"i 83 UNIT 3 Place Decisions (Caras 3.1.1. Introduction Place of distribution is a critical element of marketing mix. Its the location where goods are made available for purchase. This is also termed as distribution channel. It becomes convenient for some manufacturers to sell their Products to wholesalers who in tum sell them to the retailers, while other, manufacturers prefer to directly sell their products to retailers or customers. This whole process is known as ‘distribution channel’. Place involves different methods of transportation and storage of goods and then making them accessible to the end consumers. The role of the distribution system is to deliver the right pfoduct to the right place at the right time. Other than this, distribution also carries out facilitating, logistical and transactional functions. The decisions related to distribution include market coverage, logistics, selecting channel members, and level of service. Numerous conditions govern the selection of distribution method. Any physical or virtual (intemet- based) store can be a part of it The decisions related to place activity is majorly dominated by distribution channel. All place decisions are associated with the distribution channels, as it is the means of delivering the products to the customers. The decisions associated with the selection of a mix combining different types of distribution channels for delivering the goods from producers to final consumers is referred to as ‘place mix’. Customers are offered these goods via wholesalers and retailers or directly through chain stores. Any one of the channels is chosen, keeping in mind the convenience of customer's reachability. Hence, place is a part of organisational strategy which depicts the way it intends to make its goods and services available to its customers so as to attain profitable exchange from them. 3.1.2. Meaning and Definition of Distribution Channels Distribution channel is the route between producers and users through which goods are distributed. This route is also known as Channel of Distribution or Trade Channel. In case of services, the distribution channel is direct, since the services are intangible in nature. A distribution channel generally requires a buyer and a seller. The buyer can either be an industrial consumer or the end customer. Other than the buyer and seller in the marketing channel, various middlemen are also involved in the supply chain, Here, middlemen may be distributors, wholesalers, retailers or dealers. Broadly, a distribution channel involves the movement of goods and services from the manufacturer to the ultimate consumer passing through various intermediaries. Therefore, the Key actors in the distribution channel are manufacturers, intermediaries and consumers. According to American Marketing Association, “A channel of distribution or marketing channel is a structure of intra-company organisation, units and intra-company agents and dealers, wholesalers and retailers through which a commodity product or service is marketed”. 4 ie. ma. According to Philip Kotler, “Every producer seeks to link together the set of marketing intermediariés beat fulfthe firm's objectives. This set of marketing intermediaries is called the marketing channel (also trade channel or channel of distribution)”. According to William J Stanton, “A Channel of distribution for a product is the route taken by the title to the goods as they move from the producer to the ultimate consumers or industrial user”. Scanned with CamScanner* MBA Second Semester (Marketing Management) Spy ‘Delivery’ is the main aim of distribution channel. The availability and reachability-of all public and private goods and services to final consumers can be made only through distribution channels. As a result, numerous distribution-oriented agencies have emerged recently; such agencies are usually termed as ‘intermediaries’ since they mediate between production and consumption activities. 3.1.3, Nature of Distribution Channels The nature of distribution channels is enumerated below: | ji , 1) Pathway or Route: Distribution channel is the route through which goods and services are transmitted from the manufacturers to the consumers. yo 2) Flow: Ina distribution channel, the goods and services flow in a sequential, smooth and unidirectional manner, 3) Composition: The channel comprises of intermediaries like agents, distributors, retailers, wholesalers, ete, who willingly participate in the distribution process. ; ; , 4) Function: The functions of distribution channel are performed by intermediaries. They assist in transfer of title, ownership and possession of goods and services between manufacturers and consumers. 5) Remuneration: ‘The remuneration of intermediaries is paid in form of commission. Manufacturers compensate the remuneration as commission that they provide or by adding itto the price of goods sold, 6) Time Utility: The goods are made available to the consumers whenever required. 7) Convenience Value: The goods provided to the consumers are in convenient shape, size, unit, package and style, 8) Possession Value: It facilitates consumers to attain goods with the ownership of title. 9) Marketing Tool: Distribution channel acts as a medium for screening the external aspects of the marketing “organisation and for bridging the physical and non-physical gaps which occur while transferring goods from the manufacturers to the consumers. 10) Supply-Demand Linkage: It bridges the gap between the manufacturers and consumers by eliminating all the spatial (geographical distances) and temporal (time based) discrepancies related to supply and demand. PGES GPU RASTA SH n se 3.1.4. Purpose of Distribution Channels Following points highlight the purpose of distribution channels: 1) To Ensure the Proper Availability of Desired Product: The major purpose of any distribution channel is to provide the desired product at the desired marketplace. For this, organisations first identify the relevant marketplace having significant demand for the concerned product. Then, suitable retail outlets or stores are selected in that marketplace. Thus, through these outlets, organisations provide desired products to target customers. 2) To Improve the Sales Outlook: In a particular retail store, the sale of organisational products depends on its display. The purpose of distribution channels is to arrange a proper display of organisational products in the retail store 50 that the sales outlook of that particular retail store as well as organisation can be improved. Contribution of retail salesperson(3) is also necessary. 3) To Establish Cooperation between Distribution Factors: Various factors affect the distribution system like, type of unit loads, delivery time limits, order size, delivery access, handling aids ot tool, nature of product handling, etc. A strong cooperation between these factors is required for efficient distribution, Therefore, establishing cooperation between such factors is also a purpose of organisational distribution chanvels 4) To Achieve and Maintain a Level of Service: Another purpose of distribution channels is to achieve and maintain a level of service towards both customers and suppliers. Ths is important for the customers The observe the service performance of different suppliers so as to compare them and to determine the fata purchase decision. i 5) To Minimise Logistics and Total Cost: Cost of production is included inthe price of a given product. Tis cost is very important for pricing. Therefore, distribution channels of an organisation are focused 10 1inimise the logistics and total cost of the product. A particular cost reflected hy scletied diecibotion channel must be evaluated in terms of type of product served and the required service level 6) To Collect Accurate Information: Another purpose of distribution channels is to -collect accurile information. An efficient distribution system requires sound flow of information. Sélee wands, cost monitoring, service levels, damage reports, inventory levels, etc, are helpful in geting required information Scanned with CamScannerPlace Decisions (Unit 3) a 3.1.5. Role of Marketing Channels: Channel Functions ‘The role’functions of distribution channels are discussed below: }) Information Provider: "The main role of intermediaties is 10 provide market information to the manufacturers. The information required by all manufacturers may include changes in customer demography, Psychography, media habits, changing customer preferences and entry of a new competitor or brand. This information can be easily provided by middlemen without any additional cost as they are a part of the marketplace and have close relationship with the customers, 2) Matching Buyers and Sellers: sellers and likewise, sellers are n ‘tomatch the needs of buyers and 3) Time and Place Utility: Distribution channels facilitate the goods and services to customers at the time and Place they require them. ‘This creates time and place uty to the buyers by reducing the spatial discrepancy (distance between consumers and manufacturers) in the marketplace. 4) Assortment of Product Mostly, buyers are not aware of how and where they can meet potential }ot aware of how and where they can meet the potential buyers. Therefore, sellers is the most important role of marketing channel members. kssoxtna The assortment of products leads to the convenience of consumers since distribution channel enables the customers to purchase goods in convenient lots, units, packs and assorted range of products. Manufacturers produce goods and services in bulk in Order to achieve economies of scale and to reduce the overall cost of production, 5) Price Stability: Another function of intermediaries is to maintain price stability in the marketplace. Mostly, the intermediaries keep the increased part of price with them and cost the products at the same old price from the customers. This happens due to the intra-middlemen competition. They also strive to stabilise prices to keep their overhead costs low. ©) Promotion: The promotion of products in one’s own region is also the function of intermediaties. Several middlemen design sales incentive schemes on their own which targets at increasing customers traffic at the stores. Distribution channels carry out several promotional activities like personal selling, advertising and sales promotion, etc., in order to help the manufacturer in attaining larger market share in sales and market coverage of the product. 7) Financing: The middlemen also provide financial assistance to manufacturers for their production activities in the form of advance payments for goods and services. The manufacturer might extend credit but still the payment is made in advance, much before the goods are purchased, paid for and consumed by the end consumers. 8) Title: Usually, the goods and services are titled on the name of intermediary. This helps in minimising the tisk that lies between manufacturers and intermediaries. This also provides physical possession of ‘goods to the intermediaries, enabling them to fulfill the customers’ demand immediately, 9) Assist in Product Function: Tt helps the manufacturers to concentrate on the production function and the marketing activities are solely handled by the intermediaries, who are marketing specialists. They can sell the product in a better way than the manufacturer itself. The money that would be otherwise speat in marketing the goods can be utilised in production where an increased rate of return can be earned. 10) Matching Demand and Supply: The key function of intermediaries is to cotlect the goods from several manufacturers and provide them to the customers conveniently. Matching the level of demand with the supply of products is the main goal of marketing. 11) Pricing: While pricing @ product, manufacturer must take suggestions from the intermediaries, as they know what the end customers can pay for the product, since middlemen are in touch with them. The pricing decision may vary for different markets or products in lieu of their distribution channel. 12) Standardising Transaction: Another important role of marketing channel is standardising transactions, When transactions are standardised then the stages involved in the movement of the goods from the ‘manufacture {6 the customer gets automated. For example, in a milk delivery system, a standardised delivery system is followed throughout the distribution channel. By applying this method, no consumer is able to negotiate with the sellers on any ground, may jt be price, payment method, quantity, or location of the product. Scanned with CamScannerasddat = SAR 86 [MBA Second Semester (Marketing Management) SPPU tion channels also perform merchandisitig ‘function. Merchandising ict. An attractive display of products or es'ihe awareness and interest, forts’ of the organisation and 13) Assist in Merchandising: Distribut helps in reinforcing awareness among customers about the produ Drands not only attracts the attention of the customers but also increas Merchandising (with special emphasis on display) enhances the sales ¢f functions as a silent salesman at the retail stores. 14) Provide Market Intelligence: The distribution channel provides market int manufacturers. This is possible because channel members are directly associated are aware of all situations in the market. - lligence and feedback to the ‘with the customers. They 3.1.6. Channel Levels: Types of Distribution Channels ‘Channel stricture tat a company adopts is based on te size of channel. Distribution channels can be esteporised into three types ie, direct indirect and multi-channel or hybrid distribution system. In a direct sistibution Shannel mustnctarr sels diecly (othe consumers without javolving any intermediaries. On the othes hand in sn indveetdistibuton channel the manufacturer sells his goods with the help of numerous intermediaries Uke agents, wholesales, reales, ete, Whereas, in a mul-channel distribution system, the manufacturer uses (0 or more channels to sel its product, The three types of distribution channel are as follows: 1) Direct Marketing Channel, 2) Indirect Marketing Channel, and 3) Hybrid Distribution Channel or Multi channel distribution system. fl): It is the shortest channel used by the manufacturer for his system, the goods and services directly move from the ies. The reasons for selecting this distribution channel 1) Direct Distribution Channel (Zero Lev distribution of goods or services. Under 1! manufacturer to the consumer with no intermedi: system, is as follows: i) When direct marketing is preferred by buyers. ii) When the competitors are using direct marketing. iii) When the company has sufficient finances to invest in the market. iv) When appropriate intermediaries are not available to market the product. v) When the company is expert in marketing. vi) When the company is capable of handling its marketing acti Producer or Manufacturer — 1 7 OFT er Indirect ‘Multi-channel or mH Ove th“ po Selling at Doortodoor Mail Multiple Wholesaler Retailer Manafictrer's "sling ener shops " plant” (Salesman) houses hain) ies at a rational cost. Reailer Figure 3.1: Types of Distribution Channels ‘This method is the oldest of the distribution method ry > Is, which was largely ie sell Products and services before the emergence of industrial revohiion. one oP tn caine eta ‘manufacturers for conducting direct distibution channel system areas follows: inethods used. a -_ ig at Manufacturer's Plant: This method is also known as direct selling. Itis the oldest, cheapest { most convenient method of distribution. Here, products are directly sold by the manutacrases wie consumers. This type of selling is ideal for goods that are perishable in nature ike wll reat ish ce cream, meat, vegetables, p88 and other agricultural and edible items. Such products ae aol dre © consumers because they cannot be stored or transported for long time period. Scanned with CamScannerplace Deci (Unit 3) 87 ii) Door-to-Door Sales: This is the most unique way of selling goods and services. Under this method, a sales. agent visits, house-to-house for selling the products face-to-face. In some cases, a prior appointment is set-with the customer before appearing at his door, while in door-to-door selling the sales person is an unwanted door knocker. It is the most ancient form of direct selling, which is different from visiting a fixed the retail outlet, Although door-to-door selling has certain similar features as that of the other forms of direct selling, but it also has some crucial differences as well. iii) Sale by Mail Order Technique: In this technique, products are delivered through mail to the customer by taking their orders beforehand. The term ‘mail order’ refers to the purchasing of goods and services via mail delivery. The order is placed by the buyer through different modes like telephone or website to the merchant, The merchant then delivers the product to the customer. These deliveries are made on the address provided by the customer. They are usually home or office addresses but at times the goods are delivered at the nearest zetail location from where the product is collected by the customer. In certain cases, merchants directly deliver the product to the third party consumer, which is an innovative way of sending a gift to someone. iy) Sales by Multiple Shops: Manufacturers dealing in perishable and non-perishable goods usually open their own shops to sell their products. In this way, manufacturers are able to provide products more uickly to the customers with better services, thus building their goodwill. It also enables the firms to analyse the market trends, buyers’ preferences and styles of customers. It is a form of two-way communication. : 2) Indirect Distribution Channel: Here, goods are distributed via intermediaries. Under this channel, there may be one intermediary such as a sole selling agent to distribute the goods through several intermediaries or, there may be numerous intermediaries used to distribute the goods through retailers or wholesalers. Retailers sell the products directly to the ultimate consumers while wholesalers reach their end consumers via retailers. Typical Indirect Distribution Channels i) One-level Channel: In this type of distribution system, there is a single intermediary between the manufacturer and consumer. The intermediary used in this system can be either a retailer or a wholesaler. If the intermediary is a retailer then the product is directly sold to the consumers and if the manufacturer has to sell specialty products like reftigerator, washing machine, ete., then he chooses wholesaler as the intermediary. 1 Level 1 Level : i Producer ——> Retailer. ——® Consumer Producer ——> Distributor ——> Consumer wholesalers and ii) Two-level Channel: In this channel, there are two types of intermediaries, i. retailers. 2 hic Producer —P Wholesaler/Distributor —P Retailer —> Consumer ., Wholesaler, distributor iii) Three-level Channel: This type of channel involves three intermediaries, i. and retailer. This channel is used to sell convenience products. 3 Level Producer —> Distibutor—> Wholesaler —> Retailer —> Consumer iv) Four-level Channel: Here, four intermediaries are involved to distribute goods and services. These intermediaries are distributor, agent, wholesaler and retailer. This channel is used to sell consumer durables products. Level | Producer-P Agent-> Distributor-> Wholesaler -> Retailer—> Consumer 3) Hybrid or Multi Channel Distribution System: Earlier, most of the companies used single channel distribution system to sell products ina single market or a market segment. Inthe present scenario, with the increasing number of customers and channel possibilities, companies are adopting multi-channel or hybrid Scanned with CamScanner eres88 MBA Second Semester (Marketing Management) SPpy, distribution system. This type of marketing takes place when a firm applies two or ao istibuton channels to target one or more customer segment. With time the use of hybrid channel system has increased drastically. Figure 3.2 signifies a hybrid channel Here, the manufactures directly sels his goods to consumer segment 1 with the help of telemarketing and direct mail catalogues and then, 2pprodches consumer segment 2 via retailers. It caters to business segment | indirectly via distributors 'S and to business segment 2 through company’s sales force. Companies dealing in large and complicated markets are benefited by hybrid channels F Every i Channel increases the sales and market coverage of the company and gains opportunities to silt We PMc an services according to the specific needs of diverse customer segments. These hybrid Chane! SyAtetls are difficult to handle in themselves and with the increasing competition, conflicts have increased too ing it i at low prices through For example, when IBM started selling its products directly to customers at throug telemarketing and catalogues then the retailer working with IBM recognised this practice as “unfair competition”, and threatened them to quit IBM. Catalogues telephone Consumer Segment 1 > Reniter | [Consumer Segment 2] Producer Distributor |—s{ Dealer Business Segment 1 Sales Force ‘Business Segment 2 Figure 32: Hybrid Marketing Systems 3.1.7. Channel Flows A flow refers to a sequential set of functions performed by channel members. During this process, all the channel members, i.e. manufacturers, wholesalers, retailers and customers are linked together. The most important function performed by the channel members is the transfer of ownership via transportation, inventory i carrying, order processing, storage, promotion, negotiation, etc. This function can be carried out at various levels in the same channel system and by this the workload is shared among channel members. While, a channel is defined as the path through which movement of ttle, possession and payment of goods and services is made. The figure 3.3 illustrates the channel flows: Possession > |—Possession > |— Possession -—— Tile > |—Tite > Tine > Promotion > |—Promotion > Promotion > Negotiation >| wholesalers | €Negatation >| | eNegotiation — Producers | Financing > J—Financing > | Retsiles | Financing > | Consumer Risk beating > Risk Bearing > Risk Bearing > Ordering > ] | enformation > Figure3.3: Marketing Channel Flows Channel flow is the movement of diverse functional marketing activities i involving various integrated flows which pass over multi-channels in different directions at different velocities. es For example, BMW used different channels like online marketing, direct mail, experimental and promotional marketing alongwith other media sources to market its Mini Adventure campaign. One or more channels ean be climinated from a particular functional flow by a channel designer, but that flow cannot be eliminated. Thus, it is the marketer's role to make adjustment between the channel flows and buying behaviours while selecting the ‘marketing channel, i ee Scanned with CamScannerpace Decisions (Unit 3) . ‘The various types of marketiiig channel flows are as follows: 1) Possession Flow: The flow of goods from the manufacturer to the ultimate consumer via intermediaries is referred to 28 ‘possession flow’. In this process, the possession of goods is shifted from the manufacturer to the consumer. The possession flow involves several activities related to storage and transportation of goods from one channel member to another. The cost involved in this process is associated with the storage and transportation of goods. 2) Ownership (Transfer of Title) Flow: When the ownership of goods is transferred from one channel member to another from manufacturer to the consumer, then the ownership flow takes place. In general, ownership flow and possession flow occur at the same time when goods pass through the channel. However, these two flows might not always move in the same direction. 3) Promotional Flow: The art of influencing people is one of the aspects of marketing. Promotional flow is the persuasive communication which focuses on influencing the customers’ behaviour (consumer promotion) and other channel members (trade promotion). This flow comprises of activities like advertising, sales promotion, personal selling, publicity and public relations. It is the process of communicating the right message to the right audience while applying the right medi 4) Negotiations Flow: The art of giving and taking is ‘negotiation’, where all the issues and differences are resolved. Negotiation flow is the relationship between buyers and sellers in the marketing exchange process. In the marketing channel perspective, negotiation is the process of finding out a solution to an offer proposition. The nature of negotiation flow depends upon the attributes of the offer that are open to conciliation and the degree to which the parties are ready to compromise to resolutions and concessions. Hence, the nature of negotiation flow can be symbiotic dr predatory. 5) Financing Flow: The direction of financial flow is opposite to that of physical flow and also involves the payment of goods received from previous channel members. The selfer generally grants the buyer some time for the payment of goods, even after transferring the physical possession of goods to the buyer. The cost that the seller incurs comprises of the loss of income that the seller could have earned by investing the money elsewhere. Any channel member or any external agencies like banks and private credit card companies can incur these costs. 6) Risk Flow: The risks can flow from one channel to another with the flow of goods. These risks can occur dve to perishable properties of products or adverse price fluctuations in the market. The cost involved in this flow also includes transfer of risk like insurances, warranties, repairs, maintenance costs in case of perishable goods, etc. 7) Ordering and Payment Flow: This flow comprises of activities related to the purchasing of goods and making payments for them. Here, ordering flow is associated with the purchase of goods, i.e., ordering cost, order processing cost, etc. ‘Whereas, payment flow involves collection cost and cost related to bad debts. By using technological advancements the costs related to ordering and payment flow activities can be reduced. For example, retailers use automated reordering systems to cut down their ordering cost. 8) Information Flow: With the help of useful information flow, an effective communication between the ‘channel members can be held. This is a two-way process of exchanging information between two channel members applying more than one channel settings. The data regarding the seller’s business proposition and offer is made available by downstream or outbound flow. Whereas, through upstream or inbound flow, the response of buyer can be exchanged in form of enquiries, buying decisions, rejections or feedback. In the marketing exchange process, a proper flow of useful information is important for ordering, informing, paying, tracking, delivering and servicing. 3.1.8, Distribution Channel Intermediaries types of channel member in indirect distribution channels (excluding the zero level) are as follows: 1) Sole-Selling ‘Agent/Marketer: A sole selling agent is a large marketing intermediary having huge resources and wide-spread region to operate. When a manufacturer is unable to undertake his marketing activities, then he appoints a sole selling agent to take care of his marketing and distribution activities. Scanned with CamScanner90 MBA Second per person directly o involved in rendering services t0 4 in nt is called C&R Jirectly like clearing and forwarding activities in any form or involves went or CFA. They can also be considered as special category wholesalers. ermediary after the sole selling agents in comparison 7 is also known as ‘stockist’ or ‘distributor’. If a hen wholesalers work under the sole- instead of intermediaries. 2) C&F Agents (CFAs): A person who is 3) Wholesalers: Wholesaler is the second largest i the s s and territory of operation, A wholesale ‘manufacturer wants more than one intermediary to handle the work, selling agents. Mostly, consumer goods industry prefers wholesale! ' 4) Semi-Wholesalers: They purchase goods from manufacturers or distributors in bulk and then resell the ‘g00ds to retailers in assortments as per their needs. Semi-wholesalers also perform several functions related that of wholesalers. They might also perform retailing functions in some cases. They “specialise by region’ which is their strength, 5) Retailers: Retailers sell their goods direetly to the final consumers. They are at the lowest level of the distribution hierarchy and operate under wholesalers/distributors/stockists/semi-wholesalers. If the H company has one-tier distribution system, then the retaiter directly operates under the: company. The territory where they operate is comparatively smatier or at a specific location. Activities like sub. distribution and stock-holding are not performed by them. They keep only operational stocks that can be sold immediately at the retailer store. 6) Value-Added Resellers (VARs): They are intermediaries who purchase the basic goods from manufacturers, then add value to it or modify it on the basis of product attributes, and finally resell the goods to the end consumers. VAR is a firm where new and attractive features are added to the existing product transforming it into a unified product or turn-key solution. This is very common in the electronics industry where a software application might be combined with the hardware. 7) Merchants: Merchants are those intermediaries who buy or take physical possession of goods and then sell them to customers, retailers and other intermediaries, 3.1.9. Factors Affecting Channel Choice ‘There are several objective and subjective factors that influence the choice of distribution channel and vary from company to company. However, there are certain factors that are different and impact distribution channel in all cases, Those factors are discussed below: 1) Factors Related to Product Characteristics: —— ‘The product that is manufactured by a firm itself’ Fectars — is a goveming factor in selecting the distribution channel. Some of the product characteristics are p-————_______ as follows ctor Related o Prodoe =e i) Industria/Consumer Product: When the oa canes | product that is manufactured and sold is industrial in nature, then direct distribution | "xt0r Rested to Market or Factors Related to channel is most preferable because there are L_Co*stmet Charterites Middlemen Considerations small numbers of customer lesser need for personal attention, after sales servicing, etc, Fests Reited to Environmental Conversely, indirect distribution channel is —_ ‘most appropriate for consumer products like retailers, wholesalers, ete, Perishability: Products which are perishable in nature like vegetables, food, etc., need to adopt direct selling since the products must reach t after they are produced. The repeated handling may cause delays in del fruits, milk, bakery products, sea the consumer as soon as possible “ livering the products, Init Value: If the unit value of products is high, then it is preferabl i distribution like company's sales force can be used for ‘distibution sahee ect ‘protatng intermediaries. Alternatively, if the unit value of product is low and other expenditures are ai enue and then indirect channel of distribution is most suitable for the company. owe tl iv) Purchase Frequency: Direct distribution channel is required for products that in order to diminish the cost and burden of their distribution, ee eg eouenay ER “ Scanned with CamScannerplace Decisions (Unit 3) 3 4) 1 vw Newness and Market Acceptance: In case of new a forceful sales effort is required. Thus, indirect cl result in aggressive selling and channel loyalty ; Fi : i vi) ae Beatty A company manufacturing a large number of products is highly capable of te ihteetly Since their product line is widespread which further increases its Products having high degree of market acceptance, channels can be used for this purpose, as this may Factors Related to Company Characteristics: influenced by company’s own characteristics like it policies, past sales experiences, product mix, etc, ‘Some of the major factors in this regard are: i) Financial Strength: A financially strong company might get involved in direct selling. But, a financially weak company has to depend upon intermediaries and, consequently, has to choose indirect distribution channel like wholesalers, retailers that have a sound financial background. ii) Marketing Policies: Marketing policies related to delivery, pricing, aftersales service, etc, are important for channel decisions. For example, a company that prefers to have a quick and super- express delivery system may opt for direct selling and, therefore, will avoid intermediaries in the process and choose the fastest transportation system iii) Size of the Company: A lar selling of its products. Whil distributors, etc. The selection of suitable distribution channel is also ts size, reputation, financial position, present marketing 'ge scale company having a wide range of products would prefer direct le, a small scale company would prefer indirect selling through retailers, iy) Past Channel Experience: The choice of selecting a distribution channel is also affected by the past channel experience. For example, an established company which has a good past experience working with few types of intermediaries will prefer to select the same channel in future. ¥) Product Mix: A company with a wide range of product-mix is capable of dealing with its customers directly. Likewise, consistency in the product mix of a company ensures that its marketing channels are homogeneous, uniform and similar in nature. Factors Related to Market or Consumer Characteristics: The factors related to market and consumer characteristics largely influence the choice of channels like market location, buying habits, order size, etc. ‘Some of them are as follows: i) Consumer Buying Habits: The buying habits of consumers like credit facilities, salesman services or availability of all products at one place influences the channel choice of the company. The channel of distribution can be short ot long depending on the capability of the company to afford all the facilities required by the customers. If a company can easily afford all facilities then the channel will be short or else will be longer. ii) Location of the Market: The distribution channel is preferably long when customers are geographically widespread. Conversely, ifthe customers are localised and concentrated then direct selling is used. iii) Number of Customers: The channel of distribution would be long and indirect involving wholesalers, retailers, etc., when there arc large numbers of customers. While, direct selling is preferable when the number of customers is small iv) Size of Orders: When customers purchase large quantities of product, then direct selling is mostly preferred by manufacturers. Alternatively, when customers purchase small quantities of product repeatedly or on a regular basis like cigarettes, matches etc., long channels of distribution are used such as wholesalers, retailers, etc. Factors Related to Middlemen Consideration: Middlemen consideration also impacts the selection of distribution channel, The various factors related to middlemérr consideration are as follows: i) Sales Volume Potential: While choosing a distribution channel, the Capabilities of the middlemen are considered to ensure a targeted sales volume. Through market surveys, the sales volume potential of the channel can be determined. |i) Availability of Middlemen: The company must select aggressive middlemen to sell theit products. If | they are’inavailable, then itis relevant for company to wait for the suitable middlemen. In such cases, the company needs to handle its channel on its own until the appropriate middlemen are available. Scanned with CamScannereee | x [MBA Second Semester (Marketing Management) SpPy Provided by Middlemen: If a product offered by the company requires after-sales services, . then in such cases only those middlemen should be appointed ble then direct selling iii) Services repair services, ete, such as automobil who are capable of performing these services. If such middlemen are not avi system should be used, iv) Cost of Channel: The distribution of goods by middlemen is more economical as compared to direot selling, Direct selling isa costly approach for manufacturers, especially for small manufactures 5) Factors Related to Environmental Characteristies: The environmental factors like economic conditions, competitor's channel, fiscal structure, legal restrictions, etc.,Jargely influence the choice of channel, i) Economie Conditions: During favourable market conditions like inflation, it is beneficial to choose indirect distribution channel since the market environment is bullish in nature and has enormous future prospects. Alternatively, during adverse market conditions, shorter channels are recommended. ii) Legal Restrictions: The legal restrictions obligated by the state are exceptionally daunting and, therefore, highly influence the choice of channel. For example, M.R.T.P Act, 1969 in India, prevents i the channel systems that tends to reduce the level of competition, creates monopoly and are partial to public interest. With such objectives as a background, it prevents activities like exclusive distributorship, resale price maintenance and territorial restrictions, etc. iii) Competitor's Channel: ‘The type of distribution channel used by the competitor s the decision of channel choice. Usually, manufacturers select the similar distribution channels as that of the competitors. iv) Fiseal Structure: A country’s fiscal structure also affects the selection of distribution channel, For example, State Sales Tax rates in India differ state by state and are an important factor that impact, the final price paid by a customer. Thus, it is a crucial aspect that needs to be considered while making the channel decision. This difference not only brings about a change in the price payable by a consumer, but also the type of distribution channel selected. Ee UL Se ae 3.2.1. Introduction Channel design decisions are significant to the company because they define the market presence and buyer's accessibility to the product. In addition, channel design is of great importance as it involves long-term investments by the company. Usually, itis simpler for the companies to alter the price and promotion decisions in comparison with the marketing channels. ficantly impacts The channel design decision involves two major steps, that is: 1) Designing the Right Channel: This stage comprises of segmenting the market, recognising the right positioning responses to segments’ demands, choosing the target segment on which the company wants to focus and launching (in the absence of a pre-existing channel) or modifying (in the presence of a pre- existing channel) the channels in the market, 2) Implementing that Design: The implementation stage entails a deeper understanding of each channel members in terms of their power and dependence. It also requires an estimation of the potential sources of channel conflict and an effective plan to create the environment where an ideal channel design can be implemented without any hurdles. The result of this plan will lead to channel coordination. ‘The best and most effective form of distribution channels are those where the interests of the distributors and ‘manufacturers are in congruence. Therefore, before making any investments, the company has to get assured about the distributor's objectives, attitudes and customer focuses. 3.2.2. Dimensions of Channel Design After deciding the various alternative channel structures, the channel manager needs to evaluate the variables or dimensions affecting various channel structures. These dimensions can be categories into six types: 1) Market Dimensions: At the time of formulating and adapting the marketing mix, the marketing managers should keep in consideration the needs and wants of customers, which is their prime motive, Therefore, the Scanned with CamScannerpiace Decisions (Unit 3) 93 products offered, thé” promotional messag should clearly det Prices charged, and the es employed by the company fine’ the needs and wants of customers. Thus, market variables are th Market Dimensi n ariables are the bases imcesions | designing the marketing. channel. ‘These — 1 | rredue Dimcaions variables are basically of four t i ‘Company Dimensions | follows: ‘YPes, Which are as retires : Envroumental Dimensions 4 i) Market Geography: The geographical size, 7 ‘Behavioural Dimensions location and distance of market from the manufacturers j i ents an racial Be ayatket Beography’. From the view point of channel design, market ind ensures tinal eer developing an appropriate channel structure that serves the market effectively sures timely supply of goods and services to the markets. ii) Market Size: Market size can be determined by the number of customers that form a marketplace. 2 ~ view point of channel design, the numbers of customers are directly proportional to the market size. Hence, it can be said that the greater the number of customers, bigger is the market size of the product. If the market size is large, then the company will require various intermediaries in ‘ts channel structure, On the other hand, if the market size is small, then they will avoid using intermediaries, iif) Market Density: The market density can be identified by evaluating the number of customers per unit of land area. Here, the cost of distribution is inversely proportional to the market density and vice-versa, This particularly applies in the case of flow of goods and services to the market. iv) Market Behaviour: Market behaviour is concerned with four types of buying behaviour: a) How Customers Buy: Usually, customers tend to buy in small quantities. b) When Customers Buy: The buying behaviour of customers is highly seasonal in nature, ©) Where Customers Buy: Customers largely tend to shop at home. d) Who does the Buying: Both, husband and wife are involved in the buying activity. 2) Product Dimensions: The product characteristics also influence the decisions related to channel de: Some of the important product variables are bulk and weight, perishability, unit value, technical versus non- technical and newness of the product. i) Bulk and Weight: Products which are heavy and bulky in nature have high handling and shipping costs. The manufacturer of such products can reduce their cost by shipping goods in large quantities and to the selected possible destinations only. Subsequently, the channel structure for heavy and bulky products should be short or direct, i.c., from the manufacturer to the customer. In some exceptional cases, where customers buy small quantities and prefer quick delivery, the company needs to appoint intermediaries. ii) Perishability: There are products which are bound to rapid physical deterioration and are perishable in nature, like fresh foods. The rapid change in fashion trends is also considered highly perishable. In this case the significance of channel design is to develop suitable channel structure for highly perishable products that can be directly delivered from manufacturers to ultimate consumers. When the manufacturer and the customers are located in proximity, then the channel structure can be short. However, when there is greater distance between the manufacturer and the customers, then the channel structure needs to involve several intermediaries, for speedy delivery of products. iii) Unit Values Usually, the lower the unit value of a product, the longer will be the channel structure. The reason behind such channel structure is low cost of distribution which arises due to low unit value of a product. Typical examples of such products are convenience goods at consumer market and operational supplies in the industrial market. These products use number of intermediaries so as to share the cost of distribution by other products. As a result, this leads to economies of scale and scope. i Non-Technical: For highly technical products in the industrial market direct ie carne faved for distibutio of product, Through direct channel, manufactures can “sell the products to customers briefing them about the technical features of the product and also provide after sales services. In case of non-technical or relatively less technical products in the consumer market such as personal computers short channels are used for distribution, Scanned with CamScanner94 (MBA Second Semester (Marketing Management) SPPU new products require extensive and aggressive ‘demand in the market. It will be difficult to it is beneficial to adopt shorter channel vy), Newness: In both the consumer and industrial markets, promotion in the introduction stage to generate primary promote a new product if longer channels are used. Therefore, to gain product acceptance, ‘The company variables which affect the channel design are: }. Size: The size of firm is directly proportional tothe availability of several channel options. The Dower base of large firms like expertise, coercion, and reward helps them to apply a considerable amount of power in the channel. As a result, large firms have greater options for selecting channe! structives than coweraller firme, Thus, the capacity of large firms to develop a suitable distribution channel has high degree of flexibility as compared to smaller firms. ii) Financial Capacity: If a company has huge financial capacity then its dependency of intermediaries is Telatively low as compared to small firms. Jn few cases, where direct selling is required, the compény seeds to have its own sales force and service staff or retail outlets, warehousing and order Processing Competencies, All these facilities are easily affordable by large companies. There are excephont this Geeten lke direct mail-order channels, electronic channels, etc., who are aot financial capable of hiring large intermediaries. : ’) Managerial Expertise: It is ve 3) Company Dimen: \S ry essential for the companies to have managerial expertise in order to ~ perform distribution functions. If the company lacks managerial expertise then it can initially rely on Intermediaries in the form of wholesalers, selling agents and brokers. However, with time when the company gains experience, the distribution channel can be changed. iv) Objectives and Strategies: If a company’s general and marketing objectives and strategies have a high degree of control over the products and services, then the use of intermediaries can be eliminated or reduced. This will also lead to restricted choice of channel structures which includes aggressive promotion and rapid reaction over changing market conditions. 4) Intermediary Dimensions: The factors relating to intermediaries which affect the choice of channel structure are as follows: i) Availability: The availability of suitable intermediaries also affects the channel structure. If the suitable intermediaries are not present then the company may face problems in marketing of their products. For example, due to the unavailability of adequate channel structure, Michael Dell, the originator of Dell Computers, decided to opt a direct mail-order channel system. Through this system Dell was able to offer customised personal computers and strong technical expertise to its customers. ii) Cost: The cost of using intermediaries is one of the crucial factors in selecting the channel structure. If the cost of using intermediaries is high than the services offered: then the company minimises the use of intermediaries. iii) Services: The service offered by intermediaries is also a determining factor in the choice of channel structures. For this, the services offered by the intermediaries are evaluated to analyse the most efficient channel, at relatively low cost. 5) Environmental Dimensions: The environmental factors also influence the choice of channel structure. The Iajr Tacs which sgieantlyafet the chanel desig are economic, socal, cultura, pli legal and technological environments. The effect of environmental factors is one of the main behi making channel design decision. mata reason bein 6) Behavioural Dimensions: The behavioural variables also influence the choi aD jice of the channel structure. manager should evaluate the behaviour of channel members and set up a right approach in handling te behavioural issues in order to avoid the occurrence of channel conflicts. Managers should also give more attention to the issues which affect the communication between the channel structures. . 3.2.3. Process of Channel Design While designing a channet structure, the company must define the customer needs, illustrate channel objectives, find out alternative channel options, determine the cost of channel and evaluate the various sltématives to be used in an ideal channel system. ” Scanned with CamScannerPlace Decisions (Unit 3) 95 At the most basic level, thé channel design should be such that it allows the customers to access and Proesrel Cosine! Deg purchase the products ‘fiom the company. [AahsapGmunasbama However, it is complex, time consuming and |__SeviceOutputLevel |—]|_[~Esabishing Objectives and expensive process for a marketer to reach the point | Wenulyng wuss Gama = at which a customer can obtain a particular ‘tematnes |] Braaing War Ome product. The steps in the channel design process Aternolves ate as follows: Tea Chanel Structure 323.1. Analysing Customers’ Desired Service Output Levels The first and foremost step in designing the channel structure is to recognise the service output level on the basis of the customers’ requirements, Therefore, it is very important to capture the customer demands at the time of designing marketing channels. The channel generates the following service output }) Product Information: There are certain types of products for which customers seek more information. These products can be new products, technically complex products or those products that have a fast changing technological element, 2) Produet Customisation: There are some products that essentially require technical adjustment. Then it becomes crucial for the company to customise the product so as to meet the customers’ expectations. Even a standardised product may have to go under customisation process to fulfill a specific target customer like in terms of size or variants, 3) Product Quality Assurance: The quality of a product is the foremost priority to customers, The consequences related to a defective or low-quality product may affect the customer’s operations. Therefore, it is essential for the company to emphasise more towards the product integrity. 4) Lot Size: The lot size indicates the number of units that the channel normally sells to a customer. A lot size determines the financial decision of the customer and also leads to the final purchase decision. 5) Product Variety/Assortment: The product variety indicates the range of products that are available with the channel, which is termed as the ‘assortment breadth’. A greater assortment involves more choices which increases the chances for the customer to get what they are seeking for. Sometimes the customer may also need a broad range of products available at one place. For example, a customer who is an electrical contractor may require different electrical codes, to find out the most suitable code for his project work. 6) Spatial Convenience/Availability: There are some customers that require the channel to support a high degree of product availability. These types of customers have unpredictable product-usage rate or who switch over products at the time when the specific product is unavailable. The concepts of demand uncertainty and buffer inventory are closely linked with this situation. 7) Waiting and Delivery Time: The waiting time sefers to the average time that customers will wait for delivery of the goods. Mostly, customers prefer faster and quick delivery channels. 8) After Sales Service: The customers also require after sales services such as installation, repair, maintenance and wasranty. Many times, the quality and availability of after sales services influence the initial sale of the company. The nature of services varies with the type of industry. For example, in the computer industry, the availability of hardware and software upgrades often influence the purchase decision of the customers. 3.2, Establishing Objectives and Constraints ‘The companies should also clearly define their channel objectives in terms of the targeted service output levels. On the basis of competitive conditions, the companies should try to offer the desired level of service ‘outputs at minimal total channel cost. The marketers can identify various market segments and their different service output Ievels. From several market segments, one segment is selected and a suitable shane! is decided to serve the same. ‘The channel objectives may differ, depending upon the product characteristics. Some of them are: 1) For perishable products, direct marketing is most preferable mode of distribution. 2) Bulky prodidts like building materials require intermediaries that have shorter shipping distance and low handling cost. Scanned with CamScanneree 96 MBA Second Semester (Marketing Management) SPPY 3) The sale of non-standard products such as custom-built machinery and specialised business forms is helg directly by the company's sales representatives. | , 4) ‘The sales and maintenance of products requiring installation of maintenance services, such as heating and self or franchised dealers. cooling systems, is largely carried out by the company its ‘i 5) High-unit-value products like generators and turbines are sold by the company’s sales representatives instead of intermediaries. 50 as to meet the changing trends of the market may have fo use shorter channels so that the ‘also affect the channel design. In te a monopoly. ‘The channel objectives of a company must be flexible in nature, environment. At the time of economic depression, the company final cost of the product is not high. In the same way, the legal regulat many countries, law disapproves those channel structures that reduce competition and erea 4 considering the customer service deliverables. The channel able to meet the expected service level outputs at the Teast levels for the same product in different segments. aaaasais ‘The channel design objectives can also be frame objectives should be such that the company is possible cost. The company may have different service I 3.2.3.3. Identifying Major Channel Alternatives “Thow are various alternatives which a company may adopt fo reach out the final customers. These alternatives involve sales force, sales agents, distributors, direct mail, telemarketing, internet, etc. Different channel Stulctures have their own strengths and weaknesses. A direct sales force can handle complex produets and Sunsastions, but they ean be expensive to maintain, In contrast to other alternatives, internet is economical, but it may not handle complex products, Distributors can create high sales but the company may lose direct conlact with the customers. Whereas, manufacturer's representatives have direct contact with the customers at very low Cost but their selling power is less as compared to company's sales representatives. After deciding the target Customers and customer service deliverables of the channel, the company focuses on sciecting the various é ‘channel alternatives. While, deciding for the alternatives, the company must look for the following points: 1) ‘Types of Intermediaries: A company must identify the types of intermediaries accessible to perform the channel activities. An attempt must be made to find out the innovative marketing channels. With the rapid ‘growth in business activities over the years, various intermediaries and channel partners are in operation and can be used for marketing of products. Some of these are as follows : i) Distributors or Re-Distribution Stockist: This is the most common type of channel available. They could already be working for some companies but are readily open to work for other firms who are not directly in competition with the existing companies. ii) Carrying and Forwarding Agents: They perform the tasks like warehousing, breaking bulk and transporting. In fact, there are many transporters who act as C&F agents. They also provide services of making the dispatches against the distributor orders and collecting the sales proceeds for the same. iii) Logistics Service Providers: They are one step forward to C&F agents, They even handle the ; distribution activities, once the finished products are handed over to them. iv) Manufacturers’ Agents, Stockist, Guarantors: All these are businessmen who offer financial support to companies in selling their products in the market. They also offer credit support to o one = oe * sompanies who are not willing to provide credit drcty to their customers or distributors. m saat: v) Financing Agencies: These are banks or institutions that provide finance to channel partners and customers. For example, they provide finance to car dealers and also give low interest loans to car buyers. ‘The intermediaries discussed above, all work under different companies on contractual basis to eam commission, discounts or mark-ups. There are other intermediaries who work independently, they are: i) Wholesalers, Semi-Wholesalers: Wholesalers are traders who operate in the marketplace. They buy and sell a variety of goods and services to retailers and customers. The company may extend credit 10 them and they in tum forward the credit to retailers and customers. if) Retailers: They are the last mile in the channel structure, They di it i . They directly trade with te consumers of the product. They do not work under any company. : alia i) Service Centres: They provide servicing facilities for consumer durables and equipments purchased by the customers. They work as authorised service centres of the company as well as freelancers. The authorised services centres are widely common in the automobile sector. Scanned with CamScannercisions (Unit 3) pace Ds ” Ne ile Cae, The ulitisation of number of intermediaries at each channel level must be . >. The choi aN +. oe csive Distabtion ‘oices can be made between three major patterns of distribution, viz., Selective Distribution, and iii) Intensive Distribution, 3) Cost of | os el System ‘The cost of distribution includes transportation costs, margin, order booking and ee a Saath 7 Costs are included in the price of the product or service that the customer purchases. ine! Fit distribution costs spend and the level of customer service offered by the company is the ey responsibility of the sales management, Th vk ‘ J) The margins ofthe channel pore he es tements ofthe channel network nclude te following ii) The transportation cost of S0ods between the cor Ang i-t i) The cost of order booking and execution, PaNY ond the end-user iy) The cost related to returns of expired stocks from the market, and ¥) The cost of any reverse logistics required, e., getting empty bottles of soft drinks. 4) Terms and Responsibilities of Channel Members: The members of the channel must be treated equally by the company and must be given an opportunity to earn profits, The key elements of “trade-relation mix” are as follows: ') Price Policy: The company must form a price policy to establish a price list and a structure of discounts and commissions that is fair and profitable for intermediaries, 2» ii) Conditions of Sale: Conditions of sale is defined as the company’s terms of payment and guarantees ‘that are provided to the channel members. Many manufacturers offer cash discounts to distributors and channel partners for early payments. Manufacturers also provides guarantee against the damaged and defective products or price fluctuations. iii) Distributors’ Territorial Rights: The territorial rights of distributors refer to the distributor's territories and the conditions on which the manufacturer will choose between several distributors. The distributors are assumed to collect full credit for sale held in their territory, irrespective of whether the sales are made or not. iv) Mutual Services and Responsibilities: The mutual services and responsibilities in the channel partnership need to be clearly stated, especially in case of exclusive-agency and franchised channels. For example, McDonald's offers franchisees with a promotional support, infrastructure, technical support and training, etc. In return, the franchisees are expected to adhere the policies of the company by fulfilling the physical standards, cooperating with the promotional programs, providing the requested information and buying materials from the recommended vendors. 3234, Evaluating Major Channel Alternatives While evaluating the alternatives, the company has to select the best channel by considering the factors Affecting the channel decision through which the long-term objectives of the company can be achieved. Hence, cach sltemative is evaluated on the following criter 1) Economic Criteria: In evaluating the channel alternatives, the economic criteria are very significant because it helps the company to pursue towards making of profits. Here, three factors are most considerable: ') What level of sales volume will be achieved by each of the channel alternatives? Will a particular channel structure be able to increase the company’s sales Volume? This can be assessed by conducting a market research of the sales potential of each channel alternative. ii) The second factor to be considered is the sales and distribution costs of each altemative. This can be done by evaluating whether the cost of each alternative is reasonable and within the company’s abilities in view of its financial resources and sales volume. ii) The third criterion is to compare the sales and costs of various alternatives considering the net profit of the firm. The company should also decide whether to use its own sales force or outsource the sales force, While estimating the net profits of each alternative, the cost related with sales should also be analysed. Here, the cost should be divided into fixed and variable costs. The sales volume of smaller firms will be low and larger firms operating in smal] territories will have larger selling and distribution Cost. On the other hand, when the costs of smaller firms or larger firms operating in smaller markets reach at the break-even level, then they can use their own sales force. Scanned with CamScanner 2a er sen oe * MBA Second Semester (Marketing Management) SPU sation in evaluating the channels is the control factor. In other words, how can a marketer control a specific distribution channe!? The greater the control ar te company. the te Will be the channel of distribution, Here, the relationship between various channels of ist it tile and interests towards the company’s product and conflicts between them must De con Excl . legal aspect in appointing a particular channel should also be considered by the company. / uch as C&F agents and distributors are considered as ficiently. These channel partners have to follow y's distribution network, Some of the key The contracted partners of the distribution network st the extensions ofthe company who serve the custome’ Tic certain rules and regulations to be a part of the com cl functioning rules decided by companies and followed by the channel partners are: i) The coverage area of the markets, i., width and depth, ii) The frequency of coverage, . ii) Estimate ofthe calls made per day and the percentage of productive calls, iv) Providing ready stocks in the market and not booking orders for deliveries later, v) The limit of extending the credit facilities in the market, vi) Providing servicing support for automobiles, and vit) Parcipating in exhibitions, fies, melas, and events to promote the products. 3) Adaptive Criteria: Another consideration in channel selection is to view the sdapability of the chanel io the changing market conditions. For this, every altemative should involve some level of commitment and stability. For example, an alternative involving long-term commitment can be considerable for economic and control criteria but will not be suitable for adaptive criteria. : ‘The channel structure must be able to increase sales volume other than handling the current sales. The channel structure should be such that it can handle changes under certain situations, such i) Increase or decrease in number of products, if) Additional service support required, | iii) Coverage of new territories, e.g., rural markets for FMCG products, agricultural inputs, tractors, pump- sets, seeds and fertilizers, iv) New institutional business leads, v) Price increases and adverse consumer reactions, and vi) Controlling of stocks due to limited availability, Itis therefore necessary to decide on these criteria before evaluating the alternatives. 3.2.3.5. Ideal Channel Structure After the evaluation of various alternatives, the manufacturer must select the best channel structure that is ideal in terms of costs associated and customer service delivery. Some of the optimal channel design and their characteristics are discussed below: 1) A C&F agent or wholesaler is considered appropriate channel choice for breaking of bulk, and if intensive distribution is required then the company must hire large number of retailers. 2) A company's technically qualified sales force is an ideal choice for industrial and engineering goods for providing inventory and credit at finance, From the above channel choices, it can be said that outsourcing of distribution activities is more cost effective for the company. Whereas, using the channel partners is also a beneficial way of distributing products. The decision regarding the ideal channel structure can be taken only after evaluating the benefits and associated costs of all the alternatives. The factors to be considered other than the competitor's channel design and distribution environment are revenues, market share, penetration, transaction costs, startup costs, etc, Channel cost is also influenced by the competitor's behaviour other than the extent of channel functions to be performed. Hence, the selection of channel structure must be done carefully in order to meet out the goals and objectives of the company. 3.2.4. Criteria for Effective Channel Design The definition of an ideal channel structure is to have the best possible channel design. Therefore, it is crucial t0 understand that for accomplishing several channel service objectives a company can design iimber of channel structures instead of relying on just one channel. The channél design may vary in terme of ike channel members involved and the components used to form the network. nas Scanned with CamScannerplace Decisions (Unit 3) fe company designs a channel, wi comprises of manufacturers, whole the designs on the basis of Certain cy hile includes distributors, retailers, and C&P agents, while another channel becomes necessary for the company to evaluate +hannel structure, salers and retailers, then, it iteria and select the ideal cl Hence, some of the criteria'to be considered a 1) Effectiveness: By evaluating the aes ope Diemer peo ating e channel objectives the effectiveness of the channel can be assessed. time is . 7 i - by observing that itis achieved Withoue fae (he Channel objectives then its effectiveness can be measured Efficiency: The quantity of i 2D tbe channellaie ron aa pas Consumed to achieve the output level is used to define the efficiency of channel structure consumes rm mple, if (wo channel structures generate the same level of ‘output but one design ls considered nena in the form of logistics and other inputs, then the second channel ore input icient. ity: The i 3) ia A onthe basis Ge Of company should be equitable. The channel members should be equitable then the ch sis. : their Participation in the channel functions, If the remuneration pattern is not ein ‘dis chaanet ace structure becomes ineffective and instable. This could also lead to conflicts om icture. Thus, equity principle is of utmost consideration while selecting the channel 4) Scalability: One of the major factors to be considered is the scalability of channel structure. ‘The main question here is, Can the channel structure handle 2 sudden increase in demand? This criterion becomes crucial in case of products where itis difficult to forecast the demand, 5) Flexil Another essential criterion is the flexibility of the channel structure which is often ignored by the company. When there is a changing demand pattern or new products are introduced in the market, then it is essential to observe that whether the channel system is able to handle the changes or not, This becomes of utmost significance in case of marketing high-technology products where innovation always is an option. 3.2.5. Channel Design Decisions The channel analyst can ascertain an ideal channel structure which is able to meet out the service levels of different segments in the market. It may be required to have a separate channel to fulfil the demands of each individual segment. For this, the channel design needs to involve three ‘elements, that is: 1) Selecting the Channel Member: The channel members must be decided by the channel designer. The designer needs to decide who will be the members of the channel structure. For example, an ethnic food manufacturer has several options in front of him while deciding the retail level. He can sell its grocery products through a large number of retail outlets or through a few key wholesalers, He could also bypass all the channels and choose an online channel to sell his products. Other than all this, the manufacturer must also decide the appropriate channel, i. whether to use independent distributors, sales representative companies, independent tracking companies, financing companies or any other distribution channels need to be involved while designing the channel structure, 2) Identity of the Channel Partner at Each Channel Level: Another important element of channel design is to decide the identity of the channel partner to be used at each level. For example, if it is recommended to sell a line of luxury watches through retail stores, then the manufacturer must also choose whether to go with upscale outlets or to start with a family-owned local jewellers, Both the choices can have implications such’as the efficiency with which the channel is used and image that is built by distributing the product through a particular retailer. 2 3) Type of Channel Member: The channel manager must also decide the actual number of each type of channel members to be involved. This decision is related to the determination of channel intensity, ‘such as, in case of consumer goods, should the channel involve several retail outlets (intensive distribution), a few outlets (selective distribution), or a single store (exclusive distribution). However, the selection of channel depends on the efficiency of the channel operations and on implementation of the channel ‘tensive channel structure increases the availability of the product to the end user because m ive Cee ae eaanaiee coaflcts may arise, Therefore, the channel manager needs to make a trade off to arrive at the final decision. — ee Scanned with CamScannerMBA Second Semester (Marketing Management) SPPU ERM xed Channel options or institutions are the entities involved in the Channel Options successful distribution of the goods and services of the organisation Retziting environment, integrating the logistics with the distribution funct is crucial for the development of the effective distribution system. ‘Therefore, designing channel institutions is must for the organisaiions. Two major institutions involved in distribution - fonction are the retailers and wholesalers. They are responsible for acquiring as well as reselling of the goods and serves, They are known for offering different goods and services from different regions ofthe county or state to a paticular consumer market. Different types of technological as well as industrial changes have ‘occurred within these industries in past few years. ER eM das 3.4.1. Introduction ‘A comprehensive process of selling goods and business use or resale is called as wholesaling. farmers, and manufacturers as they are basically involved in pr is engaged in the wholesaling activities. ‘According to Philip Kotler, “Wholesaling consists of the sale and all activites in selling goods or services to those who buy for resale or business use”. to the consumer market. In continuously changing business Diseat Marketing Franchising services to the people who buy those goods or services for ‘The entire activity of wholesaling does not include retailers, rocuction activities, A wholesaler is a person who According to American Marketing Association, “Wholesalers sell to retailers or other merchants and or industrial, institutional and commercial users but they do not sell in significant amounts to ultimate consumers”. According to Cundiff and Still, “The wholesalers buy and resell merchandises to retailers and other merchants and to industrial, institutional and commercial users, but do not sell in significant amount to ultimate consumers”. ‘According to S.E. Thomas, “The wholesaler or the wholesale trader is a trader, who purchases goods in large quantities from manufacturers and resells to retailers in small quantities”. ‘The working principle of any kind of wholesaler (either freelancer or associated with company) is to generate optimum results for efforts taken. They generally have small margins and are expected to maximise effectiveness of services offered and reduce inaccuracy in operations, 3.4.2. Functions of Wholesalers Functions of wholesalers are as follows: 1) Sales and Promotion: Wholesalers have their very own salesforce. Wholesalers render the services of theit | salesforce to the manufacturers to help them reach several business customers operating at a relatively smaller scale at a reasonably low cost. As wholesalers have good contacts, it is usually observed that purchasers rely on them more than a remote manufacturer. | | i | 2) Buying and Assortment Building: A substantial amount of work a customer does is done by a wholesaler on their behalf by way of choosing the products and preparing a mixed bag of all those products as needed by the customer. 3) Bulk Breaking: Wholesalers can save big time for their buyers through purchasing products in bulk, i large carload stacks, and then dividing this bulk into smaller units as per individual requirements. 4) Warehousing: The suppliers and customers do not have to bear the inventory costs because wholesalers | hold inventories, whick decrease inventory costs as well as the risks associated with them. , } 5) Transportation: Because of selection of a prime location for conducting business, a wholesaler cat generally deliver the goods faster to the buyers as they are located closer to them. Scanned with CamScannerge ves (3) na fh jnancing: Wholesalers fina : : Geert cea ubplicrs by adopting the poli ‘ ing all the bills Fonctually. Tey als0 finance customers by Eg eee ae and paying 4 Risk pear olenien own the title of the manufacturers, they bear the risk of all the consequences. Cost of ike spoilage, damage, thefi, obsolescence, etc.) is bome by wholesalers. Market Informations 7 relevant information about the market like new products, competitive position, 1 ee te regained ets are conveyed to the suppliers or manufactures by the wholesalers. They «fso communicate required information to the customers about variety of products. 443. _ Importance of Wholesaling ‘wholesaling is important to different parties (manufacturers, retailers and customers or society) differently. ‘isis described below: 1) Importance for Retailers: The entire activity of wholesaling is very important for retailers. Wholesalers ‘buy goods in large quantities and then sell it to retailers in smaller quantities. They also deliver goods to retailers. Because of wholesalers, the retailers are able to buy different kinds of products under one roof. If wholesalers are not there, the retailers would have to contact number of manufacturers for their products. Following points reflect the importance of wholesaling to the retailers: i) Promotion: There are some wholesalers who promote the products which they sell to retailers. Generally, they perform this work at a fixed cost or for free, Variety of display materials and props are used by wholesalers to promote the product and stimulate impulse buying. They assist retailers to make impressive and compelling shelf, counter and window displays. In order to make the promotion effective, sometimes wholesalers appoint their own men at the retail counter. ii) Market Information: Significant information about the market and the customers is transferred to the retailers by the wholesalers. Wholesalers having many contacts with the local businesses and suppliers are able to collect reasonable information about the market, ie., about supply conditions, pattern of demand, trade related changes and developments, prices, industry personnel, etc. Here, salesforces of the wholesalers play an important role in conveying (informally) such information to the retailers. Wholesalers act as clearinghouse as they provide market information to attached suppliers as well as retailers. iii) Financial Aid: Wholesalers usually provide a kind of financial aid to the retailers, Retailers tend to take such financial aid for granted, Wholesalers facilitate the retailers to keep their own stock investments less in context of sales generated, by making frequent and expeditious deliveries. This indirect financial aid forwarded by wholesalers enables the retailers to decrease their amount of operating capital requirement. 2) Importance for Manufacturers: Wholesalers are important to manufacturers in the same way as they are important to the retailers. Following points describe the importance of wholesalers to the manufacturers: i) Salesforce for Retailers: Wholesalers offer their own salesforce service for the manufacturers. They direct their salesforce to communicate to the retailers on behalf of the manufacturers and save their time, money, and effort. Due to geographical dispersion, wholesalers’ salesforce is able to reach different regional retailers. ii) Reducing Inventory Costs: Manufacturers have large quantities of finished goods that they have to ‘cant inventory cost to them. Here, wholesalers buy in bulk from the store. Tt causes a signifi manufacturers and store products in their warehouses, and thus, reduce the storage cost as well as the finished goods inventories of the manufacturers. ii) Avoiding Credit Risks: The issue of credit risk of the manufacturers is eliminated by the wholesalers as they (wholesalers) offer credit on their own, It is the wholesalers who bear the risk of non-payment orcollect payment form the retailers. Thus, manufacturers become free from risk associated with credit. i») Market Information: Alongwith providing information to the retailers, wholesalers also transfer relevant ‘market information to the manufacturers. The information may include current trends of consumer demand, consumer buying behaviour, other competitive manufacturers and their strategies, etc. Importance for the Society: Wholesalers are also important for the society as they offer variety of Bods. at required time in required quantity. Following points describe the importance of the Wholesalers for the society: bh 3d Scanned with CamScanner102 MBA Second Semester (Marketing Management) SPP With its supportive functions focused towards the retailers, 1 contributes to the overall development of the business. Due to distribute their goods and services to nmerce of the nation. Therefore, i) Support to Economic Growth: manufacturers and the customers, number of wholesalers, the manufacturers are able to produce an the large extent, thus, enabling the growth of the business and com economic growth of a nation is supported by wholesalers. ii) Facilitating Mass Consumption: It is the wholesalers who Facilitate mass consumption of the goods produced by the manufacturers. Being present in local area it becomes very easy for the wholesalers TP distribute the manufacturers" goods at the large scale. Duc to large scale operations and customised services, wholesalers offer low cost of distribution across various parts of the globe. ii) Contribution to other Business and Employment: More employment opportunities are generated by the wholeseling. business 2s it Tinks with different other businesses like banking, (ransportation, insurance, etc. Moreover, it contributes to their development. iv) Sustaining Market Equilibrium: Wholesalers assist in maintaining stability of prices and general equilibrium of the market by helping manufacturers in evaluating consumer requirements and offeting Stocks in required locations at required time, This can be achieved by balancing of supplies against demand. Practically, they are the key support of a free market economy. 3.4.4. Wholesale Structure _ ‘The different types of wholesalers include: dD Wholesalers nt £ oz ‘Merchant Brokers and Manufacturer's Wholesalers ‘Agents ‘Wholesalers Sales Le Brokers Branches Fatlservice | [Limited Service Merchant ‘Merchant }-» Agents: Sales Wholesalers Wholesalers DY Sling Age Offices General ‘Truck ‘Merchants Merchandise Wholesalers 3) Manufacurer Ser Wholesalers Maitonder vice Provider” Limited Line Wholesalers ages ‘Wholesalers Cash-and-Carry 4) Food Brokers ‘Rack Jobers Wholesalers 5) Commercial Stock Franchise Drop Shippers Brokers Wholesalers Coopenstiver jure 3.4: Wholesale Structure Merchant Wholesalers: Merchant wholesalers are those who have inde i 1 n pendently owned b th take tite to the goods they deal with. Sach kind of merchant wholesalers are Known ss dstbutos, jobbess or mill supply houses. A merchant wholesaler is an institution that purchases commodities from producers and re-sels them for business use, to other wholesalers, retailers and government agencies. Every merchant wholesaler takes ttle to the commodities they sell, "They can be further categorised into full service wholesalers and limited service wholesalers: i) Full-Service Wholesalers: The most extensive range of wholesali ion i : ing function is perf full: service. wholesalers. The reasons due to which customers rely on Sal-sowice unos ae be availability of products, breaking large quantities into smaller ones, product varieties, technical advice and services and financial assistance. ° a) General Merchandise (Full-line) Wholesalers: General Merchandi ine) : F : rchandise (full-line) wholesalers hav? a variety of products available with them. These vatieti i i i a vase se varieties cover almost all items required by theit TEM Scanned with CamScannerplace Decisions (Unit 3) ii) 103 ») Specialty-Merchan products, Specialty. range of products, idise (Limited-Line) Wholesalers: " ' Focus ther limited range of “Merchandise (limited line) wholesalers have wide varieties in t tk 8 have wide varieties in that particular °) he job of furnishing the sh i ibited is iy mabe jo b z the shelves or racks on which products are exhibited is done oiling fone t®: Rack jobbers own the products on the shelves ad they undertake the activity of selling these prodi ‘ en after esting goods. “msignment basis in which the clients pay from the proceeds received d) Francl ling: D ot assoc ali: AS the name suggests, under franchise wholesaling, independent retailers exis independ and purchase systems of ne wholesaler and make use of the name, store design, business format, the wholesaler. . ©) Wholesale Cooperatives: Me * : Member firms mame Coopera Possess wholesale cooperatives to give extensive support ttn Sere Wholesalers: The limited-service wholesalers deliver comparatively less marketing ining ciull-service wholesalers. These wholesalers have few specialised functions and the rempuining functions are performed by the producers. The producers may further pass on these functions to the customers or other intermediaries, The limited-service wholesalers can be of following types: a) Truck Wholesalers: Truck wholesalers transport a limited line of products directly to the customers for ‘immediate assessment and purchase. Sometimes, they may also be known as truck jobbers. ») Mail-Order Wholesalers: These types of wholesilers make use of catalogues to sell products to the business buyers and retailers instead of employing sales representatives. ©) Cash-and-Carry Wholesalers: Such types of wholesalers are intermediaries, where small businesses are their customers. These businesses pay cash and in return they avail transportation services. Hence, they are known as cash-and-carry wholesalers. 4) Drop Shippers: They never take actual possession of goods but only take title to the goods and negotiate sales. They are also called as desk jobbers. 2) Merchandising Brokers and Agents: Merchandising brokers and agents do not provide large number of services like merchant wholesalers. They are not entitled with the ownership of the product but negotiate sales for manufacturers for whom they are acting as an agent. i) Brokers: Brokers are the medium through which buyers and sellers are brought together. Brokers do not own the title to the goods but they only receive commission on sales. They own almost negligible rights to interfere in the sales policies of the firm. Brokers are located in various markets including commodities, real estate, insurance and agriculture where the information that would join buyers and sellers is available in very less quantity. Agents: Agents usually represent buyers or sellers on a more persistent basis and can be categorised into following types: . a) Selling Agents: Selling agents are responsible for marketing the complete output produced by a manufacturer or every item of a particular product line. Besides taking ttle to goods, selling agents perform every wholesaling activity. These agents are time and again used as a substitute for marketing departments and commonly perform the sales function for many producers at the same time. b) Commission Merchants: Local sellers provide goods on consignment to the commission merchants and further these merchants negotiate sales in the central market. These agents enjoy comprehensive powers concerning prices and terms of sales and are also known as factor merchants, Commission merchants have ability to negotiate and obtain the best possible price in the current market conditions. ©) Manufacturers’/Service Providers’ Agents: These agents work for many manufacturers’ and/or service providers’ and transport complementary and non-competitive products in selected areas. These agents do not provide credit facility on product but they provide delivery and storage services, They also offer research facility as well as support in planning. Last but not the least, they provide merchandising and promotional support. 1: As the name suggests, food brokers bring together buyers and sellers of food and © aed a in onder to complete a sale. These brekers are associated with imied number of food producers and function in particular location. Scanned with CamScanner‘MBA Second Semester (Marketing Management) SPPU commercial stock brokers 3) mereial Stock Brokers: Acting as licensed sales representatives, eels y i k and/or bonds for are individuals who take orders, suggest business clients and then obtain stoc! their clients. i 3) Manufacturers’ Wholesalers: Merchant wholesalers’ operations are similai to manufacturers’ sales branches and offices: i) Sales Branches: Sales branches ae intermediaries possessed by manufacturers that se! prodets, "ey al ible i id .s to the manufacturers’ sales representatives. Suc are also responsible in providing support services ee poaectve branches are usually located away from manufacturing units, in areas where er of prose customer are available and demand for the products and services is high. They perform different functions such as deliver goods, offer credit, extend promotional aid and provide other related services. ii) Sales Offices: The operations of sales offices are owned by manufacturer of product; they generally hire an agent for offering their services. Sales offices do not carry any inventory, and similat 16 siles branches, they are located away from the manufacturing units. They may sell products, which, will enhance the product line of the manufacturing firm. For example, firms like Campbell Soup offer a Jarge variety of services to their wholesaler and retail customers. POTS Tddg MSGS 3.4.5. Marketing Decisions for Wholesalers ~ Marketing decisions for wholesalers include following important decisions: 1) Target Market and Positioning Decision: Wholesalers cannot serve every type of customer. Therefore, like retailers, they need to define their target markets and position themselves in that particular market in effective way. They may select a specific target group depending on size of customers’ mainly large retailers, or can serve credit services 10 customers who require credit, or offer products to customers through convenience stores, etc. Target groups help in identifying promising customers, designing better offers for them and building long-term relationships with them. Different initiatives like sponsoring a voluntary chain, designing systems for management training and advising, recommending automatic systems for reordering, etc., may be taken by the wholesalers. Customers who bring less profits can be reduced by adding service charges on less amount of purchase or by setting a limit for purchase (for ‘encouraging large amount of purchase). 2) Marketing Mix Decisions: Marketing Mix decisions involve decisions related with the 4P’s of marketing, ‘A wholesaler should decide about the product, price, place and promotion decision which are as follows: i) Product Decisions: While making the product related decisions, the wholesalers need to decide about the variety of products and services they want to offer. It is very difficult for the wholesalers to undertake full line services or to stock more inventories for immediate sales. However, they have to manage this difficult situation and maintain adequate inventory, else they would lose their prospective profits. Nowadays, wholesalers are reducing the number of product lines they are executing and selecting to continue only those which are profitable ones. They are also giving significant consideration to those services which are helping in establishing strong customer relationships as well as the services which should be dropped down os accompanied with some service charges. eSATA ESAS TAD ET ii) Price Decisions: Pricing decision is one of the most significant decisions for a wholesaler. The general criterion followed in pricing is to mark-up the price of product and services by 20 per cent. After excluding expenses (near about 17 per cent), the profit margin remains only 3 per cent. The profit margins in grocery items is slightest, i., less than 2 per cent. Hence, all the wholesalers try to adopt | new approach for pricing. Various new pricing techniques are being considered by them. Sometimes, for attracting new customers, wholesalers simply reduce the profit margin on certain product lines. Place Decisions: Finally, place decision is also very crucial for a wholesaler as he must be very cautious while selecting his presence at a suitable location or on internet. It is often observed that wholesalers prefer locations with low rent, low taxes and are prone to invest very Jess money in thei systems, equipment and buildings. Correspondingly, their order-processing and material-handling systems are usually obsolete. However, recent times, have witnessed many wholesalers who are operating on a large scale and have a progressive approach towards doing business, acknowledging increasing costs by investing in ontine ordering systems and automated warehouses. They are becoming technologically equipped so as to become more efficient. Scanned with CamScanner | | 4jone (Unit 3) 105 pecisions ( 1 pe ‘These processes function in the following manner- orders received from customers are fed from the renailer’s system ditectly into the wholesaler’s system, Then the goods are coltected by mechanical devices and automatically transferred onto a shipping platform where they are assembled. Now wholesalers are operating on a larger scale maki billing, accounting, inventory control, and forecasting, are a nae jv) Promotion Decisions: Promotion decision is also very significant, yet many wholesalers do not give much importance to promotional activities. Various promotional activities conducted by wholesalers such as personal selling, trade advertising, public relations and sales promotion are usually unplanned and disorganised. They still give more importance to personal selling (one to one) instead of targeting a whole segment or group at a time, Hence, the wholesalers need to change this traditional approach and go for modern techniques of promotions, some of which are used by retailers, Dl 35.1. Introduction ‘The origin of word ‘retail’ is related with the French word ‘retaillier’ which means ‘to break the bulk” or ‘to cut apiece off”. In the process of distribution, the products move from the manufacturers to the final customers. Several intermediaries or middlemen are involved in this process and the retailers are the last ones. Retailers directly offer the firm’s product to the customers, and thus, link the customers with the manufacturers. They collect feedback from the customers directly and convey it to the manufacturers. ‘The comprehensive combination of different activities or steps which are used to sell a product or a service to the consumer for self or family consumption is termed as retailing. Individual demands of target customers and supplies of available producers are effectively matched by the retailers. According to Cundiff and Still, “Retailing consists of all those activities involved in selling directly to ultimate consumers”. According to Mc. Carthy, “Retailing is selling to final consumer products to households”. ‘Therefore, if an institution (the producer, wholesaler, or retailer) offers final products directly to the ultimate consumers, it is doing retailing. Any business enterprise whose main sales volume is derived from the retailing activites is considered as a ‘retailer’ or ‘retail store’. Personal and non-business needs of different customers ae satisfied by the retailers irrespective of the place of offering (i.e, in store, at consumers’ residence or on streets) or the methods used (i.e., by vending machines, mail, intemet, telephone or in person), 35.2. Functions of Retailing Following are the main functions of retailing: 1} Sorting: Sorting is one of the main functions in retailing. Producers generally offer large quantities of similar or different products and expect it to be sold in lots to concerned buyers to reduce cost, whereas customers require variety of products to choose from and buy only in small quantities. Therefore, in order to fulfil the demand of both the parties, retailers perform the function of sorting. In this, they first buy the Products from numerous producers having different type of products in large quantities and then offer those products to the customers to choose from for making their small purchases. 2) Breaking Bulk: Another function of retailing is breaking bulk. Big lots of the products are transported by the producers and wholesalers in order to reduce the costs which are then divided into smaller quantities by the retailers so that these products can match with the consumption needs of consumers, Holding Stock: Holding stock is also a function of retailing which is significant to the producers, In order to suppor. the producers in inventory control and production, retailers provide stock holding facility to them. In this, they maintain a significant level of inventory of products to be supplied instantly t0 the ultimate coneumess when they need it, In this way, they help producers to regulate the level of production and price. It is also significant for the consumers because they know they can buy desired products in desired quantity from the retailers at any time. a Scanned with CamScanner106 MBA Second Semester (Marketing Mar vagement) SPPU, 4) Supplementary Services: Through variety of services, retailers make the buying process simple and convenient and thus, ease the process of changing merchandise ownership. In order to add value to the products, retailers are engaged in after-sales services, product guarantees and entertaining consumer complaints. In order to improve the sales, credit and hire-purchase services’ are also offered to the customers. Filling orders, processing orders and delivering as well as installing products also come under the function of retailers. Some retailers appoint sales executive so as to assist the customers with the displayed products. These executives answer the queries of the customers and provide desired information about the concerned product. 3) Channel of Communication: Acting as a channel of communication between producers/wholesalers and the customers is also a function of the retailing. Customers learn a lot about the features, traits of a product or service with the help of sales force, advertisement and displays. On the other hand, sales forecasting, consumer complaints and delivery delays are leamt by the producers. Defective or unsatisfactory merchandise and services can be replaced or modified by the manufacturer. 6) Transport and Advertising Services: Retailers can also provide assistance to the small manufacturers in advertising, storing, transporting and pre-payment of goods. In case of significantly small retailers, this activity can also be performed from the manufacturer's . The percentage and volume of sales which is required to be covered by the cost and profit determine the number of functions which will be performed by the retailer. 3.5.3. Importance of Retailing Retailing is important to producers, wholesalers as well as customers, which is described below: 1) Importance for Producers and Wholesalers: Retailers are important to the producers and wholesalers in the following manner: i) Selling Goods: In order to help the producers as well as the wholesalers, retailers sell the products directly to the customers in required quantities. Thus, they divest the responsibility of sales from the producers/wholesalers. ii) Assessing Consumers’ Tastes and Preferences: The producers/wholesalers can collect the information about the customers, their taste and preferences, with the help of retailers as these retailers are in direct contact with the customers. Retailers also observe the changing trends of buying behaviour of the customers. iii) Promoting New Products: Retailers help the producers/wholesalers in promoting a new product, As they understand the needs and preferences of the consumers, it becomes easy for the retailers to promote a new product among the customers. Customers rely on the retailers for understanding the features and uses of a new product. 2) Importance for Consumers: Retailers are important to the consumers in the following manner: i) Variety of Goods: A large variety of products is stored by the retailers which arc produced by the different manufacturers. These products are offered to the customers at a reasonable price. The different products which are required by the customer cannot be stored by him due to high associated costs. ii) Demand Creation: Retailers create demand for specific products on behalf of the consumers. They use different techniques to communicate the demand of the consumer to the producers/wholesalers. iii) Distribution: Retailers distribute different products of the producers directly to the customers, They are able to deliver appropriate goods to the concerned customers. The customers are helped in the selection of goods by the retailers on the basis of their intimate knowledge and experiences. iv) Credit Facility: Retailers offer credit services to the consumers so as to build relations. By this, retailers are able to achieve large sales volumes. v) Personal Services: Different additional services like exchange, free home delivery, after sales-service, etc., are provided by the retailers to the consumers. vi) Sale on Approval: Retailers provide sale on approval service to the customers. Undér this facitity, the product can be retumed to the retailer within the specified time if the product is not approved by the family or if it does not match the requirement of the customer. Scanned with CamScannerplace Decisions (Unit 3) ey 354. Retail Structure ‘The operating format or organisation of a retail institution is called retail structure. Following types of retail stryotures are available to the retailers: 1) Retail institutions by ownership, 2) Store retailing/retail institutions by store based strategy mix and 3) Non-store based, web and other forms of non-traditional retailing, Retail Structure (Classification Based on Types of Ownership on Chamnel Used Independent Retiler Retail Chins ‘Store Retailing /Based Non-Store Retailing Multi-Channel Franchising on Merchandise sed Retain Leased Departments echt au Cooperatives Catalogue & Direct Mail Retailing Vending Machines “Telemarketing ooka ‘TV Home Shopping oer root Video Kisis Merchandise Merchandise Departmental Sore Diese stre [Comin Se ‘Speciality Store es til i Mesto TonDat Sa Sere ir tailing a - Pee atine [Super Centes and Hyper Matket Crewe Chimie ine Sores Figure 3.5: Retail Structure 1) Retail Institutions by Ownership: Retail institutions may be consumer-owned, chain-owned, owned by manufactures, franchisee-operated or leased departments. These are briefly described below: i) Independent Retailer: When a retailer operates only jin a single retail establishment, it is regarded as an ‘independent retailer’. One of the main reasons for the attractiveness of this format of retailing is it ease of entry and it is mainly useful for those individuals who have limited capital resources. Almost 80% of total retailers fall in the category of independent retailers and they have almost 40% shares in the total retail sales. Family or the owner manages such retail institution. ii) Retail Chains: When more than one retail stores are operated by the single retailer, it is called retail chains, Only small sales are made by these retail chains. Big chain stores like, Sears, Wal-Mart and Home Depot offer bulk of sales. iii) Franchising: Franchising is an agreement between two entities where the owner (franchisor) of an institution (producer/wholesaler/retailer) grants the right to the retailer (franchisee), to use its trade name and specific business processes and techniques for offering goods or services. In general, the franchisor lists all the terms and conditions to the franchisee on the basis of which the entire business is conducted, ‘The franchisor provides all these facilites to the franchisee in retum of a fee. For this purpose, the franchisee willing to do a business provides the required time and capital to the franchisor in order to utilise all the available resources. Hence, itis a relationship between the franchisor and franchisee, who are individual business entities, may be in form of sole proprietorship, partnership, or corporations. iv) Leased Departments (Shop in Shop): Leased department can be seen as another form of retail ownership. ‘The larger space in retail store which is rented to an outside vendor is known as ‘leased department’, Leased departments work as a business unit under the large business, Apart from this, the rent for the space is paid by the lessee, Jewellery and shoe departments in large department stores can be seen as the example of this type of ownership. As the expestise which is required for a certain product line such as jewellery is not possessed by the larger stores, they can get the advantage of greater expertise within the store. These stores also provide various types of products which can fulfil the needs and wants ofthe customers. [ee nner Scanned with CamScannerace MBA Second Semester (Marketing Management) SPPy ¥) Cooperatives: Several retailers come together to form an organisation so as to maintain economies of sealc, { this is called ‘cooperative’. These are also called marketing or secondary cooperatives. Making marketing ay i integrated effort and getting discounts from the producers are the Key objectives of these cooperatives, Members own and control the operations of the cooperative and they are strongly attached with the ‘cooperative, Producers, consumers, or even the employees may be the member of such cooperatives. 2) Store Based Retailing: The type of strategy which is adopted by the retail stores for selling their goods ang services can be used to categorise various retail stores. It includes two major formats: i) General Merchandise Retailing: Selling general, non-food products in the store is termed as general jing. All kind of non-food products are available with such retailers. merchandise retail Different retail formats or structures used within general merchandise retailing are as follows: a) Departmental Stores/Variety Stores: Such retailers are very diverse in nature and are segmented into several departments or segments. These segments contain numerous varieties of products (deep assortment), that is why they are also called ‘variety stores’. Some sorts of customer services are also provided by these departmental stores. Such stores give close competition to the discount stores as they offer relatively low-cost products. The depth and breadth of products offered by departmental stores is wide in nature. In comparison to other general merchandise competitors, greater levels of services are provided by the department stores to their customers. In such stores, every department is treated as a ‘ministore’ having different set of merchandise. Individual sales space, sales personnel as well as managers are assigned 10 different segments or departments and they are responsible for their respective departments. These departments have their own integrated marketing communication (IMC) practices which may be incorporated in overall IMC practice of the store. b) Discount Stores: A store based on offering discount in any product is termed as ‘discount store’. It is a low-cost, high volume and quick-turnover store, offering variety of merchandise at very less prices. These stores have the similar product lines as in the case of department stores such as electronics, appliances, furniture, etc. Apart from this the items related to auto accessories, house wares, gardening equipment, etc., are also offered by these stores. They have the facility of centralised checkout. The customer services are offered at a centralised area rather than the store department. Majorly these stores operate on the principle of self-service, yet in adverse cases, assistance is provided to the customers. ©) Specialty Stores: Such stores specialise in limited product line (one or few), that is why they are termed as ‘specialty stores’. In such stores limited variants of the particular product line(s) are available. Market segmentation approach instead of mass marketing is applied in such stores so as to attract prospective customers. A particular market niche is developed by specialty stores as per their offerings. These types of retailers have speciality in the products such as books, apparel, toys, jewellery, sporting goods, shoes, auto supplies and so on. In the current era, a new retailing format has evolved, i.e, category killers (category specialist). Such stores are characterised by offering discounts on the products. They offer numerous variants of a particular product like toys, sporting goods, shoes, books, etc. For example, numerous varieties of consumer electronics are offered by Best Buy. 4) Membership Club: In this retailing format, a club is constituted of price-sensitive business buyers as well as individual consumers. Only members can benefit from such clubs. It lies between the retailing and the wholesaling. Employees and business buyers constitute 2 relatively small portion of the club yet they alone constitute the 60 per cent of the total sales of membership clubs. They pay a given annual fee so as to purchase the products at wholesale rate, The products are bought for personal use or for business purpose. Individual consumers are the major constituents of the membership club who contribute to the 40 per cent of the total sales of the club. They buy products for their personal use. After submitting a reasonable membership fee, they are allowed to buy products at retail prices. The prices may be higher ‘sometimes in comparison to that paid by business buyers. Membership is allowed to only those consumers who are employed in any educational institution, member of a union, or associated with other defined groups. ue Scanned with CamScanner