MARKETING CHANNELS

Distribution Channel-DefinitionDistribution Channel-Definition

Philip Kotler Philip Kotler ““A channel of distribution is a set of A channel of distribution is a set of

independent independent organizations involved in the organizations involved in the process of making a product process of making a product or service available or service available for use or Consumption by the for use or Consumption by the consumer or consumer or business user”business user”

William J. StantonWilliam J. Stanton

““A channel of distribution for a product is the A channel of distribution for a product is the route route taken by the title of the goods as they move taken by the title of the goods as they move from the from the producer to the ultimate consumer or producer to the ultimate consumer or industrial usersindustrial users””

Distribution Channel-DefinitionDistribution Channel-Definition

The American Marketing Association Distribution channel as the structure of intra

company organization units and extra company agents and dealers, wholesalers and retailers through which a product or service is marketed”.

Richard Bushkirk “Distribution channels are the system of economic institutions through which a producer of goods delivers them into the hands of their users”.

Distribution Channel-DefinitionDistribution Channel-Definition

A channel of distribution represents three types of flows:

a. Goods flow from producer to consumers;

b. Cash flow from consumers to producer as payment for good

c. Marketing information flows in both directions, from producers to consumers in the form of information on new products, new uses of existing products, etc. The flow of information from consumers to producers is the feedback of the wants, suggestions, complaints, etc.

Function of Distribution ChannelFunction of Distribution Channel1. Distribution channels facilitate the sales process by being physically close to customers.2. They bridge the makers and users efficiently and economically.3. Break the bulk and cater to the small size requirements of buyers.4. Assemble and offer suitable assortments of products as required by buyers.5. Help sub-distribution.

a) selling to sub-distributorsb) re-transportc) handlingd) accounting

Function of Distribution Function of Distribution ChannelChannel

6. Help stock holdinga) financing the stocksb) risk bearingc) storage of productsd) making available ware house spacee) aiding the sales by transforming the static stocks into operational stocks.

7. Provide salesmanship.8. Provide pre-sale and after-sale service.9. Assist in sales promotion.10. Assist in merchandising.

Function of Distribution Function of Distribution ChannelChannel

11. Aid the introduction of new products in the market.12. Aid the price mechanism between the firm and the ultimate customers.13. Assist in developing sales forecasts for the territory concerned.14. Provide feed back and market intelligence.15. Maintain records/registers.16. Maintain liaison17. Extend credit to retailers as well as actual users.18. Transfer technology to the users and act as

“change agents”.

Types of distribution ChannelTypes of distribution Channel

Channel Level:

A layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer

Direct Marketing Channel:

That has no intermediaries Indirect Marketing Channel

Containing one or more intermediary level

Direct Channel Direct Channel (Zero level)(Zero level) The most simple and the shortest mode of

distribution is direct distribution, where in the goods are made directly available by the manufacturers to customers, without involving any intermediary

e.g., Eureka Forbes

Manufacturer Customer

Indirect ChannelIndirect Channel

When a manufacturer employs one or more intermediary to move goods from the point of production to the point of consumption

1. Manufacturer-Retailer Consumer (One Level Channel):

In this form of arrangement one intermediary i.e., retailers is used between the manufacturers and the customers. That is, goods pass from the manufacture to the retailers who, in turn, sell them to the final users.

For example, Maruti Udyog sells its cars and vans through company approved retailers. This type of distribution network enables the manufacturers to cover wide area o market while retaining control over the Channels.

Manufacturer Retailer Customer

Indirect ChannelIndirect Channel

2.Manufacturer-Wholesaler-Retailer-Consumer (Two Level Channel)Manufacturer-Wholesaler-Retailer-Consumer (Two Level Channel)

This is the most commonly adopted This is the most commonly adopted distribution distribution network network for most consumer goods like soaps, oils, clothes, for most consumer goods like soaps, oils, clothes, rice, rice, sugar sugar and pulses. and pulses.

The wholesaler and retailer function as The wholesaler and retailer function as connecting links connecting links between the manufacturer and consumer. between the manufacturer and consumer.

Use of two middlemen in the channel Use of two middlemen in the channel network enables network enables the the manufacturer to cover a larger market areamanufacturer to cover a larger market area.

Manufacturer Wholesaler Retailer Customer

Indirect ChannelIndirect Channel

Manufacturer-Agent-Wholesaler- Retailer-Consumer (Three Level Channel)

Manufactures use their own selling agents or brokers who Manufactures use their own selling agents or brokers who connect them with wholesalers and then the retailers. connect them with wholesalers and then the retailers.

One more level is added to the levels discussed in the One more level is added to the levels discussed in the proceeding arrangement.proceeding arrangement.

It is done particularly when the manufacturer carries a It is done particularly when the manufacturer carries a limited product line and has to cover a wide market.limited product line and has to cover a wide market.

An agent in each major area is appointed, who in turn An agent in each major area is appointed, who in turn contact the wholesalerscontact the wholesalers..

Manufacturer Agent Wholesaler Retailer Customer

Factors of choice of Factors of choice of DistributionDistribution

1.1. Market ConsiderationsMarket Considerations

The nature of the market is a key factor influencing the choice of channels of distribution. The nature of the market is a key factor influencing the choice of channels of distribution.

aa. . Consumer or industrial marketConsumer or industrial market: : If the product is meant for industrial users, the channel of distribution will If the product is meant for industrial users, the channel of distribution will be a short one. be a short one. This is because industrial users buy in a large quantity and the producer This is because industrial users buy in a large quantity and the producer can easily establish a direct contact with them.can easily establish a direct contact with them. But in case for goods meant for consumers, retailers may have to be But in case for goods meant for consumers, retailers may have to be included in the channels of distribution.included in the channels of distribution.b.b. Number and location of buyersNumber and location of buyers: : When the number of potential customers is small or the market is When the number of potential customers is small or the market is geographically located in a limited area, direct selling is easy and geographically located in a limited area, direct selling is easy and economical. In case of large number of customers, use of wholesalers and economical. In case of large number of customers, use of wholesalers and retailers becomes necessary.retailers becomes necessary.

Factors of choice of Factors of choice of DistributionDistribution

c. c. Size of orderSize of order: : Direct selling is convenient and Direct selling is convenient and economical where customers place order in big lots as in economical where customers place order in big lots as in case of industrial goods. But where the product is sold in case of industrial goods. But where the product is sold in small quantities, middlemen are used to distribute such small quantities, middlemen are used to distribute such products. A manufacturer may use different channels for products. A manufacturer may use different channels for different types of buyers. He may sell directly to big retail different types of buyers. He may sell directly to big retail stores and may use wholesalers to sell to small retailersstores and may use wholesalers to sell to small retailers ..

d. Customers buying habitsd. Customers buying habits: : The customer buying habits The customer buying habits like the time he is willing to spend, the desire for credit, like the time he is willing to spend, the desire for credit, the preference of personal attention and one stop the preference of personal attention and one stop shopping significantly affect the choice of distribution shopping significantly affect the choice of distribution channels.channels.

2. Product Considerations2. Product Considerations

a. Unit valueUnit value Products of low unit value and common use are generally sold through middlemen, as they cannot bear the cost of direct selling.

Expensive consumer goods and industrial products are sold directly by the producers.

2. Product Considerations2. Product Considerations

b. Perishabilityb. Perishability Perishable products like vegetables, fruits and bakery items have relatively short channels, as they cannot withstand repeated handling. Goods, which are subject to frequent changes in fashion and style, are generally distributed through short channels, as the producer has to maintain close and continuous touch with the market.

2. 2. Product ConsiderationsProduct Considerations

c. Bulk and weightc. Bulk and weight Heavy and bulky products are distributed Heavy and bulky products are distributed directly to minimize handling costs. Coal, bricks, directly to minimize handling costs. Coal, bricks, stones, etc., are some examples.stones, etc., are some examples.

d. Standardisationd. Standardisation Custom-made and non-standardised products Custom-made and non-standardised products usually pass through short channels due to the usually pass through short channels due to the need for direct contact between the producer and need for direct contact between the producer and the consumers. Standardized and mass-made the consumers. Standardized and mass-made goods can be distributed through middlemen.goods can be distributed through middlemen.

2. Product 2. Product ConsiderationsConsiderations

e. e. Technical natureTechnical natureIndustrial products requiring demonstration, installation and aftersale Industrial products requiring demonstration, installation and aftersale service are often sold directly. The consumer products of technical nature service are often sold directly. The consumer products of technical nature are generally sold through retailers.are generally sold through retailers.f.f. Product line Product lineAn entrepreneur producing a wide range of products may find it An entrepreneur producing a wide range of products may find it economical to set up its own retail outlets. On the other hand, firms with economical to set up its own retail outlets. On the other hand, firms with one or two products find it profitable to distribute through wholesalers and one or two products find it profitable to distribute through wholesalers and retailers.retailers.g.g. Age of the product Age of the productA new product needs greater promotional effort and few middlemen may A new product needs greater promotional effort and few middlemen may like to handle it. As the product gains acceptance in the market, more like to handle it. As the product gains acceptance in the market, more middlemen may be employed for its distribution.middlemen may be employed for its distribution.

Factors influencing Marketing Channel strategies

FACTORS CHARACTERISTIC FOR SHORT

CHANNEL

CHARACTERISTIC FOR LONG

CHANNEL

MARKET FACTORS Business Users Consumers

Geographically Concentrated Geographically Dispersed

Extensive technical knowledge & Regular

service

Little technical knowledge & no Regular

service

Large orders Small orders

PRODUCT FACTORS Perishable Durable

Complex Standardized

Expensive Inexpensive

ORGANIZATIONAL FACTORS Has adequate resources to perform functions Lacks

Broad product line Limited product line

Channel control important Not important

COMPETITIVE FACTORS Satisfied with intermediaries performance in

promoting products

Not Satisfied with intermediaries performance

in promoting products

Vertical Marketing System (VMSVertical Marketing System (VMS))

Planned channel system designed to Planned channel system designed to improve distribution efficiency and cost improve distribution efficiency and cost effectiveness by integrating various effectiveness by integrating various function throughout the distribution function throughout the distribution chainchain

A distribution channel structure in which A distribution channel structure in which producers ,wholesalers ,and retailers act producers ,wholesalers ,and retailers act as a unified systemas a unified system

Vertical Marketing System (VMSVertical Marketing System (VMS))

TypesTypes Corporate Marketing systemCorporate Marketing system

VMS in which single owner operates the VMS in which single owner operates the entire marketing channelentire marketing channel

Administered Marketing systemAdministered Marketing system

VMS that achieves channel coordination when VMS that achieves channel coordination when a dominant channel member exercises its powera dominant channel member exercises its power

Contractual Marketing systemContractual Marketing system

VMS that coordinates channel activities VMS that coordinates channel activities through formal agreements among participationthrough formal agreements among participation

Designing Marketing ChannelDesigning Marketing Channel

1. Formulating the channel objectiveFormulating the channel objective

2.2. Identifying the functions to be performed by the Identifying the functions to be performed by the channel channel

3.3. Analyzing the product and linking Analyzing the product and linking the channel the channel design to design to the product characteristicthe product characteristic

4.4. Evaluating the distribution environment, including Evaluating the distribution environment, including legal legal aspectsaspects

5.5. Evaluating competitors channel designEvaluating competitors channel design

6.6. Evaluating company resources and Evaluating company resources and managing the managing the channel design to the channel design to the resources resources

7.7. Generating alternative designs, evaluating them and Generating alternative designs, evaluating them and selecting the bestselecting the best