Introduction, Place, Distribution Channel Management

The marketing mix (also known as the 4 Ps) is a foundation model in marketing. The
marketing mix has been defined as the "set of marketing tools that the firm uses to
pursue its marketing objectives in the target". Thus the marketing mix refers to four
broad levels of marketing decision, namely: product, price, promotion, and place.
Marketing practice has been occurring for millennium, but marketing theory
emerged in the early twentieth century. The contemporary marketing mix, or the 4
Ps, which has become the dominant framework for marketing management decisions,
was first published in 1960. In services marketing, an extended marketing mix is
used, typically comprising 7 Ps, made up of the original 4 Ps extended by process,
people, and physical evidence.

In the 1990s, the model of 4 Cs (consumer, cost, communication, convenience), was

introduced as a more customer-driven replacement of the 4 Ps.

Distribution channels in marketing are one of the classic “4 Ps” (product, promotion,
price, placement a.k.a. “distribution”). They’re a key element in your entire
marketing strategy — they help you expand your reach and grow revenue.
A distribution channel is a chain of businesses or intermediaries through which a
good or service passes until it reaches the end consumer. It can include wholesalers,
retailers, distributors, and even the internet. Channels are broken into direct and
indirect forms: A direct channel allows the consumer to buy the good from the
manufacturer, and an indirect channel allows the consumer to buy the good from a
wholesaler or retailer.

Channel of Distribution:

A group of marketing intermediaries that joining together to transport and store

goods from producers to consumers.
A firm may have as many intermediaries in its distribution channel as it
chooses. It can even have no intermediaries at all, if it practices direct marketing.

Functions of Distribution Channels:

Following are the main functions performed by the distribution channels:

1. Sorting: Middlemen obtain the supplies of goods from various suppliers and sort
them out into similar groups on the basis of size, quality etc.

2. Accumulation: In order to ensure a continuous supply of goods, middlemen

maintain a large volume of stock.

3. Allocation: It involves packing of the sorted goods into small marketable lots like
1Kg, 500 gms, 250 gms etc.

4. Assorting: Middlemen obtain a variety of goods from different manufacturers and

provide them to the customers in the combination desired by them. For example, rice
from Dehradun & Punjab.

5. Product Promotion: Sales promotional activities are mostly performed by the

producer but sometimes middlemen also participate in these activities like special
displays, discounts etc.

6. Negotiation: Middlemen negotiate the price, quality, guarantee and other related
matters about a product with the producer as well as customer.
7. Risk Taking: Middlemen have to bear the risk of distribution like risk from
damage or spoilage of goods etc. when the goods are transported from one place to
another or when they are stored in the god-owns.

Marketing Intermediaries:

Marketing Intermediaries are the independent groups or Organizations that assist

in moving goods and services from businesses to businesses (B2B) and from
businesses to consumers (B2C).

They are called intermediaries because they are in the middle of a series of firms
that distribute goods.

Why Do Markets Need Intermediaries:

 Intermediaries perform marketing tasks faster and cheaper than most

manufacturers could provide them.

 Marketingintermediariesmakemarketsmoreefficientbyreducingtransactionsandc
ontacts.

The following are the types of Intermediaries

Retailer: Sells goods or services directly to final consumers for personal and
non-business use. A retailer will buy goods from a manufacturer, distributor or
wholesaler and sell them on to the customer at a marked up price. Retailers needs
to be registered and may be official retailers for a certain line of products.
Retailing refers to a process where the retailer sells the goods directly to the end-
user for his own consumption in small quantities. Broadly two types can be
distinguished:

Physical store based retailing:The most common and ubiquitous type of retailing
is done through brick and mortar stores. Although these stores may differ in their
retail concepts by one common aspect to them is their physical structure.Most of
the large retail organizations have grown using a particular retail format. Using a
particular format to a certain extent is often considered to be a crucial component
of a successful strategy for that retailer.

So adopting a winning format that is designed in the context of SWOT analysis of

that organization and effectively implementing that format throughout the
geographical expansion eventually enable the retailer to obtain economies of scale,
efficiency, and a strong brand image and brand recall. Therefore, an understanding
of the different retail formats used is imperative for gaining an understanding of a
winning retail strategy.

Store retailing falls into the following major categories:

Store based formats Description Example

Departmental Stores A department store is a Shoppers Stop,

set-up which offers wide Pantaloon,Globus,Westside
range of products to the
end-users under one roof.
In a department store, the
consumers can get almost
all the products they
aspire to shop at one
place only. Department
stores provide a wide
range of options to the
consumers and thus fulfill
all their shopping needs.A
department store is a large
retail outlet with an
extensive assortment
(width and depth) of
merchandise and services
 that are organized into
separate departments for
the purpose of buying,
promotion, customer
service, and so on.

They typically are

lifestyle stores where the
merchandise constitutes
apparels, lifestyle
products, and the
merchandise other than
food and grocery. They
offer high-quality service
to consumers in a very
attractive and aspirational
store atmosphere.

A department store is
often a multilevel store
(generally two to three
stories) that is divided
into

Merchandise:
Electronic Appliances
Apparels
Jewellery
Toiletries
Cosmetics
Footwear
Sportswear
Toys
Books
CDs, DVDs

Discount Stores Discount stores also offer Wal-Mart, Vishal Mega Mart,
a huge range of products Brand Factory
to the end-users but at a
 discounted rate. The
discount stores generally
offer a limited range and
the quality in certain
cases might be a little
inferior as compared to
the department stores.

Merchandise:
Almost same as
department store but at a
cheaper price.

Superstore/ Hypermarket A retail store which Big Bazar

generally sells food
products and household
items, properly placed
and arranged in specific
departments is called a
supermarket. A
supermarket is an
advanced form of the
small grocery stores and
caters to the household
needs of the consumer.
The various food products
(meat, vegetables, dairy
products, juices etc) are
all properly displayed at
their respective
departments to catch the
attention of the customers
and for them to pick any
merchandise depending
on their choice and need.

Merchandise:
Bakery products
Cereals
Meat Products, Fish

Convenience Stores
Mom and Pop Store (also
called Kirana Store in India)
products
Breads
Medicines
Vegetables
Fruits
Soft drinks
Frozen Food
Canned Juices
A convenience store is a Reliance Fresh, KB’s [Kishore
well-located store and Biyani] Fair Price shop, 7-
very convenient to reach. Eleven
It is often called as the
“mom-and-pop” stores.
The major reasons for its
patronage are the overall
ease of shopping, credit
facility, and personalized
services. Because of these
reasons, consumers
frequently shop at these
stores even when it
charges average to above-
average prices, and
carries a moderate
number of categories and
items.
Mom and Pop stores are
the small stores run by
individuals in the nearby
locality to cater to daily
needs of the consumers
staying in the vicinity.
They offer selected items
and are not at all
organized. The size of the
store would not be very
big and depends on the
land available to the
 owner. They wouldn’t
offer high-end products.

Merchandise:
Eggs
Bread
Stationery
Toys
Cigarettes
Cereals
Pulses
Medicines

Speciality Stores As the name suggests, Tanishq stores of Tata

Speciality store would
specialize in a particular
product and would not
sell anything else apart
from the specific
range.Speciality stores
sell only selective items
of one particular brand to
the consumers and
primarily focus on high
customer satisfaction.

Narrow Product Line.

LikeBookstore, Furniture
stores.

Branded Store Sell a particulat brand Stores of Louis Philippe or

exclusively.Showrooms Samsung or Sony
are either owned or
franchised by a
manufacturer.
Non-Physical store based retailing: Non-store retailing is the form and format of
retailing in which the business of retailing is operated without using brick-and-
mortar stores. Non-store retailing is the selling of goods and services outside the
confines of a retail facility. It is a generic term describing retailing taking place
outside of shops and stores (that is, off the premises of fixed retail locations and of
markets stands). The non-store distribution channel can be divided into direct
selling (off-premises sales) and distance selling, the latter including all forms
of electronic commerce. Distance selling includes mail order, catalogue sales,
telephone solicitations and automated vending. Electronic commerce
includes online shopping, internet trading platforms, travel portals, global
distribution systems and teleshopping. Direct selling includes party sales and all
forms of selling in consumers' homes and offices, including even garage sales.Non-
Store retailing is a form of retailing in which sales are made to consumers without
using stores.

Non-store retailing falls into the following major categories:

Non-Store based formats Description Example

Direct Selling Direct selling consists of Aquaguard

the business models:
single-level marketing, in
which a direct seller
makes money by buying
products from a parent
organization and selling
them directly to
customers

E-Retailing E-retailing or online Flipkart, Myntra

retailing refers to a wide
range of online retailing
activities for products and
services. After
globalization, the world
now is termed as the
“global village” and has
gone about bringing both
business and customer
closer than before. India
 is a very young country,
and aspirations are
extremely high among the
youth of today, who is
always connected to the
Internet.E-retailing (or
simply e-tailing) is
basically a retail format in
which the retailer and
customer interact with
each other through an
interactive web portal
(digital network). After
this virtual interaction, the
customer orders the
merchandise directly
through the interactive
network only.

Payments are done by the

customer through online
banking services (e.g.,
using the debit or credit
card) or through COD
option. E-retailer then
arranges the last-mile
delivery to the location
preferred by the customer.
Hence, the parties
involved in transaction
essentially interact
electronically (digital or
virtual) rather than by
physical exchanges or
direct physical contact.

Automatic Vending Vending machines are Coffee Vending Machine by

found in factories, offices, Nestle
 large retail stores, and
hotels.

Products are dispensed

from a machine to the
customers after they
deposit money in the
machine.

Multi-level marketing Multi-level Oriflame, Avon, Tupper ware

marketing (MLM), also
called pyramid
selling,network
marketing,and referral
marketing, is a marketing
strategy for the sale of
products or services
where the revenue of the
MLM company is derived
from a non-
salaried workforce selling
the company's
products/services, while
the earnings of the
participants are derived
from a pyramid-shaped
or binary compensation c
ommission system.

Mail order Mail order is Basnett's

the buying of goods or ser
vices by mail delivery.
The buyer places an order
for the desired products
with the merchant
through some remote
method such as through a
telephone call or web site.
Then, the products are
delivered to the customer.
The products are typically
delivered directly to an
address supplied by the
customer, such as a home
address, but occasionally
the orders are delivered to
a nearby retail location
for the customer to pick
up. Some merchants also
allow the goods to be
shipped directly to a third
party consumer, which is
an effective way to send a
gift to an out-of-town
recipient.

A mail order catalogue is

a publication containing a
list of
general merchandise from
a company. Companies
who publish and operate
mail order catalogues are
referred to as cataloguers
within the industry.
Cataloguers buy or
manufacture goods then
market those goods to
prospects (prospective
customers). Cataloguers
may "rent" names
from list
brokers or cooperative
databases. The catalogue
itself is published in a
similar fashion as any
magazine publication and
distributed through a
variety of means, usually
via a postal service and
 the internet.

Tele marketing Telemarketing (sometime Home Shop 18, Asian Sky-Shop

s known as inside
sales,or telesales in the
UK and Ireland) is a
method of direct
marketing in which
a salesperson solicits
prospective customers to
buy products or services,
either over the phone or
through a subsequent face
to face or Web
conferencing appointment
scheduled during the call.
Telemarketing can also
include recorded sales
pitches programmed to be
played over the phone via
automatic dialing.

Telemarketing is defined
as contacting, qualifying,
and canvassing
prospective customers
using telecommunications
devices such as telephone,
fax, and internet. It does
not include direct mail
marketing.

Wholesaler: Wholesaling is the selling of merchandise to anyone—either a person

or an organization—other than the end consumer of that merchandise. Wholesalers,
who are sometimes referred to as middle agents, represent one of the links in the
chain along which most goods pass on their way to the marketplace. As
intermediaries between producers and consumers of goods, wholesalers facilitate the
transport, preparation of quantity, storage, and sale of articles ultimately destined for
customers. Wholesalers are extremely important in a variety of industries, including
such diverse product areas as automobiles, grocery products, plumbing supplies,
electrical supplies, and raw farm produce. They are particularly vital to the
operations of small retailers. Whereas large retail companies buy directly from the
manufacturer and often have their own intermediate warehousing operations, the
limited resources of independent retail outlets makes alliances with wholesalers a
practical necessity.

Wholesalers are successful only if they are able to serve the needs of their
customers, who may be retailers or other wholesalers. Some of the marketing
functions provided by wholesalers to their buyers include:

 Provide producer's goods in an appropriate quantity for resale by buyers.

 Provide wider geographical access and diversity in obtaining goods.
 Ensure and maintain a quality dimension with the goods that are being
obtained and resold.
 Provide cost-effectiveness by reducing the number of producer contacts
needed.
 Provide ready access to a supply of goods.
 Assemble and arrange goods of a compatible nature from a number of
producers for resale.
 Minimize buyer transportation costs by buying goods in larger quantities and
distributing them in smaller amounts for resale.
 Work with producers to understand and appreciate consumerism in their
production process.

6 types of Wholesalers

1) Merchant Wholesalers
These are the most common type of wholesalers used in the FMCG industry,
agriculture industry or Private label industry. Quite simply, Merchant wholesalers
are the ones who buy directly from the manufacturer, store the product and then
sell it to the customer. They might sell in any channel and they are not restricted to
selling to retail only or to online only.

If there is any loss between the buying and selling of the product, it must be borne
by the merchant wholesaler.

Example – A vegetable wholesaler buys produce directly from the farm and stocks
it at his own warehouse. He then sells these products to the local retail outlets or
even to end customers. He may also sell to restaurants. However, any loss of the
produce due to spillage or any other reason is a cost to the merchant wholesalers.

Even in FMCG, companies like Britannia or P&G use merchant wholesalers.

These wholesalers have a greater control in the region they operate. They benefit
because they buy in bulk from the company and take charge of the risk they are
facing. Plus, they are responsible for the sales targets, however, they achieve it.

2) Full-service Wholesalers – Retail Wholesalers

They are most commonly observed in Consumer Durables or Engineering products.

The full-service type of wholesalers is, as the name suggests, giving full service to
the end retailer. These wholesalers mainly operate in the retail market and sell
products to a reseller (a retailer in this case) Everything except service of the
product is the responsibility of the full-service wholesaler.

Example – Samsung wants to expand its operation in region A but it does not have
a sales office in that region. So it appoints a distributor in region A. This distributor
is solely responsible for order picking, delivery, training sales
associates, promotionsand everything for the Samsung brand. He is now a full-
service wholesaler. However, for service of the product, there is a different service
franchise opened in the same region.

In real life scenario, Many full-service wholesalers also start a second services
related business and start giving services for the products they are wholesaling.
Example – A Samsung wholesaler also starting a service center of Samsung.

As a result, they might get both – sales and service orders. However, for theoretical
purposes, Servicing and maintenance of the product is not a part of a full-service
wholesaler. He is mainly for sales, deliveries, and financing. These are the second
most common types of wholesalers in the market.

3) Limited Service Wholesalers

A limited service wholesaler is someone who stocks the products of the company
and sells it in a limited channel. He does not have a large turnover or does not
cover all channels of the company.

Example – Company X wants to sell its products online but it knows that if it
allows local distributors to sell online, there will be a huge price war. As a result,
Company X appoints an exclusive online wholesaler. This online wholesaler has
only one job – To purchase the product and stock it and sell it online. So whenever
an order comes from Amazon or eBay, this wholesaler gives the machine to
Amazon or eBay. That’s his only job.

The same way – there are other limited-service wholesalers. 2 are mentioned below.

 Cash and Carry wholesalers – Strong FMCG products are sold as cash and
carry. Immediate payment is demanded on a delivery of material.
 Logistics wholesalers – A milk wholesaler who delivers whole trucks of
milk across the market. His only work is to deliver the milk and not to get
orders for the company.

4) Brokers and Agents

Most commonly observed in the real estate industry or in the chemical markets. A
broker assumes no risk. He has the producer or the manufacturer on one side and
he has the buyer on the other side. The work of the broker is to get the deal done
and he gets a commission on the deal.

Example – A small lab has regular requirement of litmus paper. There is a litmus
paper wholesaler in their area who is a broker for several companies and who
arranges any lab material in bulk. The lab approaches the broker and wants to
purchase huge quantity. The broker then talks to multiple manufacturers and
finally, a deal is struck with one manufacturer. The manufacturer pays 2%
commission to the broker for his work and for bringing the enquiry. Similarly, this
broker can pick an order of Beakers, Petri dishes or any other equipment. He will
keep arranging meetings with the right supplier and keep earning commissions.

A similar example like above is also observed in the retail industry wherein the
broker earns a commission to sell an apartment.

The difference between a broker and agent is that a Broker is short-term and he
will be there for a couple of orders. However, an Agent is long-term and
specialized in repeated purchase so that he stays for a longer time with the
company and specifically works for the betterment of the company. Example –
Insurance has Agents (repeated buying) whereas real estate has brokers (single
buying)

5) Branches and mini offices

Although branches and mini offices do not come in the various types of
wholesalers, these are common ways for companies to start selling their products
in a region they are targeting. A branch can also be called a type of wholesaling
wherein the branch directly picks the orders from the end customers in bulk and
ensures the supply and reorders from the customer.

Example – Paper company like B2B or 3M knows that large companies require a
lot of print paper across the month. These companies then establish branch offices
which also act as the sales office. They pick a bulk order of paper and the company
might transport the complete order from their warehouse to the company.

6) Specialized wholesalers
These are wholesalers who do wholesale of specialized items only. Example – A
used car wholesaler who sells directly to customers or to other used car dealers. He
is specialized in used cars and knows the ins and outs of selling a used car to
consumers or refurbishing the used cars.

Similarly, there are other specialized wholesalers who are known for the specific
product that they sell.

The above were the various types of wholesalers in the market. As E-

commerce rises in sales, there is a lesser requirement of Wholesalers in developing
economies. However, emerging markets still use various types of wholesalers to
their advantage.

Logitical Organization:Logistics companies provide logistical solutions to

other organizations. Specifically, these services involve the management of freight,
warehousing and inventory management. Businesses often outsource certain
functions to logistical organizations to lower costs and increase the efficiency of
their supply chains. Logistics companies are usually third-party logistics service
providers and specialize in a specific area of logistics.

Logistics in business means the organized movement of products and materials, as

well as their storage and packaging. In most industries, logistics is the part of the
supply chain management that involves warehousing, transportation, inventory,
material handling, packing, distribution and security. The term "logistics" also
refers to the process of planning and managing the flow and storage of goods,
services or information between the point of origin and the point of use.

Business logistics aims to achieve the optimal demand-service level at the lowest
cost possible. The main function of business logistics is control over the movement
of resources and supplies. Businesses need to ensure that required items are in the
right place at the right time. A business suffers if it doesn't synchronize its supply
chain.

Another essential function of logistics is the management of inventory. This

involves the control of static inventory, as well as moving the inventory from one
place to another. To avoid delays, a company must know how much inventory to
keep in its warehouse and how quickly it can restock inventory from suppliers.

Logistics as a business results from the increasing complexity of supplying

manufacturers with materials and shipping out goods. Logistics companies
generally specialize in the transportation, distribution, storage and packaging of
products. Manufacturing companies often use external organizations to execute
logistics functions. This allows manufacturers to focus on the core business of
manufacturing. Manufacturing companies often require some logistics machinery
to function properly, but they may outsource many of the logistics functions not
directly associated with manufacturing activities.

Channel Levels
 Channel level refers to the intermediary in marketing distribution channel between
the producer/manufacturer and the end consumer. Every channel level plays a role
in making the good available to the end consumer. The number of channel levels
between the producer and consumer could be 0,1,2,3 or more.

A zero level channel is a direct marketing channel where there is no intermediary

and the producer sells directly to the consumer. For example – direct mails,
telemarketing etc
A one level channel has one intermediary, typically a retailer between a
manufacturer and consumer. Similarly a 2 level channel and a 3 level channel have
2 and 3 intermediaries respectively.

Factors Determining Choice of Channels of Distribution:

Following are the main factors which help in determining the channels of
distribution:

1. Product Related Factors:

Following are the important product related considerations in deciding on channels

of distribution:

(a) Nature of Product:

In case of industrial goods like CT scan machine, short channels like zero level
channel or first level channel should be preferred because they are usually technical,
expensive, made to order and purchased by few buyers. Consumer goods Ike LCD,
refrigerator can be distributed through long channels as they are less expensive, not
technical and frequently purchased.

(b) Perishable and Non- Perishable Products:

Perishable products like fruits or vegetables are distributed through short channels
while nonperishable products like soaps, oils, sugar, salt etc. require longer channels.

(c) Value of Product:

In case of products having low unit value such as groceries, long channels are
preferred while those with high unit value such as diamond jewelry short channels
are used.

(d) Product Complexity:

Short channels are preferred for technically complex goods like industrial or
engineering products like machinery, generators like torches while non complex or
simple ones can be distributed through long channels.

2. Company Characteristics:

Following are the main Company Characteristics offering choice of channel of

distribution:

(a) Financial Strength:

The companies having huge funds at their disposal go for direct distribution. Those
without such funds go for indirect channels.

(b) Control:

Short channels are used if management wants greater control on the channel
members otherwise a company can go in for longer channels.

3. Competitive Factors:

Policies and channels selected by the competitors also affect the choice of channels.
A company has to decide whether to adopt the same channel as that of its competitor
or choose another one. For example, if Nokia has selected a particular channel say
Big Bazaars for sale of their hand sets, other firms like Samsung and LG have also
selected similar channels.

4. Market Factors:

Following are the important market factors affecting choice of channel of

distribution:

(a) Size of Market:

If the number of customers is small like in case of industrial goods, short channels
are preferred while if the number of customers is high as in case of convenience
goods, long channels are used.

(b) Geographical Concentration:

Generally, long channels are used if the consumers are widely spread while if they
are concentrated in a small place, short channels can be used.

(c) Quantity Purchased:

Long channels are used in case the size of order is small while in case of large orders,
direct channel may be used.

5. Environmental Factor:

Economic factors such as economic conditions and legal regulations also play a vital
role in selecting channels of distribution. For example, in a depressed economy,
generally shorter channels are selected for distribution.

Types of Distribution Channels:

1. Direct Channel or Zero Level Channels:

When the producer or the manufacturer directly sells the goods to the customers
without involving any middlemen, it is known as direct channel or zero level
channel. It is the simplest and the shortest mode of distribution. Selling through post,
internet or door to door selling etc. are the examples of this channel.

Example:

 When a company like Samsung sells its products through its own Web store it
uses direct marketing channels.
  Type manufacturers like Goodyear sell directly to companies like Ford and
Hyundai
 Dell pioneered the concept of direct selling of computers to a wide customer
base.
 Eureka Forbes, leaders in domestic and industrial water purification systems,
vacuum cleaners, air purifiers & security solutions is pioneered in direct selling
that makes it an Asia’s largest direct sales organization.

Methods of Direct Channel are:

(a) Door to door selling

(b) Internet selling

(c) Mail order selling

(d) Company owned retail outlets

(e) Telemarketing

2. Indirect Channels:

When a manufacturer or a producer employs one or more middlemen to distribute

goods, it is known as indirect channel.

Following are the main forms of indirect channels:

(a) Manufacturer-Retailer-Consumer (One Level Channel):

This channel involves the use of one middleman i.e. retailer who in turn sells them
to the ultimate customers. It is usually adopted for specialty goods.
For example:

 Tata sells its cars through company approved retailers.

 Even E-commerce is an excellent one channel level example – wherein the
companies tie up directly with E-commerce portals and then sell in the market.
 In consumer markets, this is usually a retailer. The consumer electrical goods
market in the United Kingdom is typical of this arrangement whereby
producers such as Sony, Panasonic, Canon etc. sell their goods directly to large
 retailers such as Comet, Dixons and Currys which then sell the goods to the
final consumers.

(b) Manufacturer-Wholesaler-Retailer-Customer (Two level channels):

Under this channel, wholesaler and retailer act as a link between the manufacturer
and the customer. This is the most commonly used channel for distributing goods
like soap, rice, wheat, clothes etc.

(c) Manufacturer-Agent-Wholesaler-Retailer-Consumer (Three level channels):

This level comprises of three middlemen i.e. agent, wholesaler and the retailer. The
manufacturers supply the goods to their agents who in turn supply them to
wholesalers and retailers. This level is usually used when a manufacturer deal in
limited products and yet wants to cover a wide market.

In the three level channel, the example can be taken of Ice cream market. Because of
the manufacturing levels required, Ice cream markets have C&F agents who stock
the ice cream in refrigerated cold rooms. These ice creams are then transported to
local distributors who also have refrigerated cold rooms. The distributors then
transport to local dealers who will have 10-12 small freezers. And finally it is
transported to the retailer who will have 1-2 freezer of each company.
Here are perfect representations for channel levels between consumer marketing
channel and an industrial marketing channel.
3. Multiple or Hybrid Channels:

In cases where a marketer utilizes more than one distribution design, the marketer is
following a multichannel or hybrid distribution system. Starbucks follows this
approach as its distribution design not only includes using a direct retail system by
selling their products in company-owned stores, they also utilize several other
distribution systems, including a single-party selling system by selling through
grocery stores and a direct marketing system as they sell product via an online store.
For example-

 a Nike shoe can be ordered from the company’s own web store and it can
bought from a conventional brick and morter store located in high street market.
 Titan
 Samsung
 IBM

4. Horizontal marketing system (HMS)

A horizontal marketing system is a distribution channel arrangement whereby two

or more organizations at the same level join together for marketing purposes to
capitalize on a new opportunity. According to businessdictionary.com, a horizontal
marketing system is a merger of firms on the same level in order to pursue
marketing opportunities. The firms combine their resources, such as production
capabilities and distribution, in order to maximize their earnings potential.

Examples:

 Apple and Starbucks, who announced a music partnership in 2007. The

purpose of this partnership was to allow Starbucks' customers to wirelessly
browse, search, preview, buy, and download music from iTunes Store onto
 their iPod touch, iPhone, or PC or Mac running iTunes. Apple’s leadership in
digital music, together with the unique Starbucks experience, created a
partnership that offered customers a world class digital music experience.
Apple benefits from this partnership with higher iTunes sales
as Starbucks has a vast and loyal customer base. When Apple first introduced
its iTunes Store, it had hoped to sell one million songs in six months, but to its
surprise, sold over one million songs within the first six days of launching. With
such loyal online music consumers, Starbucks benefits from higher sales, increase
in market share, and stronger customer loyalty. This example demonstrates how
two companies can join forces to follow a new market opportunity. This
opportunity allowed Starbucks and Apple to both achieve greater results than
otherwise would have been possible if they somehow attempted this strategy
independently

 McDonalds places “express” versions of its restaurants in Wal-Mart stores.

McDonalds benefits from Wal-Mart;s considerable store traffic, while Wal-
Mart keeps hungry shoppers from having to go elsewhere to eat.

5. Vertical Marketing Systems

A vertical marketing system is a form of cooperation between multiple levels of

a distribution channel. The members work together to promote efficiency and
economies of scale in the way products are promoted to customers, credit is
provided to customers, and products are inspected and delivered to customers.
A vertical marketing system (VMS) is one in which the main members of a
distribution channel--producer, wholesaler, and retailer--work together as a unified
group in order to meet consumer needs. In conventional marketing systems,
producers, wholesalers, and retailers are separate businesses that are all trying to
maximize their profits. When the effort of one channel member to maximize
profits comes at the expense of other members, conflicts can arise that reduce
profits for the entire channel. To address this problem, more and more companies
are forming vertical marketing systems.
Vertical integration is the expansion of a company by moving forward or backward
within your vertical market or industry.
An example of forward integration might be ITC buying wheat from farmers to
produce Aashirwad atta and Sunfeast biscuits recently.
The following are the types of VMS:

Corporate Vertical Marketing

A corporate vertical marketing system involves the ownership of all levels of the
production or distribution chain by a single company. This would include the
production, development, marketing, and distribution by a single company. This
system is often the result of forward or backward integration; a manufacturer
expanding into all parts of the distribution network is considered forward
integration while a company buying up suppliers of its widgets would be
backwards integration. An example of a corporate vertical marketing system would
be a company such as Apple selling the products it designs and manufactures
through its own retail stores .
An example for the corporate is Apple who is responsible for doing everything
related with their products.
Apple Company has place for the designing and also the making of the products.
These products that are made by the company are sold in the retailer shops of the
company itself. They need not have to depend on any of the other people for the
purpose of production or even selling of the products.
Amway is an American cosmetic company, which manufactures its own product
range and sell these products only through its authorized Amway stores. Here the
ownership of production and distribution is with the company itself.

Contractual Vertical Marketing

A contractual vertical marketing system involves a formal agreement between the
various levels of the distribution or production channel to coordinate the overall
process. This system allows companies to benefit from economies of scale and
marketing reach. These relationships are a popular form of vertical marketing.
This is a kind of vertical marketing system that has formal agreement involved in it
that exists between various levels that of the production or it can be between the
levels of distribution channel. This is done for coordinating the overall process that
is related with the particular company. A common form of contractual VMS is
franchising.
Franchising, retail sponsored and wholesale sponsored are forms of a contractual
vertical marketing system. McDonalds and Burger King are examples of franchises.

The following are the types of contractual VMS:

(a) Wholesaler-Sponsored Vertical Marketing System

In this type of contractual VMS, voluntary chains of independent retailers are
organized by the wholesalers to get help for competing large chain companies. For
this purpose, a program is initialized by the wholesaler in which the independent
retailers are agreeing to buy their purchases from that wholesaler at discounted
rates and standardize their selling practices, so that the whole group can compete
with the large chain companies effectively.
For example, Coca-Cola bottler’s is a manufacturer-sponsored wholesaler.
(b) Retailer Cooperatives:
Retailer Cooperative is such kind of contractual VMS in which a new business is
organized by the retailers for the wholesaling purposes and even for production
also. All members of the contracting group purchase their goods through the
retailer cooperatives and advertising is made jointly through a common plan. All
the profits are distributed back to the retailers, according to their proportion of
purchases.

(c) Franchise Organization:

In franchise organization, stages of production and distribution process are linked
by a channel member called franchiser.

The franchise is further divided into the following three forms.

 Manufacturer Sponsored Retailer Franchise System

 Manufacturer Sponsored Wholesaler franchise System
 Service Firm Sponsored Retailer Franchise System

Manufacturer Sponsored Retailer Franchise System:

Automobile industry is composed of this form of the franchise system.

Example-Maruti, Ford, Hyundai

Manufacturer Sponsored Wholesaler franchise System:

Soft drink industry adopts this form of the franchise system.

Service Firm Sponsored Retailer Franchise System:

In this form of franchises, certain retailers are given license by the service firm to
provide the services of that firm to the consumers.

Examples can be found in the fast food service busibesses like-McDonalds, Pizza
Hut.

The most important fact in the success of the contractual VMS is that many
customers cannot make a difference between contractual and corporate system.
 Administered Vertical Marketing System

An administered vertical marketing system is one in which one member of the

production and distribution chain – due to its sheer size – is dominant and
organizes the nature of the vertical marketing system informally. Under
Administered VMS, there is no contract between the members of production &
distribution channel but their activities do get influenced by the Size and Power of
any one of the member. In simple words, any powerful and influential member of
the channel dominate the activities of other channel members. For example, Big
brands like HUL, ITC, Procter& Gamble, etc. command a high level of
cooperation from the retailers in terms of display, shelf space, pricing policies, and
promotional schemes.An example of this type of system could include a large
retailer such as Wal-Mart establishing standards for makers of smaller products,
such as a generic type of laundry detergent.

6. Internet as a distribution channel

Channel -Conflicts

Channel conflict occurs when manufacturers (brands) disintermediate their channel

partners, such as distributors, retailers, dealers, and sales representatives, by selling
their products directly to consumers through general marketing methods and/or over
the Internet.
Channel conflict comes in many forms. Some are mild, merely the necessary friction
of a competitive business environment. Some are actually positive for the
manufacturer, forcing out-of-date or uneconomic players to adapt or decline. Other
conflicts, however, can undermine the manufacturer's business model. Such high-
risk conflicts generally occur when one channel targets customer segments already
served by an existing channel. This leads to such a deterioration of channel
economics that the threatened channel either retaliates against the manufacturer or
simply stops selling its product. The result is disintermediation, in which the
manufacturer suffers.

A company establishes a network of distributors and dealers in order to get

the products to the end consumers. However, because this network is operated
manually, it will always have friction. This friction comes in the form
of channel conflict, which arises due to various reasons. Price differentiation can
be one reason and territory encroachment can be another. However, if you look at
the overall picture, there are many different reasons for channel conflicts but there
are only three different types of such conflicts.

It is important that a company which sells its products through channel marketing,
understanding the different types of channel conflicts and thereby take steps to
manage channel conflicts. Let us understand the typical distribution channel first
The three type of channel conflicts which can occur are

1) Horizontal channel conflicts

One of the most common type of channel conflicts to occur are the horizontal ones.
Horizontal channel conflict is a conflict between two players at the same level in
the distribution channel. So a conflict between 2 distributors or a conflict between
2 retailers is known as horizontal channel conflict.

Example of Horizontal channel conflict

There are two stores in a region which are given a territory each. Store 1 is given
territory 1. Store 2 is given territory 2. Now the channel conflict occurs, when store
1 services customers from territory 2 or vice versa. This means that the channels
are not following rules set by the company and hence it is creating conflict.

There is a difference between competition and horizontal channel conflict. If store

1 and store 2 were both performing optimally so that they can show the best figures
to the company and win the prize for the best channel dealer, then they are
competitors. However, if they are breaking the company rules and encroaching
each others territories, then this is clearly channel conflict. And it has to be
managed by the company by setting a rule or a policy.
 Such channel conflicts are one of the most common kinds of conflict in channel
management. These arise due to human nature. Distributor in territory 1 might be
more aggressive and the one in territory 2 might be passive. Thus, encroachment
happens and is not controlled till the distributor 2 raises his voice against the
injustice. Such Horizontal channel conflicts can happen at various levels in the
channel and it is not necessary that it happen at retailer level only or the reason be
encroachment only.

2) Vertical Channel conflict

Another type of conflict seen in channel management is the Vertical channel conflict.
Where the horizontal channel conflict exists between players within the same level
of the distribution channel, the vertical channel conflict happens at different levels of
the distribution channel. A typical conflict might be between the retailer and the
distributor, or it might be between the distributor / C&F and the company.
Example of vertical channel conflict –
Lets take the example of an Ice cream company. To motivate its dealers, many ice
cream companies provide FREEZERS at discounted price along with the ice cream
to their retailers. These freezers are used to keep the ice cream at frozen
temperatures. Now, an ice cream company notices that Region 1 is not performing
well and it can motivate region 1 by providing the freezer completely free. So it
gives freezers for free in the market with ice cream so that ice cream sale rises. It
actually does and because retailers are taking the freezer for free, they are stocking
more ice cream and selling more ice cream. The company is happy.

However, Region 2 now gets news that this is happening in region 1 and that
freezers are being provided for free to all retailers in region 1. The retailers of
region 2 immediately revolt and ask for further discounts on freezers or to give the
freezers completely free. They don’t understand that sales in region 2 is already
high and margins are low for the company. Ultimately, this creates a vertical
channel conflict for the company. Now the company has to decide whether it will
support region 1 or region
As you can see, handling vertical channel conflicts is far difficult for companies as
compared to handling horizontal conflicts. Horizontal conflicts always happen at a
lower level then the company. But vertical channel conflicts might involve the
manufacturer or the distributors themselves. Hence, managing vertical channel
conflicts becomes important for the company.

Another example of vertical channel conflict is a Distributor preferring one retailer

over the other. In such a case, retailer 1 might get extra credit, he might get
deliveries faster, he might get further discounts, whereas due to whatever reasons,
retailer 2 might not get such benefits. It might be due to the distributors relations
with Retailer 1 or it might be due to the nature of retailer 2 (haggling, rudeness).
But this can be another real live example of vertical channel conflict.

3) Multiple channel conflict

Because of their very nature, vertical channel conflicts happen rarely, but once
they happen, they have a long lasting effect. In the recent decade, we have seen
some fantastic examples of Multi channel conflicts.

When Small retailers and businessmen were thriving in business, Modern retail
came in the picture. Large hypermarkets and malls were started
where people could do all their shopping. An altogether different distribution
channel was created. Due to their bulk buying power, these hypermarkets were
giving huge discounts and making huge sales as well.

As a result, many companies were boycotted by small retailers because they felt
left out and they could not cope with the price. This created a huge multiple
channel conflict with small retailers standing in unity against the tyranny of
large markets. Ultimately, the companies had to come in and settle the dispute by
maintaining the price across multiple channels. So they set a standard price of
products, whether it was selling in hyper markets or small retail.

Now, the same thing is repeating but the players are three fold – Small business,
Modern retail and E-commerce. E-commerce went a step ahead of modern retail
and even small businessmen got back at modern retailers by offering even lower
prices on online platforms. There was no store to be leased, no rent to be paid, not
a dollar to be spent but only material had to be bought and it had to be shipped.
The lower the price of buying, the lower the selling price.

In the times of E-commerce, Hypermarkets had leased huge spaces for which they
were paying sky high rents. When E-commerce started, hypermarkets dropped a bit
in demand and today all of them are fighting each other. It is a constant multiple
channel conflict for each company because if there are lower prices anywhere, it
immediately gets public and then the other channel starts complaining or
demanding lower prices. Furthermore, one channel might complain about the other
and vice versa.

In the end, these are the three types of channel conflicts which exist in channel
marketing. Horizontal conflict might be quite regular but its effect will be localised.
Vertical conflict is not regular and its effect might be regional. However, multiple
channel conflict generally has a national level effect because it always occurs when
the company has made major changes.
Channel Power

The Channel Power refers to the ability of any one channel member to alter or
modify the behavior of other members in the distribution channel, due to its
relatively strong position in the market.

Generally, the manufacturers are seen, dominating the behavior of other channel
partners and influencing their actions according to its requirements.

Types of Channel Power

In this article, we will discuss the powers of the manufacturer, that he can use in
order to control the behavior of other channel partners.
1. Coercive Power: The manufacturer threatens to terminate the relationship
with other channel partners or withdraw the resources deployed with them. With
this power, the manufacturer can dominate the others and keep them under his
control.

But the negative side is, the channel partners may lose their faith in the
manufacturer and may enter into inter-conflicts.

2. Reward Power: The manufacturer provides several additional benefits to

the intermediaries, with the intention to motivate them to perform certain activities
as required.

This power is very useful since it brings in the maximum efforts from each channel
partner, but this may sometimes be negative as the channel partners may always
seek for the benefits in case, they are required to do some other activity.

3. Legitimate Power: Here the manufacturer reminds the channel partner to

carry out their activities in accordance with the contract they have entered into at
the time they became the channel partners.
 The manufacturer may find it convenient to keep a check on the channel partners
in terms of their signed agreement, but the partners may feel humiliated for the
continuous reminder for their code of conduct.

4. Expert power: The manufacturer has the expertise that he transfers to the
channel partners, and once they acquire it, the power of expertise reduces. Thus,
the manufacturer should focus on creating the new expertise, thereby keeping the
channel partners updated with the day to day operations.

The manufacturer uses this power to retain the interest among the channel partners
to work, but the intermediaries may not feel to learn any new things apart from
what they have learned.

For example, HUL and P&G can help retailers in inventory,display,sales training
and assortment management, which will improve their bottom line.

5. Referent Power: The manufacturer should develop its image in such a way,
that the intermediaries must feel proud to be associated with it. The manufacturer
with the influential image can get varied options with regard to the channel
partners.

For instance, a company such as Apple and HUL enjoy high level of referent power in
geting channel members to do their job well.

But if the manufacturer is weak then intermediaries may not like to get associated
with it because that might spoil their market image.

Thus, the manufacturer is the one who provides the goods and services to be sold
via intermediaries and, therefore, the channel partners are dependent on the
manufacturer for their individual businesses.