CHAPTER 3

COMPONETS OF MARKETING CHANNELS

Nature of Distribution Channels

Functions of Distribution Channels

Types of Middlemen

Number of Middlemen

Elements of Physical Distribution

Channel Institution: Retailing

Channel Institution: Wholesaling

Mega Selling

Product movement
 CHAPTER 3
COMPONENTS OF MARKETING CHANNELS

Channels of Distribution of Products: Meaning, Functions, Factors and Types

The goods are produced at one place but the customers are scattered over a wide
geographical area. Thus, it is very difficult for a producer to distribute his products all over the
country. Therefore, he takes the help of some intermediaries to distribute his goods. For example,
Maruti cars are manufactured at Gurgaon but are available all over the country with the help of
intermediaries.

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.

FUNCTIONS OF DISTRIBUTION CHANNELS:

Following are the main functions performed by the Distribution Channels:

1. Sorting:

Middlemen obtain the supplies of goods from various suppliers and sort them out into similar
groups on the basis of size, quality etc.

2. Accumulation:
In order to ensure a continuous supply of goods, middlemen maintain a large volume of
stock.

3. Allocation:
It involves packing of the sorted goods into small marketable lots like 1Kg, 500 gms, 250gms
etc.

4. Assorting:
Middlemen obtain a variety of goods from different manufacturers and provide them to the
customers in the combination desired by them. For example, rice from Dehradun & Punjab.

5. Product Promotion:
 Sales promotional activities are mostly performed by the producer but sometimes middlemen
also participate in these activities like special displays, discounts etc.

6. Negotiation:
Middlemen negotiate the price, quality, guarantee and other related matters about a product
with the producer as well as customer.

7. Risk Taking:

Middlemen have to bear the risk of distribution like risk from damage or spoilage of goods
etc. when the goods are transported from one place to another or when they are stored in the god-
owns.

TYPES OF MIDDLEMEN

What Is Middlemen?

Middlemen specialize in performing activities that are directly involved in the purchase
and sale of goods in the process of their flow from producers to the ultimate buyers. Their
position is between the producers and ultimate buyers.

Producers see them as extensions of their own marketing organizations, if such persons
would not have been in existence, their own organizations would have to earn on all negotiations
leading up to sales to ultimate buyers who in turn consider middlemen as sources of supply and
points of contact with producers.

Middlemen can be classified into two divisions. They are merchants and agents. A
Merchant buys and resells goods while an Agent negotiates purchases or sales or both but does
not buy the goods in which he deals.

Hence the difference between the two lies in the ‘title of goods’ he handles. If he does,
then he is a merchant otherwise he is an agent. Merchant does buying and reselling but agent
may specialize in negotiations of either selling or buying transactions.

IMPORTANCE OF MIDDLEMEN:

Some people say “Middlemen and Agents are nothing but social parasites and the sooner
they are eliminated the better for the society.” In our own opinion to say like that is not just,
because in the age of ‘division of labor’ and specialiazation the existence of middlemen is a
must.
 With the rapid development in the field of business activities, the business of today is not
confined to a village or a city or a state. In this situation, it is not possible for producers to have
direct contact with the consumers. Thus we say that middlemen today play a vital role in the
transfer of goods from the producers to the consumers and moreover an important link between
producers and ultimate consumers.

ELEMENTS OF PHYSICAL DISTRIBUTION

1. Materials Handling:
It involves moving products in and out of a stock. It consists of routine tasks that can be
performed through mechanization and standardization. Efficiency is increased through use of
electronic data processing to control conveyor systems, order picking and other traffic flaws.

The modern mechanized handling services and protective packaging have improved the
level of customer service and at the same time lowered physical distribution costs. Material
handling and packaging services have also speeded up the order processing and movement of
consignments.

2. Inventory Planning And Control:

 Inventory refers to the stock of products a firm has on hand and ready for sale to
customers. Inventories are kept to meet market demands promptly. Inventory is the link
interconnecting the customer’s orders and the company’s production activity. In fact the entire
physical distribution management rotates around the inventory management. Inventory
management is the heart of the game of physical distribution.

Marketing managers undertake an inventory planning to develop adequate assortments of

products for the target market and also try to control the costs involved in obtaining and
maintaining inventory.

Marketing managers generally take three decisions while conducting inventory

management, viz, (i) how can the track be kept, on a day-to- day basis of location, amount and
the condition of the inventory? (ii) How can inventory information best be channeled to
production managers or buyers for resale to help them schedule their activities? (iii) What
inventory information can other departments in the organization use to help them perform their
functions efficiently?

3. Order Processing:
Order-processing and inventory control are related to each other. Order processing is
considered as the key to customer service and satisfaction. It includes receiving, recording,
filling, and assembling of products for dispatch. The amount of time required from the dates of
receipt of an order up to the date of dispatch of goods must be reasonable and as short as
possible.

It comprises in undertaking the processes that are needed to make certain orders
processed quickly, accurately, and efficiently. The marketing manager has to decide about these
along with such issues as what is the most efficient way to bill customers; how cans the paper
work may be minimized? And how can the physical function of assembling orders more
efficiently?

4. Transportation:
It is an essential element of physical distribution. It involves integrating the advantages of
each transportation method by adopting containers and physical handling producers to permit
transfers among different types of carriers.

For example, to place containers in railway flat cars and then load the containers on
motor vehicles is called “piggy back” and if the containers are off loaded to water carriers, it is
called “flash back.” Exchange of containers between air and truck carriers are referred to as “Air
truck” or “birdy back”.

The marketing manager has to decide to (i) what mode or combination of modes of
transportation (rail, truck, pipeline, water ways or air) should be used to transport products to
warehouses and from there to customers? (ii) Should the transportation cost be reduced and the
desired levels of customer service still maintained.

5. Communications:
It is a process of passing information and understanding from one person to another. This
includes the information system which should link producers, intermediaries, and customers.
Computers, memory systems, display equipment and other communication technology facilitate
the flow of information among other members in the channel.

A manager to be successful must develop an effective system of communication. So that

he may issue instructions, receive the reactions of the subordinates, and guide and motivate
them.

6. Organizational Structure:
The person in charge of the physical distribution should co-ordinate all Activities into an
effective system to provide the desired customer service in the most efficient manner. Examples
of organizational consideration are: (i) How can the five elements of physical distribution best be
coordinated so that a team effort results? How can compartmentalization thinking be avoided?
(ii) If a central head is established to direct all physical distribution activities, to whom should he
report—The Head of the Marketing or The Chief Executive Officer?

CHANNEL INSTITUTION: RETAILING

RETAILING

Retailing involves all activities required to market consumer goods and services to
ultimate consumers who are motivated to buy in order to satisfy individual 0r family needs in
contrast to business, institutional, or industrial use. Thus, when an individual buys a computer at
Circuit City, groceries at Safeway, or a purse at Ebags.com, a retail sale has been made.

We typically think of a store when we think of a retail sale. However, retail sales are
made in ways other than through stores. For example, retail sales are made by door-to-door
salespeople, such as an Avon representative, by mail order through a company such as: L.L.
Bean, by automatic vending machines, and by hotels and motels. Nevertheless, most retail sales
are still made in brick-and-mortar stores.
 Figure 10.5: The Marketing Channels for the performing arts.

(Sources: John R. Nevin, “An Empirical Analysis of Marketing Channels for the Performing Arts,” in
Michael P. Mokwa, William M. Dawson, and E. Arthur Prieve (eds.). Marketing the Arts, New York:
Praeger Publishers, 1980, p. 204.)

CHANNEL INSTITUTION: WHOLESALING

WHOLESALING

Another important channel member in many distribution systems is the wholesaler.

Wholesaling includes all activities required to market goods and services to businesses,
institutions, or industrial users who are motivated to buy for resale or to produce and market
other products and services. When a bank buys a new computer for data processing, a school
buys audio-visual equipment for classroom use, or a dress shop buys dresses for resale, a
wholesale transaction has taken place.

The vast majority of all goods produced in an advanced economy have wholesaling
involved in their marketing. This includes manufacturers. who operate sales offices to perform
wholesale functions, and retailers, who operate warehouses or otherwise engage in wholesale
activities. Even the centrally planned socialist economy needs a structure to handle the
movement of goods from the point of production to other product activities or to retailers who
distribute to ultimate consumers. Note that many establishments that perform wholesale
functions also engage in manufacturing or retailing. This makes it very difficult to produce
accurate measures of the extent of wholesale activity. For purposes of keeping statistics, the
Bureau of the Census of the United States Department of Commerce defines wholesaling in
 terms of the per cent of business done by establishments who are primary wholesalers. It is
estimated that only about 60 per cent of all wholesale activity is accounted for in this way.

Today there are approximately 600,000 wholesale establishments in the United States,
compared to just fewer than 3 million retailers. These 600,000 wholesalers generate a total
volume of over USD 1.3 trillion annually; this is approximately 75 per cent greater than the total
volume of all retailers. Wholesale volume is greater because it includes sales to industrial users
as well as merchandise sold to retailers for resale.

Functions of the Wholesaler

 Wholesalers perform a number of useful functions within the channel of distributions. These may
include all or some combination of the following:
 Warehousing–the receiving, storage, packaging, and the like necessary to maintain a stock of
goods for the customers they service.
 Inventory control and order processing–keeping track of the physical inventory, managing its
composition and level, and processing transactions to insure a smooth flow of merchandise from
producers to buyers and payment back to the producers.
 Transportation–arranging the physical movement of merchandise.
 Information–supplying information about markets to producers and information about products
and suppliers to buyers.
 Selling–personal contact with buyers to sell products and service.

In addition, the wholesaler must perform all the activities necessary for the operation of any
other business such as planning, financing, and developing a marketing mix. The five functions
listed previously emphasize the nature of wholesaling as a link between the producer and the
organizational buyer.

By providing this linkage, wholesales assist both the producer and the buyer. From the
buyer’s perspective, the wholesaler typically brings together a wide assortment of products and
lessens the need to deal directly with a large number of producers. This makes the buying task
much more convenient. A hardware store with thousands of items from hundreds of different
producers may find it more efficient to deal with a small number of wholesalers. The wholesaler
may also have an inventory in the local market, thus speeding delivery and improving service.
The wholesaler assists the producer by making products more accessible to buyers. They provide
the producer with wide market coverage information about local market trends in an efficient
manner. Wholesalers may also help with the promotion of a producer’s products to a local or
regional market via advertising or a sales force to call on organizational buyers.

MEGA SELLING

Explore the Strategy of Mega Marketing

Mega marketing

Most business is organized around two parties—buyers and sellers.

 The two sides meet in the marketplace to engage in free exchange; when the comparative
advantage of the transaction is good for both parties, an exchange is made, leaving both parties
better off than before. This is all considered a success… until a third party enters the mix and
changes the rules.

What is Mega Marketing?

Mega Marketing is the expansion of marketing beyond the buyer to third parties that
influence (or block) transactions. These third parties include labor unions, cultural institutions,
reform groups, banks, and—most significantly—governments.

For what kinds of customers is Mega Marketing effective?

Mega Marketing is directed not at the primary customers, but at the third parties that
impact customers’ perceptions and ability to buy a company’s products. These include
politicians, civil servants, regulatory agencies, special interest groups, national media, and
opinion leaders.

In a potential market, there are some groups opposed to a business, some which support
it, and many other which are uninterested. The Mega marketing campaign aims to appease or
persuade the opposition, rally supporters, and turn uninterested but potential supporters into
allies.

PRODUCT MOVEMENT

Managing Product Movement

In this part of the Principles of Marketing Tutorials, we explore the decisions involved in
managing product movement from the marketer to the customer. In addition to enlisting the
assistance of retailers and wholesalers to make products available to customers, marketers also
face additional concerns when trying to meet their distribution objectives.
We begin this tutorial, by first examining how physical distribution decisions often involve
analyzing the trade-off between the service level the marketer offers to customers versus the
costs associated with providing these services. Next we examine the three major tasks marketers
or their distribution service providers may need to carryout in order to ship products to
customers. These tasks include:

 Ordering and Inventory Management

 Transportation
 Product Storage

In some cases, the marketer will take on the responsibility of carrying out some of these
functions, while other tasks may be assigned to distribution service providers. Whether handled
by the marketer or contracted to others, these functions are crucial to having a cost-effective and
efficient distribution system.
 It is worth noting that while most physical distribution is concerned with moving tangible
products, some of the issues covered here are also applicable to intangible products, such as
services and to digital products.