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1 CONCEPTS OF DISTRIBUTION CHANNELS

Distribution channel (channel of distribution) is a set of interdependent organisations (intermediaries) involved in the process of making a product or service available for use or consumption. The channel decisions affect other marketing decisions and involve long term commitments. In simple words distribution channel is the chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. A distribution channel can include wholesalers, retailers, distributors and even the internet. Channels are broken into direct and indirect forms, with a "direct" channel allowing the consumer to buy the good from the manufacturer and an "indirect" channel allowing the consumer to buy the good from a wholesaler. Direct channels are considered "shorter" than "indirect" ones. Goods and services often pass to consumers through multiple channels. While increasing the number of ways in which a consumer can find a good has the potential to increase sales, it also creates a complex system that can make distribution management difficult. In addition, the longer the distribution channel the less profit a product manufacturer might get from the sale. In the marketing mix the distribution channel is referred to as place. The other elements of marketing mix are product, pricing and promotion. A distribution channel consists of three types of flows:

Downward flow of goods from producers to consumers. Upward flow of cash payments for goods from consumers to producer. Flow of marketing information in both downward and upward direction. This is the flow of information about new products, new uses of existing products etc. from producers to consumers and flow of information in the form of feedback from consumers to producers.

An entrepreneur has a number of alternative channels available to him for distributing his products. These channels vary in the number and types of middlemen involved. Some channels are short and directly link producers with customers. Whereas other channels are long and indirectly link the two through one or more middlemen. The three major types of channel distribution are intensive, selective and exclusive distribution.

2.2 IMPORTANCE OF DISTRIBUTION CHANNELS

In the present business scenario the distribution channel plays a very vital role in a firms growth and profitability. The intermediaries will provide information, contacts and other useful information which will benefit the firm and its products. If a firm handles its own distribution function without the help of intermediaries, these benefits cannot be ascertained. The product or service must be available to the customer at the right place at the right time. The distribution channel ensures that the product reaches the consumer as and when the product is demanded by the consumer. The intermediaries will be specialists in their field and this will be beneficial to the firm. The experience of intermediaries will help to increase the demand for the firms product or service and result in growth of the firm. The intermediaries provide other functions like risk taking and storage of products. The channel members are able to reduce distribution costs by being experienced at what they do. They often perform their job more rapidly resulting in faster product delivery. The channel members will know consumer preferences and wants. They will communicate it to the firm. The firm will benefit as a result of such information which is vital for their growth and profitability. The choice of a suitable channel of distribution is very important for a business firm because: - (i) it affects the time and costs of distribution; (ii) it affects the volume of sales; (iii) it influences pricing and promotional efforts. Such a decision will determine the profitability of the business and also the long term sustainability of these profits.

2.3 CLASSIFICATION OF CHANNELS OF DISTRIBUTION

Producer-Customer:-This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is fast and economical channel of distribution. Under it, the producer or entrepreneur performs all the marketing activities himself and has full control over distribution. A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial products of high value. Small producers and producers of perishable commodities also sell directly to local consumers.

Producer-Retailer-Customer:-This channel of distribution involves only one middleman called 'retailer'. Under it, the producer sells his product to big retailers (or retailers who buy goods in large quantities) who in turn sell to the ultimate consumers. This channel relieves the manufacturer from burden of selling the goods himself and at the same time gives him control over the process of distribution. This is often suited for distribution of consumer durables and products of high value.

Producer-Wholesaler-Retailer-Customer:-This is the most common and traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally sell the product to the ultimate consumers. This channel is suitable for the producers having limited finance, narrow product line and who needed expert services and promotional support of wholesalers. This is mostly used for the products with widely scattered market.

Producer-Agent-Wholesaler-Retailer-Customer:-This is the longest channel of distribution in which three middlemen are involved. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents. The agents distribute the product among a few wholesalers. Each wholesaler distributes the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products. An entrepreneur has to choose a suitable channel of distribution for his

product such that the channel chosen is flexible, effective and consistent with the declared marketing policies and programmes of the firm. While selecting a distribution channel, the entrepreneur should compare the costs, sales volume and profits expected from alternative channels of distribution and take into account the following factors:

Product Consideration: - The type and the nature of products manufactured is one of the important elements in choosing the distribution channel. The major product related factors are:-

Products of low unit value and of common use are generally sold through middlemen. Whereas, expensive consumer goods and industrial products are sold directly by the producer himself.

Perishable products; products subjected to frequent changes in fashion or style as well as heavy and bulky products follow relatively shorter routes and are generally distributed directly to minimise costs.

Industrial products requiring demonstration, installation and after sale service are often sold directly to the consumers. While the consumer products of technical nature are generally sold through retailers.

An entrepreneur producing a wide range of products may find it economical to set up his own retail outlets and sell directly to the consumers. On the other hand, firms producing a narrow range of products may their products distribute through wholesalers and retailers.

A new product needs greater promotional efforts in the initial stages and hence few middlemen may be required.

Market Consideration: - Another important factor influencing the choice of distribution channel is the nature of the target market. Some of the important features in this respect are:

If the market for the product is meant for industrial users, the channel of distribution will not need any middlemen because they buy the product in large quantities. While in the case of the goods meant for domestic consumers, middlemen may have to be involved.

If the number of prospective customers is small or the market for the product is geographically located in a limited area, direct selling is more suitable. While in case of a large number of potential customers, use of middlemen becomes necessary.

If the customers place order for the product in big lots, direct selling is preferred. But if the product is sold in small quantities, middlemen are used to distribute such products.

Other Considerations: - There are several other factors that an entrepreneur must take into account while choosing a distribution channel. Some of these are as follows:

A new business firm may need to involve one or more middlemen in order to promote its product, while a well established firm with a good market standing may sell its product directly to the consumers.

A small firm which cannot invest in setting up its own distribution network has to depend on middlemen for selling its product. On the other hand, a large firm can establish its own retail outlets.

The distribution costs of each channel are also an important factor because it affects the price of the final product. Generally a less expensive channel is preferred. But sometimes, a channel which is more convenient to the customers is preferred even if it is more expensive.

If the demand for the product is high, more number of channels may be used to profitably distribute the product to maximum number of customers. But, if the demand is low only a few channels would be sufficient.

The nature and the type of the middlemen required by the firm and its availability also affect the choice of the distribution channel. A company prefers middlemen who can maximise the volume of sales of their product and also offers other services like storage, promotion as well as after sale services. When the desired types of middlemen are not available, the manufacturer will have to establish his distribution network. All these factors or considerations affecting the choice of a distribution

channel are inter-related and interdependent. Hence, an entrepreneur must choose the most efficient and cost effective channel of distribution by taking into account all these factors as a whole in the light of the prevailing economic conditions. Such a decision is very important for a business to sustain long term profitability.

2.4 CHANNEL FUNCTIONS

The channel members perform various functions that are beneficial to the producers or firms. They are: Information Matching Promotion Contact Negotiation Physical Distribution Financing Risk Taking

2.5 DESIGNING THE CHANNEL

Channel distribution is a strategic marketing tool. The channel has to be decided only after a careful study of the various alternative channels available and after conducting a costbenefit analysis. There a four important decisions that help a firm to design a distribution channel. They are: What role the distribution is to play in achieving objectives? What type of channel is needed? (i.e. with or without intermediaries) What level of intensity of distribution? Which specific intermediary to use? (i.e. which will be best suited to achieve objectives) The above four decisions will help the organisation to design an effective distribution channel which is in par with the organisational objectives. The decision regarding the

channel or channels to be selected has a long term impact on the firm. A wrong decision regarding the channel will affect the firms growth and profits.

2.6 CHANNEL ARRANGEMENTS

The distribution channel consists of many parties each seeking to meet their own business objectives. Clearly for the channel to work well, relationships between channel members must be strong with each member understanding and trusting others on whom they depend for product distribution to flow smoothly. Relationships in a channel are in large part a function of the arrangement that occurs between the members. These arrangements can be divided in two main categories:

Independent Channel Arrangements - Under this arrangement a channel member negotiates deals with others that do not result in binding relationships. In other words, a channel member is free to make whatever arrangements they feel best in their interest. This so-called "conventional" distribution arrangement often leads to significant conflict as individual members decide what is best for them and not necessarily for the entire channel.

Dependent Channel Arrangements - Under this arrangement a channel member feels tied to one or more members of the distribution channel. Sometimes referred to as "vertical marketing systems" this approach makes it more difficult for an individual member to make changes to how products are distributed. However, the dependent approach provides much more stability and consistency since members are united in their goals.

2.7 RELATIONSHIP ISSUES IN CHANNELS

A good distribution strategy takes into account not only marketing decisions, but also considers how relationships within the channel of distribution can impact the marketers product. A channel can be made up of many parties each adding value to the product purchased by customers. However, some parties within the channel may carry greater weight than others. In marketing terms this is called channel power. Channel power refers to the influence one party within a channel has over other channel members. In an effort to increase product sales, marketers are often attracted by the notion that sales can grow if the marketer

expands distribution by adding additional resellers. Such decisions must be handled carefully, however, so that existing dealers do not feel threatened by the new distributors who they may feel are encroaching on their customers and siphoning potential business. The channel conflicts should be checked and efforts must be made to reduce channel conflicts. Channel decisions have long-term consequences for marketers since efforts to establish new relationships can take an extensive period of time while ending existing relationships can prove difficult. The firm must take maximum care while designing the channels and must maintain good relationships with the channel members as the decisions on channels have a long term impact on the company. The channel members must be convinced to handle the marketers product. The needs of the channel members must be identified just like the needs of the final consumer are identified. The needs of the channel members are different from the needs of the final consumers. The marketer can satisfy the channel members to sell their products by offering incentives, profit margin, training, promotional help etc...

2.8 DISTRIBUTION SYSTEMS

The marketer or the firm has to decide on a marketing system which matches with the company objectives and products. For a marketer the choice of distribution comes down to the following three options:

Direct Distribution System By adopting a direct distribution system the marketer reaches the intended final user of their product by distributing the product directly to the customer. That is, there are no other parties involved in the distribution process that take ownership of the product.

Indirect Distribution System - Through an indirect distribution system the marketer reaches the intended final user with the help of others. These resellers generally take ownership of the product, though in some cases they may sell products on a consignment basis (i.e., only pay the supplying company if the product is sold). Under this system intermediaries may be expected to assume many responsibilities to help sell the product. The indirect methods include single-party selling system and multiple-party selling system. Under single-party selling system the marketer engages another party who sells and distributes directly to the final customer. This is most

likely to occur when the product is sold through large store-based retail chains or through online retailers. In multiple-party selling system the product passes through two or more distributors before reaching the final customer. This is most likely when a wholesaler purchases from the manufacturer and sells the product to retailers.

Multi-Channel or Hybrid Distribution Systems - In cases where a marketer utilizes more than one distribution design the marketer is following a multi-channel or hybrid distribution system. The multi-channel approach expands distribution and allows the marketer to reach a wider market.

2.9 CHANNEL MOTIVATION AND MONITORING

It is difficult enough to motivate direct employees to provide the necessary sales and service support. Motivating the owners and employees of the independent organizations in a distribution chain requires even greater effort. There are many devices for achieving such motivation. Perhaps the most usual one is incentives. The supplier offers a better margin to tempt the owners in the channel to push the product rather than its competitors. In other cases compensation is offered to the distributors sales personnel, so that they are tempted to push the product. Julian Dent defines this incentive as a Channel Value Proposition or business case, with which the supplier sells the channel member on the commercial merits of doing business together. In the same way that the organization's own sales and distribution activities need to be monitored and managed, so will those of the distribution chain. In practice, many organizations use a mix of different channels; in particular, they may complement a direct sales-force, calling on the larger accounts, with agents, covering the smaller customers and prospects. These channels show marketing strategies of an organization. Effective management of distribution channel requires making and implementing decision in these areas. Distribution channels play a very crucial role in any manufacturing industry. The goods manufactured have to reach the customers as and when they require it. This is the place where the distribution channel fits in. The channels must be motivated and monitored by the firm or marketer according to the services rendered by them. Popular Industries follow a very

carefully designed distribution channel to reach their final product (candles) to the end consumers who need it.