MARKETING CHANNELS

A marketing channel is the people, organizations, and activities necessary to transfer the ownership of
goods from the point of production to the point of consumption. It is the way products and services get to
the end-user, the consumer; and is also known as a distribution channel

Role and Significance/Importance of Distribution Channels

Distribution Channels perform a crucial role in the successful distribution and marketing of all
products. They have various contacts, expertise and wider knowledge of the products. The rapidly
growing markets and increasing complexities of distribution have increased the demand and requirement
of the distribution channels.

The role of distribution channels can be summarised as follows:

1. Distribution channels offer salesmanship: The distribution channels offer pivotal role of a sales
agent. They help in creating new products in market. They specialize in word of mouth selling
and promotion of products. They assure pre-sale and post-sale service to the consumers. Since
these channels are in direct and regular contact with the consumers, they do salesmanship very
well and at the same time provide true and valuable feedback to the producers.
2. Distribution channels increase distributional efficiency: The intermediary channels ease the
sales process as they are in direct contact with the customers. They narrow down the gap between
producers and consumers both economically and efficiently. These intermediaries reduce the
number of transactions involved in making products available from producers to consumers. For
instance, there are four producers who are targeting to sell their products to four customers . If
there is no distribution channel involved, then there will be sixteen transactions involved. But if
the producers use distribution channels, then the number of transactions involved will be reduced
to eight( four from producer to intermediary and four from intermediary to customer), and
thereby the transportation costs and efforts will also be reduced.

3. The channels offer products in required assortments: Just like the producers have expertise in
manufacturing products, similarly the intermediaries have their own expertise. The wholesalers
specialize in moving and transferring products from various producers to greater number of
retailers. Similarly, the retailers have expertise in selling a wide assortment of goods in less
quantity to a greater number of final customers. Due to the presence of distribution
channels(wholesalers and retailers), it is possible for a consumer to buy the required products at
right time from a store conveniently located(geographically closer) rather than ordering from a far
located factory. Thus, these intermediaries break the bulk and meet the less quantity demand of
the customers.

4. They assist in product merchandising: It is actually the merchandising by intermediaries which

fastens the product movement from the retail shop desk to the customer’s basket. When a
customer goes to a retail shop, he may be fascinated by the attractive display of some new
product, may get curious about that new product, and he may switch over to that new product
leaving his regular product. Thus merchandising activities of the intermediaries serve as a quiet
seller at a retail store.

5. The channels assist in executing the price mechanism between the firm and the final
customers: The intermediaries help in reaching a price level which is acceptable both to the
producers as well to the consumers.

6. Distribution channels assist in stock holding: The intermediaries perform various other
functions like financing the products, storing the products, bearing of risks and providing required
warehouse space.
 Channel Levels
Each intermediary that performs work in bringing the product & its title closer is a channel level.

Types of Distribution Channels:

Broadly, Channel of distribution is of two types viz., (1) Direct Channel (2) Indirect Channel.

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. For example, Mc Donalds, Bata, Mail order etc.

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 speciality goods. For example Tata sells its cars
through company approved retailers.

Manufacturer→ Retailer→ Consumer

(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.

Manufacturer→ Wholesaler→ Retailer→ Customer

(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.

Manufacturer → Agent → Wholesaler → Retailer → Consumer

Factors affecting choice of distribution channel

When a manufacturer selects some channel of distribution he/she should take care of such factors
which are related to the quality and nature of the product. They are as follows:

1. Unit Value of the Product:

When the product is very costly it is best to use small distribution channel. For example,
Industrial Machinery or Gold Ornaments are very costly products that are why for their
distribution small distribution channel is used. On the other hand, for less costly products
long distribution channel is used.

2. Standardised or Customised Product:

Standardised products are those for which are pre-determined and there has no scope for alteration.
For example: utensils of MILTON. To sell this long distribution channel is used.

On the other hand, customised products are those which are made according to the discretion of the
consumer and also there is a scope for alteration, for example; furniture. For such products face-to-face
interaction between the manufacturSter and the consumer is essential. So for these Direct Sales is a
good option.

3. Perishability:

A manufacturer should choose minimum or no middlemen as channel of distribution for such an item or
product which is of highly perishable nature. On the contrary, a long distribution channel can be
selected for durable goods.

4. Technical Nature:

If a product is of a technical nature, then it is better to supply it directly to the consumer. This will help
the user to know the necessary technicalities of the product.

(B) Considerations Related to Market

Market considerations are given below:

1. Number of Buyers:

If the number of buyer is large then it is better to take the services of middlemen for the distribution of
the goods. On the contrary, the distribution should be done by the manufacturer directly if the number
of buyers is less.

2. Types of Buyers:

Buyers can be of two types: General Buyers and Industrial Buyers. If the more buyers of the product
belong to general category then there can be more middlemen. But in case of industrial buyers there
can be less middlemen.

3. Buying Habits:

A manufacturer should take the services of middlemen if his financial position does not permit him to
sell goods on credit to those consumers who are in the habit of purchasing goods on credit.

4. Buying Quantity:

It is useful for the manufacturer to rely on the services of middlemen if the goods are bought in smaller
quantity.

5. Size of Market:

If the market area of the product is scattered fairly, then the producer must take the help of middlemen.

(C) Considerations Related to Manufacturer/Company

Considerations related to manufacturer are given below:

1. Goodwill:

Manufacturer’s goodwill also affects the selection of channel of distribution. A manufacturer enjoying
good reputation need not depend on the middlemen as he can open his own branches easily.

2. Desire to control the channel of Distribution:

A manufacturer’s ambition to control the channel of distribution affects its selection. Consumers should
be approached directly by such type of manufacturer. For example, electronic goods sector with a
motive to control the service levels provided to the customers at the point of sale are resorting to
company owned retail counters.

3. Financial Strength:

A company which has a strong financial base can evolve its own channels. On the other hand, financially
weak companies would have to depend upon middlemen.

(D) Considerations Related to Government

Considerations related to the government also affect the selection of channel of distribution. For
example, only a license holder can sell medicines in the market according to the law of the government.

In this situation, the manufacturer of medicines should take care that the distribution of his product
takes place only through such middlemen who have the relevant license.

(E) Others

1. Cost:

A manufacturer should select such a channel of distribution which is less costly and also useful from
other angles.

2. Availability:

Sometimes some other channel of distribution can be selected if the desired one is not available.

3. Possibilities of Sales:

Such a channel which has a possibility of large sale should be given weight age.

Channel-Design Decisions
Designing a channel system calls for analyzing customer needs, establishing channel objectives, &
identifying & evaluating the major channel alternatives.

Analyzing Customers’ Desired Service Output Levels

Channels produce 5 service output levels:

1. Lot size: # of units that the marketing channel permits a typical customer to purchase on a
purchase occasion
2. Waiting time: Average time that customers of that channel wait for receipt of the goods.

3. Spatial convenience: Degree to which the marketing channel makes it easy for customers to
purchase the product.

4. Product variety: assortment breadth.

5. Service backup: add-on services provided by the channel (installation, repairs, credit).

2.) Establishing the Channel Objectives & Constraints

 Channels objectives vary with product characteristics.

 Channel design must take into account the strengths & weaknesses of different types of
intermediaries.

 Channel design is also influenced by the competitors’ channels.

 Channel design must also adapt to the larger environment.

  Legal regulations & restrictions also affect channel design.

3.) Identifying the Major Channel Alternatives

A channel alternative is described by three elements:

1. Types of intermediaries.

Depends on the service outputs desired by the target market & the channel’s transactions costs.
The company must search for the channel alternative that promises the most long-run
profitability.

2. Number of intermediaries.

Exclusive distribution
Selective distribution
Intensive distribution

3. Terms & responsibilities of channel members

The producer must determine the rights & responsibilities of the participating channel members,
making sure that each channel member is treated respectfully & given the opportunity to be
profitable.

4.) Evaluating the Major Channel Alternatives

Each alternative needs to be evaluated against three criteria.

1. Economic Criteria
o The first step is to determine whether a company sales force or a sales agency will
produce more sales.

o The next step is to estimate the costs of selling different volumes through each channel.

o The final step is comparing sales & costs.

Each channel will produce a different level of sales & costs.

2. Control Criteria
The agents may concentrate on other customers’ products or they may lack the skills to handle
our products.
3. Adaptive Criteria
The channel members must make some degree of commitment to each other for a specified
period of time.

5.) Channel-Management Decisions

After a company has chosen a channel alternative, individual intermediaries must be selected, motivated
& evaluated.

6.) Selecting Channel Members

For some producers this is easy; for others it’s a pain in the ass.
Anyway, in order to select them, producers should determine what characteristics distinguish the better
intermediaries (years in business, other lines carried, solvency, reputation, etc.)

7. Motivating Channel Members

Constant training, supervision & encouragement. Producers can draw on the following types of power to
elicit cooperation:

 Coercive power. Manufacturer threatens to withdraw a resource or terminate a relationship if

intermediaries fail to cooperate. Produces resentment.
 Reward power. Manufacturer offers intermediaries extra benefits for performing specific acts.

 Legitimate power. Manufacturer requests a behavior that is warranted by the contract.

 Expert power. Manufacturer has special knowledge that the intermediaries value.

 Referent power. Intermediaries are proud to be identified with the manufacturer.

8.) Evaluating Channel Members

Underperformers need to be counseled, retrained or re-motivated. If they do no shape up, it might be best
to terminate their services.

Modifying Channel Arrangements

Periodic modification to meet new conditions in the marketplace. Modification is necessary when:

 Distribution channel is not working as planned.

 Consumer buying patterns change.

 Market expands.

 New competition arises.

 Innovative channels emerge.

 Product moves into later stages in the product life cycle.

3 levels of channel adaptation can be distinguished:

1. Adding or dropping individual channel members.

2. Adding or dropping particular market channels.

3. Developing a totally new way to sell goods in all markets.

Channel Flows –
Channel flows refer to the marketing functions performed by
manufacturers, wholesalers, retailers, and other channel members within the channel. Eight
universal channel flows have been identified:
 physical possession
 ownership
 promotion
 negotiation
 financing
 risking
 ordering
 paymen

Supply Chain Managementinvolves the management of materials, information, etc. from the suppliers
to the physical distribution of the finished products to the consumers which encompasses logistics,
material handling, and purchasing.

6. The entire management in Supply Chain from the source to the consumer and back involves
forward flow as well as backward flow. Apart from flow of physical products, the other flows are
information, ownership, money (financial transactions), and risk.

7. Physical flow starts from the source of the channel that is suppliers. This flow, mainly via
transportation is among suppliers, manufacturers, intermediaries, and consumers. There may be
backward flow of physical goods in case of returns for various reasons like defects, etc.

8. Title flow involves transfer of ownership through the channel. The flow of ownership
accompanies physical flow most of the times but not all the intermediaries take title of the product.
Brokers and agents negotiate deals but don’t take title of the product.

9. Payment flow or financial flow is movement of payment of goods within the channel. It may
involve financial institutions like banks, finance firms, etc. Payment can be in cash or credit and it flows
in the direction opposite to the flow of physical flow.

10. Information flow involves negotiation, terms of sale, advertising, etc. It is the flow of
information within the channel among different intermediaries, consumers, manufacturers, and
suppliers. It may be a feedback, an appreciation, a request, or even a complaint from the consumer, and
a reply to this from the manufacturer, wholesaler or a retailer.

11. Risk flow involves all kinds of risks in handling the product. It usually flows with the flow of
physical flow and affects all the members of the channel. Product becoming outdated, passing its expiry
date, defects, price changes, etc. are many of the risks that affect the buyers and sellers. All the
members on the channel try to reduce the risk by various means like insurance against damage, finance
firms increase interest rates, etc.