Channel of Distribution And its Types PDF

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Channel of distribution is a connecting link to sell the products. The consumers may be scattered in many places and the producer is situated in one place. The gap between the producer and the consumer is shrunk by the channel of distribution. The major participants in the distribution channel are: ...

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MARKETING MANAGEMNET Table of Contents: • • • •

Meaning of Channel of Distribution. Levels of Channel of Distribution. Types of Distribution Channel. Examples and Explanation.

❖ Meaning of Channel of Distribution: Channel of Distribution: According to the American Marketing Association, “A channel of distribution, or marketing channel, is 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.” Philips Kotler has defined the channel of distribution as “a set of independent organization involved in the process of making a product or service available for use or consumption”. Thus, the distribution channel can be described as “a pathway composed of intermediaries, also called middlemen, who perform such functions as needed to ensure smooth flow of goods and services from the manufacturing ends to the consuming ends in order to achieve marketing of the produce of the company.” The consumers may be scattered in many places and the producer is situated in one place. The gap between the producer and the consumer is shrunk by the channel of distribution. Hence the channel of distribution is a connecting link and the consumer to sell the products. The major participants in the distribution channel are: producers, intermediaries and consumers. The channel of distribution helps in making products available at the right time in the right place and in the right quantity.

❖ LEVELS OF CHANNELS OF DISTRIBUTION: Various levels that are available in the distribution channel are listed below: 1. Zero-Level Channel. 2. One-Level Channel. 3. Two-Level Channel. 4. Three-Level Channel.

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MARKETING MANAGEMNET These levels of Channels of Distribution have been briefly discussed below: 1. Zero-level Channel: A zero level channel, also called a direct marketing channel, consists of a manufacturer selling directly to the final customer. The major examples are mail order, online selling, telemarketing, door-to-door sales, home parties and manufacturer-owned stores. Thus, in this case there is no middleman. This method is most common in industrial marketing particularly in respect of capital goods like industrial chemicals, heavy equipment, etc.

MANUFACTURER

CONSUMER

2. One Level Channel: A one-level channel contains one selling intermediary, such as a retailer. In this channel of distribution, a retailer is being appointed or plays a middleman role in between the producer or manufacturer and the end user. In modern business world the production of goods takes place on a large scale in factory located at one place. Whereas the consumers are scattered throughout the country. Hence there is a need to have a link between producer and users who are sitting in different places. MANUFACTURER

RETAILER

CONSUMER

3. Two Levels Channel: A two-level channel contains two intermediaries, typically a wholesaler and a retailer. That is, two levels of channels of distribution have two levels of middleman between the manufacturer and the end user of the product and service. The two middlemen are wholesaler and retailer. Whenever the size of business increases both in quantity and geographical distance wise, two level of channels distribution becomes more effective.

MANUFACTURER

WHOLESALER

RETAILER

CUSTOMER

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MARKETING MANAGEMNET 4. Three-Level Channel: A three-level channel contains three intermediaries, typically an agent, a wholesaler and a retailer. The three-level channel involves an agent besides the wholesaler and retailer who assists in selling goods. These agents come handy when goods need to move quickly into the market soon after the order is placed. Manufacturers opt for three-level channel when the userbase is spread over a vast geographical location and the demand of the product is very high. MANUFACTURE

AGENT

WHOLESALER

RETALIER

CONSUMER

❖ TYPES OF DISTRIBUTION CHANNELS: Distribution channels can be primarily categorized as non-integrated and integrated: Non- integrated Channels (Conventional Marketing Channels): Non-integrated channels are also termed as conventional channels. These comprise of merchant middlemen (wholesalers and retailers), agents and brokers. Manufacturers and channel members behave autonomously except for negotiations over terms of sale. There is no central control or common programmes. The conventional channel choice includes decision regarding direct or indirect channel: ⚫ Direct Channel (Manufacturer--Consumer): This is the oldest, shortest and the simplest channel of distribution. This is also known as zero level or direct channel. Selling of product takes place without involving any intermediary. The sale can be made door to door through salesman, retail stores and direct mail. Few categories of industrial and consumer goods such as clothes, shoes, books, hosiery goods, cosmetics, household appliances, electronic goods etc., may be sold through direct contact. Perishable goods such as vegetable and fruits can also be sold directly. Mail order selling, door to door selling or manufacturer’s outlets are few examples of direct sale. Advertising greatly contributes in effective direct selling. In this mode of selling, companies make use of their own staff directly. ❖ Direct channel circumstances:

is

conveniently

adopted

under

the

following

1. Producer of perishable goods aims to avoid physical distribution, but tries to sell directly e.g., bakery products, ice cream, etc. pg. 3

MARKETING MANAGEMNET 2. Manufacturers of fashion goods enter into direct sales for quick sales, before the fashion disappears. 3. When the plant is located near the customers, it is easier to sell the products. 4. Direct channel is widely used wherever new products are introduced into the market for aggressive sales. 5. Articles, which are of technical nature and need demonstration may be marketed directly. 6. When production is in small quantity, direct sales is employed. 7. Certain articles are sold directly, when the goods belong to special segments of customers. 8. When the manufacturer wants to have a close control over the price, the channel is good. 9. The manufacturer is able to undertake various functions of marketing, by employing his own sales force or by retail shops. The system is good. 10. It aims to reach the specific target markets.

❖ Methods of Direct Channel are: (a)Sales Counter at Manufacturer’s Plant. (b)

Door to Door Sales.

(c) Internet selling (d) Sales by Mail Order. (e) Company owned retail outlets (f) Telemarketing. (g) Sales through Mechanical Devices. In developed countries commodities like coffee, soft drinks, newspapers etc. are sold by mechanical devices. In India we can see in some railway stations drinking water is sold through such device directly to customers without involving any intermediary. ❖ Advantages of Selling through Direct Channels: o It is simple and fast. o It is economical.

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MARKETING MANAGEMNET o The producer has full control over distribution. o Satisfies the desire to reduce dependence on middle men. o Cash sales.

❖ Disadvantages of selling through direct channels: o Non-availability of expert services of middle man. o Large investment is required. o Unsuitable for small producers

⚫ Indirect Channels of Distribution: According to this method of indirect selling, product is passed on to the customers through intermediaries, known as wholesalers, retailers and agents. Indirect channels are long as middlemen are engaged to channelize products to consumers. The preference for indirect channels will further include inter-alia the choice of indirect channel (i.e., wholesaler, distributor or retailer) suitable for achieving company’s marketing goals. The various indirect channels followed for transferring the products to ultimate consumers have been described as follows: ◆ Manufacturer- Wholesaler- Consumer: This is a one-level channel of distribution. This channel makes use of only wholesaler as middleman in the chain of distribution. Wholesaler does not use the services of retailers and deals directly with customers. This channel is usually followed when there are large and institutional buyers such as government, hospitals, consumer cooperatives. ◆ Manufacturer- Retailer- Consumer: This is also a one-level channel of distribution. In this channel, a company uses only one type of intermediary i.e., retailer for selling goods to consumers. He performs function of wholesaler such as financing, insurance, storage and transport. Departmental stores, supermarket, large mail order house, chain stores, discount house are common types of this channel. In this channel, manufacturer moves away from consumers by one step. In India, Bata India Ltd. uses this channel to sell its product through its own retail shops situated in many cities. ◆ Manufacturer- Wholesaler- Retailer- Consumer: This is a two-level channel of distribution. This channel comprises of wholesaler and retailer. Products are routed from manufacturer to consumers through two types of intermediaries. It is traditional and popular channel in India which is used by pg. 5

MARKETING MANAGEMNET large as well as small companies. This channel is used for drugs, groceries and other convenience goods. Hindustan Unilever Ltd. is one common example which is using this channel. This channel is suitable when: (i) products are durable, (ii) products are not subject to fashion changes, (iii) wholesalers are specialized and (iv) manufacturer has limited funds.

◆ Manufacturer- Agent- Wholesaler- Retailer- Consumer: This is a three-level channel of distribution. In this channel, manufacturer engages agent middleman called sole selling agent or distributor at the primary stage of flow of goods. The agent sells the goods to wholesalers who further sell them to retailers. Sole selling agent works on commission basis. A number of textile mills in India make use of this channel and appoint sole agents for distribution. The appointment of such agent help manufacturer in keeping themselves free from marketing operations. The company can make exclusive choice of channel discussed above or it may make use of two or more channels. When company makes use of only one channel of distribution for its all types of products and in all markets, it is termed as single channel. The use of two channels by the company for selling its product to the consumers is referred to as dual channel. Company may use more than two channels depending upon size or density of market. It is termed as multiple channel.

❖ INTEGRATED CHANNELS: Integrated channels are networks in which channel components participate in a co-ordinated manner. Integrated channels may be vertical or horizontal. Vertical distribution channels are professionally managed and centrally programmed networks, pre-engineered to achieve operating economies and maximum market impact. These are “rationalized and capital-intensive networks designed to achieve technological, managerial and promotional economies through the integration, co-ordination and

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MARKETING MANAGEMNET synchronization of marketing flows from points of production to point of ultimate use." 1. Administrated Vertical Channel: Administered vertical channels, contractual vertical distribution channels and corporate vertical channels are three types of vertical integrated marketing channels. In administered vertical channels one of a limited number of firms use developed programmes to achieve the coordination of marketing activities. A manufacturer controls the marketing of a particular line of merchandise. 2. Contractual Vertical Channel: Under contractual vertical distribution channel, independent firms are employed on a voluntary basis to develop a more efficient system on a contractual basis, so as to achieve systematic economies and increased market impact. 3. Corporate Vertical Channel: Under corporate vertical distribution channel, channel components are owned and operated by one organization. The firms own both production and distribution facilities, e.g., Bata, Tata etc. 4. Horizontal Marketing System: Horizontal marketing system, also known as symbiotic marketing, occurs when two or more related or unrelated companies working at the same level come together to exploit marketing opportunities. By coming together, they have the option to combine their capital, production capabilities, marketing strengths to gain substantial advantage by each company working alone. This kind of joining forces is viewed as symbiotic relationship and can be between non-competitors as well as competitors. This arrangement can be on a temporary or permanent basis. For example: Auto manufacturers have joined hands with finance institutions to finance customers, TVS-Whirlpool and Onida joined hands to market washing machines, etc. So, these are the different channels, discussed above, available to a business enterprise for the distribution of its products. The enterprise should make a judicious choice of the distribution channels based on its needs and purpose after consideration of the various factors that may affect the choice of a particular distribution channel.

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