the product.
4. Announcement of New Products:
The wholesaler informs the retailer about the arrival of new goods. The new products may be advertised by the manufacturer. They may be kept in the showroom and his travelling salesman may create demand through personal salesmanship. The wholesaler may help the retailer in an efficient window-display of the new products in his shop.
5. Grant of Credit:
Wholesalers grant credit to their permanent customers. Average size of the retailer’s order is large and the order may be placed on different departments of the wholesaler’s organisation. Secondly, the retailer makes frequent purchases and cash settlement for each purchase may lead to inconveniences and waste of time.
Hence, the wholesaler usually grants monthly or quarterly credit and sends periodical statements of account to the retailers who are granted credit facilities. Such financial help increases in effect the working capital of the retailer. However, he has to forego cash discount when he accepts credit from the wholesaler.
The wholesaler may grant credit to those retailers whose sales turnover is slow, whose transactions are on credit and who are required to maintain large stocks at a time. Quick sales turnover and cash sales do not require large stocking of goods. Hence, the wholesaler may not grant credit to such retailers.
Position of the Retailer in the Absence of the Wholesaler- We may realise the indispensability of a person much more when he is absent rather than when he is present and serving us in different ways. This is true in the case of the wholesaler, who is acting as a connecting link between the manufacturer and the retailer.
In the absence of wholesaler, the retailer will suffer from the following inconveniences- (1) He will have to hold large stocks of varied articles, and for this he must have adequate space and ample capital. Very few retailers can command both space and capital. (2) He will have to assemble stocks from different manufacturers. (3) He will have to arrange for their carriage, packing, warehousing, etc. (4) He will have to bear the risk of fluctuations in prices, changes in public taste and demand. Very few retailers are capable of bearing such risk of loss.
Retailing is a trading activity directly related to the sale of goods or services to the ultimate consumer for personal, non-business use. A retailer is the last middleman in the machinery of distribution and he is responsible to satisfy recurrent wants of consumers. Retail trade is selling of varied goods in small quantities to the final consumer. There are three distinguishing features of retail trade.
The retailer deals in small quantities and his business is usually local in character. Secondly, retail trade always shows tendency towards variety as it has to satisfy innumerable wants of consumers. A specialised retail shop is for approaching specific target market. Thirdly, a retailer, by operating near about the residential areas of consumers, sells his wares directly to consumers. He may extend credit facilities and offer home delivery service. Manufactured goods are worthless until they pass acid-test of retail distribution. The retailer alone can offer safe and reliable goods to consumers.
Channels of Distribution # 15. Channel Conflict-Types and Causes:
Even when a company has an effective distribution set up in the market, some conflict between channel members and between the company and channel members may take place. This is normally due to conflicting business interests. Example- the Company wants the distributor to extend the activities to new and uncovered markets and appoint new dealers for increasing sales volumes.
But the distributor focuses on existing, developed markets and loyal dealers and is comfortable to work in the established market. He is reluctant to explore new and unknown markets.
There are three types of channel conflict:
(1) Vertical Channel Conflict:
Vertical channel conflict relates to conflict between different levels within the same channel. Example- Conflict between distributor and the retailer.
(2) Horizontal Channel Conflict:
Horizontal channel conflict means conflict between members at the same level of the distribution channel. Example- Price-cutting between retailers in the same market.
(3) Multi-Channel Conflict:
Here the company selects two or more channels to sell its products in the same market. Example- Company makes direct supplies to wholesales as well as key retailers in the same market. The wholesaler is hurt since this arrangement affects his sales in the market.
(1) Conflicting Objectives:
The objectives of the company and the channel members differ. Example- The Company wants the distributor to offer sales incentives for bulk purchases. The distributor wishes to work with high margins and is concerned with his profitability.
(2) Demand for Extra Discount:
The channel members may ask for additional discount for pushing the products and the company may not be in favour such proposal, leading to conflict.
(3) Unethical Practices:
Channel members i.e., distributors and dealers may resort to unethical practices like charging more than MRP (particularly during shortages), not passing on free goods to consumers, selling spurious products, etc. leading to conflict between company and channel members.
(4) Some companies may supply directly to key industrial customers bypassing the area distributor. The distributor looses the business and the commission, and this leads to conflict between the company and the distributor.
(5) The distributor may sell competitors’ products and this will affect company’s business.
(6) Reduction in the Area of Operation:
In order to improve dealer coverage and sales, company may reduce the area of operation of the current distributor and add one or more distributors in the same area. The distributor is upset with the decision of the company as his area of operation has been reduced and his sales may be affected.
(7) Managing Channel Conflict:
Channel members play a major role in growth and development of business. They perform specialised marketing functions such as buying, selling, warehousing, grading, financing, risk taking and provide valuable marketing intelligence to the company. Chosen channels cannot be terminated overnight. Channel decisions require special attention as they are key external resource equally important like internal resource (employees).
Regular communication between the company, distributors and dealers will certainly go a long way in minimising channel conflicts. Circulars, e-mails, newsletters, personal one-to-one discussions can be used to communicate with channel members. Taking feedback from key distributors/dealers and involving them in discussions will help the company in improving relations with distribution channel members.
(b) Aligning Goals of the Company with These of Channel Members:
The sales and field activities plan of the company should be discussed and communicated to the distributors/ dealers so that both the company and channel members can work together for achievement of common objectives.
(c) Dealer Councils:
Dealer councils can resolve conflicts between company/distributors/dealers. It provides an opportunity for dealers to represent the problem in the market.
(d) Arbitration and Mediation:
Arbitration and mediation facilitate settlement of channel conflicts. If these methods prove ineffective, the member may go to the court. However, it is a time-consuming and very often an expensive option.
Channels of Distribution # 16. Role of Distribution Channels:
In an ever-widening market, particularly in consumer goods market, distribution channels have a distinctive role in the successful implementation of marketing plans and strategies.
These channels perform the following marketing functions:
1. The searching out of buyers and sellers (contacting).
2. Matching goods to the requirements of the market (merchandising).
3. Offering products in the form of assortments or packages of items usable and acceptable by the consumers/users.
4. Persuading and influencing the prospective buyers to favour a certain product and its maker (personal selling/sales promotion).
5. Implementing pricing strategies in such a manner that would be acceptable to the buyers and ensure effective distribution.
6. Looking after all physical distribution functions.
7. Participating actively in the creation and establishment of market for a new product.
8. Offering pre-and after-sale services to customers.
9. Transferring of new technology to the users along with the supply of products and playing the role of change agents, e.g., in the agricultural green revolution in our country.
10. Providing feedback information, marketing intelligence and sales forecasting services for their regions to their suppliers.
11. Offering credit to retailers and consumers.
12. Risk-bearing with reference to stock holding/transport.
Channels of Distribution # 17. Managing Channel Members:
Intermediaries also known as distribution intermediaries, marketing intermediaries, or middlemen, are an extremely crucial element of a company’s product distribution channel. Without intermediaries, it would be close to impossible for the business to function at all.
This is because intermediaries are external groups, individuals or businesses that make it possible for the company to deliver their products to the end user. For example – merchants are intermediaries that buy and resell products.
There are four generally recognized broad groups of intermediaries-
Agents or brokers are individuals or companies that act as an extension of the manufacturing company. Their main job is to represent the producer to the final user in selling a product. Thus, while they do not own the product directly, they take possession of the product in the distribution process. They make their profits through fees or commissions.
Unlike agents, wholesalers take title to the goods and services that they are intermediaries for. They are independently owned, and they own the products that they sell. Wholesalers do not work with small numbers of product they buy in bulk, and store the products in their own warehouses and storage places until it is time to resell them.
Wholesalers rarely sell to the final user; rather, they sell the products to other intermediaries such as retailers, for a higher price than they paid. Thus, they do not operate on a commission system, as agents do.
Distributors function similarly to wholesalers in that they take ownership of the product, store it, and sell it off at a profit to retailers or other intermediaries. However, the key difference is that distributors ally themselves to complementary products.
For example – distributors of Coca Cola will not distribute Pepsi products and vice versa. In this way, they can maintain a closer relationship with their suppliers than wholesalers do.
Retailers come in a variety of shapes and sizes: from the corner grocery store, to large chains like Wal-Mart and Target. Whatever their size, retailers purchase products from market intermediaries and sell them directly to the end user for a profit.
Channels of Distribution # 18. Distribution Channel Management:
Just like the company’s own sales team, the distribution channel also works as a partner in increasing the sales of the company. The management of a distribution channel requires long term vision, consistency, transparency, fairness and relationship building focus.
The channel partners must be trained for product knowledge, the company’s sales processes, terms and conditions, competitive comparisons etc. Some regular motivation activities must also be carried out to keep up their enthusiasm and engagement with the company.
The company must decide the right discount structure which can motivate the channel partners to sell the company’s products. The discount must be enough to let the channel partners earn some money after covering all their expenses. Periodically, the company may come out with some schemes/special discounts/incentives etc. to motivate the channel partners to boost sales.
Some companies encourage and support their channel partners in marketing promotion activities by helping them in execution and by sharing some costs with them. Some also fully or partially reimburse some other costs e.g. rent, manpower, storage, inventory etc.
Because of the complexities of the market and geographic realities, there may arise some conflicts among different channel partners. Sometimes, the channel partners may have some grievances against company policies, practices, product quality, prices or its salespeople. We should have some well-defined policy to take care of such conflicts and grievances.
Any delay in sorting out the same may hurt the company’s sales performance, so the company must attend to them seriously. The main focus of the resolution approach must be promptness, fairness, long term relationship and transparency.
A weak or non-performing channel partner may damage the company’s reputation; weaken its customer base and which may result into lost time and sales for the company. So, it is necessary that the performance of all the channel partners is tracked by the company. There should be some regular tracking method by which the company’s sales team must be aware of the performance of the channel partners. The company must keep its eyes and ears open through its field sales force to check the channel partners’ activities.
In addition to the sales going to the channel partners, the company must also track the partners’ activities to boost sales and strengthen the network. The company’s salespeople must regularly visit the channel partners for troubleshooting, relationship building and market development. It should also get feedback from the channel partners down the line to examine the performance of the higher level channel partners.
The company must act on any negative or adverse reports about the performance and try to improve the channel partner performance. If nothing works, the company should switch its non-performing channel partner.
The company must establish a smooth process for receiving orders from the channel partners, dispatching goods for the same and receiving payments from them. All the terms and conditions regarding taxation, in-transit documentation, logistics expenses and penalty for delay in payments etc. must be clarified. The process for handling the in-transit damage must also be spelled out. If due to any reason the channel partner has to return some of the company’s goods, the process, terms and conditions for the same must be specified.