Business Studies Part I
Business Studies Part II

Channels of Distribution

In the case of a large number of consumer products, the potential buyers are scattered over a wide geographical area. In order to contact these people efficiently and effectively, it is important to take the help of a number of intermediaries as contacting them directly may not be cost-effective and may be difficult even otherwise. For example, a manufacturer of detergent powder in Gujarat would find it very difficult to directly approach customers, say in Delhi, Thiruvananthapuram, Bhuvaneshwar, Hyderabad Srinagar and other far off places. Therefore, he/ she would supply a large quantity of his/her product to a big merchant, say in Hyderabad. This big merchant would then supply detergent powder to relatively small sellers in various towns of Hyderabad. These sellers would, in turn, resell the goods to customers. In this manner, goods are distributed from the place of production to the place of consumption. These people, institutions, merchants, and functionaries, who take part in the distribution function, are called ‘Channels of Distribution’

Channels of Distribution are set of firms and individuals that take the title, or assist in transferring title, to particular goods or services as it moves from the producers to the consumers. In other words, a channel refers to a team of merchants, agents and business institutions that combine physical movement and title movement of products to reach specific destinations. Most goods and services are distributed through a network of marketing channels. For example, we buy merchandise of our need such as salt, bulb, tea, sugar, soap, paper, books, flour, etc., from retail sellers. The channels bring the economy of effort. This can be better understood with the help of an example. Let us say you have to buy four things, viz., Sugar, Bulb, Coffee and Ink. Most probably you would walk into a General Merchant’s Shop and buy all the articles from one place. Imagine what would happen if there were no middlemen or general merchants available. In that case, you would have to buy directly from the manufacturers of these products. You will have to make four contacts, each with the producer of Sugar, Bulb, Coffee, and Ink. Compared to this, there was only one contact when all the things were bought from the same general merchant. Now let us assume that there are four customers needing the same four articles. In all sixteen contacts would have to be made. In case middleman is used, as shown in part II of the figure, only eight contacts could be needed. Thus, use of middlemen brings economy of effort. This situation is illustrated in the preceding figure. Apart from the economy of effort, middlemen help to cover large geographical areas and bring efficiency in distribution, including transportation, storage, and negotiation. They bring convenience to customers as they make various items available at one store and also serve as an authentic source of market information as they are in direct contact with the customer. Functions of Distribution Channels Channels of distribution smoothen the flow of goods by creating possession, place and time utilities.

They facilitate Channels of Distribution used for a Consumer Product movement of goods by overcoming various time, place and possession barriers that exist between the manufacturers and consumers. The important functions performed by middlemen are as follows:

1. Sorting: Middlemen procure supplies of goods from a variety of sources, which is often not of the same quality, nature, and size. For example, a wholesaler of cashew nuts may procure a large quantity from different cashew nut producing areas, which would contain nuts of varied quality and sizes. He/She then sort the nuts into homogenous groups on the basis of the size or quality.

2. Accumulation: This function involves the accumulation of goods into larger homogeneous stocks, which help in maintaining continuous flow of supply.

3. Allocation: Allocation involves breaking homogenous stock into smaller, marketable lots. For example, once cashew nuts are graded and large quantities are built, these are divided into convenient packs of say 1 kg, 500 gms, and 250 gms, to sell them to different types of buyers.

4. Assorting: Middlemen build an assortment of products for resale. There is usually a difference between the product lines made by manufacturers and the assortment of combinations desired by the users. For example, a cricket player may need a bat, a ball, wickets, gloves, a helmet, a T-shirt, and a pair of shoes. Perhaps no one manufacturer produces these products in the desired combination. Middlemen procure a variety of goods from different sources and deliver them in combinations desired by customers.

5. Product Promotion: Mostly advertising and other sales promotion activities are organized by manufacturers. Middlemen also participate in certain activities such as demonstrations, special displays, Economy of Efforts with the use of Channels contests, etc., to increase the sale of products.

6. Negotiation: Channels operate with manufacturers on the one hand and customers one, the other. Arriving at deals that satisfy both parties is another important function of the middlemen. They negotiate the price, quality, guarantee and other related matters with customers so that transfer of ownership is properly affected.

7. Risk Taking: In the process of distribution of goods the merchant middlemen take the title of the goods and thereby assume risks on account of price and demand fluctuations, spoilage, destruction, etc.

  1. The factors influencing the choice of channels of distribution which were discussed in the meeting are listed below:
    • Product related factors: It has been mentioned that the machines were sophisticated.
    • Market related factors: It has been mentioned that the size of the order is not large. (in)
    • Company related factors: It has been mentioned that the company was short of funds
      to pay the additional staff which had to be recruited to personally visit and train the hospital staff.
  2. The other considerations to be taken care of in each of these factors is explained below:
    • The market related factors:
      • Geographical concentration of potential buyers: If the potential buyers for the firm’s product are geographically concentrated at a few specific places, it is advisable for the marketer to adopt direct channels of distribution. If the market for the product is widely scattered, indirect channels of distribution will be more effective.
      • Size of market: If the size of the target market is small, it is advisable that the marketer adopts methods of direct channels of distribution like online selling, mail order house, personal selling etc. wherein there are no intermediaries between the manufacturer and the consumers. However, if the marketer intends to target larger markets he should adopt indirect channels of distribution (one level, two level or three level) by using intermediaries like wholesalers , retailers etc.

S.No

Type of channel

Size of market

Geographical concentration of potential buyers

1.

Direct

Small

Concentrated

2.

Indirect

Large

Widely scattered

    • Product related factors:
      • Nature of product: Considering the technical nature of the industrial products they require short channels i.e., direct channel or involving few middlemen. Moreover, they are made to order and expensive products purchased by selective buyers. Whereas the consumer products, being standardised, less expensive, less bulky, non-technical can be better distributed by long network of channels, involving many middlemen. Moreover they are purchased frequently.
      • Type of product: If the product under consideration is perishable like fruits, vegetables, and dairy products short channels should be adopted in order to preserve their quality. Whereas non-perishable products like toiletry products (e.g., shampoo , toothbrush, deodorants etc.), groceries (cooking oil, pulses etc.), fabrics can be best marketed through longer channels so as to reach wide spread consumers.
      • Unit value of the product: If the unit value of a product is low as in case of most convenience products, long channels are considered more appropriate whereas products of high value should be sold through shorter channels.

S.No

Type of channel

Nature of product

Type of product

Unit value of the product

1.

Direct

Perishable

Industrial

More

2.

Indirect

Non- perishable

Consumer

Less

    • Company related factors:
      • The degree of control it wants to hold on other channel members: Short channels may be used if the management of the firm desires to have greater control on the channel members, but if the management does not plan to exercise strict control over the middlemen indirect channels or large number of intermediaries may be opted for.

S.No

Type of channel

The degree of control it wants to hold on other channel members

1.

Direct

Concentrated

2.

Indirect

Widely scattered