Marketing for Customer Value
Module 3: Distribution Channels
Course Instructor: Prof. Tabreez Pasha
Distribution Channels and Physical Distribution Decisions: Nature, functions, and types of
distribution channels; Distribution channel intermediaries; Channel management decisions;
Retailing and wholesaling.
Channel of Distribution
❖ Distribution is defined as the act of spreading the product throughout the market, as large
and wide as possible so that many people can buy it.
❖ A marketing channel system is the particular set of interdependent organizations
involved in the process of making a product or service available for use or consumption.
❖ Channel of Distribution refers to the chain of businesses or intermediaries through which
a good or services passes until it reaches the end consumers.
Need of Physical Distribution
❖ Helps in Production Function
❖ Marketing Demand and Supply
❖ Financing the Producers
❖ Aid to Communication
❖ Stabilizing the Prices
❖ Promotional Activities
❖ Pricing
Functions of Distribution Channel
❖ Bridge the gap b/w production and consumption
❖ Close Study
❖ Creating contacts
❖ Understanding the customer’s Needs
❖ Negotiate price
❖ Storage and Distribution
❖ Smooth Working
❖ Risk taking
Types of Distribution Channels
❖ Zero-level channel (Direct marketing channel)
❖ One-level channel
❖ Two-level channel
❖ Three-level channel
A zero-level channel, also called a direct marketing channel, consists of a manufacturer
selling directly to the final customer. The major examples are door-to-door sales, home
parties, mail order, telemarketing, TV selling, Internet selling, and manufacturer-owned
stores. Traditionally, Eureka Forbes sales representatives sell vacuum cleaners and water
purifiers door-to-door, AllSchoolStuff sells through online catalogs, ICICI Lombard sells
insurance through telemarketing and the Internet, Elvy sells gifts online, and Fabindia sells
garments and furniture through its own stores. Many of these firms now sell directly to
customers in more ways than one, via the Internet, catalogs, etc.
A one-level channel contains one selling intermediary, such as a retailer.
A two-level channel contains two intermediaries. In consumer markets, these are typically a
wholesaler and a retailer.
A three-level channel contains three intermediaries. In the meatpacking industry,
wholesalers sell to jobbers, essentially small-scale wholesalers, who sell to small retailers. In
Japan, food distribution may include as many as six levels. Obtaining information about end
users and exercising control becomes more difficult for the producer as the number of channel
levels increases.
Number of Intermediaries:
❖ Intensive
❖ Selective
❖ Exclusive
Three strategies based on the number of intermediaries are exclusive distribution, selective
distribution, and intensive distribution. Exclusive distribution means severely limiting the
number of intermediaries. It’s appropriate when the producer wants to maintain control over
the service level and outputs offered by the resellers, and it often includes exclusive dealing
arrangements. By granting exclusive distribution, the producer hopes to obtain more
dedicated and knowledgeable selling. Selective distribution relies on only some of the
intermediaries willing to carry a particular product. Intensive distribution places the goods
or services in as many outlets as possible. This strategy serves well for snack foods, soft drinks,
newspapers, candies, and gum—products consumers buy frequently or in a variety of
locations. Woodland is a good example of selective distribution.
CHANNEL-MANAGEMENT DECISIONS
After a company has chosen a channel system, it must select, train, motivate, and evaluate
individual intermediaries for each channel. It must also modify channel design and
arrangements over time.
Selecting Channel Members
A) To customers, the channels are the company. Companies need to select their channel
members carefully.
B) To facilitate channel member selection, producers should determine what characteristics
distinguish better intermediaries.
They should evaluate the:
❖ Number of years in business
❖ Other lines carried
❖ Growth and profit records
❖ Financial strength
❖ Cooperativeness
❖ Service reputation
C)If the intermediaries are sales agents, producers should evaluate the:
❖ Number and character of other lines carried.
❖ Size and quality of the sales force.
D)If the intermediaries are department stores that want exclusive distribution, the
producer should evaluate:
❖ Locations
❖ Future growth potential
❖ Type of clientele
Training and Motivating Channel Members
A company needs to determine intermediaries’ needs and construct a channel positioning such
that its channel offering is tailored to provide superior value to these intermediaries.
Stimulating channel members to top performance starts with understanding their needs and
wants.
The company should provide training programs and market research programs to improve
intermediaries’ performance.
The company must constantly communicate its view that the intermediaries are partners in a
joint effort to satisfy end users of the product.
Channel Power
Producers vary greatly in skill in managing distributors.
Channel power can be defined as the ability to alter channel member’s behavior.
Manufacturers can draw on the following types of power to elicit cooperation:
1) Coercive power
2) Reward power
3) Legitimate power
4) Expert power
5) Referent power
Channel power is the ability to alter channel members’ behavior so they take actions they
would not have taken otherwise. Manufacturers can draw on the following types of power to
elicit cooperation:
Coercive power means that the manufacturer threatens to withdraw a resource or terminate a
relationship if intermediaries fail to cooperate.
Reward power includes when the manufacturer offers intermediaries an extra benefit for
performing specific acts or functions.
Legitimate power includes the manufacturer requesting a behavior that is warranted under the
contract.
Expert power means the manufacturer has special knowledge the intermediaries value. Once
the intermediaries acquire this expertise, however, expert power weakens.
Referent power means the manufacturer is so highly respected that intermediaries are proud to
be associated with it.
Channel Partnerships
More sophisticated companies try to forge a long-term partnership with distributors. The
manufacturer clearly communicates what it wants from its distributors in the way of market
coverage, inventory levels, marketing development, account solicitation, technical advice and
services, and marketing information and may introduce a compensation plan for adhering to the
policies.
To streamline the supply chain and cut costs, many manufacturers and retailers have adopted
efficient consumer response practices (ECR) to organize their relationships in three areas:
1) demand side management or collaborative practices
2) supply side management to optimize supply
3) enablers and integrators, to support joint activities that reduce operational problems
Evaluating Channel Members
Producers must periodically evaluate intermediaries’ performance against such standards as
sales quota attainment, average inventory levels, customer delivery times, treatment of
damaged and lost goods, and cooperation in promotional and training programs.
A) Under performers need to be counseled, retrained, motivated, or terminated
Modifying Channel Design and Arrangements
No channel strategy remains effective over the whole product life cycle. In competitive markets
with low entry barriers the optimal structure will inevitably change over time. The change
could mean adding or dropping individual market channels or channel members or developing
a totally new way to sell goods.
Channel Modification Decisions
A producer must periodically review and modify its channel design and arrangements.
The distribution channel may not work as planned, consumer buying patterns change, the
market expands, new competition arises, innovative distribution channels emerge, and the
product moves into later stages in the product life cycle.
Adding or dropping individual channel members requires an incremental analysis. Increasingly
detailed customer databases and sophisticated analysis tools can provide guidance into those
decisions.
RETAILING
Retailing includes all the activities involved in selling goods or services directly to final
consumers for personal, nonbusiness use.
1. A retailer or retail store is any business enterprise whose sales volume comes primarily
from retailing.
2. Any organization selling to the final consumer—no matter how or where they are sold
is doing retailing.
Functions of Retailing
❖ Sorting
❖ Breaking Bulk
❖ Holding stock
❖ Communications
❖ Assist small suppliers
❖ Customer service
Types of Retailers
Consumers today can shop for goods and services at store retailers, nonstore retailers, and retail
organizations.
Store Retailers
Perhaps the best-known type of store retailers is the department store.
The most important types of major store retailers are
1. Specialty store: Narrow product line. The Limited, The Body Shop.
2. Department store: Several product lines. JCPenney, Bloomingdale’s.
3. Supermarket: Large, low-cost, low-margin, high-volume, self-service store
designed to meet total needs for food and household products. Kroger, Safeway.
4. Convenience store: Small store in residential area, often open 24/7, limited line
of high-turnover convenience products plus takeout. 7-Eleven, Circle K.
5. Drug store: Prescription and pharmacies, health and beauty aids, other personal
care, small durable, miscellaneous items. CVS, Walgreens.
6. Discount store: Standard or specialty merchandise; low-price, low-margin, high-
volume stores. Walmart, Kmart.
7. Extreme value or hard-discount store: A more restricted merchandise mix than
discount stores but at even lower prices. Aldi, Lidi, Dollar General, Family
Dollar.
8. Off-price retailer: Leftover goods, overruns, irregular merchandise sold at less
than retail. Factory outlets; independent off-price retailers such as TJ Maxx;
warehouse clubs such as Costco.
9. Superstore: Huge selling space, routinely purchased food and household items,
plus services (laundry, shoe repair, dry cleaning, check cashing). Category killer
(deep assortment in one category) such as Staples; combination store such as
Jewel-Osco; hypermarket (huge stores that combine supermarket, discount, and
warehouse retailing) such as Carrefour in France and Meijer’s in the
Netherlands.
10. Catalog showroom
Retailers can position themselves as offering one of four levels of service:
1) Self-service
2) Self-selection
3) Limited service
4) Full service
Non-store retailing
Although the overwhelming bulk of goods and services—97%—is sold through stores,
nonstore retailing has been growing much faster than store retailing. Nonstore retailing falls
into four major categories:
1. Direct selling
2. Direct Marketing (which includes telemarketing and Internet selling)
3. Automatic vending
4. Buying service
Corporate Retailing and Franchising
Although many retail stores are independently owned, an increasing number are part of some
form of corporate retailing.
These organizations achieve economies of scale, greater purchasing power, wider brand
recognition, and better-trained employees than independent stores can usually gain alone.
The major types of corporate retailing:
1) corporate chain stores,
2) voluntary chains,
3) retailer and consumer cooperatives,
4) franchises, and
5) merchandising conglomerates.
WHOLESALING
Wholesaling includes all the activities involved in selling goods and services to those who
buy for resale or business use.
A) Wholesaling excludes farmers, manufacturers, and retailers.
Major Wholesaler Types
❖ Merchant wholesalers
❖ Full-service wholesalers
❖ Limited-service wholesalers
❖ Brokers and agents
❖ Manufacturers’ and retailers’ branches and offices
❖ Specialized wholesalers
A) Wholesalers (also called distributors) differ from retailers in:
1) Wholesalers pay less attention to promotion, atmosphere, and location because
they are dealing with business customers.
2) Wholesale transactions are usually larger than retail transactions.
3) Wholesalers cover a larger trade area than retailers.
4) The government deals with wholesalers and retailers differently in terms of legal
regulations and taxes.
B) Wholesalers are more efficient in performing the following functions:
1) Selling and promoting
2) Buying and assortment building
3) Bulk breaking
4) Warehousing
5) Transportation
6) Financing
7) Risk bearing
8) Market information
9) Management services and counseling
Trends in Wholesaling
Wholesaler-distributors have faced mounting pressures in recent years from new sources of
competition.
A) One major response has been to increase asset productivity by managing inventories
and receivables better.
B) Each have had to improve their strategic decisions on target markets, product
assortment, and services, price, promotion, and place.
