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DISTRIBUTION

What is a Distribution Channel ?

 It is a set of interdependent organizations involved in the process of making a

product or a service available for use or consumption by the consumer or the
business user

Why are marketing channels used ?

 Marketing channels are used for their greater efficiency in making goods
available to target markets because of their contacts, experience, specialization
and scale of operations. They can offer the producer more than it can achieve
on its own

 Channel intermediaries can provide economies. The use of channels implies

fewer relationships to manage & hence intermediaries reduce the amount of
work that must be done by producers & consumers

 Marketing intermediaries transform the assortment of products made by

producers into assortments wanted by consumers

 Producers produce narrow assortments of products in large quantities, but

consumers want broad assortment of products in small quantities

 The channel intermediaries buy moderately large quantities from many

producers & break them down into smaller quantities & broader assortments
which are bought by consumers. Thus, channels play an important role in
matching demand & supply

Functions of distribution channels

 Information : Gathering & distributing info about producers’ offers to

consumers, collecting market intelligence from consumers & providing them to
producers for their planning & control

 Promotion : Persuading target consumers to buy products & services produced

by the producers
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 Contact : Locating & communicating with prospective buyers

 Matching : Shaping the offer to suit the buyers’ requirements

 Negotiating : Reaching a negotiated price & other terms of the offer so that
ownership can be transferred

 Physical storage & distribution

 Financing : Funding the cost of channel work

 Risk taking : Bearing & sharing the risk of carrying out channel functions

The different channel functions create different flows through the marketing channels :

 Physical Flow (Forward Flow)

 Title Flow (Forward Flow)

 Payment Flow (Backward Flow)

 Information Flow (Forward & Backward Flow)

 Promotion Flow (Forward Flow)

Channel Levels

A) Consumer Marketing Channels

Zero – level (Direct marketing channels) : Manufacturer → Consumer

One – level : Manufacturer → Retailer → Consumer

Two – level : Manufacturer → Wholesaler → Retailer → Consumer

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Three-level : Manufacturer → Wholesaler → Jobber →Retailer →

Consumer

B) Industrial Marketing Channels

Zero – level : Manufacturer → Industrial Consumer

One – level : Manufacturer → Industrial Distributor → Consumer

Two – level : Manufacturer → Manufacturer’s Rep → Industrial

Distributor → Consumer

Different intermediaries perform different functions :

 Wholesalers & Retailers buy, take title to & resell merchandise. They are
Merchandisers

 Manufacturer’s representatives, brokers, sales agents search for customers &

may negotiate on behalf of the manufacturer, but do not take title to the goods.
They are called Agents

 Transportation companies, independent warehouses, banks, ad agencies assist

in the distribution process but do not take title to the goods & do not negotiate
purchase or sale. They are called Facilitators

Channel Design

 In designing channels, marketers look at what is ideal & what is practical

 Designing the ideal channel may not be a problem. The problem is how to
convince one or a few intermediaries to handle the company’s line

 A company may use different channels to reach different target markets

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 Channels can evolve over time. However, channels once established, should
have some stability. Channel structures cannot be changed as easily as product,
price or promotion decisions

 Channel design calls for :

 Analyzing consumer service needs

 Setting channel objectives & constraints

 Identifying major channel alternatives

 Evaluating channel alternatives

Analyzing consumer service needs

 Involves finding out target customers’ expectations

- Do customers want to buy from nearby locations ?

- Are they willing to travel some distance to buy ?
- Do they want to buy in person, or over phone, by using mail, or on the
internet ?
- Would they prefer product variety or assortment breadth or would
they like specialization ?
- Do they expect add-on services like delivery, credit, installation,
repair, maintenance, exchange, buy-back ?

 Faster delivery, greater assortment, more add-on services mean higher levels of
channel service

 It may not be possible for a firm to render highest levels of channel service
because it may not have the resources or the skills needed

 Providing higher levels of service would mean more work for the channel &
higher prices for the consumer
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Setting Channel Objectives & Constraints

 Usually, a firm can identify different segments wanting different levels of

channel service

 The firm should then decide which segments to serve and the best
channels to use to reach them

 In each chosen segment the firm should try to minimize the total
channel cost of meeting customers’ expected channel service requirements

 Channel decisions are also influenced by the nature of the product.

Perishable products require direct marketing. Bulky products (e.g. cement )
require to minimize shipping distance and handling. Custom-made
products are sold by company sales forces.

 Products that need installation or maintenance are sold & maintained by

franchised dealers and so on

 Strengths & weaknesses of different intermediaries dictate channel

decisions. Distributors have more customer contacts and hence their cost
per unit is low compared to Company’s sales people but the distributor’s
selling effort per unit is also low

 Channel decisions are made keeping in mind the competitors’ channels .

A Company may want to compete in or near the same outlets that are
used by competitors, or, it may consciously avoid those channels & look
for more exclusive or innovative channels rather than fight for retail
shelf-space with competitors

 Environmental factors also dictate choice of channels. In a depressed

economy, producers would want to move goods to the target markets
using the shortest channels & do away with add-on channel services
that are dispensable to keep prices low

Identifying Major Channel Alternatives

a) types of intermediaries
b) the no. of intermediaries &
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c) the responsibilities of each channel member

Types of Intermediaries : Depending on the type of product & level

of distribution channels to be used , the firm needs to decide what
type of intermediaries to use like

 Company sales force

 Wholesalers
 Retailers
 Agents
 Brokers
 Industrial distributors
 Telemarketing
 Direct Mail
 Internet Marketing, etc.

No. of intermediaries to be used :

i) Intensive Distribution - Producers of convenient products use this

strategy. They stock their products in as many outlets as possible.
These products must be available when & where customers want
them , e.g. toothpaste, soap , chewing gum, soft drinks , etc.

ii) Exclusive Distribution - Some producers severely restrict the no. of

outlets that carry their products . Practiced by some auto manufacturers
( Maruti ) Jewelers ( Tanishq ) , Apparel (CD shirts).

Exclusive Distribution enhances company & product image, allows price

premiums to be charged, secures stronger distributor service & promotion,
gives more control on distribution

iii) Selective Distribution – Lies between intensive and exclusive

distribution. Involves selecting more than one but less than all of the
intermediaries willing to carry the line. Most durables & appliances
adopt this strategy
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Responsibilities of each channel member

The producer & the intermediaries need to agree on

i) Price Policies : The Producer has to establish a list price & a

fair set of discounts for the intermediaries

ii) Conditions of sale : Refer to payment terms & producer

guarantees

iii) Distributors’ territorial rights : The producer has to clearly spell

out the distributor’s territory & it should be careful in placing
new resellers

iv) Mutual services & duties : to be clearly spelt out in terms of

promotional support, training support, record-keeping, technical
assistance , physical facilities , manpower , information exchange ,etc.

Evaluating channel Alternatives :

Channel alternatives need to be evaluated against the following criteria

 Economic

 Control

 Flexibility

Economic Criteria

 Companies try to replace high cost channels with low-cost channels &
gain a channel -advantage, assuming no loss of sales/service quality

 Low – cost channels are low-touch channels

 While evaluating channel options, one needs to compare possible

sales revenues & likely selling costs for each option
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Agency

Selling Sales Force

costs

Sales revenues

 Companies believe that for smaller expected volumes, agencies are

cheaper . This is why many new companies use agencies or large
companies use agents for low potential markets

 For higher volumes, it is believed that the sales force is more effective

i) they have better product knowledge

ii) they are more aggressive
iii) they are more motivated to sell as their future depends on it
iv) many customers prefer to deal directly with the company
v) they would provide better service and collect better market
information

 For sales volume < P , agency will be preferred & for volume > P,
sales force will be preferred

 The fixed cost of engaging a sales force is higher compared to

engaging an agency which earns only a commission but costs rise faster
with the agency as the commissions earned by the agency is more than
those earned by sales people

Control Criteria

 A company has less control on independent channel members than on

its own sales force

 Channel members being independent businesses , concentrate on buyers

that buy more , not on the company’s products
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 Channel members cannot be expected to master the company’s product

or be as motivated to sell the company’s line as would the company’s
salespeople

Flexibility Criteria

 Setting up channels would mean a mid-term or a long-term

commitment from both sides. Yet, to adapt to changing market
conditions, the company might need more flexibility in its distribution

 A company’s sales force is more flexible while a channel structure is

more inflexible

Channel Management Decisions

 Selecting channel members

 Training channel members
 Motivating channel members
 Evaluating channel members
 Modifying channel arrangements

Selecting Channel Members

 In order to select channel members, the company needs to evaluate each

member’s

- years in business
- other product lines carried
- growth and profit history
- cooperativeness
- reputation
- size and quality of sales people
- location
- market covered
- nature of customers
- future growth potential
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 Big and reputed companies manufacturing well-known & heavily

advertised brands have little difficulty in attracting channel members

 Some producers manufacturing new products with little advertising back-

up find it very difficult to attract channel members. For e.g. Polaroid
could not get photography stores to carry its new cameras . So, it had to
sell them through mass- merchandising outlets

Training Channel Members

 Companies need to train the sales & service personnel of the channel
members as they are viewed as the company by the end-users

e.g. Microsoft carries out training for third-party service engineers who
are required to take certification exams. Those who pass are formally
recognized as Microsoft - certified professionals. This helps them to
promote their business

Motivating Channel Members

 The Company must sell not only through channel intermediaries but to
them . They are the company’s first-line customers

 To motivate them , the Company at times uses the carrot-and-stick policy.

At times it offers motivators like higher margins, special deal premiums,
display allowances, sales contents , etc.

 At times, the Company uses demotivators like reduced margins, slower

delivery, etc. This is bad practice

 Companies should look upon channel members as working partners . It

should carefully study the needs & wants of the channel members &
also clearly state what is expects out of them by way of market coverage ,
inventory levels, market feedback , technical advice & services, etc.

 Smart companies enter into formal channel agreements and set up

distribution programming arrangements . The company typically establishes
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a distributor - relations planning department , whose job is to identify

individual distributor needs , jointly decide merchandising goals, inventory
levels , display plan , sales training , promotions , etc.

Evaluating Channel Members

 The Company should periodically review each channel member’s

performance against mutually agreed standards like sales quota, average
inventory levels, treatment of damaged and lost goods, co-operation in
company promotion & training, service etc.

 Performing channel members need to be rewarded & recognized

 Under - performing intermediaries need to be assisted , motivated , guided

or as a last resort, replaced

CHANNEL CONFLICT

 Vertical Channel Conflict

 Horizontal Channel Conflict

 Multi Channel Conflict

 Vertical channel conflict occurs between different levels within the same
channel . This type of conflict occurs when the manufacturer

1. tries to impose too many conditions on the intermediaries or

2. has unrealistically high expectations from the channel or
3. under - services the intermediaries or
4. favours some channel members

 It can also occur when intermediaries deviate from agreed business terms
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 Horizontal channel conflict occurs between members at the same level

within the same channel . This type of conflict occurs when some
channel members undercut the others , undertake very aggressive
advertising or encroach upon the territories of others

 Multi Channel conflict usually occurs when the manufacturer has set up
two or more channels to serve the same market. A recent type of multi
channel conflict has come into being with many companies trying to set
up online business in addition to traditional channels . Many such channel
members perceive this as a threat to them . Possible ways to resolve this
conflict could be

i) sell different brands on the net

ii) offer higher margins to off-line channels & give credit to channel
members
iii) convince off line channel members that on-line transactions are
insignificant compared to off-line transactions & that the website will
only help and not harm the channel partners

Causes of Channel Conflict

1) Goal Incompatibility : The manufacturer wants to achieve rapid market

penetration through a low price policy, but the distributors prefer high
margins ( high price ) and pursue short-run profitability

2) Unclear roles & rights : Different channels ( e.g. sales force & dealers )
trying to sell to the same accounts can cause conflict regarding territory
ambiguity & credit for sales

3) Addition of new channels : When new channels are added, existing channels
feel threatened. For e.g. ,

i)Commission salespersons resent the company’s servicing of house –accounts

ii) The personal sales force resents setting up telemarketing

iii) The sales force resents dealers trying to sell to large accounts

4) Difference in perception : The manufacturer may be optimistic about the

short-term market prospects and hence expect the dealer to carry larger
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inventory but such optimism may not be shared by the dealers and they
may view this as a dumping effort on the part of the manufacturer

5) Over-dependence : Over-dependence of exclusive dealers on the manufacturer

can be a potential conflict area as the dealer’s fortunes depend heavily on
& fluctuate with the manufacturer’s product & price decisions

How to Manage Channel Conflict

1) Adoption of super-ordinate goals

2) Exchange of personnel between channel organizations

3) Co-optation : Leaders of the channel organizations may be included in the

manufacturer’s advisory councils, board, etc.

4) Joint-memberships in trade associations

5) Diplomacy : Each side sends a team or a group to meet its counterpart

to resolve conflict

6) Mediation : Engage a neutral third party who has the skills to reconcile
the conflicting parties’ interests

7) Arbitration : Two parties present their arguments to an arbitrator or an

umpire whose decision will be binding on the parties

Channel Dynamics

 Vertical Marketing Systems (VMS)

 Horizontal Marketing Systems (HMS )

 Multi Channel Marketing Systems

 A conventional marketing channel comprises an independent producer,

wholesalers and retailers. Each is a separate business unit seeking to
maximize its own profits even if it means less profits for the system as
a whole . No member in the channel has enough powers to control the
other members
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 A VMS comprises the producer , the wholesaler(s) and the retailer(s)

acting as a unified system. One channel member , the channel captain ,
either owns the others, or franchises them, or has so much power that
the other members are forced to co-operate

 VMS arose as a result of strong channel members’ attempts to control or

eliminate channel conflict

 A VMS can achieve economies through size, bargaining power and

elimination of duplicated services

 There are three types of VMS – Corporate , Administered & Contractual

 A Corporate VMS combines successive stages of production and

distribution under single ownership. For e.g., Saj Industries ( manufacturer
of Biskfarm ) is owned by the Aparna Group ( Distributors )

 Sony world retail outlets are owned by Sony

 Bata Retail Stores are owned by Bata Shoe Co.

 Music World is owned by the RPG group which also owns Saregama

 A Contractual VMS consists of independent firms at different levels of

production & distribution integrating their programs through contracts to
obtain more economies or sales impact than each could achieve alone

 Conflict is managed through contractual agreements

 The most common form of Contractual VMS are the franchise

organizations. This is the fastest-growing retailing format

 There are 3 forms of franchises :

i) Manufacturer - sponsored retailer franchise system

e.g. Maruti Udyog franchises exclusive car dealer outlets like Machino
Techno
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ii) Manufacturer - sponsored wholesaler franchise systems

e.g. Coca Cola franchises bottlers ( wholesalers ) who buy the concentrate ,
carbonate , bottle & sell to retailers

iii) Service firms - sponsored franchise systems

e.g. MacDonald outlets , Monginis outlets

 Administered VMS co-ordinates successive stages of production &

distribution through the size & power of one of the members.
Manufacturers of a dominant brand are able to secure strong trade co-
operation & support from the re-sellers

 E.g. : HLC , ITC , Cadbury’s , Nestle dominate the trade & are able to
secure high levels of co-operative displays, self-space, promotions &
price policies

Horizontal Marketing Systems

 Two or more companies at one level join together to follow a new

marketing opportunity. By working together, they can combine their
capital, production capabilities or marketing resources to exploit emerging
marketing opportunities

 They may work together on a temporary or a permanent basis or they

may create a separate Joint Venture Company

 Such arrangements work well globally , for e.g. McDonald’s burger outlets
offer Coke & P&G’s Pringle potato chips

 Coca Cola & Nestle formed a Joint venture to market ready - to - drink
coffee & tea worldwide. Coca Cola offers worldwide marketing experience
in distribution & Nestle offers 2 brands - Nescafe & Nestea

 Other examples : Bancassurance, petrol pumps selling non-petroleum

merchandise
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Multi-channel Marketing systems or Hybrid Marketing Systems

 Traditionally, companies have used a single channel to sell to a single

market or market segments

 Today, with the proliferation of customer segments & channel

possibilities, more & more companies are adopting multi-channel
marketing systems

 This occurs when a single firm sets up 2 or more channels to reach one
or more customer segments

 Offers advantages to companies facing large & complex markets

 It helps the company to expand sales & market coverage. Gains

opportunity to tailor products & services

 They are harder to control & are prone to channel conflict

 For e.g., Credit Cards marketing companies often use telemarketing to

call on potential users to generate leads for their sales force . They use
DSA to find corporate customers . They enter into special agreements
with petrol filling stations to promote cards to drive-in customers . They
tie up with super market outlets or deep-discount stores to promote
cards in-shop during special festival occasions and so on. They also
reach customers on-line through advertising on websites

Changing Channel Organization

 Changes in technology & explosive growth of direct & online marketing

are having a deep impact on channel design

 One major trend is towards “disintermediation”. It means increasingly

producers are bypassing intermediaries & going directly to final buyers

 With the growth of e-commerce, many traditional intermediaries will be

done away with
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 To avoid being eliminated from the supply chain , they will have to think
of ways & means of adding value to the chain

 Direct or on-line marketing will also have producers coming into direct
conflict with their traditional channel partners

 To remain competitive, the producers will have to find ways in which

the resellers will add value or drop them from the channel