Distribution Channel or Marketing Channels

DISTRIBUTION CHANNEL

OR

MARKETING CHANNEL

1AMITABH MISHRA (Ph.D)

2

Channels of

Distribution

AMITABH MISHRA (Ph.D)

• Product Distribution (or Place) is one of the four

elements of the marketing mix.

• “Distribution is the process of making a product or

service available for use or consumption by a

consumer or business user, using direct means, or

using indirect means with intermediaries”.


• Distribution of products takes place by means of

channels.

• “A Channel of Distribution comprises a set of

institutions (intermediaries) which perform all of the

activities utilised to move a product and its title from

production to consumption”.

Producers Middlemen Final Consumer OrBusiness Users


• Intermediaries make distribution and selling

processes more efficient.


Channel Efficiency: How Intermediaries reduce the Number of Channel Transactions


Types/Levels of

Distribution Channel


• There may be two bases of classification of

distribution channels-

1. ‘Business-to-Consumer’(B2C)Distribution Channels/

Consumer Channels.

2. ‘Business-Business’ (B2B) Distribution Channels/Industrial

Channels.

AMITABH MISHRA (Ph.D) 8

1. “Business-to-Customer (B2C) distribution occurs between

the producer and the final user.”

2. “Business-to-Business (B2B) distribution occurs between a

producer and industrial users of raw materials needed for

the manufacturer of finished products.”


• Both types types/levels of distribution channels may

be-

1. Direct

2. Indirect

3. Hybrid


• Direct Channel: A distribution system is said to be direct when the

product or service leaves the producer and goes directly to the

customer, with no middlemen involved.

• For example,

– Company owned outlets

– Car wash

– Barber utilize direct distribution because the customer receives the

service directly from the producer.

– The jewelry manufacturer who sells its products directly to consumer.


• Indirect Distribution Channel: An indirect distribution

channel relies on intermediaries to perform most or all

distribution functions, otherwise known as wholesale

distribution.

• Hybrid Distribution Channel: Many times companies use

combination/hybrid of Direct and Indirect channels to

distribute its product in the market.

– Ex: A company (suppose Samsung mobiles) may sell the product

through its exclusive company owned outlet and website, as well as

through independent retailers.


Distribution Channel for Consumer Products


• Zero Level channel/Direct Marketing Channel: It consists of a

manufacturer directly selling to the end consumer.

• Ex.

– Door to Door sales,

– Direct mails or

– Telemarketing.

• One Level Channel: It has an intermediary in between the producer

and the consumer. Ex.

– An insurance policy in which there is an insurance agent

between the insurance company and the customer.


• Two level Channel: It consists of two intermediaries between

manufacturer and consumers, usually a wholesaler and a

retailer.

• It is a widely used marketing channel in the FMCG and the

consumer durables industry.


• Three level channel: It can combine the roles of a

distributor on top of a dealer and a retailer. The

distributor stocks the most and spreads it to dealers

who in turn give it to retailers.

• It as usually observed in both the FMCG and the

consumer durables industry.


Distribution Channel for Business Products


Channel Alternatives/

Types of Intermediaries


• Major Channel Alternatives/Types of Intermediaries are:

1. Merchants (Wholesalers and Retailers).

2. Agents and Brokers/ Manufacturers’ Representatives/ Sales

agents

3. Facilitators (Transportation companies, Independent

warehouses, Banks, and Advertising agencies).


• Merchants (Wholesalers and Retailers) are intermediaries that buy

and resell products.

– They take title to, and resell the products.

• Agents and Brokers/ Manufacturers’ Representatives/ Sales

Agents chase customers and may bargain on the producer’s behalf .

– They but do not take title to the products.

• Facilitators (transportation companies, independent warehouses,

banks, and advertising agencies), help in the distribution process .

– They neither take title to goods nor negotiate purchases or sales.


Marketing Channel

Flows


• Marketing channels perform following five

flows-

– Physical flow

– Title flow

– Payment flow

– Information flow

– Promotion flow


Marketing Channel Flows


Tasks of Intermediaries

Wholesalers

&

Retailers


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Tasks of Intermediaries - Wholesalers

• Break down ‘bulk’

• Buys from producers and sell small quantities to retailers

• Provides storage facilities

• Reduces contact cost between producer and consumer

• Wholesaler takes some of the marketing responsibility

e.g. sales force, promotions


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Tasks of Intermediaries - Retailer

• Much stronger personal relationship with the

consumer

• Hold a variety of products

• Offer consumers credit

• Promote and merchandise products

• Price the final product

• Build retailer ‘brand’ in the high street


Purpose/Objectives of

Distribution Channels


• Major objectives of Distribution Channel are-

– Physical distribution and insuring product availability.

– Market Information.

– Promotional Support.

– Bearing the risk and reducing the cost.

– Storing

– Providing help , support and services to the customers.

– Negotiation with customers.

– Prospecting (finding, communicating, and tracking prospective buyers)

– Financing (acquiring and using funds to cover the costs or carrying out the

channel work) Break down ‘bulk’


Factors affecting Distribution Channel Choice


• Factors related to Market/Consumers.

– Number of buyers

– Expansion/spread of the Consumers.

– Size of the Order/Sale.

– Objective of Purchase.

– Need of the Credit Facilities.


• Factors related to Product.

– Price of the product

– Standardised or customised product

– Perishability of the product

– Technical nature of the product

– Goods made to order.

– After-sales service.


• Factors related to the Intermediary/Middlemen

– Services offered by middlemen.

– Scope or possibilities of quantity of sales.

– Attitude of agents towards the producers' policies.

– Cost of channel of distribution.


• Factors related to the Producer /Company

– Level of production.

– Financial resources of the company.

– Managerial competence and experience.

• Other Factors

– Distribution channel of competitors.

– Social viewpoint.

– Freedom of changing the middleman.


Push Strategies

vs.

Pull Strategies


• Push Strategy: “A push strategy uses the manufacturer’s sales

force, trade promotion money, and other means to induce

intermediaries to carry, promote, and sell the product to end

users”

• “Pushing the product “down” through the distribution

channel to the customer”.

– Incentives to agents and intermediaries


• Pull Strategy: “A pull strategy uses advertising,

promotion, and other forms of communication to

persuade consumers to demand the product from

intermediaries”.

• Pulling the customer “up” through the distribution to

the channel

– Traditional media/private sales/CRM.


FUNCTIONS/IMPORTANCE

OF

DISTRIBUTION CHANNEL


• Information (gathering and distributing information and

intelligence)

• Promotion (development and spreading marketing

communications)

• Contacts (Finding and communicating with prospective buyers)

• Negotiation with customers (reaching an agreement on price

and other terms)

• Physical distribution (transporting and storing goods)


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• Prospecting (finding, communicating, and tracking

prospective buyers)

• Financing (acquiring and using funds to cover the costs or

carrying out the channel work)

• Risk taking (assuming the risks of carrying out the channel

work)

• Break down ‘bulk’

• Provides storage facilities


Channel

Management


• “Channel Management is a process by which a producer or

supplier directs marketing activity by selecting, involving,

training and motivating the entities comprising its channel of

distribution”.

• “Channel Management refers to the administration of

existing channels to secure the cooperation of channel

members in achieving the firm’s distribution objectives”.


• Channel Management involves-

1. Selection of channel members

2. Training of channel members

3. Motivating channel members

4. Evaluation of channel members

5. Conflict management


1. Selection

of

Channel Members


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• Selecting a distribution channel is an important

aspect of building a competitive advantage for

businesses of every size.

• The right distribution channel ensures that

customers in different locations around the country,

or around the world, can buy products and get the

right level of service from the firm.


Factors in Selection

of

Channel Members


• To select the right distribution channel for business, company need

to consider what a channel can offer to company, including-

– Location

– Reach (The channel must be easily accessible for customers and

prospects)

– Skills (channel member should have the skills and knowledge to sell

products)

– Resources

– Management costs and

– Degree of control


2. Motivating

Channel Members


• “Channel Motivation refers to the actions taken by

the manufacturer to foster strong channel member

cooperation in implementing the manufacturer’s

distribution objectives”.

• Channel motivation can be done by two ways-

– Positive motivation

– Negative motivation


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• Positive motivation: To motivate intermediaries the

firm can use positive actions, such as-

– Offering higher margins to the intermediary,

– Special deals,

– Premiums and Incentives may be offered for reaching

performance goals

– Allowances for advertising or display.


• Negative motivation: On the other hand,

negative actions may be used, such as-

– Threatening to cut back on margin, or

– Hold back delivery of product.

– Sanctions may be imposed middlemen not

performing well


3. Training

of

Channel Members


• An effective channel management requires channel

members to be equipped with the right skills to

consistently execute on the companies strategy.

• The channel members must be trained in

– Technical specifications of product

– Hospitality and courtesy

– Company’s policies and strategies

– Ways to stay ahead to competitors in local market

– Etc.


4. Evaluation of

Channel Members


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• The company should constantly evaluate the channel

members and monitor-

• What is working?

• What is not working?

• What can be improved?


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• The company must evaluate intermediaries

performance against various standards as:

• Sales quota attainment

• Average inventory levels

• Customer delivery time

• Treatment of damaged and lost goods

• Cooperation in promotional and training programs.


5. Channel Conflict/

Conflict in

Distribution Channels


• Channel conflict can arise when one intermediary's actions prevent

another intermediary from achieving their objectives.

• Channel conflict is “disagreements between channel members on goals

and roles, who should do what, and for what rewards”

• Channel conflict may be

– Vertical conflict is conflict between different levels of the same

channel (Ex: Manufacturer competes with retailer in selling product to

target market.)

– Horizontal conflict is conflict among members at the same channel

level (Ex: Two retailers compete to carry a supplier’s “exclusive”

product.)


• Vertical channel conflict: Vertical conflict is conflict between

different levels of the same channel.

• It occurs between the levels within a channel and

• Ex: Manufacturer competes with retailer in selling product to

target market.


• Horizontal channel conflict: Horizontal conflict is conflict

among members at the same channel level.

• It occurs between intermediaries at the same level within a

channel.

• Ex: Two retailers compete to carry a supplier’s “exclusive”

product.


• Some conflict encourages healthy competition which

produces innovation and better performance.

• Too much conflict becomes dysfunctional.


Vertical

Producervs.

Wholesaler

Producervs.

Retailers


Channel Design


• “Designing a channel system calls for analyzing customer

needs, establishing channel objectives, and identifying and

evaluating the major channel alternatives.”


Analyzing Customer

Needs

Establishing Channel

Objectives

Identifying Major Channel

Alternatives

Evaluating Major Channel

Alternatives

1. Analyzing Customers’ Need/ Service Output Levels Desired By Customers

• The marketer must recognize the needs of its target customers.

• Channels produce five service outputs:

– Lot size: The number of units the channel allows a particular customer to buy at one time.

– Waiting and delivery time: The average time consumers of that channel wait for receipt of the

goods. Customers generally prefer fast delivery channels.

– Spatial convenience: The extent to which the marketing channel facilitate for customers to

obtain the product.

– Product variety: The variety provided by the channel. Usually, consumers prefer a greater

collection, which enhances the chance of finding what they need.

– Service backup: The add-on services such as credit, delivery, installation, repairs provided by

the channel.


2. Establishing Channel Objectives and Constraints

• Another factor in designing a marketing channel system is that marketers must

declare their channel objectives in terms of targeted service output levels.

• Channel objectives differ with product characteristics.

• For example-

– Perishable products require more direct marketing.

– Bulky products, such as building materials, require channels that minimize the shipping

distance and the amount of handling in the movement from producer to consumer.

• Channel design is also affected by numerous environmental factors as

competitors’ channels, monetary conditions, and legal regulations and

limitations.


3. Identify Major Channel Alternatives

• Companies may select array of channels to approach customers,

each of which has distinctive strengths as well as limitations.

• Each channel alternative is explained by

• Major Channel Alternatives/Types of Intermediaries:

– Merchants (Wholesalers and Retailers).

– Agents and Brokers, Manufacturers’ representatives, and Sales

agents

– Facilitators (Transportation companies, Independent

warehouses, Banks, and Advertising agencies).


– Wholesalers and Retailers: Some intermediary merchants such as

wholesalers and retailers buy, take title to, and resell the products.

– Agents such as brokers, manufacturers’ representatives, and sales

agents chase customers and may bargain on the producer’s behalf but

do not take title to the merchandise.

– Facilitators (transportation companies, independent warehouses,

banks, and advertising agencies), help in the distribution process but

neither take title to goods nor negotiate purchases or sales.


4. Evaluating the Major Alternatives

• The Company must assess each alternative against suitable economic,

control, and adaptive criteria. The firm should verify whether its own sales

force or a sales agency will create more sales and it estimates the costs of

selling different quantities through each channel


Multi Level Marketing/Network Marketing


• Multi-level marketing (MLM), also called pyramid selling, network

marketing, and referral marketing,

• “Multi-level marketing is a strategy that some direct sales

companies use to encourage their existing distributors to recruit

new distributors by paying the existing distributors a percentage of

their recruits' sales; the recruits are known as a distributor's

downline.”


• MLM is one type of direct selling.

• “It is a marketing strategy where profit is derived by a participating

salesperson from a sales force which is compensated not solely by

the direct sales (although insignificant) generated by the

salesperson, but principally (although statistically improbable) from

the sales of other salespeople that the participating salesperson has

managed to recruit, and of further recruits that these earlier

recruits can additionally recruit, etc.”

• MLM salespeople not only sell the company's products but also

encourage others to join the company as a distributor.


Distribution Channel or Marketing Channels

Marketing

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