Distribution Channel

Meaning: Channels of distribution indicate routes or pathways through which goods and services
flow, or move from producers to consumers. The distribution channel as the set of interdependent
marketing institutions participating in the movement of goods or services from producer to the
ultimate consumers. Channel of distribution is the route from the producer to the consumers.
Philip Kotler: “Every producer seeks to link together the set of marketing intermediaries is called
the marketing Channel or Channel of Distribution”.
Richard – “Distribution channels are system of economic institutions through which a producer
of goods delivers them into the hands of their users”.
McCarthy – “Any sequence of institutions from the producer to the consumer, including one or
any number of middlemen, is called a channel of distribution”.
Functions of Distribution Channels –
1. Financing: Intermediaries usually make advance payments for goods & services providing
necessary working capital for their day-to-day operations. The manufacturers extend credit,
payment made in advance, even before the product is bought, consumed & paid by consumer.
2. Provides Market Intelligence: Market intelligence & feedback to the principal are rendered by
channels. In the nature of things, channels are in a good position to perform this task, since they
are in constant & direct contact with customers.
3. Assortment of Products: It leads to the customer convenience help the consumers to buy
goods in convenient unit & assorted varieties of the products. In order to use the economics of
scale & to minimise the overall production cost, goods & services are produced in bulk.
4. Promotion: Sales programmes are designed by middlemen aiming to building customers
traffic. Channels perform promotional activities like advertising, personal selling & promotion
etc. so the producer achieving great market shares in sales & market coverage of products.
5. Title: The title to the goods, services & trade are taken by middlemen under their own names.
It helps in eliminates the risks between the manufacturer & middlemen.
6. Provides Salesmanship: They help in introducing and establishing new products in the market.
Under some cases, buyers go by the recommendations of the dealers. The dealers establish the
products in the market through their persuasive selling and person-to-person communication.
7. Matching Demand and Supply: The major function of intermediaries is to assemble the
goods from many producers in such a manner that a customer can affect purchases with ease.
The goal of marketing is the matching of segments of supply and demand.
8. Assists in Merchandising: Through merchandising, they help reinforce the awareness about
the product among customers. While visiting a retail shop, customer’s attention by an attractive
display of the product/brand increasing his awareness & interest. Merchandising display
complements the selling efforts of the company & acts as a silent salesman at the retail outlet.
9. Pricing: While pricing, the producer should invite the suggestions from the middlemen as they
are very close to the ultimate users & know what they can pay for the product. Pricing may be
different for different markets or products depending upon the channel of distribution.
10. Information Provider: Middlemen play an important role in providing information about the
market to the manufacturer. Changes in customer demography & the entry of a new competitor
& changes in customer preferences are the developments that are the information needed.
Types of Distribution Channels
1. Direct Channel: The channel of distribution of goods & services adopted by a producer is the
direct channel, where are absent between the producers & consumer. Under direct channel of
distribution, the manufacturer can adopt one of the following methods of selling:
a) Selling at Manufacturer’s Plant: It is one of the earliest, easiest and cheapest methods of
distribution of goods and known as direct selling. The goods are sold by the producers directly
to the consumers; it is usually preferred in case of perishable products like bread, milk, fish,
meat, egg, and vegetables etc. These products are directly sold to the consumers for the reason
they lose their value or become unfit for use if they are stored or transacted for a long time.
b) Door-to-Door Sales: Manufacturer employed salesmen for a door-to-door marketing. They
move door-to-door to introduce the new product at the door of a customer. Dealers may not
have knowledge of the goods or they require a good margin of profit or they do not want to
stock unknown products; for them this system is good.
c) Sales by Mail Order Method: Here the post office plays a significant role and it is known as
shopping by post or mail or selling by post. By Post, customers are approached by sending
catalogues, price lists, pamphlets, etc. Advertising adds further speed in the selling; e.g.,
books, copies, Magazines, watches, toys, small appliances, clothes, seeds, jewellery, etc.
d) Sales by Opening Own Shops: The producers of perishable and non-perishable goods sell
their products to customers, by their own retail shops. Manufacturers can push the goods
quickly through retail shops & offer satisfactory service to customers, thereby building
goodwill. It also helps the producers to study the market trends. This system offers a two way
communication.
2. Indirect Channel: Under this system, distribution of goods is performed by middlemen or
intermediaries like wholesalers’ stockiest distributions etc. Retailer sells directly to the
consumers whereas wholesalers sell through them.

Zero Level Channel: A zero level channel, commonly known as direct marketing channel has no
intermediary levels. In this channel framework manufacturer sells merchandise directly to
customers. Many service providers like holiday companies, also market direct to consumers,
bypassing a traditional retail intermediary – the travel agent.
a) One Level Channel: A one level channel contains one selling intermediary. In consumer
markets, this is usually a retailer. The consumer electrical goods market in the United
Kingdom is typical of this arrangement whereby producers such as Sony, Panasonic, Canon
etc. sell their goods directly to large retailers which sell the goods to the final consumers.
b) Two Level Channels: A two level channel encompasses two intermediary levels – a
wholesaler & retailer. A wholesaler buys & stores large quantities of goods from various
manufacturers & then breaks into the bulk deliveries to supply retailers with smaller quantities.
Small retailers with limited financial resources & order quantities.
c) Three Level Channels: A third level encompasses three intermediary levels – a wholesaler, a
retailer & a jobber. In the poultry industry, products like mutton, chicken, eggs etc. are first
sold to wholesalers; he then sells it to jobbers, who sell to small & unorganized retailers.
3. Hybrid Distribution Channel: Many companies used a single channel to sell to a single
market or market segment. Recently the creations of customer segments & channel
 possibilities, several companies have adopted multi-channel distribution systems; is called
hybrid marketing channels.
Factors Affecting Channel Distribution
A. Factors Related to Products: Product is a prime factor in channel selection. Product-related
factors are among most relevant and powerful factors affecting channel decision.
1. Perishability: Perishable products must be sold & consumed immediately. Perishable products,
direct channel is suitable. However, due to availability of rapid means of transportation &
advanced cold storage facilities, the perishable product can be sold by long-indirect channels.
2. Technical Aspects: Technical products cannot be used without sufficient information and
direct supervision. Even, they need more frequent services. It is advisable to adopt indirect and
multilevel channels to assist consumers to use the technical product properly and safely.
3. New v/s Existing Product: Consumers need more information & attention for new products.
More efforts & time are required to convince consumers. A company may choose for indirect
channel. For existing products, the company can use direct and/or indirect channels.
4. Size of Product: In case of heavy and bulky products, direct or short channel is more suitable.
This is due to difficulties related to physical movement of the product.
5. Unit Price of Product: Precious products, like gold, jewellery, etc., are distributed using direct
channels of distribution. Use of direct channel can minimize risk of theft or robbery.
B. Factors Related to Company: Company’s internal situations have direct impact on choice of
marketing channel. Manager analyzes company-related factors to decide the best fit channel.
1. Company’s Financial Position: Financially sound companies can maintain separate and well-
equipped departments for distribution of products. Such companies can open & manage own
retail outlets and can hire salesmen to manage distribution effectively. But, financially weak
companies have to opt for indirect channels to share resources & expertise of channel members.
2. Product Mix of Company: A product mix consists of product lines and product items in each
product line. Many product lines and several product items/ varieties in each of the product
lines can enable the firm to offer multiple choices to a large number of consumers. In this,
direct channels are more suitable. Small companies with limited product lines or product items
should distribute products via wholesalers & retailers, who sell products of many companies.
3. Desire for Control: If a company desires to have direct and close control over production and
selling activities, direct channels are preferred and vice-versa.
4. Experience & Expertise: Successful distribution needs experience & expertise. If a company
possesses necessary experience, expertise, it can manage selling activities by its own. When a
company lacks experience & skills, it has to involve middlemen, & prefers indirect channels.
5. Past Experience: A company’s past experience can also affect channel decision. When a
company has satisfactory experience to work with middlemen, it may continue working with
them. If it is not satisfied to work with middlemen, it would shorten its channel of distribution.
C.Factors Related to Middlemen:
1. Creditworthiness of Middlemen: Middlemen’s credibility is an important criterion to decide
on the channel. If middlemen have good reputation & creditworthiness a company can multiply
its gain. Creditworthiness is a critical aspect while offering dealership for definite area.
2. Attitudes of Middlemen: Positive attitudes of middlemen make companies to involve them in
distribution activities. Companies like to select indirect channel with one or more levels.
Opposite situation leads companies to select direct channels.
3. Services Rendered by Middlemen: Channel decisions depend on number & quality of
services offered by middlemen to customers. When the channel members are ready to provide
services to customers, like home delivery, repairing, credit facility, & post-sales services, the
manufacturers like to involve them in distribution to avail such services to their customers.
4. Financial Capacity of Middlemen: Strong financial capacity of middlemen attracts
manufacturers. This is due to the fact that strong financial position benefits both manufacturers
and customers. Strong financial position results into speedy recovery of bills receivable, less
bad debts, immediate payment, credit facility to customers, and also advanced payment.
D. Factors Related to Market:
1. Size of Market: In concentrated market, it is economically affordable for a company to
manage its own distribution. When market is small, it is assigning distribution to middlemen.
2. Geographical attention: When firm’s customers are highly concentrated in particular region, it
can directly deal with customers by using any of the direct channels. Middlemen can do better
job with less costs.
3. Services Expected: Number & types of services expected by the target market, and company’s
capacity and readiness to meet them are important issues to be considered in this connection.
4. Habits of Consumers: Distribution channels must be fit with habits of consumers. Manager
should find out why, how, when, where and from whom the consumers like to buy.
E. Factors Related to Competition:
1. Intensity of Competition: When there exists a several competition in the market, a company
must consider competitors distribution strategies and practices while selecting marketing
channels. In case of less competition, a company choice will be independent of competition.
2. Response & Reactions of Competitors: Reactions and response of the close competitors must
be taken into account while deciding on distribution channel. A company must select such
channels that can help availing competitive advantages.
3. Competitive Position in Market: A leader company can design its own distribution network.
It can select a specific channel of distribution as per its requirements. But, the follower
companies have to follow market leader. Their choice depends on leader’s practice.
F. Factors Related to Environment:
1. Economic Condition of Country: Country’s economic condition affects firm’s operations. In
economically poor countries, short or direct channels are used to sell product at low price. In
developing and developed countries, normally, indirect channels are used to distribute products.
2. Trade Cycle: Phases of trade cycle, like recession, recovery, prosperity, etc., indicate the
country’s economic condition. Normally, in prosperity stage, long & indirect channels are used
due to need for mass distribution and willingness of people to pay high price for the product.
3. Legal Provision: Government policies and legal provisions have direct or indirect implication
on firm’s distribution activities. Taxes, charges, administrative procedures, restrictions, and
other issues are worth noted in this regard.
4. Availability of Facilities: Availability, costs, and quality necessary facilities play decisive role
in channel selection. Facilities like transportation, communication, warehousing, banking,
insurance, government agencies at national and international level, degree of harmony among
states of the country, and relations among nations at large affect firm’s channel decisions.
CHANNEL DESIGN
Channel design: Those decisions involving the development of new marketing channels where
none had existed before, or the modification of existing channels. Channel design is presented as a
decision faced by the marketer, and it includes either setting up channels from scratch or
modifying existing channels. Who Engages: Producers and manufacturers, wholesalers, and
retailers all face channel design decisions? Producers and manufacturers “look down” the channel.
Variables Affecting Channel Structure
1. Market Variables:
 Market Geography: Market geography refers to the geographical size of the markets & their
location & distance from producer & manufacturer. “The distance between the manufacturer &
its markets, that the use of intermediaries will be less expensive than direct distribution.”
 Market Size: The number of customers making up a market determines the market size. From
a channel design standpoint, the larger the number of individual customers, the larger the
market size. “If the market is large, the use of intermediaries is more likely to be needed
because of the high transaction costs of serving large numbers of individual customers.
 Market Density The number of buying units per unit of land area determines the density of the
market. “The less dense the market, the more likely it is that intermediaries will be used. The
greater the density of the market, the higher the likelihood of eliminating intermediaries.”
 Market Behavior: Market behavior refers to the following four types of buying behaviors:
How customers buy, when customers buy, Where customers buy, Who does the buying. Each
of these patterns of buying behavior may have a significant effect on channel structure.
2. Product Variables:
 Bulk and Weight: Heavy and bulky products have very high handling and shipping costs
relative to their value. Therefore, a producer should attempt to minimize these costs by shipping
only in large lots to the fewest possible points.
 Perishability: Products rapid physical fall & those of rapid fashion obsolescence require rapid
movement from production to consumption. “When products are highly perishable, channel
structures should be designed to provide for rapid delivery from producers to consumers.”
 Unit Value: The lower the unit value of the product, the longer the channel should be. When
the unit value is high relative to its size and weight, direct distribution is feasible because the
handling and transportation costs are low relative to the product’s value.
 Degree of Standardization: Custom-made products should go from producer to consumer
while more standardized products allow opportunity to lengthen the channel.
 Technical versus Nontechnical: A highly technical product will generally be distributed
through a direct channel. This is because the manufacturer may need sales and service people
capable of communicating the product’s technical features to the user.
3. Company Variables: The most important company variables affecting channel design are:
 Size: In general, the range of options for different channel structures is a positive function of a
firm’s size. Larger firms have more options available to them than smaller firms do.
 Financial Capacity: Generally, the greater the capital available to a company, the lower its
dependence on intermediaries.
 Managerial Expertise: Lacking in the managerial skills necessary to perform distribution
tasks, channel design must of need include the services of intermediaries who have expertise.
 Objectives & Strategies: The firm’s marketing and general objectives & strategies, such as the
desire to exercise a high degree of control over the product, may limit the use of intermediaries.
4. Intermediary Variables: The key intermediary variables related to channel structure are:
 Availability: The availability (number of and competencies of) adequate intermediaries will
influence channel structure.
 Cost: The cost of using intermediaries is always a consideration in choosing a channel
structure. If the cost of using intermediaries is too high for the services performed, then the
channel structure is likely to minimize the use of intermediaries.
 Services: This involves evaluating the services offered by particular intermediaries to see
which ones can perform them most effectively at the lowest cost.
5. Environmental Variables: Economic, socio cultural, competitive, technological, and legal
environmental forces can have a significant impact on channel structure.
Process of channel design
1. Defining the customer needs: In designing the market channel, the marketer must understand
the service output levels its target customer want. It includes the following: Product information
Product customization, Product quality assurance, Lot size, Product variety, and Waiting,
delivery time, after sales service.
2. Defining channel objective: The channel objective varies with product characteristics:
Perishable products require more direct marketing. Bulky products, such as building materials,
require channels that minimize the shipping distance & handling. High- unit- value products
such as generators are sold through a company sales force rather than intermediaries.
3. Channel alternative: A company looks at alternatives for its distribution channel after it has
decided on the targeted customers & customer service deliverables it desires from its channel
partners to reach these customers. Deciding the company: Type of intermediaries Logistics
service providers, manufacturer’s agents, guarantors, financing agencies, Wholesalers and semi
wholesalers, Retailers & service centers, Number of intermediaries, cost of the channel system.
4. Evaluation of major alternative: The major problem before the producer is to decide which of
the alternatives would be best satisfy the long term objectives of the firm taking in view the
factors which would affect the channel decision.
5. Ideal channel structure: With the completion of steps, the number of alternatives would have
narrowed down considerably. The firm must evaluate design & choose the best among them.
RETAILING
Meaning: The word ‘retail’ is derived from the French word retaillier, meaning ‘to cut a piece
of’ or ‘to break bulk’. The distribution of finished products begins with the producer and ends at
the ultimate consumer. Retailing is defined as a set of activities or steps used to sell a product or a
service to consumers for their personal or family use. Retailing includes all the activities involved
in selling goods or services directly to final consumers.
Cundiff: “Retailing consists those activities involved in selling directly to ultimate consumers.”
American Marketing Association: “A set of business activities carried on to accomplishing the
exchange of goods and services for purposes of personal, family, or household use, whether
performed in a store or by some form of non-selling.” –
Philip Kotler: “Retailing includes all the activities involved in selling goods or services to the
final consumer for personal, non-business use.” –
Features or characteristics of Retailing:
1. Sale to Ultimate Customer: Goods or service in a retail transaction are sold to final customer
for consumption. There is no re-sale of the product or service. Goods & service sold for
consumption may be for domestic or household or industrial uses are retail transaction.
2. Convenient Form: The word retail means cut size or break the bulk. Retailers buy in large
quantity from middleman or manufactures; he breaks the bulk and sells in small quantities.
Goods may be delivered in small packs in convenient form which can carry to his home.
3. Convenient Place & Location: Retailers deliver goods from a location that is convenient to
the customers. It may be a small store, a shop & multiplex. It may also be on internet, through
mobile or mail. Goods/or service are offered to the convenience and comfort of the consumer.
4. Last Link in Chain of Distribution: A retailer is the last link in the chain of distribution. He
sells goods to final customer. He connects between middlemen and consumer acting as link
between them. He is described as merchandising arm or neck, in the bottle of distribution.
5. Marketing not Just Sale: It is a marketing activity. Consumer is offered comfort, convenience
& concession in buying goods of his choice. Marketing functions like transportation banking
 insurance are undertaken to create & deliver goods to satisfaction of people. Goods are
designed & delivered to match the taste of people & satisfy their desire.
6. Goods and also Service: Retail marketing is not only connected with delivery of physical
goods or merchandise like Grocery Vegetable, etc., it is also engaged in providing services.
Now a day’s marketing of services is an important area like Insurance, Tourism, Hotel, etc.
Functions of Retailing:
1. Sorting: Manufacturers usually make one or a variety of products and would like to sell their
entire inventory to a few buyers to reduce costs. Final consumers prefer a large variety of goods
and service to choose from and usually buy them in small quantities. Retailers are able to
balance the demands of both sides by collecting an assortment of goods from different sources,
buying them in sufficiently large quantities & selling them to consumers in small units.
2. Breaking Bulk: Breaking bulk is another function performed by retailing. The word retailing is
derived from the French word retailer, meaning ‘to cut a piece off’. To reduce transportation
costs, manufacturers and wholesalers typically ship large cartons of the product. Breaking bulk
means physical repackaging of the products by retailers in small unit sizes according to
customer’s convenience and stocking requirements.
3. Holding Stock: Retailers also offer the service of holding stock for the manufacturers.
Retailers maintain an inventory that allows for instant availability of the product to the
customers. It helps to keep prices stable and enables the manufacturer to regulate production.
To ensure the regular availability of the offerings retailers maintain appropriate inventory
levels. Consumers normally depend on the retailers directly to replenish their stocks at home.
4. Additional Services: Retailers ease the change in ownership of merchandise by providing
services that make it convenient to buy and use products. Providing product guarantees, after-
sales service and dealing with consumers complaints are some of the services that add value to
the actual product at the retailer end. Retailer also offer credit and hire-purchase facilities the
consumers to enable them to buy a product now & pay for it.
5. Communication Channel: Retailers as the channel of communication &information between
the wholesalers or suppliers and the consumers. From advertisements, salespeople and display,
shoppers learn about the characteristics and features of a product of service offered.
Manufacturers in their turn learn of sales forecasts, delivery delays, and customer complaints..
6. Transport & Advertising: Small manufacturers can use retailers to provide assistance with
transport, storage, advertising and pre-payment. This also works the other way round in case
the number or retailers is small. The number of functions performed by a particular retailer has
a direct relation to the percentage & sales volume needed to cover both their costs and profits.