WHY IS SELECTION OF DISTRIBUTION CHANNEL SO IMPORTANT?

Businesses need to find a way to serve their customers, wherever they are located. That's why selecting a
distribution channel is an important aspect of building a competitive advantage for businesses of every size

 It intimately affects every other element of marketing strategy

 Difficult to replace: Companies can change their products, advertising and Pricing easily but not their
distribution channels. It’s not an easy task to change distribution channel, franchisees, dealers and
retailers.
 The pricing structure depends on whether there will be a limited number of high mark-up dealers or if
there will be mass distribution
 Promotion strategy depends on it, namely:
o Directly to consumers
o Through manufacturer’s representatives
o Through retailers
 Product strategy also depends on it:
o Department stores: Department stores are retail stores that offer variety of goods and brands
under the same roof which may or may not be at a discounted price. E.g.: Any local kirana shop
o Discount stores: A department store which offers its items at a lower price than many other retail
stores. Discount stores are often able to drop their prices due to efficient distribution methods.
E.g.: Wal-Mart, Big Bazaar

DESIGNING THE CHANNEL

Channel design refers to those decisions involving the development of new marketing channels where none had
existed before or to the modification of existing channels.

The channel design decision can be broken down into four phases or steps. These are:

1. Analyzing customers’ desired service output levels:

2. Establishing the channel objectives & constraints
3. Identifying the major channel alternatives
4. Evaluating the major channel alternatives

Many situations can indicate the need for a channel design decision. Among them are: Developing a new product
or product line, aiming an existing product to a new target market, making a major change in some other
component of the marketing mix, establishing a new firm

INTENSITY
Intensity refers to the number of intermediaries at each level of the marketing channel. The choice to distribute
intensively, selectively, or exclusively is a strategic decision based on many factors such as the nature of the brand,
the types and number of competitors, and the availability of retail choices

Factors That Affect a Product’s Intensity of Distribution

Intensive

Firms that choose an intensive distribution strategy try to sell their products in as many outlets as possible.
Intensive distribution strategies are often used for convenience offerings—products customers purchase on the
spot without much shopping around.

Soft drinks and newspapers. You see them sold in all kinds of different places.

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Selective

By contrast, selective distribution involves selling products at select outlets in specific locations.
Sony TVs can be purchased at a number of outlets such as Croma, Reliance Digital but the
same models are generally not sold at all the outlets. By selling different models with different
features and price points at different outlets, a manufacturer can appeal to different target
markets

Exclusive

Exclusive distribution involves selling products through one or very few outlets. Most students often think
exclusive means high priced, but that’s not always the case. Exclusive simply means limiting distribution to only
one outlet in any area, and can be a strategic decision based on applying the scarcity principle to creating demand.

Designer Michael Graves has a line of products sold exclusively at Target. To purchase those
items, you need to go to one of those retailers. In these instances, retailers are teaming up
with these brands in order to create a sense of quality based on scarcity, a sense of quality that
will not only apply to the brand but to the store.

To control the image of their products and the prices at which they are sold, the makers of
upscale products often prefer to distribute their products more exclusively. Expensive perfumes
and designer purses are an example.

DIRECT VS INDIRECT SALES

Direct

Direct sales means going straight to your customer and selling her your product. You can phone the customer, see
her face to face or even use email. The communication link between the company and the prospective customer
is direct.

Direct channels tend to be more expensive to start running and can sometimes require significant capital
investment. Warehouses, logistics systems, trucks and driving staff need to be set up.

E.g.: Avon, Tupperware

Advantages

 High level of influence on your customer and know exactly how your customer feels about your product
or service because of the direct communication
 One processes are in place, and for larger volumes the direct channel is likely to be shorter and less costly
than an indirect channel
 There is more control over distribution functions as it is organized and managed by the firm itself

Indirect

When engaging in indirect sales (also called channel sales), a company uses some type of go-between and does
not directly contact the customer. The go-between could be a reseller, a commissioned independent sales agency
or even another distributor.

The most challenging part of indirect distribution channels is that another party has to be entrusted with the
manufacturer's products and customer interaction.

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Advantages

 The company can expand its geographic reach without having to hire hundreds or even thousands of sales
representatives
 Indirect channels also free the manufacturer from any start-up costs. With the right relationship, they are
much simpler to manage than direct distribution channels

CHANNEL DYNAMICS
Conventional marketing channel

 Comprises an independent producer, wholesaler(s) & retailer(s)

 Each is a separate entity
 No channel member has complete or substantial control over the other members

Vertical Marketing Systems

 Producer, wholesaler(s) & retailer(s) act as a unified system

 They all cooperate
 Can be dominated by any of the three members of the system

It arose as a result of strong channel members’ attempts to control channel behaviour & eliminate the conflict
that results when independent channel members pursue their own objectives under conventional systems.

Has become the dominant mode of distribution in the U.S. consumer marketplace.

3 types of VMS:

Corporate VMS

A corporate vertical marketing system streamlines the process by bringing all of the elements of the distribution
channel, from manufacturing to the stores, under the ownership of a single business. Combines successive stages
of production & distribution under single ownership

Firestone, for example, manufactures tires and owns the service centres that sell the tires to customers.

Administered VMS

Employ neither formal contractual obligation nor corporate ownership of the distribution channel. Instead, one
member of the distribution channel wields enough power, generally though sheer size, to effectively control the
activities of the other members of the distribution channel. Coordinates successive stages of production &
distribution through the size & power of one of members.

Massive retail chain stores, such as Walmart, often preside over administered vertical marketing systems. Other
examples are Kodak, Gillette, P&G

Contractual VMS

Independent firms at different levels of production & distribution integrating their programs on a contractual
basis to obtain more economies &/or sales impact than they could achieve alone.

For example, if 15 independently owned restaurants enter into an agreement with a produce wholesaler, the total
costs go down for everyone thanks to bulk ordering and shipping.

The most common form of Contractual VMS is Franchising. In franchising, the producer authorizes the distributor
to sell its product under the producer’s name against some annual license fee.

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For example, Mc-Donald’s, Dominos, Pizza Hut, etc. are all forms of the franchise which are working on a
contractual basis.

Horizontal Marketing Systems

Two or more unrelated companies put together resources or programs to exploit an emerging marketing
opportunity.

Multichannel Marketing Systems

A single firm uses two or more marketing channels to reach one or more customer segments. By adding more
channels, companies can gain 3 important benefits: increased market coverage, lower channel cost, more
customized selling.

MANAGING RETAIL BUSINESS PERFORMANCE

A retailer considers the following factors while taking decisions about products to stock:

 Movement out of shelf: Stock more of what sells more

 Margin: Higher margin is obviously a motivator
 Credit/Investment
 Schemes
 Size of SKU
 Slotting fee
 Return policy
 Substitute stocks
 Shelf life

Carrying unnecessary or excess inventory can block precious cash and damage profitability. In addition, holding
inventory for a long time results in shrinkage (loss of inventory due to obsolescence, theft, pilfering and damage)
and other hidden costs viz moving the inventory, packing and unpacking costs, movement from stores to
warehouse and vice versa. Hence, it is vital to ensure a very high level of Inventory productivity.

Retailers must use these metrics to understand their performance:

 Inventory Turnover
Inventory turnover answers the fundamental question – how many times in a year am I able to turn my
inventory into cash. Inventory Turnover links the average inventory and sales.

Thus, if a Retailer holds Inventory worth $1000 (at retail sales price) and is able to sell the entire inventory
once every three months, then the Inventory Turnover will be 4

 GMROI (GM Return On Inventory)

It is a measure of inventory productivity and expresses the relationship between total sales, gross margin
and inventory investment. Stated very simply, GMROI calculates the total return for every dollar invested
in inventory.

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 Typically, inventory makes up about 70% - 80% of a retail operations financial assets - meaning the largest
drain on your cash. So it makes sense that the health of your business is directly linked to how well you
manage your inventory.

 GMROS (GM Return On Space)

In any retail outlet, the biggest constraint is space. If space had not been a constraint, no retailer would
have kept a warehouse and everything would be displayed. But space is an expensive constraint. GMROS
measures how effectively this constraint is being exploited.

The GMROS is the calculated as a ratio of Gross margin in $ and square foot allotted to the product. A
product with higher GMROS will consume relatively less space and earn more Gross Margin dollars.

WHOLESALERS
All merchants and agents who intervene between producers on the one hand and retailers or users on the other
are wholesale establishments.

In the words of Evelyn Thomas, “a true wholesaler is himself neither a manufacturer nor a retailer but acts as a
link between the two”.

Types of wholesalers and basis of classification:

 Ownership
o Independent
o Captive
 Title of Goods
o Merchant Wholesalers
o Agent Wholesalers
 Functions
o Full Function
o Limited Function
 Merchandise
o Full Line
o Limited Line
 Degree of Control
o Dedicated
o Shared
o Independent

Merchant Wholesalers

The important feature of merchant wholesalers is that they take title to the goods before being sold by them. A
wholesaler who buys plywood from the manufacturer is a merchant wholesaler. He actually takes title to the
plywood before selling to the retailers.

In India a large number of wholesalers are merchant wholesalers. Merchant wholesalers often specialize in certain
types of products or customers and they service relatively small geographic areas. And within that category
several wholesalers compete for the same customers.

Merchant Wholesalers perform the following functions:

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 i. Market Coverage: For good market coverage so that customers can get goods as and when they need,
manufacturers often rely on merchant wholesalers to secure the necessary market coverage at
reasonable cost.
ii. Making Sales Contacts: For manufacturers, the cost of maintaining an outside sales force is high. To sell
products to many customers over a large geographical area, the cost of covering the territory with its
sales force can be prohibitive.
iii. Holding Inventory: By taking title to goods, and stocking the inventory, the wholesalers help
manufacturers to reduce their burden and risks. By providing outlet the wholesalers assist manufacturers
to better plan their production schedule.
iv. Order Processing: Order processing by wholesalers saves manufacturers from number of small orders.
Manufacturers prefer to attempt to fill large-sized orders of wholesalers. Many of original dot.com firms
engaged demised due to high cost of order processing.
v. Gathering Market Information: Wholesalers are usually quite close to their customers geographically and
in many cases have continuous contact through frequent sales calls on their customers. Hence, they are
in a better position to learn about customers’ product and service requirements.
vi. Offering Customer Support: Merchant wholesaler provide retailers many value added services like
facilities like returns, exchanges, repairs, or technical assistance on behalf of the manufacturer.
vii. Breaking Bulk: A merchant wholesaler buys in large quantity and breaks down these bulk quantities into
smaller quantities.

Agents and Brokers

Wholesale agents and brokers make up the other major portion of the wholesale trade industry. Agents and
brokers differ from merchant wholesalers in that they do not purchase or take ownership of the goods they buy
and sell. Instead, the agent or broker will arrange for the sale of goods between the merchant wholesaler and the
retailer and will generally earn his money by receiving a fee for the arrangement of the sale (commission whereas
merchant wholesalers earn through margins).

Merchant wholesalers are distinct from agents and brokers in that they purchase the inventory they sell before
profiting from it. This means that they assume a greater level of risk than the broker because they must assume
financial responsibility for the products that they sell. Brokers do not assume this level of responsibility as they
primarily serve as middlemen between the wholesaler and the retail purchaser.

Drop Shipper

Drop shipper are those wholesalers who take title to goods but not the delivery. Normally they procure orders
from retailers or professional buyers and ask the manufacturer to directly load the goods to the retailer or
professional buyers. Thus product saves double loading. It is quite common in the trade of coal, cement, logs,
butter and cheese etc.

Independent Wholesalers

Why use independent wholesalers at all?

 Time saved from setting up new channels

 Lower effort
 Narrow product line – can’t go on my own
 Cost – not feasible to go on my own
 Risk taking – shared by independent wholesalers
 Finance

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Disadvantages

 Lower control
 Less push
 Promotions – cannot control higher visibility as such
 Market development cannot be done as effectively
 Market information is not handled very well

Why do retailers go to independent wholesalers?

 Larger product line

 Better credit
 Flexible timing

Disadvantages

 Sometimes promotion schemes are not passed to retailers

 Stock outs – reliability
 Return policy is weak

SELLING
Types of salespersons:

1. Order Takers
 Order takers are not expected to persuade customers to buy the company’s products or increase their
quantity of purchase
 They are supposed to book customer orders and pass on the information to relevant people in the
company
 Doesn’t involve a lot of active selling
 They are expected to be accurate
 They are also expected to have information about when the order that has been booked will be delivered
to customers
 Customers will often enquire the delivery date from them and they should have answers
 Orders takers are also being prompted to at least prod customers to buy certain other products of the
company besides the ones that they are already buying or increase their quantities of purchase

a) Inside order takers: Retail sales assistants are typical inside order takers. The customer has full freedom
to choose products without the presence or influence of a salesperson. The salesperson’s task is
transactional. He receives payments and passes over the goods to the customers.

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 b) Delivery salespeople: Delivery salespeople are primarily concerned with delivering the product. There is
little attempt to persuade customers to increase the order. Changes in order size are customer driven.
Though delivery salespeople do not try to influence demand, winning and losing an order is heavily
dependent on reliability of delivery.
c) Outside order takers: Salespeople visit the customer, but they primarily respond to customers’ requests
rather than actively seek to persuade them. They are being replaced by the more cost efficient
telemarketing teams who call customers and book their orders.

2. Order Creators
 The prime objective of order getters is to convince customers to buy the company’s products
 The salesperson needs to understand customer’s requirements and convince him that his company’s
products serve his requirements best
 Involves active selling

a) Missionary salespeople: In some industries, notably pharmaceuticals and building industry, the sales task
is not to close the sale but to persuade the customer to specify the seller’s products.
Medical representatives calling on doctors cannot make a direct sale since the doctor does not buy drugs
but prescribes them for patients. Architects also act as specifies rather than buyers. In these situations,
the selling task is to educate and build goodwill for the company. Evaluation of such salespersons becomes
a difficult task.
b) Order getters: An order getter persuades a customer to make a purchase. He is a frontline salesperson,
and is in a typical selling job. He is supported by technical support staff and merchandisers.

Sales Support

 Technical support salespeople: Where a product is highly technical and the negotiations are complex, a
salesperson may be supported by product and financial specialists who can provide the detailed technical and
financial information required by customers.
This may be on-going as part of a key account team or on a temporary basis with the specialist being called
into the selling situation whenever required.
 Merchandisers: Merchandisers advise on product display in stores, implement sales promotions, check stock
levels and maintain contact with store managers. They provide support to the sales function in retail and
wholesale selling. Salespeople serving individual outlets are supported by merchandisers.

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