What is Distribution Channel?

Everything you need to know about distribution channels.

Distribution channels are the network of organizations, including
manufacturers, wholesalers, and retailers, that distributes goods or
services to consumers.
A distribution channel is the network of individuals and
organizations involved in getting a product or service from the
producer to the customer.
Distribution channels are also known as marketing channels or
marketing distribution channels.
Contents:
1. Meaning of Distribution Channels
2. Concept of Distribution Channels
3. Objectives of Distribution Channels
4. Need of Distribution Channels
5. Types of Distribution Channels
6. Routes of Distribution Channels
7. Middlemen in Distribution Channels
8. Channel Choice for Distribution
9. Market Coverage of Distribution Channels
10. Advantages of Distribution Channels
11. Disadvantages of Distribution Channels

What is Distribution Channel – Meaning

In the field of marketing, channels of distribution indicate routes or
pathways through which goods and services flow, or move from
producers to consumers.
We can define formally the distribution channel as the set of
interdependent marketing institutions participating in the marketing
activities involved in the movement or the flow of goods or services
from the primary producer to the ultimate consumer.
The prime of object of production is its consumption. The movement
of product from producer to consumer is an important function of
marketing. It is the obligation of the producer to make goods available
at right place, at right time right price and in right quantity. The
process of making goods available to the consumer needs effective
channel of distribution. Therefore, the path taken by the goods in its
movement is termed as channel of distribution.
Distribution channels are the network of organizations, including
manufacturers, wholesalers, and retailers, that distributes goods or
services to consumers. A distribution channel is the network of
individuals and organizations involved in getting a product or service
from the producer to the customer. Distribution channels are also
known as marketing channels or marketing distribution channels.
An entrepreneur has a number of alternative channels available to him
for distributing his products. These channels vary in the number and
types of middlemen involved. Some channels are short as they directly
link producers with customers. Whereas other channels are long and
indirectly link the two through one or several middlemen.
In short, the distribution channel can be defined as ‘the path through
which goods and services or payment for those goods or services travel
from the vendor to the consumers’. Distribution channel can be as
short as a direct transaction from the vendor to the consumer, or may
include several interconnected intermediaries along the way such as
the followings –
1. Wholesalers
2. Distributors
3. Agents and
4. Retailers
The above mentioned are the channels of distribution. A channel of
distribution or trade channel is defined as the path or route along
which goods move from producers or manufacturers to ultimate
consumers or industrial users. In other words, it is a distribution
network through which producer puts his products in the market and
passes it to the actual users.
This channel consists of:
1. Producers
2. Consumers or end users and
3. Various middlemen like wholesalers, selling agents and retailers,
dealers etc., intervene between the producers and consumers.
Therefore, the channel serves to bridge the gap between the point of
production and the point of consumption thereby creating time, place
and possession of utilities.
Each intermediary receives the item at one pricing point and moves it
to the next higher pricing point until it reaches the final buyer. For
example Tea, Coffee or dry fruits do not reach the consumer before
going first, through a channel involving the farmer, exporter,
importer, distributor, and the retailer.
Product distribution or place is one of the four elements of the
marketing mix. The other three parts of the marketing mix are
product, pricing, and promotion. 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.

What is Distribution Channel – 5 Different Types of

Flow Concepts: Physical Flow, Title or Ownership,
Promotion Flow, Information Flow and Monetary Flow
One of the ways to understand the concept of channels of distribution
is to observe from where consumers get their items of consumption.
Consumers rarely buy products directly from the companies that make
and market them. Products such as television, shoes, tea, sewing
machine, and paper are purchased from retailers.
Retailers procure their products from wholesalers. Wholesalers in turn
get their stock of products from the producing companies. Therefore,
products pass through a chain of partners called intermediaries or
channel partners. This chain of participating firms or partners
constitute the channel of distribution.
In other words, channel of distribution refers to a network or conduit
of member organizations or intermediaries that mark a path or route
on which products move from producer to consumer. There are a
variety of intermediaries that participate in distribution of products
such as wholesalers, distributors, agents, and retailers.
The channels of distribution can be visualized as a flow concept.
There are five different types of flow concepts are:
i. Physical Flow:
Once products are manufactured they need to be moved to point of
consumption. In this journey, products physically flow from their
point of production to the point of consumption. This physical
movement is perceptible when products move from distant locations
where they are produced to the marketplace.
For instance, many luxury cars like Porsche, which are not
manufactured in India, travel from their factories to the ultimate
buyers using a complex path or ‘route to market’ that involves
intermediaries in the country of their origin to intermediaries in the
country of sale. The participating partners take physical possession of
products in this journey. This flow is also often called downward flow.
ii. Title or Ownership:
Besides the physical flow of products, there are other flows that
happen in this process. Along with the physical movement of products,
sometimes the title to the goods also gets transferred from one
intermediary to the other. That is, as goods move the ownership also
gets transferred. For instance, companies sell their goods to
wholesalers and who in turn sell the same to retailers. Here the title
flows from the manufacturer in the direction of the consumer.
iii. Promotion Flow:
Efforts made by channel partners in the promotion of goods with their
customers is known as promotion flow. Like any other marketing
entity, the channel partners also employ a variety of promotion tools
including advertising, sales promotions, and personal selling to push
their products to the next participating partner in the chain. For
instance, wholesalers often offer incentives and bulk discounts to
retailers who buy more quantity of their products.
iv. Information Flow:
In the channels of distribution information flow can take both upward
and downward form. Information that flows upwards from channel
members is of great importance because it contains inputs on how
marketing can be made better. For instance, how consumers react to a
new model of car may reach the producing company through the
dealership where buyers interact with the sales staff.
The intermediaries, because of their proximity to the customers, have
better access to their feedback and needs and wants. They are
particularly better placed in forecasting demand and consumer trends.
Information also flows from intermediaries to customers. Since
intermediaries are experts in their areas they help customers take
better and informed buying decisions. This happens when a customer
of insurance, car, or house seek information from resellers.
v. Monetary Flow:
As the product moves from producer to consumer following a path,
money flows in the reverse direction. The money that a customer parts
at the point of sale moves up to the point at which the products
originate. The monetary flow in channels of distribution is upwards.
An important question that arises is why firms use channel partners or
intermediaries. The channels of distribution are necessary because
they add value by performing functions that cannot be efficiently
performed by the producer.

The objectives of channels of distributions are discussed as

follows:
Objective # 1. Receiving Fast and Accurate Feedback of
Information:
In order to maintain and provide an efficient distribution system and
service, a good and regular. How of relevant information is necessary,
which includes inventory levels, sales trends, damage reports, service
levels, cost monitoring etc.

Objective # 2. Making the Product Readily Available to the

Market Consumers:
To ensuring the product is represented in the right type of outlet or
retail store is an important objectives of channels of distribution.
Having identified the correct marketplace for the goods, the company
must make certain that the appropriate physical distribution channel
is selected to achieve this objective.

Objective # 3. Achieving a given Level of Service:

Once again, from both the supplier’s and the customer’s viewpoints, a
specified level of service should be established, measured, and
maintained. The customer normally sees this as crucial and relative
performance in achieving service level requirements is often used to
compare suppliers and may be the basis for subsequent buying
decisions.

Objective # 4. Enhancing the Prospect of Sales being Made:

The most appropriate factors for each product or type of retail store
will be reflected in the choice of channel. The general aims are to get
good positions and displays in the store; and to gain the active support
of the retail salesperson, if required. The product should be “visible,
accessible, and attractively displayed’.

Channel choice is affected by this objective in a number of

ways:
(i) Does the deliverer arrange the merchandise in the shop?

(ii) Are special displays being utilised?

(iii) Does the product required to be installed, demonstrated or

explained?

(iv) Is there a special promotion of the product is required?

Objective # 5. Minimising Logistics and Total Costs:

Costs are very crucially significant as they are reflected in the final
price of the product. The selected channel will reflect a certain cost
and this cost must be assessed in relation to the type of product
offered and the level of service required.

Objective # 6. Achieving Co-Operation with Regard to any

Relevant Distribution Factors:
These factors can either be from the supplier’s or the receiver’s point
of view and include minimum order sizes, unit load types, product
handling characteristics, materials handling aids, delivery access (e.g.,
vehicle size), and delivery time constraints, etc.

What is Distribution Channel – Need for Selecting an

Appropriate Channel of Distribution
It is a fact that the distribution channels are greatly required by the
manufacturers. The need for selecting an appropriate channel can be
understood on the basis of the parameters considered, which highlight
the fact why distribution channels must be selected?
1. Attention – Little attention of companies to their distribution
channels may damage results such as profit, brand, number of
customers etc.
2. Imaginative distribution systems – Companies can use imaginative
distribution systems to take competitive advantage. For example Dell,
Flipkart.com etc. Dell is the best example of revolution in Distribution
channel. Dell is selling its products directly to the consumer rather
than through retailer.
3. Difficult to Replace – Companies can change their products,
advertising and Pricing easily but not their distribution channels. It is
not an easy task to change distribution channel, franchisees, dealers
and retailers.
4. Value Addition – Distribution Channel Members can provide
greater efficiency in making availability of goods to the target markets
through their Contacts, Specialization, experience, and scale of
operation. This can add value to the product or service at each level of
distribution.
5. Reduced number of Channel Transactions – Marketing
intermediaries or channel members help to reduce the number of
channel transactions.
6. Information – Gathering and distributing information is very
helpful.
7. Promotion – Communication to the consumer regarding product
information and offers through advertising and promotion.
8. Financial support – Offering financial support for example
Purchase on credit, exchange options, purchase using payment plans
9. Other – Financing, Physical Distribution and Risk Taking are other
parameters that influence a channel selection decision Reduces
Distribution cost and time.

What is Distribution Channel – 5 Main Types: Direct

Channel, One Level Channel, Two Level Channel and
Three Level Channel
The types of marketing channels are nothing but the route taken by
the products to go from the manufacturer to the final consumer. There
are certain channels where the products go directly from the
manufacturer to the final consumer, but in other channels some
intermediaries come in between the manufacturer and the final
consumer.
The following are the different channels available:
1. Manufacturer to Consumer (Zero Level/Direct Channel):
The products in this channel go from the manufacturer directly to the
final consumer. There is no intervention by any other intermediary.
Under this channel, the final consumer must be large enough to buy
products in a large quantity directly from the manufacturer or the
manufacturer should have the capacity to distribute the goods directly
to all the final consumers. Example-An industry purchasing the raw
materials directly from the source.
2. Manufacturer to Retailer to Consumer (One Level
Channel):
The retailer plays his role in between the manufacturer and the
consumer. The retailer buys directly from the manufacturers and sells
the goods to the consumers in the required quantities. Such a retailer
should be strong enough because on the one hand he has to purchase
in a large quantity from the manufacturer and on the other hand sell
the products to a large number of consumers in small quantities.
This channel suits organized retailing well because the retailers under
this system are not only financially strong but also of a large size such
as departmental stores, malls, super bazaars, chain stores etc.
3. Manufacturer to Wholesaler to Retailer to Consumer
(Two Level Channel):
We find that in this channel there are two intermediaries in between
the manufacturer and the consumer-the wholesaler and the retailer.
The wholesaler buys the goods from the manufacturer in very large
quantities and in-turn sells the goods in relatively smaller quantities to
the retailer, but there is no direct relationship between the
manufacturer and the consumer.
The retailer buys the goods from the wholesaler in sufficiently large
quantities and sells them in very small quantities to the consumers.
The retailer has no direct contact with the manufacturer.
4. Manufacturer to Wholesaler to Consumer (One Level
Channel):
The retailer is by-passed in such a channel. The wholesaler buys the
goods from the manufacturer in large quantities and sells them
directly to the consumers. This arrangement is possible only when the
final consumer is able to buy the goods in sufficiently large quantities
directly from the wholesaler. This is found in institutional consumers
such as hospitals, government departments, educational institutions
etc.
5. Manufacturer to Agent to Wholesaler to Retailer to
Consumer (Three Level Channel):
Under this channel we find that there is an agent who acts in between
the manufacturer and the wholesaler. The agent generally does not
buy the goods, he only arranges for the sale of goods from the
manufacturer to the wholesalers. From this point onwards the
wholesalers sells the goods to the retailer and the retailer in-turn sells
the goods to the final consumer. This arrangement is found in cases
where the manufacturer operates on a very large scale over a very wide
area and has a very wide product range.
It is not necessary that a company has to use only one type of channel
for all its products through its market. It may use the direct or one
level channel to reach its customers in the local area and longer
channels to reach its customers at far off places. There is no rigidity
regarding the use of channels.
If a company uses only one type of channel for all its marketing
requirements, it is called a mono-channel or a single-channel policy. If
a company uses different types of channels to reach different
customers at different places, it is called a dual or a multi-channel
policy.
Integrated Channels of Distribution:
The new model of distribution that has emerged is the integrated
distribution. Vendors and the channel are moving away front a two-
tier distribution model to a single supply chain that leverages various
elements of the channel for most distribution logistics. There is also a
possibility under this system for a vendor to maintain a direct
relationship with the customer and allows for the rise of
comprehensive services delivered by either the vendor or the channel.

What is Distribution Channel – Most Common Routes

Used for Bringing the Products to the Market
The most common routes used for bringing the products
to the market from-producer to consumer are as follows:
1. Manufacturer-Consumer (Direct Sale):
There are three alternatives in direct sale to consumers.
They are:
(i) Sale through advertising and direct methods (mail order selling),
(ii) Sale through travelling sales force (house to house canvassing),
(iii) Sale through retail shops of manufacture, for example, shops
selling mill cloth. Bata Shoe Company outlets, etc.
2. Manufacturer-Retailer-Consumer:
This channel option is preferable when buyers are large retailers, for
example, a departmental store, discount house, chain stores, super
market, big mail-order houses or cooperative stores. The wholesaler
can be by-passed in this trade route. It is also suitable when products
are perishable and where speed in distribution is essential. However,
the manufacturer has to perform the functions of a wholesaler such as
storage, insurance, financing of inventories and transport.
3. Manufacturer-Wholesaler-Retailer-Consumer:
This is a normal, regular and popular channel option used in groceries,
drugs goods, etc. It is suitable for producers under the given
conditions – (i) They have a narrow product line (ii) They have limited
finance (iii) Wholesalers are specialized and can provide strong
promotional support, (iv) Products are durable and not subject to
physical deterioration or fashion changes.
4. Manufacturer-Agent-Wholesaler-Retailer-Consumer:
In this channel the producer uses the service of agent middlemen such
as – a sales agent, for the initial dispersion of goods. The agent in turn
may distribute to wholesalers, who in turn sell to retailers. There may
be a sole selling agent for many manufacturers, for example, Voltas.
Many textile mills have sales agents for distribution. Agent middlemen
generally operate at the wholesale level. They are common in
agricultural marketing.
Agent middlemen sell directly to wholesaler or to a large retailer on
commission basis. They are used by manufacturers for marketing of
this goods.
5. Manufacturer-Wholesalers-Consumer:
Wholesaler may by-pass retailer when there are large and institutional
buyers, e.g., industrial buyers, for example, government, consumer
cooperatives, hospitals, educational institutions, business houses, etc.
6. Competitors:
Marketers closely watch the channels used by rivals. Many a time, they
prefer similar channels to bring about distribution of their products
also. For instance, they may by-pass retail store channel and adopt
door-to-door sales.

What is Distribution Channel – Factors for Channel

Choice in Distribution: Product, Market, Middlemen,
Company, Marketing Environment and Competitors
Marketing channel decisions considerably influence all other
marketing decisions such as pricing and promotion. Channel decisions
also require special attention as these involve long-term commitments
to other firms with whom marketer enters into a contract. Chosen
channel cannot be terminated overnight. A distribution system is a key
external resource, equally important with key internal resources.
The problem of selecting the most suitable channel of distribution for
a product is complex. The most fundamental factor for channel choice
and channel management is economic criteria, viz., cost and profit
criteria. Profit organisations are primarily interested in cost
minimisation in distribution and assurance of reasonable profit
margin.
However, channel decisions are not made entirely on the basis of
rational economic analysis. We have to consider a number of factors
such as the nature of the product, market trends, competition outlook,
pricing policies, typical consumer needs, as well as needs of the
manufacturer himself.
The following are other critical factors:
1. Product:
(a) If a commodity is perishable or fragile, a producer prefers few and
controlled levels of distribution. For perishable goods speedy
movement needs shorter channel or route of distribution,
(b) For durable and standardised goods longer and diversified channel
may be necessary,
(c) For custom made product direct distribution to consumer or
industrial user may be desirable,
(d) Systems approach needs package deal and shorter-channel serves
the purpose,
(e) For technical product requiring specialised selling and serving
talents, we have the shortest channel,
(f) Products of high unit value are sold directly by travelling salesforce
and not through middleman.
2. Market:
(a) For consumer market, retailer is essential, whereas in business
market we can eliminate retailer,
(b) If the market size is large, we have many channels, whereas in a
small market direct selling may be profitable,
(c) For highly concentrated markets, direct selling is enough but for
widely scattered and diffused markets, we must have many channels,
(d) Size and average frequency of customer’s orders also influence the
channel decision. In the sale of food products, we need both
wholesaler and retailer.
Market means people with money and willing to purchase want-
satisfying goods. Age, income group, sex, vocation, religion of
customers will have to be studied to secure adequate information of
market segments or target markets. Buying habits of customers and
dealers will also influence our channel choice.
Consumer and dealer analysis will give data on the number, type,
location, buying habits of consumers and dealers. Channel choice
needs this information. For example, desire for credit, preference for
one stop shopping, demand for personal services, amount of time and
effort the customer is willing to spend — all are important factors in
channel choice.
If ultimate buyers are numerous, the order is small, order frequency is
great and buyers insist on the right to choose from a wide variety of
brands/goods, we must have three or even more levels of distribution.
Market considerations also govern mass distribution (through
multiple channels) or selective/exclusive distribution through few or
even one dealer. When service after sale is required, e.g., TV Sets,
Refrigerators, etc. selective distribution is profitable.
3. Middlemen:
(a) Middlemen who can provide wanted marketing services will be
given first preference. Of course, they must be available,
(b) The selected middlemen must offer maximum co-operation
particularly in promotional services. They must accept marketing
policies and programmes of the manufacturers and actively help them
in their implementation,
(c) The channel generating the largest sales volume at lower unit cost
will be given top priority. This will minimise distribution cost.
4. Company:
(a) The company’s size determines the size of the market, the size of its
larger accounts and its ability to get middlemen’s co-operation. A big
firm may have shorter channel,
(b) The company’s product mix influences the pattern of channels. The
broader the product line, the shorter will be the channel. If the product
mix has greater depth or specialisation, the company can favour
selective or exclusive dealerships,
(c) A company with substantial financial resources need not rely too
much on the middlemen and can afford to reduce the levels of
distribution. A weaker company has to depend on middlemen 4o
secure financial and warehousing reliefs,
(d) New companies rely heavily on middlemen due to lack of
experience and ability of management,
(e) A company desiring to exercise greater control over channel will
prefer a shorter channel as it will facilitate better co-ordination,
communication and control,
(f) Heavy advertising and sale promotion can motivate middlemen to
handle displays and join enthusiastically in the promotion campaign
and co-operative publicity. In such cases even a longer chain of
distribution can be profitable. Thus, quantity and quality of marketing
services provided by the company can influence the channel choice
directly.
5. Marketing Environment:
Marketing environment can also influence the channel decision.
During recession or depression, shorter and cheaper channel is always
preferable. In times of prosperity, we have a wider choice of channel
alternatives. Technological inventions also have impact on
distribution.
The distribution of perishable goods even in distant markets become a
reality due to cold storage facilities in transport and warehousing.
Hence, this led to expanded role of intermediaries in the distribution
of perishable goods.
6. Competitors:
Marketers closely watch the channels used by rivals. Many a time,
similar channels may be desirable to bring about distribution of your
products also. However, sometimes marketers deliberately avoid
customary channels (dominated by rivals) and adopt different channel
strategy. For instance, you may by-pass retail store channel (usually
used by rivals) and adopt door-to-door sales (Where there is no
competition).

TYPES : Intensity of Distribution: Extensive

Distribution, Selective or Limited Distribution,
Exclusive Distribution
Once, the company decides the general channels to be used, it has to
decide on the number of middlemen in each channel, i.e., intensity of
distribution.
There are three alternatives:
1. Extensive Distribution:
We have maximum number of retail outlets for mass distribution of
convenience goods as consumers demand immediate satisfaction and
that too at the most convenient retail shops. Extensive or broadcast
distribution is essential when the price is low, buying is frequent and
brand switching is a common phenomenon.
Extensive distribution secures rising sales volume, wider consumer
recognition and considerable impulse purchasing. But it creates
problem of motivation and control and it may generate unprofitable
sales due to higher marketing costs.
2. Selective or Limited Distribution:
When special services are needed, e.g., TV sets or a right prestige
image is to be created, e.g., certain cosmetics to be sold only through
chemists, we have selective distribution. The number of outlets at each
level of distribution is limited in a given geographic area.
When we have limited number of middlemen, they can spend more on
sales promotion and offer maximum cooperation in the company’s
promotion campaign. If the product has long useful life and consumer
brand preference can be established, selective distribution will be
more profitable.
3. Exclusive Distribution:
When final buyers do not need any product service, mass or extensive
distribution is adopted. If the amount of product service expected by
final buyers is considerable, exclusive distribution is preferable. Here,
we have one wholesaler or one retailer for a given market to handle the
right of distribution in that market. Similarly, if your brand has not
only brand preference but also brand insistence and consumers refuse
to accept substitutes, selective or even exclusive distribution is
feasible.
Exclusive distribution creates a sole agency or sole distribution-ship in
a given market area. Such types of distribution are very useful in the
sale of consumer speciality goods, e.g., expensive men’s suits.
Exclusive distribution privileges offer tremendous loyalty of dealers
and substantial sales support from dealers.
However, the main sacrifice involved is the rising sales volume that
might be obtained through wider or extensive distribution. The
manufacturer can have greater control over prices and markets and he
can get maximum co-operation from middlemen. Exclusive dealer can
carry complete stock and offer after-sale-service to the buyers of
products.

Advantages of Distribution Channels

When a customer is considering buying a product he tries to access its
value by looking at various factors such as its delivery, availability etc.,
which are directly influenced by channel members. Similarly, a
marketer too while choosing his distribution members must access
what value the member is adding to the product.
Some advantages of distribution channel are as under:
1. Results in Customer Convenience – Channel distribution provides
accumulating and assorting services, which means they purchase from
many suppliers the various goods that a customer, may demand.
Secondly, channel distribution is time saving as the customers can find
all that they need in on$ retail store and the retailer.
2. Customers can buy in small quantities – The phenomenon of
breaking bulk quantities and selling them in smaller quantities is
known as bulk breaking. The customers have the benefit of buying in
smaller quantities and they also get a share of the profit the retailer
makes when he buys in bulk from the supplier.
3. Customers receive financial support – Resellers offer financial
programs to their customers which make payment easier for the
customer. Customers can buy on credit and using a payment plan etc.
4. It is Cost Saving – Distribution channel partners are specialists in
what they do therefore, they perform at much lower costs than
companies trying to run the entire distribution channel all by itself.
5. It is Time Saving – Time of delivery is reduced due to efficiency and
experience of the channel members. For example, the grocery store
receives deliveries from the wholesaler in amounts required and at a
suitable time and often in a single truck. In this way cost as well as
time is saved.
6. Channel members also help in boosting sales – Resellers often use
persuasive techniques to persuade customers into buying a product
thereby increasing sales for that product. They often make use of
various promotional offers and special product displays to entice
customers into buying certain products.
7. Channel members provide valuable information – Manufacturers s
rely on the intermediaries to provide information which will help in
improving the product or in increasing its sale. High- level channel
members often provide sales data. On all other occasions the
manufacturer can always rely on the reseller to provide him with
customer feedback.
8. Bigger Reach – A channel of distribution makes it possible to deal
with customers that the company could not economically reach with
own sales force or store. A network of distributors or retailers provides
ready-made coverage of other regions or the whole country without
the company having to invest.
9. Increased Market Knowledge – Distributors provide company with
local market knowledge, enabling it to enter new markets quickly and
effectively without the cost of market research or marketing programs
10. Increased Core Competency – A small business needs to focus its
resources on product development and generate revenue. Using
channel distribution allows a small business to focus on those core
competencies without having to hire new personnel
11. Results in increased Efficiency – the intermediaries help to develop
a single line of contact for each customer. That line of contact would
include order placement, defective product returns, payment
collections, product questions and product returns. All this helps in
increasing the efficiency of the manufacturer.
12. Results in Growth – An international channel distributor can help
a small business reach markets all over the world
Distribution Channel: Functions and Levels (With
Diagram)
Distribution channel is a means used to transfer merchandise from the
manufacturer to the end user through retailer and other necessary
intermediaries. An intermediary in the channel is called an
agent/middleman. Channels normally vary from two-level channels
without intermediaries to five-level channels with three
intermediaries.

For example, a leather handbag manufacturer who prepares handbags

and sells it directly to the customer is in a two-level channel. A poultry
farmer sells chicken and eggs to a restaurant supplier, who sells to
individual restaurants, who then serve the customer, is in a four-level
channel. Agents/intermediaries in the channel of distribution are used
to facilitate the delivery of the merchandise as well as to transfer title,
payments, and information about the merchandise.

According to Philip Kotler, the channel decisions are among the most
important decisions that management faces and will directly affect
every other marketing decision. These decisions are set of
interdependent organizations (intermediaries) involved in the process
of making a product or service available for use or consumption by the
consumer or business user.
Functions of a Distribution Channel:
Distribution channels are well organized arrangements that perform
all the necessary tasks to assist exchange transactions. The basic
function of a distribution channel is to provide a link between
production and consumption and to create time, place and possession
utilities which constitute the added value of distribution.

Intermediaries (wholesalers, retailers, agents, brokers) are needed

because manufacturers lack the necessary financial and human
resources to carry out direct marketing. Maruti Suzuki Corporation
sells its cars through more than 600 dealer outlets in India and
abroad. It will not be feasible for Maruti Suzuki Corporation to buyout
its dealer network and sell car throughout the country and abroad.

Distribution channels can be exemplified by the number of

intermediary levels that separate the manufacturer from the end
consumer. The choice of a particular distribution channel is
determined by factors related to market size, buyer behaviour and
organization’s characteristics. A typical distribution channel has to
perform various functions as mentioned below.
All the above mentioned functions should be considered logically in
any market. The idea is to know what functions are to be performed,
who will perform them and how many levels it requires to make the
distribution efforts cost effective, is another important decision to
take.

Channel Levels:
Each layer of distribution intermediaries that performs some work in
bringing the product to its final consumer is a channel level.

(i) A Zero Level Channel:

A zero level channel, commonly known as direct marketing channel
has no intermediary levels. In this channel framework manufacturer
sells merchandise directly to customers. An example of a zero level
channel would be a factory outlet store. Many service providers like
holiday companies, also market direct to consumers, bypassing a
traditional retail intermediary – the travel agent.

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.

The remaining channels are known as indirect-marketing channels.

(ii) A One Level Channel:

A one level channel contains one selling intermediary. 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.
(iii) A Two Level Channel:
A two level channel encompasses two intermediary levels – a
wholesaler and a retailer. A wholesaler typically buys and stores large
quantities of merchandise from various manufacturers and then
breaks into the bulk deliveries to supply retailers with smaller
quantities. For small retailers with limited financial resources and
order quantities, the use of wholesalers makes economic sense.

This agreement tends to work paramount where the retail channel is

jumbled – i.e. not dominated by a small number of large, dominant
retailers who have an encouragement to cut out the wholesaler.
Distribution of drugs/ pharmaceuticals in the Europe and United
Kingdom is typical example of such arrangement.

(iv) A Three Level Channel:

A third level channel, as the name implies, encompasses three
intermediary levels – a wholesaler, a retailer and a jobber. In the
poultry industry, products like mutton, chicken, eggs etc. are first sold
to wholesalers; he then sells it to jobbers, who sell to small and
unorganized retailers.

One point in this regard, is to be noted that the levels of distribution

vary from industry to industry and country to country. In Japan, food
distribution system usually may involve as many as five or six levels
while rest of the world, rely on two to three levels distribution
network.
Factors Affecting Choice of
Distribution Channel
Everything you need to know about factors influencing choice of
distribution channel. Deciding or selecting channels of distribution is
a strategic decision for any manufacturing or trading concern.
The choice of channels depends on various factors. Usually,
manufacturers consider which distribution channel would be
objective and efficient.
The selected channels must have lowest cost with maximum overall
profit. It should also be remembered that there is no single channel of
distribution that will always result in optimum profit. The integrated
marketing concept has prompted many manufacturers to employ
several kinds of channels.
There are various constraints that are to be considered before
deciding channel objectives.
Learn about the factors influencing choice of distribution channel are:-
1. Market Related Factors 2. Product Factors 3. Company Factors 4.
Channel Related Factors 5. Environmental Factors.

There are several channels available for the purpose of distribution of

goods. Each channel has its own advantages and limitations and every
company has to make difficult choice about channels of distribution.
This decision about choice of a channel of distribution depends on
several factors. A company has to consider all these factors and make
an appropriate choice.
The following are the factors:
1. Market Related Factors:
Since the channels of distribution operate in the market. The market
related factors are very important. There are several forces in the
market which dictate the choice of channels of distribution.
The following are the market related factors to be
considered:
a. Customers:
The ultimate purpose of any channel of distribution is to distribute the
goods to the customers. Therefore the requirements and the nature of
the customers should be considered while deciding the channel of
distribution.
If the customers are widely scattered the channels must be in a
position to reach them out effectively. This requires appropriate
channels but if the customers are not widely scattered smaller
channels would be sufficient. If the customers are very large in
number such as individuals, very wide channels of distribution will be
necessary, but if the customers are small in number and purchase in
large quantities such as the industrial purchasers, small channels or
even direct distribution will be sufficient.
b. Competition:
One has to consider the channels of distribution arranged by the
competitors. This choice represents the wisdom and experience of the
competitors. It also means that the competitors have been successful
in using such channels over the long run. A company can adopt such
channels of distribution if found suitable to itself. Unless there are
compelling reasons, a company should not try to change the pattern of
distribution as compared with that of the competition.
c. Existing Channels of Distribution:
One has to make study of the existing channels of distribution. The
functions performed by these channels, their strengths and
weaknesses, their suitability and such other factors affect the choice of
channels. Their relative advantages must also be studied.
2. Product Factors:
Since it is the product which is to be distributed, the product
characteristics also have to be analyzed while choosing a channel of
distribution. Different products are different in nature and this nature
of the products requires different types of channels.
The following product factors have to be considered:
a. Perishability:
If the products are highly perishable, the channel must be short or
even direct marketing would be suitable. This is because long channels
of distribution with a large number of intermediaries delay the
distribution of goods. Products like milk, flowers etc. require very fast
distribution.
b. Nature of the Product:
Consumer goods are purchased by a larger number of people, in
smaller quantities and more frequently. Therefore such goods require
longer channels of distribution which have a wide range. The presence
of retailers is a must. Industrial goods on the other hand are
purchased in larger quantities by a smaller number of purchasers and
less frequently. Moreover the industrial goods purchaser is well
informed, knowledgeable and rational. Such goods require shorter
channels of distribution.
c. Technicality:
Some products are highly technical in nature such as computer
hardware and software, medical diagnostic equipments etc. Such
goods require a high amount of technical support which can be
provided only by the manufacturer. Therefore, such goods are best
distributed by manufacturers’ salesmen. Goods which do not require
such technical support, for example-ready-to-wear garments can be
distributed by longer channels of distribution.
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d. Seasonality:
Some goods have a seasonal nature either in terms of production
(agricultural goods), or consumption (woolen goods) and such goods
require different types of distribution channels.
e. Variety Offered:
If a manufacturer has a wide range of goods, he can opt for direct
distribution of the goods since a large number of products are
available. If a manufacturer has very few products, he has to distribute
them through long channels of distribution.
f. Unit Value:
Products of high unit value suit shorter channels of distribution or
even direct marketing, but products of low unit value which are mass
consumed require longer channels of distribution.
3. Company Factors:
A company has to look within and understand itself while choosing a
channel of distribution. It has to understand its requirements,
strengths and weaknesses.
The following factors of the channel must be considered:
a. The Ability of the Channels:
Well established and strong channels have the ability to distribute
goods effectively over a wide area. They can promote and sell even
unknown products. Newly established channels of distribution
however cannot do these. Therefore a company has to consider the
ability of the channels before deciding on the channels of distribution.
b. The Financial Strength of the Channels:
Financially strong channels of distribution can distribute the goods
well and also finance the manufacturers directly or indirectly. They
can lift the goods from the manufacturers by paying cash immediately
which indirectly amounts to financing the manufacturers. Therefore,
such financial ability is also a factor that must be considered by a
company regarding choice of channel of distribution.
c. Ability to Provide after Sales Service:
Some products require a long term after sales service. In such a case it
should be decided as to who has to provide the after sales service
whether the manufacturer or a member of the channel of distribution.
In such a case a company has to look into the ability of the channels of
distribution to provide effective after sales service in a sustained
manner.
5. Environmental Factors:
A company’s channel choice depends on certain environmental
factors. Environment in this context means the environment within
which the company, the channels of distribution, the customers etc.
are present.
The following are certain environmental factors which must
be considered while deciding channels of distribution:
a. Economic Situation:
The prevailing economic situation in the country affects all the
economic activities. Therefore, a company has to be aware of the
prevailing economic conditions. During an economic boom, the sales
of all the products will naturally good and channels of distribution will
be more than willing to take up distribution of products.
During a recessionary period, the general sales come down as a result
of h which channels of distribution become reluctant to take up
distribution. These are the factors to be considered by a company
while deciding on a channel of distribution.
b. Legal Factors:
A company is free to decide about its channels of distribution as long
as its activities are legal. There are certain legal factors however which
must be considered while deciding channels of distribution and
arrangements with them. Certain types of arrangements with the
channels of distribution in the form of sole distributorship and in the
cases of certain essential commodities may be objectionable under
law. Therefore, such legal factors are to be considered.
c. Fiscal Structure:
Fiscal structure in this context refers to certain indirect taxes levied by
the state governments on products. There is no uniformity in this
matter and clarity is absent in certain cases. Therefore, such matters
must also be considered while deciding on, channels of distribution.
Factors Influencing Choice of Distribution Channel –
Product, Consumer, Company, Middlemen and
General Considerations
A. Product Considerations (Nature of Product):
1. UNIT Value – Use short direct sales type channel for high value
goods. Use large channels for low value goods.
2. Perishability – Short channels or direct to consumer for perishable
goods e.g. fruits, vegetables, perfumes. Long channel for durable
goods.
3. Bulky and Weighty (like iron & steel, cotton etc.) – To be sold
directly by manufacturer or short channel to reduce distance and
number of handlings.
4. Highly Technical Products – To be sold through shortest channel /
directly by Manufacturer.
5. General Goods (with Substitutes) – Sell through long channels.
6. Limited Product Line – Direct Selling .
7. Standardized / Branded Products – Sell through long channels.
8. Ordered Goods (goods as per customer specifications) – Sell direct
by Manufacturer.
9. Expensive High Unit value Products – Sell direct by companies.
10. Inexpensive products – Sell through indirect / long channel.
11. Tangible and intangible Products – Tangible goods sold through
indirect, longer channel. Intangible services are sold through direct or
shorter channel.
12. Repeated Handling (like delicate jewelry) – Short channel.
13. Customer-Specifications Goods – Shorter channel (direct channel).
14. After Sales Service Requirement – Direct/short channel.
15. Nature of product – For consumer products, indirect channels are
preferred and for industrial goods direct channel.
16. Goods subject to Fast Style Changes – Manufacturers prefer selling
direct to retailers.
B. Consumer Considerations:
1. Dispersed geographically Customers – Sell through Middlemen (one
or more layers).
2. Large no of customers – Sell through Middlemen (one or more
layers).
3. Credit and other facilities – Better use intermediaries; for
wholesalers, retailers can better asses creditworthiness of customer.
4. Order Size Manufacturer – he can sell direct to big organisation and
use wholesalers to sell to retailers.
5. Buying Habits of Customers – For consumers buying frequently but
in small quantities -Indirect channel.
If customer buying in large amount – Direct channel is profitable.
C. Company Considerations:
1. Large scale Manufacturers – Distribute their products directly.
2. Small Manufacturers – Sell through wholesalers as they cannot
afford heavy expenses of sales force.
3. Custom of the Industry may decide the channel.
4. Financial Position – Direct sales by financially strong companies.
Weak co (with lesser financial/human resources) to depend upon
intermediaries.
5. Maximizing short-run profits – Sell through direct channel.
6. Managers with Expertise to Sell – Sell direct.
D. Middlemen / Intermediaries Considerations/Factors:
1. Manufacturers may choose to avail middlemen’s important services;
2. Middlemen’s Liberal and co-operative attitude helps their use;
3. Rigid attitude restricts their use;
4. Use middlemen if they can assure maximum sale and have
necessary capability; and
5. Producers would use channels if they are not costly and such
channels which have low costs.
E. General Considerations:
Choose channels which satisfy following criteria viz.:
1. Suitability – Suitable channel be adopted.
2. Efficiency – Efficient channel be adopted.
3. Flexibility – Channel should be capable of being changed.
4. Competitors’ Channels be kept in mind and sell through same
channels or devise alternatives.
5. Social Considerations – Attitude of society towards a channel be
considered.
6. Inflationary / Recessionary conditions – In Inflation sell through
longer channels to penetrate deep into market and generate greater
sales revenue. In recession, use shorts channels to prevent undesirable
price increase in products.

Channels for New Products:

In case of a product being put on the market for the first time, it is
important to ensure that the potential buyer learns from some source
that the product exists and that it will satisfy certain specific needs of
his. If it is an important product, the buyer will seek considerable
information (whether from the advertisement or from the middleman)
before deciding to go in for it.
This may be said of items like refrigerators, room coolers, air-
conditioners, etc. If, however, it is a relatively unimportant thing, the
potential buyer may not want much information and may be inclined
to make a purchase just as soon as the product is made available. The
choice of a channel or a set of channels will be dictated by the kind of
product that is being introduced.
The seller of a new consumer product can generally choose from
among a number of alternatives. A wholesaler may not promote the
product aggressively but he does usually have useful connections with
retailers and charges a lower margin of profit. If the manufacturer can
create a response for the product through advertising, the wholesaler
will be a good choice.
A speciality shop may promote the product with force but will
generally demand higher profit margin. Direct sales could also be
made to the retailer. This will call for a large sales force. As a further
alternative, missionary salesmen may be employed to call on the
retailer and the product may be marketed through wholesalers. This
may mean more cost but it will ensure better dealer co-operation.
In practice, a beginning may be made with a channel that ensures
aggressive promotion of the product even though the cost in the form
of margin is high. As the product becomes accepted in the market, the
manufacturer can switch over to the channels that mean less cost (say
wholesalers).
Of course, in making this switchover, utmost care should be taken to
avoid ill-will on the part of the original channel as it may be required
again to promote another new product.

Factors Influencing Choice of Distribution Channel – 2

Main Factors: Product and Market Considerations
The entrepreneur must take into account the following factors namely
product considerations, market considerations, and other
considerations before selecting a distribution channel. All these factors
or considerations affecting the choice of a distribution channel are
inter-related and interdependent.
Hence, an entrepreneur must choose the most efficient and cost
effective channel of distribution by taking into account all these factors
as a whole in the light of the prevailing economic conditions. Such a
decision is very important for a business to sustain long term
profitability.
These have been briefly discussed below:
Factor # 1. Product Consideration:
The type and the nature of products manufactured is one of the
important factors in choosing the distribution channel.
The major product related factors are:
i. Low value Products – these are ordinarily sold through middlemen,
whereas, expensive consumer goods, and industrial products are sold
directly by the producer.
ii. Perishable products – these kinds of products are short life
products that are subjected to frequent changes in fashion or style as
well as heavy and bulky products follow relatively shorter routes and
are generally distributed directly to minimize costs.
iii. Industrial products – these products require demonstration,
installation and after sale service therefore, they are often sold directly
to the consumers. While the consumer products of technical nature
are generally sold through retailers.
iv. Wide range of products – the producer of these products may find
it economical to set up own retail outlets and sell directly to the
consumers. On the other hand, firms producing a narrow range of
products may sell or distribute through wholesalers and retailers.
v. A new product – a new product needs greater promotional efforts in
the initial stages and hence few middlemen may be required. All the
direct marketing effort has to be put by the producer.
Factor # 2. Market Consideration:
Another important factor influencing the choice of distribution
channel is the nature of the target market.
Some of the important features in this respect are:
i. Industrial user – If the market for the product is meant for industrial
users, the channel of distribution will not need any middlemen
because they buy the product in large quantities.
ii. Small customer market – lf the number of prospective customers is
small or the market for the product is geographically located in a
limited area, direct selling is more suitable. While in case of a large
number of potential customers, use of middlemen becomes necessary.
iii. Bulk buying market – lf the customers place order for the product
in big lots, direct selling is preferred. But, if the product is sold in
small quantities, middlemen are used to distribute such products.
Other Considerations:
There are several other factors that an entrepreneur must take into
account while choosing a distribution channel.
Some of these are as follows:
i. A new business firm may need to involve one or more middlemen in
order to promote its product, while a well-established firm with a good
market standing may sell its product directly to the consumers.
ii. A small firm which cannot invest in setting up its own distribution
network has to depend on middlemen for selling its product. On the
other hand, a large firm can establish its own retail outlets.
iii. The distribution costs of each channel are also an important factor
because it affects the price of the final product. Generally, a less
expensive channel is preferred. But sometimes, the customers prefer a
more convenient channel even if it is more expensive.
iv. If the demand for the product is high, more number of channels
may be used to profitably distribute the product to maximum number
of customers. But, if the demand is low only a few channels would be
sufficient.
v. The nature and the type of the middlemen required by the firm and
its availability also affect the choice of the distribution channel.
Distribution or Marketing channels are an important part of any
organization to deliver their products and services to consumer
properly. This is a set of interdependent organizations or parties
involved in the process of making a product or service available for
consumption or use by consumer or end users.