Channels of Distribution

UNIT-7
Channel of distribution

A marketing channel (also called a channel of distribution) is a group of individuals

and organizations that directs the flow of products from producers to consumers.
The major role of marketing channels is to make products available the right time
at the right place in the right quantities.
 Nature of Marketing Channels
• Distribution channels include wholesalers, retailers, distributors, and the Internet.
Indirect channels

Indirect channels involve multiple intermediaries before the product

ends up in the hands of the consumer
Marketing Channels Create Utility

Marketing channels create three types of utility: time, place, and

possession.
• Time utility–created by having products available when the customer
wants them
• Place utility–created by making products available in locations where
customers wish to purchase them
• Possession utility–created by the customer having access to the product to
use or to store for future use- in small parts
• Channel members sometimes create form utility by assembling, preparing,
or otherwise refining the product to suit individual customer tastes.
 Role of Marketing Channels

• Channel Functions and Flow

• Channel Levels
• Service Sector Channels
 Role of Marketing Channels- Channel Functions and Flow

Channel Function
It overcomes the time place and
possession gap
Through their contacts, network,
experience, specialization, and
scale of operation,
intermediaries make goods
widely available and accessible
to target markets.
Usually offering the firm more
effectiveness and efficiency than
it can achieve on its own.
Many producers lack the
financial resources and expertise,
to sell directly on their own.
Direct Channels
Manufacturers Customers- This is the shortest and
simplest choice as goods move directly from the
source of manufacture to the ultimate user. For
example, vacuum cleaner, water cooler, etc. The
sales are affected through the company sales
force.
Direct channels of distribution can take the
following forms:
• Direct selling or salesmanship. Example-
Eureka Forbes, Zenith computers.
• Vending machines. Example- Pepsi and Coke
• Manufacturers retail shop. Example- Bata,
Titan, Reebok.
• Factory outlets – small outlet just outside their
factory- export factory outlet.
• Direct mail order business. Example-
teleshopping network, books
Channel Flow
Channel Levels
Manufacturers – Customers:
•No Intermediary
Manufacturers – Retailers – Customers:
•This option consists of only one intermediary. It is short and simple. This is a popular in case
of consumer durables such as textiles, readymade garments, etc.
Manufacturers – Wholesalers – Retailers – Consumers:
•Here, two intermediaries exist. This is the most popular choice and is used by both small and
big companies alike. This is ideal for consumer non-durables. Example- Biscuits and
chocolates, soaps, shampoos, Parle-g etc.
Manufacturers – Agent – Wholesaler – Retailer – Consumer:
•This is the longest indirect channel available to a firm. The agent middlemen may be
commission agents, export merchants who manage trade on behalf of the manufacturer.
Companies’ with multiple product portfolio and producing consumer non-durables with
national and international market resort to this channel.
Channel Levels
 Service Sector Channels
• Marketing channels for service are quite different from marketing channels that are designed for
goods
• These are usually short because of the characteristics- intangibility, simultaneity, heterogeneity,
perishability etc.
• As Internet and other technologies advance, service industries such as banking, insurance, travel,
and stock buying and selling are operating through new channels.
• Marketing channels also keep changing in "person marketing." live programs- entertainers,
musicians, and other artists can reach prospective and existing fans online in many ways-their
own Web sites, social community sites such as Facebook and Twitter, and third-party Web sites.
• Politicians also must choose a mix of channels-mass media, rallies, spot TV ads, direct mail,
faxes, e-mail, blogs, Web sites, and social networking sites for delivering their messages to voters.
• Nonprofit service organizations such as schools, colleges, hospitals, government agencies,
religious institutions etc.- adopt a zero level or one level channel like franchisee restaurants
 Functions of Marketing channels
• Facilitating the exchange- The primary purpose of any channel of distribution is to bridge the
gap between the producer of a product and the user of it, whether the parties are located in the
same community or in different countries thousands of miles apart. The channel of distribution is
defined as the most efficient and effective manner in which to place a product into the hands of the
customer. The channel is composed of different institutions that facilitate the transaction and the
physical exchange.
• Match Discrepancy- discrepancy between demand and supply and discrepancy of
assortment(variety) -Manufactures usually follow a specialization model and produce one type of
product. For instance, a customer who is engaged in construction of a house needs cement, bricks,
steel, and sand simultaneously, But ACC only produces cement.
• Standardizing Transactions- By standardizing transactions, marketing channels automate most
of the stages in the flow of products from the manufacturer to the customers.
Taking the example of the milk delivery system, the distribution is standardized throughout the
marketing channel so that consumers do not need to negotiate with the sellers on any aspect,
whether it is price, quantity, method of payment or location of the product
 Functions of Marketing channels
• Matching Buyers and Sellers- The most crucial activity of the marketing channel
members is to match the needs of buyers and sellers. Normally, most sellers do
not know where they can reach potential buyers and similarly, buyers do not know
where they can reach potential sellers. From this perspective, the role of the
marketing channel to match the buyers’
• Providing customer service- Marketing channels, such as distributors,
wholesalers, and retailers, provide your business with three kinds of functions:
buying products for resale to customers, distributing products to customers, and
supporting sales to customers through financing and other services. Distribution
channels provide satisfaction to the consumer by providing services and by
supplying products in different varieties, colors, sizes, and according to fashion
and extend your market coverage to a wider group of customers.
Channel Dynamics
• Distribution channels may not be same forever. Distribution channel should be changed
according to environmental changes. Changing of channels according to time is called
channel dynamics. As the marketing is dynamic, so the distribution channel is dynamic.
• 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.
• Avon' door-to-door system for selling cosmetics was modified as more women
entered the workforce.
• Despite the convenience of automated teller machines, online banking, and telephone
call centers many bank customers still want "high touch" over "high tech," or at least
they want the choice Banks are thus opening more branches and developing cross-
selling and up-selling practices to capitalize on the face-to-face contact that results.
Channel Dynamics

Change in the market place have led to the evolution of:

• Vertical Marketing System
• Horizontal Marketing System
• Multichannel Marketing System
vertical marketing system (VMS)

• In a vertical marketing system, manufacturers, wholesalers, and retailers

participate together in the production and distribution process. Therefore,
business owners can manage their businesses efficiently and obtain a more
significant market share. A vertical marketing system tries to eliminate
competition and conflict that often arise between companies. As a result, there’s
better efficiency and a reduction in product costs.
• The system can be divided into three main types:
1. Corporate Vertical Marketing System
2. Administered Vertical Marketing System
3. Contractual Vertical Marketing System
Types of vertical marketing system

• Corporate. This type involves a single company that has ownership over all stages of the supply chain.
Although there’s only one business that controls all the production and distribution processes, each
organization inside this channel continues to manage the project. One of the examples is Amway. It’s
an American marketing company that manufactures beauty, home care, and health products. The
brand belongs to a corporate vertical marketing system because it sells products only through its
authorized stores. Hence, the company plays the role of a producer and distributor of its goods.
• Administered. Distribution channel are affected by the size and power of one of the member,
although there’s no contract.
• Simply put, a large company that has the most influence dominates the activities of others and can
secure strong trade cooperation and support from resellers. For example, Procter & Gamble, Gillette,
get high levels of cooperation in connection with displays, shelf space, promotions, and price policies
• Contractual. In this system, every member of the distribution channel performs as an independent
entity.
• Firms sign contracts with large distributors to sell their goods and stay competitive. Working with a
franchise is an example of a contractual type. To open one of such stores or cafes, individuals
purchase a license. However, they have to follow the standards, practices, and guidelines of a
franchisor. The famous examples of franchises are Pizza Hut, Dominos, and McDonald’s.
Horizontal Marketing Systems

• Another channel development is the horizontal marketing system, in which two or

more unrelated companies put together resources or programs to exploit an
emerging marketing opportunity.
• Each company lacks the capital, know-how, production, or marketing resources to
venture alone, or it is afraid of the risk.
• The companies might work together on a temporary or permanent basis or create
a joint venture company.
For example, many supermarket chains have arrangements with local banks to offer
in-store banking.
For example, tie-up between TVS-Whirlpool and Onida to market washing machines.
Frappuccino- Pepsi co and star bucks
Multichannel Marketing Systems

• Most companies today have adopted multichannel marketing. Disney

sells its DVDs through five main channels: movie rental stores such as
Blockbuster, Disney Stores (now owned and run by The Children's
Place), retail stores such as Best Buy, online retailers such as Disney's
own online stores and Amazon.com, and the Disney catalog and other
catalog sellers. This variety affords Disney maximum market coverage
and enables it to offer its videos at a number of price points.
 Inter-type Channel Conflict

These type of conflicts commonly arise in scrambled merchandising,

where the large retailers go out of their way to enter a product line
different from their usual product range, to challenge the small and
concentrated retailers.
Causes of Channel Conflict

• Role Ambiguity: The uncertain act of an intermediary in a multi-channel

arrangement may lead to disturbance in the channel of distribution and
cause conflict among the intermediaries.
• Incompatible Goals: When the manufacturer and the intermediaries do
not share the same objectives, both work in different directions to meet
their ends, this results in channel conflict. Example-profit maximization,
sales maximization, market share
• Marketing or Strategic Mis-Alignment: Sometimes, two-channel partners
promote the manufacturer’s product in a different manner, which created
two different images of the same product in the consumers’ mindset,
which creates conflicting brand perception.
Causes of Channel Conflict

• Difference in Market Perception: The manufacturer’s understanding of the

potential market and penetration into a specific region or territory, may
vary from the perception of the intermediaries, which can create conflict
and reduce the intermediary’s interest in capturing that particular market.
• Change Resistant: When the channel leader plans to modify the
distribution channel, the intermediaries may or may not accept this change.
Thus, it may result in a condition of discord or non-cooperation.
• Improper Geographic or Demographic Distribution: If the sales territory
has a narrow consumer base, and the channel leader allows many selling
partners, they tend to lose interest soon because of low profit and limited
sales.