UNIT-IV Channel Decisions: Nature of Marketing Channels –.

Types of
Channel flows - Channel functions - Functions of Distribution Channel –
Structure and Design of Marketing Channels -Channel co-operation, conflict
and competition – Retailers and wholesalers.

Introduction:
In simple terms, channel management decisions refer to the choices firms
make in selecting, managing, and optimizing allocation channels. These
decisions ensure the seamless delivery of goods or services to the target
market. Channel management findings are crucial for firms to stay competitive
and improve sales.

Channel Design is a design or plan prepared for the distribution and

movement of goods and services from the manufacturer to the customer.
Thus, Channel Design Decisions refer to the strategic choices and actions
taken by a company to create an effective distribution and communication
network for its products or services. These decisions involve determining the
types of channels (such as direct, indirect, or hybrid), the number and
location of intermediaries, and the integration of various communication and
delivery methods. Channel design decisions also encompass considerations,
such as channel length, breadth, and depth. The goal is to design a channel
system that efficiently and effectively connects the company with its target
customers, ensuring the right product reaches the right place at the right
time while also maximizing customer satisfaction and achieving business
objectives.

Definition:

In simple terms, channel management decisions refer to the choices firms

make in selecting, managing, and optimizing allocation channels. These
decisions ensure the seamless delivery of goods or services to the target
market. Channel management findings are crucial for firms to stay competitive
and improve sales.

Nature of Distribution Channel:

The nature of the distribution channel can be understood below.

 ❖ A distribution channel connects producers to consumers by facilitating
the movement of goods from the point of production to the point of
consumption.
❖ It involves a network of intermediaries like wholesalers, distributors,
retailers, agents, transportation companies, and warehouses that help
transfer ownership of products from producers to end users.
❖ The main functions of distribution channels are to make goods available,
promote goods, provide market information to producers, and reduce
risks for producers.
❖ Products pass through various stages in the distribution channel -
manufacturer, wholesaler, retailer, and finally, the consumer. At each
stage, goods are physically handled, stored, promoted, and sold.
❖ The choice of distribution channel depends on factors like the nature of
the good, target market, required market coverage, costs involved, and
degree of control desired by the producer.
❖ An effective distribution channel can help maximize a company's reach,
sales, and overall profitability by getting goods to target customers
efficiently.
❖ Distribution channels help producers reach global markets. They extend
the producer's reach beyond the local market to regional, national, and
international markets. This helps increase sales volumes.
❖ Distribution channels provide market information to producers. The
feedback and data gathered by intermediaries help producers improve
their goods, identify new options and adapt to changing market
conditions.

Importance:

Understanding marketing channel importance is a crucial concept in

business. Marketing channels are the vessel between you and your audience.
They allow the seamless exchange of information between your brand and its
buyers, providing the opportunity to reach more people and expand awareness
of your product and services.
Marketing channels are important because they:
➢ Identify the best channels to distribute to a target audience.
➢ Ensure products reach their intended audience.
➢ Save time and money by having a channel do the work.
➢ Reach more customers.
Functions of Distribution Channels:

The functions of distribution channels have been discussed below.

❖ Make goods available: The main function of distribution channels is to

make goods physically available to target clients. This involves
transporting, storing, and displaying goods at handy locations.
❖ Transfer ownership: Distribution channels facilitate the transfer of
ownership of goods from the producer to intermediaries and finally to
end clients. They move goods from one entity to another in the channel.
❖ Promote and sell goods: Channel members promote and sell goods on
behalf of the producer to generate more sales and revenue. They
undertake various marketing and sales activities.
❖ Provide market data: Intermediaries in distribution channels gather
valuable market and client data which they pass on to the producer. This
helps producers improve their goos.
❖ Handle physical distribution: Channel members undertake the physical
work of transporting, warehousing, and inventorying goods until they
reach the final user. This reduces costs for producers.
❖ Provide storage: Intermediaries in distribution channels offer storage
facilities for goods until they are sold. This helps manage inventory levels
and meet unstable demand.
❖ Perform sorting and grading: Some channel members sort and grade
goods based on size, quality, etc., before passing them on to the next
channel member. This adds value.
❖ Conduct market segmentation: Distribution intermediaries can segment
markets based on customer needs and features to better target specific
groups. This increases sales effectiveness.

Types of channel flows:

Introduction:

As discussed a conventional channel of distribution consist of a manufacturer,

a wholesaler, a retailer and the ultimate consumer. Not all the channels
include all these marketing institutions. At times the product passes directly
from the manufacturer to consumer. When a marketing channel has been
developed a series of flows emerge. These flows provide the links that tie
channel members and other agencies together in the distribution of goods and
services.

Definition:

Channel flows in marketing are the movement, or flows of physical items and
services, title, promotion, information, and payment along a channel
of distribution.
Channel flows in marketing are the various types of activities that take place in
order to promote and distribute a product or service using different channels.

Importance of channel Flows:

Channel flows are important to businesses and marketing managers because

they provide a way to track the progress of a product or service from its point of
origin to the point of consumption.
Channel flows also allow businesses to identify any bottlenecks or problems
that may arise during the distribution process. By understanding where these
bottlenecks occur, businesses can take steps to improve their
distribution channels and make them more efficient.

Types of Channel Flows:

There are four important flows in marketing channels, let us go through them
right away-

1. Product Flow:
The product flow refers to the actual movement of the product or service
through the distribution channel. This flow begins at the point of production
and ends at the point of sale. A few steps involved in product flows are
warehousing, inventory management, order processing, and transportation.
Product flow is important because it ensures that the product or service is
delivered to the customer in a timely and efficient manner. It is also responsible
for ensuring that the product or service is delivered in good condition and that
it meets the customer’s expectations.

2. Information Flow:
The information flow refers to the movement of information about the product
or service through the distribution channel. This information is used to
promote and sell the product or service. Some of the steps involved in
information flows are market research, product development, advertising, and
sales. Information flow is important because it helps businesses to understand
the needs and wants of their target market. It also helps businesses to develop
new products and services that meet the needs of their target market.

3. Ownership Flow:
The ownership flow refers to the movement of ownership of the product or
service through the distribution channel. This flow begins at the point of sale
and ends when the product or service is delivered to the customer. Some of the
steps involved in ownership flows are order processing, transportation, and
delivery. Ownership flow is important because it ensures that the product or
service is delivered to the customer in a timely and efficient manner. It is also
responsible for ensuring that the product or service is delivered in good
condition and that it meets the customer’s expectations.

4. Negotiation Flow:
The negotiation flow refers to the movement of money and other forms of
compensation through the distribution channel. This flow begins at the point of
sale and ends when the product or service is delivered to the customer. Some
of the steps involved in negotiation flows are pricing, financing, persuasive
communication, etc. It revolves around the interplay of the buying and the
selling functions associated with the transfer of title of the products or services.

Channel Functions:

Functions of channels of distribution:

Distribution channels play a vital role in business by ensuring efficient product

distribution, expanding market reach, and enhancing customer satisfaction.
They facilitate the movement of goods from manufacturers to consumers,
handling tasks such as warehousing, transportation, and inventory
management.
The main function of distribution channel is to assemble the goods from
different manufacturer and make it available to the consumer. Apart from this,
the channel members also perform a number of other functions like buying,
carrying inventory, selling, transporting, financing, etc. These functions enable
products and information flow from manufacturer to user in a timely and effi-
cient manner.
The main functions performed by the distribution channels can be divided into
following categories:

1. Transactional Functions:
These functions relate to the various transactions performed for moving the
goods from one channel end to other. It includes functions like buying, selling
and risk bearing. These functions are performed by channel members. The
goods are sold by the producer or manufacturer to various intermediaries who
in turn sell it to the ultimate consumer. Movement of goods also include
change in the title of goods from one to another.

2. Logistical Functions:
These include functions like assembling, storage, grading and transportation
for physical movement of the goods from one place to another. It is very
necessary that the goods are properly assorted and stored at the right place.
Channel members have to ensure that stored goods are transported at right
time, so that it is made available to the consumers.

3. Facilitating Functions:
These functions facilitate the performance of different functions by the channel
members. With these functions, activities by the channel members can be
performed smoothly. It includes financing, credit facilities, after-sale services,
maintenance, etc. Purchase of most of the goods these days are accompanied
by various services like loan facility, credit facilities, free servicing, etc. which
facilitates the channel members.

The main function of distribution channel is to assemble the goods from

different manufacturer and make it available to the consumer. Apart from this,
the channel members also perform a number of other functions like buying,
carrying inventory, selling, transporting, financing, etc.

These functions enable products and information flow from manufacturer to

user in a timely and efficient manner.

Some of the functions of distribution channels are:-

1. Financing
2. Assists in Merchandising
3. Provides Market Intelligence
4. Assortment of Products
 5. Price Stability
6. Promotion
7. Provides Salesmanship
8. Title
9. Helps in Production Function
10. Matching Demand and Supply
11. Pricing
12. Standardizing Transactions
13. Matching Buyers and Sellers
14. Information Provider
15. Time and Place Utility

Structure and Design of Marketing Channels:

Introduction:

The marketing channels are the independent business organizations. They

are also known as the middlemen, intermediaries. There are various forms of
these intermediaries. They bear variety of names. They act as an interface
between the firm and its customers. They facilitate the producers and ensure
a smooth flow of products/services to the customers.

Definitions:

Philip Kotler opines Channel of Distribution as that “It is a set of independent

organizations involved in the process of making a product or service available
for use or consumption”.
American Marketing Association defines it as – “the structure of intra
company organization units and extra company agents and dealers,
wholesale and retail, through which a commodity, product or service is
marketed”.

Need:

Reasons why channels are needed are explained below:

1. Intermediaries bring the buyers and sellers together, simplify and
facilitate the transactions.
2. Intermediaries are the independent business organizations. These are
the private and professional institutions with the objective of profit
 making. Hence, it is easier and economical to work through their
extensive and established network.
3. Intermediaries create time, place, form and possession utilities for the
customers by making the products/services available at the convenient
place, time and in convenient form.
4. Every time producers cannot deal directly with the ultimate consumers
especially when the consumers are scattered over a wide geographical
area.
5. Many producers tack the financial resources and expertise to carry out
direct marketing. Hence they prefer marketing channels.
6. For the small producers having very limited budget for the promotion,
it is quite difficult to create the awareness, interest and desire to buy
the products among the customers. In this case, intermediaries being
closer to the customers and having direct and regular interaction with
them can effectively promote and sell the products. They can sell
unpackaged commodities more effectively and economically compared
to the producers.
7. Intermediaries through their contacts in the market, experience,
specialization, infrastructure, relations and rapport with the customers
can do selling activities more profitably compared to that of done by the
producers on their own.
8. If the producers delegate distribution to the intermediaries, they can
increase their investment and can focus more on their main business
activities.
9. Intermediaries play important role in bridging the gap between the
customers’ quality, quantity and variety expectations and producers’
offerings.
10. Intermediaries reduce the number of transactions thereby
reducing the efforts and cost.

Importance:

Channel design is important because it helps companies to identify the most

effective marketing channels to reach target customers and achieve company
objectives. The goal of channel design is to create a system that optimizes
customer engagement and minimizes costs.

Channel design is important because it helps companies to identify the most

effective marketing channels to reach target customers and achieve company
objectives. The goal of channel design is to create a system that optimizes
customer engagement and minimizes costs. Channel design is important
because it helps companies determine which channels will be most effective in
reaching their target customers. The goal of channel design is to create a
system that optimizes customer engagement and minimizes costs.

Channel design helps companies to save money by reducing the need for
marketing and advertising in channels that are less likely to reach the target
customer.

Channel design is also important because it helps companies to improve

customer service and support. By understanding the customer’s needs,
companies can design channels that provide the best possible experience for
the customer. Channel design can also help companies to identify and resolve
problems more quickly.

Functions:

1. Facilitation – Bringing the buyers and sellers together and facilitating

both the parties in closing the deal.
2. Information – Giving the information about the products/services to
the customers.
3. Promotion – Promoting the products/services, i.e., building and
promoting the producers’ brands.
4. Negotiation – Negotiations on behalf of the manufacturer with the
customers on the prices, terms of delivery, etc.
5. Transfer of the title and ownership – They help in transfer of the title
or ownership from one party, i.e. sellers to other party, i.e. buyers.
6. Holding inventory and sharing risk – Channels hold the stock of ready
products with them, thus they share the risk and cost associated with
holding the inventory.
7. Finance – Channels keep deposit with the manufacturers, book the
orders in advance, and keep the stock of ready products. Thus they
reduce the manufacturers’ financial burden.
8. Providing pre-sale and post-sale services – Channels provide pre-sale
and post-sale services, maintenance services, etc. to the customers on
behalf of the producers as they cannot personally reach to the
individual customer.
9. Change agents – Channels inform the customers about the changes in
product and price. They tell the customers about the new or additional
features introduced. They can create a positive, favorable opinion
 about these changes among the customers, as they are closer to
customers and they directly and regularly interact with their
customers. Thus, they act as ‘Change Agents’.
10. Warehousing and transportation – Channels provide the
warehousing facility and arrange transport facility from the
warehouses to the markets/retailers/end users.
11. Market feedback and intelligence – Channels provide valuable
and authentic information about the customers, competitors, market
changes and trends and market conditions to the manufacturers.
They also maintain the sales records and database of the customers,
which can be useful to the manufacturers in future decision-making.

Types:

Intermediaries can be broadly categorized in three categories as follows, on

the basis of the criteria like ownership rights and the possession of the
goods.

1. Merchants:
These are the intermediaries who take title to the merchandise and resell the
merchandise, generally having the physical possession of the goods. Some of
these types of intermediaries are wholesalers and retailers. They sell the
merchandise and earn profit.

2. Agents:
These are the intermediaries, sales agents, brokers, auctioneers, etc., who
may have the possession of the goods or may not have the possession of the
goods, but in no case will have the title to the merchandise. They are the
intermediaries who search for buyer and seller together, bring buyer and
seller together or may negotiate the sale transaction on behalf of the seller.

3. Facilitators:
These are the intermediaries who assist in the distribution process of the
merchandise. In this process, they may have physical possession of the
merchandise in certain cases or may not have physical possession of the
merchandise, but in no case will have title to the merchandise or negotiate
purchase or sales transaction. Transportation companies, independent
warehouses, banks, advertising agencies, insurance companies, etc., are
some of the intermediaries in the category of the facilitators.
Channel Structure:

Channel structure is distinguished on the basis of the number of

intermediaries. There are different levels in a channel structure. The common
levels are zero-level, one-level, two-level, three-level. Each level presents both
opportunities and challenges for the marketer. Exhibit 4.6 gives a picture of the
different levels

1. Zero-level:
Structure is one of the simplest forms of the channel structure. Here
organizations like Avon, Eureka Forbes use direct selling mode to take the
products from their production houses to the consumers directly. A lot of
money has to be spent in order to make this channel structure effective, as
there is no third party to take your product to the consumer. Even a bakery
can come as a firm, which bakes cakes and sells it directly to the consumers.
Marketers who use the mailing services, toll-free numbers are also using this
service.

2. One-level:
Structure is one in which we have one intermediary acting as a link between
the manufacturer and the consumer. Here the retailers procure goods directly
from the manufacturer and supply it to the consumers. Retailers like Viveks,
Wal-Mart deal directly with the manufacturer. In some cases in order to retain
profitable and reputed retailers the manufacturers act as wholesalers. One of
the advantages for the intermediaries is the customization and the discounts
they receive.
 3. Two-level:
Channel has two people interceding before the product reaches the consumer.
Here there would be a wholesaler and a retailer who takes the efforts for a
speedy delivery and this is one of the most commonly used structures for
consumer goods. In the case of Metro, most of the small retail and Kirana
stores buy all the merchandise from Metro and in turn sell them to the
consumer.
One of the advantages of the four-level structure is the benefit of using the
wholesaler in the distribution of services.

4. Three-level:
Channel happens predominantly when the firms plans to go global. When a
manufacturer enters another country, it always holds well when he uses the
help of agents to operate in that environment. The agents are people who know
the legal procedures and who can negotiate with the host country in case of a
problem. Most of the airline firms that operate in different countries take the
help of agents to penetrate the market.

Channel co-operation, conflict and competition:

Definition of Co-operation and Conflicts:

Companies have to build channels to work effectively in the market. It is rightly

said that one person cannot do everything, but everyone can do something to
contribute to success, and this is exactly how the distribution system works in
the business environment. For example, producers manufacture the product,
and wholesalers keep the product stored in high quantities. Agents help in
connecting the wholesaler with different buyers who will be interested in
buying the product. Retailers buy small quantities of those products and sell
them to consumers.
So, for one manufactured good, we see various people getting involved. Now
that so many people are involved in this scenario with different personal greed,
it is understood that conflict and competition are going to arise in channels,
and companies have to find a way to cooperate between them.

Reasons for Channel Conflicts:

There are multiple reasons why the channel partners are going to fight in
between them; to list a few, they would be −
• Goal incompatibility: Though everyone is here for professionals, their
desire to achieve the product differs from individual to individual.
 Dealers or retailers might want to achieve high margins on the product,
as well as the producer, who might look at the long run and want to
penetrate the market with low-cost, quality goods, causing conflict.
• Unclear roles, areas of work, and rights: The Company might be
abrupt, or the channel partners might misread the rules and regulations.
For example, the area sales manager is trying to cover and capture
retailers outside their working domain.
• Personal greed: Everyone involved in the channel is here for profit, and
they would also try to exploit the people around them to ensure higher
margins of profit for themselves in the market. This leads to sour
relationships with each other, an increased price of the product, and a
bad image of the company.
• Difference in perception: The production team might think about the
economic growth and hence ask the retailers to maintain huge stocks; on
the other hand, the retailers might witness the bullish market and want
to risk less.
• Dependence on the channel steward: There is always going to be one
person in the channel partners who has more power than the rest
because of the resources, scarcity of rights and resources, or other
factors, and this might cause conflict between the partners.

Types of Channel Conflicts:

No matter how hard the companies try, conflicts are going to arise, and it is
best to understand the different types of conflicts to better deal with them.

1. Horizontal conflict: This is a type of conflict in which conflict arises

between people doing the same type of work. For example, different
Macdonald’s outlet owners might fight with each other because if one
outlet provides sub-standard quality products, the sales of all the
McDonald's partner outlets will be impacted. This is because customers
would not want to waste their money, and it is the general perception
that if a brand could not serve you well once, then they might not be in
other outlets as well.

2. Vertical conflict: This occurs between the different channels partners

involved in the selling decision-making process by the company. For
example, if a retailer buys Fast Moving Consumer Goods (FMCG) from
different brands like HUL, P&G, Dabur, Nestle, and others, and if the
brand gives preference to one and not to the others, then conflict will
 arise. For example, a retail store owner might give more shelf space to
HUL than P & G.

3. Multi-channel conflict: This is a situation in which the company or the

distribution channel is serving multiple channels at the same time. For
example, P&G sells its products to both big shopping malls and small
retailers. The big store owners are going to get the benefits of deep
discounts or bulk discounts that retailers might not get, and hence the
customer would prefer purchasing from the big stores to the retailer’s
houses.

Different Ways to Manage Channel Conflicts:

Conflicts need to be managed and the different ways it can be done.

• Strategic justification: The Company here tries to give strategic
justification to the channel members for the differentiation faced by
them. For example, in multichannel conflicts, the brand might try to
make channel partners understand that they are not that competitive
and that a little here and there is not making much difference in their
sales.
• Dual compensation: Here the company understands the issues and
problems of the channel partner and tries to improve the situation by
offering double compensation to the channel partner. When the brands
went online and retailers complained of lower sales volume, many brands
provided more discounts on the purchase of the brand product, so the
retailers started getting more margins and hence were cooperative with
the brand for the time being.
• Super-ordinate goal: Here the channel members face their own
differences and try to achieve the super-ordinate goal of the company.
This generally happens when the brand faces an external threat.
• Employee exchange: companies can ask the different channel partners
to work on the inter-channel fields to get a better understanding of their
situation and problems, thus restoring channel harmony.
• Legal resources: If the channel partners feel that damage will happen or
is happening because of a step by the company or another channel
member, they can join hands to file a lawsuit.
• Diplomacy, mediation, and arbitration: Companies can also take up
different approaches to deal with conflicts, and those are to remain
diplomatic, i.e., not take sides; mediation is to find the middle ground
between the issue or the product so that the case could be win-win for
 both of them; and arbitration happens when the company asks each
channel partner to place their points and thus take the most viable
decision for the channel as a whole.

Retailers and wholesalers:

Meaning and definition of Retailer and Wholesaler:

Wholesale and retail are two major components of the distribution process in
the supply chain industry. When a company manufactures a product, it is
first sold in bulk to a wholesaler, who then sells it to a retailer, who then sells
it to the final customers. Simply put, a wholesaler purchases a product in
bulk from the manufacturer and sells it to a retailer, who then sells it to end
users.

Who is a Wholesaler?
Wholesalers buy goods directly from the manufacturers in bulk and sell them
to retailers in small quantities. They serve as a link between manufacturers
and retailers. He purchases products in bulk, unpacks them, repacks them,
and sells them to retailers. The wholesaler sells only specific items and is
unconcerned about the shop’s location, packaging, or display of the goods.
They are more concerned with the quantity of a product than with its quality.
Large capital is required to maintain a large stock and provide credit facilities
to retailers. Functions like grading of products, packing into smaller lots,
storage and transportation, promotion of goods, collection of market
information, etc., are performed by the wholesaler.

Who is a Retailer?
Retailers buy goods and services in small quantities from the wholesalers and
sell them to customers, who will use them directly rather than resell them. In
order to connect wholesalers and customers, retailers act as a middleman.
Due to the retailer’s business of purchasing goods at lower costs and charging
customers a higher price, the profit margin in the retail industry is high.
Rent, electricity, employee wages, and other costs are all factored into the
final price that retailers charge for the product. The area of operation of
retailers is generally limited to a locality.

Importance of retailers:
 • Provide Assortments:
Supermarkets or small Kirana shops sell different product items
manufactured by different companies. These places enable and give
choices to customers to pick from a vast assortment of goods, sizes,
brands, and prices at one location.
• Breaking Bulk Orders:
Manufacturers and wholesalers sell the products in bulk to the retailers.
The retailers then sell it to the customers in smaller and more useful
quantities. This activity of breaking bulk order into tiny amount
according to customer’s requirement is known as breaking bulk.
• Holding Inventory:
The significant action accomplished by the retailer is maintaining an
inventory, so the items are available whenever the customers want. This
action allows the customer to buy products in a small quantity as
required.
• Providing Services:
Retailers implement services that make customers shopping journey
favorable. Example, retailers showcase all the products so that the
customers can see and buy them. Retail store’s employee salesperson to
assist the customers.

Importance of wholesaler:

• Break Down Bulk:

Wholesalers make distribution easy by dividing bulk things small parts. This
helps marketer or manufacturer to distribute products efficiently and smoothly
with value addition at this stage.
• Sells in Small Quantity:
Wholesalers buy products in bulk and sells in small quantity.
• Storage:
One more important thing is that wholesalers provide storage facility.
• Reduced Contact Cost:
Wholesalers help to reduce contact cost of producer and customer.
• Risk Bearing:
Wholesaler takes responsibilities like sale force, promotion etc. This helps
organization to boost product sale without spending additional cost.
• Demand Supply Stability:
Wholesaler is like an effective communication linkage between producer and
retailer or customer. Wholesaler is connected to the retailer and market
 directly. Hence he knows better about product demand in the market.
Wholesaler helps manufacturer and economy to maintain Demand Supply
Stability.

Difference between Wholesaler and Retailer:

Basis Wholesaler Retailer

Individuals who purchase

goods in large quantities
from manufacturers with
Meaning the purpose of reselling
them for a profit are known
as Wholesalers.
Individuals who purchase
from wholesalers and sell
goods in smaller quantities to
end users are known as
Retailers.

Less capital is needed as

Capital A large capital is needed.
compared to Wholesalers.

It is a link between
It is a link between
Link manufacturers and
wholesalers and customers.
retailers.

They are located in the They are located in various

Location
central market of the city. markets of the city.

In wholesale, the margin of In retail, the margin of profit

Margin of Profit
profit is less is high.

Generally, most of the

Nature of Most of the dealings are done
dealings are done on
Payment with cash.
credit.

Specialty They sell or deal in one or They deal in a variety of

 Basis Wholesaler Retailer

two specialized products. products.

They do not require large

They require large storage
storage areas as they
Storage areas to stock goods on
purchase goods on small
large scale.
scale.

Wholesalers do not require Retailers do have a

Window any advertisement or requirement for
Display/Advertise window display as they are advertisements and window
ment not required to attract their displays to attract more and
clients. more customers.

There is no arrangement for There is arrangement of after-

After-sale service
after-sale or repair service. sale service.

Business is spread over

Scope of business Retailers cover local areas.
several places.