Unit 5
Distribution
Channel of distribution refers to those people, institutions or merchants who help in the distribution of goods and services. Philips Kotler defines channel of distribution as “a set of independent organizations involved in the process of making a product or service available for use or consumption”.
Channels of distribution bring economy of effort. They help to cover a vast geographical area and also bring efficiency in distribution including transportation and warehousing. Retailers, Wholesalers are the common channels of distribution.
Channels of distribution provide convenience to customer, who can get various items at one store. If there were no channels of distribution, customer would have faced a lot of difficulties.
Distribution channels help in the following ways:
(i) Enhance Efficiency:
The components of distribution channels enhance the efficiency of the system. A system of manufacturers directly dealing with consumers will be less efficient than the decentralised system involving distribution agents.
(ii) Smooth Flow of Goods and Services:
The distribution channels smoothen the flow of goods and services by creating possession, time and place utilities.
(iii) Reducing Cost of Transactions:
The cost of transactions is minimised if they are undertaken regularly. The distribution through intermediates will be possible if products are standardised. The terms and conditions of purchase, sale, payments will be standardised resulting into increased number of transactions. Instead of casual transactions, routine dealings will reduce the cost of marketing.
(iv) Facilitate Search:
The buyers and sellers search for each other in the market to transact for products and services. This function is facilitated by distribution agents. These intermediaries remain in touch with sellers and buyers, thus facilitate exchange.
(v) Less Stocks of Goods:
In the absence of distribution agents’ manufacturers are required to keep large stocks of goods. When middlemen enter the chain of distribution then stocks are maintained by large number of intermediaries and it reduces the burden of producers.
(vi) Proximity to Consumers:
The intermediaries are nearer to the consumers as compared to the producers. They are in direct touch with the users of goods and services and understand their reactions to the supplies. The intermediaries help producers in knowing the reactions of consumers to the goods and services brought out by them. This information is of immense value to producers in planning for their products.
Channels of distribution can be divided into direct channel and indirect channels. Indirect channels can further be divided into one-level, two-level, and three-level channels based on the number of intermediaries between manufacturers and customers.
Direct Channel or Zero-level Channel (Manufacturer to Customer)
Direct selling is one of the oldest forms of selling products. It doesn’t involve the inclusion of an intermediary and the manufacturer gets in direct contact with the customer at the point of sale. Some examples of direct channels are peddling, brand retail stores, taking orders on the company’s website, etc. Direct channels are usually used by manufacturers selling perishable goods, expensive goods, and whose target audience is geographically concentrated. For example, bakers, jewellers, etc.
Indirect Channels (Selling Through Intermediaries)
When a manufacturer involves a middleman/intermediary to sell its product to the end customer, it is said to be using an indirect channel. Indirect channels can be classified into three types:
One-level Channel (Manufacturer to Retailer to Customer)
Retailers buy the product from the manufacturer and then sell it to the customers. One level channel of distribution works best for manufacturers dealing in shopping goods like clothes, shoes, furniture, toys, etc.
Two-Level Channel (Manufacturer to Wholesaler to Retailer to Customer)
Wholesalers buy the bulk from the manufacturers, break it down into small packages and sell them to retailers who eventually sell them to the end customers. Goods that are durable, standardised and somewhat inexpensive and whose target audience isn’t limited to a confined area use two-level channel of distribution.
Three-Level Channel (Manufacturer to Agent to Wholesaler to Retailer to Customer)
Three-level channel of distribution involves an agent besides the wholesaler and retailer who assists in selling goods. These agents come in handy when goods need to move quickly into the market soon after the order is placed. They are given the duty to handle the product distribution of a specified area or district in return for a certain percentage of commission.
The agents can be categorised into super stockists and carrying and forwarding agents. Both these agents keep the stock on behalf of the company.
Super stockists buy the stock from manufacturers and sell them to wholesalers and retailers in their area. Whereas, carrying and forwarding agents work on a commission basis and provide their warehouses and shipment expertise for order processing and last-mile deliveries.
Manufacturers opt for a three-level channel when the userbase is spread all over the country and the demand for the product is very high.
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 Donald’s, 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 specialty 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
1. Distribution policy: Where the manufacturer is interested in distributing his products through all possible outlets, it is desirable to use more than one channel to reach the target customers. This is known as intensive distribution policy. The purpose in this case is to make the product available as near to the consumers as possible. Consumer goods of frequent use like pens, pencils, paper, soap, hair pin, etc., are distributed through a large number of wholesalers and retail traders. If goods are meant for customers who are very particular about their quality and usefulness, manufacturers adopt a selective distribution policy. In that case, few selective channels which can be relied upon for their efficiency of operation are used
2. Characteristics of the product: The nature of the product influences the choice of channel. For example, perishable products like eggs, milk, etc., are supplied either directly or through the short channels. In the case of heavy and bulky products (e.g., Cement, steel) where distribution and handling costs are more, short channels are preferred. Sophisticated electrical and electronics equipment which require careful handling are also generally distributed directly or through short channels. On the other hand, long channels are found in the case of light-weight and small-size items like dress material, readymade garments, pocket calculators, stationery, toothpaste, toothbrush, etc. Similarly, simple mechanical products like electronic toys, time-clocks, etc., are supplied through long channels for intensive distribution.
3. Characteristics of target customers: If the number of customers is large and geographical area is extensive, long and multiple channels are necessary for intensive distribution of goods. This is also suitable where the consumers are in the habit of making frequent purchases of small quantities at irregular intervals. Short channels and direct selling are possible in the case of few customers who purchase large quantities at regular intervals and they are concentrated in a small area.
4. Supply characteristics: Goods produced by a small number of producers concentrated in one region are generally distributed through short channels. Particularly this is more so if each producer controls a fairly large share of the market. Long channels are suitable if a large number of producers in different regions produce and supply the goods.
5. Types of middlemen: Availability of suitable middlemen in the channel of distribution is another factor in the selection of the channel. This is because different functions like standardization, grading, packing, branding, storage, after sale servicing, etc., are expected to be performed by middlemen. Efficiency of distribution depends upon the size, location and financial position of middlemen. If the middlemen in a specific channel are dependable and efficient that channel may be preferred by producers.
6. Channel competition: There are different situations in which manufacturers compete with each other for availing the services of particular wholesalers. Similarly, wholesalers often compete with each other to deal with particular retailers or carrying particular brands of products. Sometimes producers use the same channel which is used by their competing producers. If an producer arranges exclusive distribution through a particular wholesaler, other producers also do the same. Thus, selection of a channel may depend on the competition prevailing in the distribution system.
7. Potential volume of sales: The choice of the channel depends upon the target volume of business. The ability to reach target customers and the volume of sales varies between different channels. One outlet may not be adequate for achieving the target in which case more channels need to be used. Of course, the competitive situation must be taken into account while examining the potential volume of sale through different channels:
8. Cost of distribution: The various functions carried out in the channel of distribution add to the cost of distribution. While choosing a channel, the distribution costs of each channel should be calculated and its impact on the consumer price should be analyzed. A channel which is less expensive is normally preferred. Sometimes, a channel which is convenient to the customers is preferred even if it is more expensive. In such cases the choice is based on the convenience of the customers rather than the cost of distribution.
9. Long-run effect on profit: Direct distribution, short channels, and long channels have different implications with regard to the profits in the short-run and long-run. If demand for a product is high, reaching the maximum number of customers through more than one channel may be profitable. But the demand may decline in course of time if competing products appear in the market. It may not be economical then to use long channels. So, while choosing a channel one should keep in mind the future market implications as well.
Channels are a private method of communication between organizations. As a result, most changes to the channel configuration need to be agreed to by other members of the channel. A channel would not be useful if an organization could join the channel and read the data on the ledger without getting the approval of other organizations. Any changes to the channel structure need to be approved by a set of organizations that can satisfy the channel policies.
Policies also govern the processes of how users interact with the channel, such as the set of organizations that need to approve a chain code before it can be deployed to a channel or which actions need to be completed by channel administrators.
Channel policies are important enough that they need to be discussed in their own topic. Unlike other parts of the channel configuration, the policies that govern the channel are determined by how different sections of the file work together. While channel policies can be configured for any use case with few constraints, this topic will focus on how to use the default policies provided by Hyperledger Fabric. If you use the default policies used by the Fabric test network or the Fabric sample configuration, each channel you create will use a combination of signature policies, Implicit Meta policies, and Access Control Lists to determine how organizations interact with the channel and agree to update the channel structure.
A channel strategy refers to a vendor's plan to move a product or service through a chain of commerce to the end customer. Channels serve two primary functions. The first is to sell a product or service to a customer, and the second is to deliver a customer experience. Companies can distribute their goods and services through direct or indirect channels. Here is how each of these types of channels operates:
Direct channel- In a direct channel, consumers buy a product or service directly from a company. For example, a consumer might purchase a product from a physical storefront or an e-commerce website.
Indirect channel- In an indirect channel, consumers purchase a product or service from an intermediary instead of directly from the company that produced it. For example, a consumer might buy a product from another large retailer that the company distributes their products to.
A complete channel strategy includes all the steps a vendor takes to connect with their target customers through various platforms or channels. The goal of each channel strategy can vary, depending on a company's overarching marketing and sales objectives.
For example, a new company may want to create a channel strategy focused on generating brand awareness, while a well-established company might focus more on expanding into an untapped market. An organization can customize its channel strategy depending on the products and services it sells, the size of its target audience and whether it is a B2B or B2C business.
Benefits of channel strategies for distribution
While each channel strategy has its own unique advantages, there are some common benefits that all channel strategies share. A well-developed channel strategy can help you:
Improve the consumer experience-Developing an effective channel strategy can help companies determine where and how their consumers prefer to purchase their products. This knowledge can allow companies to provide a better overall consumer experience.
- Expand into new markets- Companies often select which channels to integrate into their channel strategy based on which new markets they want to expand into. This can help companies reach a wider audience and increase sales.
- Reduce costs-Many companies choose to use distribution channels to outsource pieces of the distribution process. This can help companies reduce their production and marketing costs by developing an effective channel strategy that compliments their in-house capabilities.
- Increase sales- An effective channel strategy can help companies scale faster, acquire new customers and increase sales by giving them access to a larger target audience of potential consumers.
Types of channel strategies
Companies may choose to use several channel strategies to help them reach their customers, sell their products and provide an excellent customer experience. Here are some of the most popular types of distribution channel strategies:
Retail
A company that uses retail as a distribution channel may sell its products directly to consumers in-store, online or by phone. It may also use a third-party online marketplace to sell its goods. Some benefits of using retail as a distribution channel include:
- More control over how to reach consumers
- Ability to gather better consumer data from sales
- A more personal connection with consumers
- Higher profit margin than wholesalers
- More control over your brand identity
Wholesale
Companies that sell their products in bulk to different outlets or retailers use the wholesale distribution channel. These outlets and retailers then resell the products to consumers. Companies that use the wholesale distribution channel typically sell their products at a lower price because bulk orders reduce transportation and labour costs. Some benefits of using the wholesale distribution channel include:
- Ability to use drop-shipping, which decreases the space needed to store inventory
- Increased brand awareness
- Accelerated growth and access to global expansion
Direct to consumer
Many companies choose to sell their products directly to their consumers. Companies that market their products directly to consumers often use catalogues, telemarketing, social media advertisements or face-to-face sales to reach their consumers. Some benefits of using the direct-to-consumer distribution channel include:
- More control over the entire consumer experience
- Access to more data about your consumers and target audience
- Higher profit margins than retail or wholesale distribution channels
Business to business (B2B)
Businesses that plan to sell their products to other businesses use the business-to-business (B2B) distribution channel. This distribution channel differs from the wholesale distribution channel because the businesses that purchase the products plan to use them instead of reselling them to another consumer. For example, a company that produces teleconference devices might sell its products directly to an office that plans to use them for meetings. Some benefits of using the business-to-business distribution channel include:
- Stronger relationships with customers
- A more loyal customer base
- Higher profit margins than retail
- Ability to sell to niche markets
Franchising
Instead of building their own physical storefronts, companies may choose to use the franchising distribution channel. To do this, a business sells the rights to their product or service and their brand name to an individual so that they can open a franchise location. While the individual owns the franchise location, the business maintains a significant level of control through contractual agreements. Some benefits of using the franchise distribution channel include:
- Increased brand awareness
- Ability to scale faster
- Access to more potential customers through different geographic locations
Dealer network
Companies that use the dealer network distribution channel outsource the sale of their products to a network of dealers, agents and brokers. This replaces the need for an in-house sales team. Using the dealer network distribution channel can benefit you if you have a niche product and want to build connections with a specific industry quickly. For example, an auto insurance company might work with an extensive network of brokers to find potential customers and sell them insurance policies. Some benefits of using the dealer network distribution channel include:
- Reduced costs compared to having an in-house sales team
- Ability to work with trained dealers, agents and brokers
- Access to a larger network of potential customers
Value-add resellers
Many companies choose to sell their inventory to value-add resellers (VARs) that may upgrade their products or package them with additional products to increase their value. This distribution channel works well for companies that have niche products. Some benefits of using the value-add resellers distribution channel include:
- Increased brand awareness
- More potential customers
- Recurring revenue from VAR buyers
References:
- Basic Marketing- Concepts, Decisions and Strategies- Cundiff, Edward, W. & Still, R.R.
- Marketing Management - Kotler, Phillip
- Principles of Marketing - Kotler, Phillip & Armstrong, Gray
- Marketing Management - Mamoria, C.B,Mamoria Satish & Suri, R.K.
