What is a Distribution Channel?
A distribution channel is a set of institutions that involves the process of the movement of goods, services, or any information, an idea from the producer to the final consumers.
In very simple words, a distribution channel is a set of channels such as wholesalers, dealers, distributors, retailers, middlemen, or any intermediaries, etc. who participate in the transfer of products from producer to the consumers by means of exchange.
The channel of distribution is also called the marketing channel. By R.S. Davar, a marketing channel is a path traced in the direct or indirect transfer of ownership to a product, as it moves from the production point to final consumers or industrial buyers.
The main purpose of the marketing channel is to appropriately deliver the goods and services of a producer to the target consumers through the exchange process. In this process, the ownership or title of the products is transferred to the final consumers or industrial users from the producer.
A channel may be a group of people or firms through which the products are transferred. The major distribution channels or marketing intermediaries are:
- Agents, and
- Other marketing intermediaries.
The channel of distribution, as its name suggests, plays a role in the delivery route and helps to overcome the time, place, and possession vacuum that separates goods. The key functions of the members of the marketing channels are mentioned below:
Information: One of the major functions of the channel is the assimilation and dissemination of marketing information where it is required. Through channel members, the firm can collect various information about the marketing environmental factors which add up to select the best one and serve well to the target markets.
Promotion: There is no doubt on channel members do not promote the producer’s offerings. Since the members of marketing channels are scattered all over the market, they are obviously directly or indirectly involved in the promotion of manufacturer’s goods or services. Moreover, when the product is introduced in the market, through the channel members initiation and persuasive communication are done.
Contact: The marketing channel helps the business firm to develop contact with existing and potential buyers from the market. Where members of the channel develop a system whereby an organization’s offerings match with all consumer’s requirements.
Negotiation: It also plays one of the important roles which is negotiation. The marketing channel through its members develops a win-win situation for both the firm and its customers. Moreover, the channel facilitates a situation whereby both buyer and seller agree on a mutually set price which is key to transfer ownership.
Physical Distribution: The marketing channel also ensures the physical distribution i.e. the transportation of actual products to the hand of ultimate consumers. It is a great means of transfer of physical products from one place to the next.
Financing: Only the production of products and services does not make a profit to the firm. The produced goods and services need to be distributed where they are needed as the expectation of demand. As such, members of the channel have a significant role in the transfer of products they, are the main source of revenue for the marketing firm.
Risk Taking: One of the key functions, the channel of distribution take is the assumption of risk. This risk-taking function is often the key to a smooth flow of products from the production point to the consumption point.
Types of Distribution Channels
In general, there are two types of channels of distribution, namely, direct and indirect distribution. Where direct distribution means, straight purchase relation between the producer and consumers whereas indirect means the sales of goods is (simply) through the producer to wholesaler to the retailer and finally to consumers.
However, the types of distribution are better understood with the distribution channels for the consumer products and industrial products.
Channel of Distribution For Consumer Products
The channels of distribution used or designed for the consumer products are as follows:
i. Producer-Consumer Channel: Producer-Consumer channel is the direct distribution. Direct distribution does not need any middlemen to make sell the producer’s products. Since there are no middlemen this channel is also known as the Zero-Level channel of distribution. Here, all the marketing activities the producer or manufacturer does himself.
ii. Producer-Retailer-Consumer Channel: In this channel one middleman is used i.e., retailer. That is why the producer-retailer-consumer channel is also called a one-level channel. The retailer’s function is as middlemen or marketing intermediaries between producers and consumers. The distribution of offerings is done first between producer and retailer and finally, the retailer sells to the ultimate customers.
iii. Producer-Wholesaler-Retailer-Consumer Channel: In this channel structure, there are two middlemen used wholesaler and retailer, hence it is also called the two-level channel of distribution. In this channel structure, the first selling activity is between producer to wholesaler, then wholesaler to retailer, and the retailer sells to the final consumers.
iv. Producer-Agent-Retailer-Consumer Channel: In this channel system, instead of using wholesalers many producers prefer to use a producer’s agent, selling agent, broker, or any other agent. The agent then sells the product to the retailer who in for sell to the consumer.
v. Producer-Agent-Wholesaler-Retailer-Consumer: In this channel structure three levels of channel middlemen or marketing intermediate are used to reach the ultimate users, thus it is also called a three-level channel. The three marketing intermediaries are used are agent, wholesaler, and retailer. Here, agents collect the products from the producer and distribute them to wholesalers on a commission basis, wholesalers sell them to the retailer in small lot sizes, and the retailer’s direct sell to the ultimate users.
To sum up the channel design for consumer products, as such there are mainly two types of distribution channels direct and indirect. The first channel of distribution is direct distribution. The second, third, fourth, and fight channels are indirect channels since independent middlemen or intermediaries are used to reach the final consumers.
During the direct channel system, the producer exercises the maximum level of distribution control. While in an indirect channel system, the producer loses the controlling power over distribution functions. In an indirect channel system, independent middlemen such as wholesalers and retailers become dominant in controlling the distribution of the products.
Channel of Distribution For Industrial or Business Buyer
The channels of distribution designed for the industrial or business buyers are as follows:
i. Producer-Industrial Users (Business or Government User): Like producer to consumer, the producer to the industrial user is also a direct distribution channel without any intermediaries. Here, the producer directly sells his products to industrial users. Usually, the bulky, expensive, technically high-value products are purchased directly from the producer. These are the products purchased infrequently. It is seen that 75% of industrial products are directly purchased because of the high cost of using middlemen.
ii. Producer-Agent-Industrial User: A producer may use commission agents if he does not have his marketing department. Producers in this situation may be willing to control the distribution system till the products are delivered to the users. Also, a company that wants to introduce a new product in the market may prefer to use agents rather than its own sales force.
iii. Producer-Industrial Distributor-Industrial User: Producers of operating supplies and small accessory equipment use industrial distributors to reach their markets. For instance, the producers of building materials, construction equipment, and air conditioning equipment may heavily use industrial distributors. Because many industrial users heavily use these industrial products and the users are scattered geographically for which the direct sale may not be possible for the producer himself.
iv. Producer-Agent-Industrial Distributor-Industrial User: Many industrial products are explicitly used by many individuals and organizational users scattered geography. Moreover, the unit sale is too small to sell which makes it unfeasible to go through the agent directly to the industrial users. In such cases, the producer uses both agents and industrial distributors to supply the products. Decentralized inventories are needed to supply such products to the users rapidly. Thus, the storage services of the industrial distributors become essential in such cases.
Factors That Affect the Selection of Distribution Channel
The appropriate distribution channel a significant role in decision making. An appropriate marketing channel may uplift the sustainability of the firm, selection of selection hence is important.
How to select the best distribution channel? Selection of distribution channel means whether to select a direct distributon or indirect distribution channel. However, the selection of distribution channel is affected by the following factors,
The consumer is the primary factor that affects the selection of channels. The major consideration for consumers that affect the selection channel are:
i. Types of Consumer or Market: Consumer types are the primary factors that affect channel selection. If the marketing is industrial the wholesalers play a vital role in distributing products, while in the consumer market, retailers play a vital role.
ii. Number of Consumers: If the number of consumers is relatively small, the producer may use its sales force to sell directly to the ultimate users. If the number of customers is large the produces requires middlemen.
iii. Geographic Concentration of Market: when the buyers are concentrated in a few geographic areas, direct sales are more feasible. On the other side, if the market is spread over the entire nation, intermediaries are needed.
iv. Order Size: If the order size of the customer is significant the producer may directly sell to the customer because it is more economical for both. When the order size of the customer is small and heterogeneous, middlemen are needed as it is neither possible nor economical for the producer to distribute on their own.
Before selecting a channel of distribution for a product, the company should consider several relevant factors in its situation:
i. The Desire for Control: Producers willing to control the distribution of their products usually select a direct channel. By distributing products themselves they can achieve more aggressive promotion, reduce the time required for distribution, and can sell products at reduced cost and vice-versa.
ii. Managerial Ability and Experience: Producers lacking managerial ability and distribution experience generally use middlemen for the distribution of their products.
iii. Financial Resources: A business with adequate finances can establish its own sales force and branch offices. Financially weak companies on the contrary have to depend on middlemen.
iv. Services Required: Producers dealing in technical products that require adequate before-sale services and after-sales service usually opt for a direct channel. The reason behind choosing a direct channel is the lack of expertise on part of middlemen.
Selection of channel of distribution is also affected by the numerous product-related factors explained as follows:
i. Nature of Product: Perishable products are distributed through relatively direct channels because delays in the distribution of such products may damage marketability.
ii. Unit Value of the Product: Products with high unit value require short or direct channels compared to those of low unit value. The use of middlemen or long channels often incurs an additional cost to the product.
iii. Technical Products: Technical products are often distributed directly. To distribute those products, producers must have trained salesmen and servicemen who can explain the product to potential customers and who can provide pre-sale and post-sale services. Wholesalers and retailers normally cannot do this.
iv. Order Size and Weight of the Product: When the size of an order placed for the product is bulky, a direct sale is preferable because it minimizes the cost of distribution significantly. Similarly, heavy, bulky items, where freight is a significant part of the total value, are distributed directly to minimize physical handling.
Middlemen or Intermediaries Considerations
A company may not be able to arrange exactly the channels it desires. In this situation, the company has to use independent channels or middlemen. But the choice of a channel is affected by several middlemen factors such as:
i. Services Provided by Middlemen: When a producer is unable to provide marketing services required for the ultimate consumers or users, economically, he may select middlemen who can provide necessary services more economically.
ii. Availability of Desired Middlemen: The middlemen preferred by the producer may not be available because they may be carrying competitive products and do not wish to add another line. In this particular situation, it will be better for the producer to establish its own sales depots or branches.
iii. Sales Volume Possibilities: Middlemen may be used by the producer when he thinks that by using middlemen, sales volume will increase.
iv. Attitude of Middlemen towards the Producer’s Policies: Sometimes the marketing policies of the producers may not be acceptable to the middlemen. Some wholesalers or retailers may be willing to distribute products if they get sole agency for a particular territory. In this situation, it becomes difficult for a producer to select an appropriate distribution channel and has to use its own sales depots or branches.
The choice of a channel of distribution is affected by the nature and degree of competition in the market. When several producers offer homogeneous products to the same market, it is natural that they seek essentially the same channels.
In this scenario, it may be rather difficult to get the desired channel member when a company is offering a new or differentiated product, it is important to seek the most competent and dynamic middlemen who have promotion capabilities.