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Selecting Channel of Distribution

Presented by:

Dr. Harjit Singh

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Distribution Channels

A distribution channel is a set of independent organizations involved in the process of making a product or service available to the consumer or business user

Used to move the customer towards the product….

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1. Information

2. Promotion

3. Contact

4. Matching

5. Negotiation

6. Physical Distribution

7. Financing

8. Risk taking….

Channel Functions

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Marketing Intermediaries

Middlemen – independent link between producers and consumers. i.e. intermediaries

Merchant middleman – actually buys goods and takes title/ownership

Agent – business unit that negotiates purchases and sales but does not take ownership

Wholesaler – a merchant who primarily stores and handles goods in large quantities

Retailer – merchant middleman who sells to final consumers

Broker – middleman who serves as a go-between for the buyer and seller….

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Marketing Intermediaries Contd.. Manufacturer’s agent – an agent who operates by

contract serving a geographic territory Distributor – wholesale middleman in lines with

selective or exclusive distribution Jobber – a middleman who buys from

manufacturers and sells to retailers. (A wholesaler) Facilitating agent – a firm that performs distribution

tasks other than buying, selling and transferring title might include financing, shipping, warehousing……

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Why Use Marketing Intermediaries?

Because it has been seen that selling through wholesalers and retailers usually is much more efficient and cost effective than direct sales..

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Role of IntermediariesRole of Intermediaries

Greater efficiency in making goods available to target markets.

Intermediaries provide Contacts Experience Specialization Scale of operation

Match supply and demand….

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InformationInformation

PromotionPromotion

ContactContact

MatchingMatching

NegotiationNegotiation

PhysicalPhysical

Gathering and distributing marketing research about the environment

Gathering and distributing marketing research about the environment

Developing and spreading persuasive communications about an offer

Developing and spreading persuasive communications about an offer

Finding and communicating with prospective buyers

Finding and communicating with prospective buyers

Shaping and fitting the offer to the buyer’s needShaping and fitting the offer to the buyer’s need

Agreeing on price and terms of the offer so ownership or possession can be transferred

Agreeing on price and terms of the offer so ownership or possession can be transferred

Distribution: transporting and storing goodsDistribution: transporting and storing goods

FinancingFinancing Acquiring and using funds to cover the costs of channel work

Acquiring and using funds to cover the costs of channel work

Distribution Key Functions Channel

Risk TakingRisk Taking Assuming financial risks such as the inability to sell inventory at full margin

Assuming financial risks such as the inability to sell inventory at full margin

Distribution Channel Functions

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WholesalerWholesaler JobberJobber RetailerRetailer ConsumerConsumer

ConsumerConsumer

RetailerRetailer ConsumerConsumer

ProducerProducer

0-level channel

WholesalerWholesaler RetailerRetailer ConsumerConsumer ProducerProducer

2-level channel

ProducerProducer

3-level channel

1-level channel

ProducerProducer

Channel Level - Each Layer of Marketing Intermediaries that Perform Some Work in Bringing the Product and its Ownership Closer to the Final Buyer.

Number of Channel Levels

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Verticalmarketingchannel

Manufacturer

Retailer

Conventionalmarketingchannel

Consumer

Manufacturer

Consumer

Retailer

Wholesaler

Wh

ole

sale

r

Conventional Distribution Channel vs. Vertical Marketing Systems

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Wholesalers

Buy from manufacturers in bulk They create value for suppliers and retailers

by handling their function efficiently and effectively

They seek producers of major brands for which sales and profits are greatest…

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Store Retailing

Mass merchandisers carry a broad assortment of goods and compete based on selection and price

Specialty stores handle deep assortments in a limited number of product categories

Convenience stores are retailers whose primary advantage is location…..

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Non-Store Retailing

Catalogs Direct mail Vending machines Television home shopping Direct sales E-commerce…..

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Channel Considerations

Selecting a channel of distribution can depend on one of these factors . . .

1. Distribution coverage required

2. Degree of control desired

3. Total distribution cost

4. Channel flexibility……

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Factors Influencing Channel Choice

(Channel Considerations)Various Channel Considerations are:-1. Product Characteristics

2. Consumer Characteristics

3. Middlemen Considerations

4. Company Characteristics

5. Market Characteristics

6. Environmental Factors

7. Other Factors…..

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1. Product Characteristics

It Includes: Unit value of goods Product Features-Weight, size, Volume, Perishable

Technical Features Product Standardization…..

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2. Consumer Characteristics

It refers to- Buying habits Size and Location of Market Order Size Number of Customers Geographical Dispersion Frequency of Purchase…..

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3. Middlemen Characteristics

It includes- Service render by the middlemen Cooperation in implementing promotional activities Availability of Suitable Middlemen Cost of Retaining Distribution policy of the firm His market exposure Reputation in the market….

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4. Company Characteristics

Reputation of the Firm Financial Situation Past Channel Experience Current marketing Policies Company Product Mix Status of the Company - Old/New

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5. Market Characteristics

Market Size Nature of the Market – Stable/Volatile

Size of Consumer order Competitors’ Practices Frequency of Customers’ Orders…

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6. Environmental Factors

Stage of the Economy – Inflation/Deflation Taxation Policies Political Influences Cultural Influences…

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7. Other Factors

Government Attitude Competitors’ Policy International Trends Market Developments Market Coverage Geographical…

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Advantages Disadvantages Franchisor

1. Capital for growth2. Faster growth3. Additional management4. Additional income

1. Lower potential profits2. Controlling service quality3. Controlling firm image

Franchisee

1. Lower risk2. Established brand name3. Successful business plan4. Expert assistance

1. Franchisee fees2. Lack of freedom3. Controlled by franchisor

Franchising

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Channel Behavior

Channel members are dependent upon one another and must work together for the channel to operate successfully

Members should understand and accept their roles, coordinate their goals and activities, and cooperate to attain overall channel goals…

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How Conflict EmergesHow Conflict Emerges

When a channel member perceivesthat another member’s actions hamper the

attainment of his or her goals

Direct, personal, and opponent-centered behavior

Behavioral trademarks

Cause

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Reasons of Channel Reasons of Channel ConflictConflict

Non-clarity of role Resource Scarcities Perceptual Differences Expectational Differences Decision Domain Disagreements Goal Incompatibilities Profit/Sales/Customer

Satisfaction

Communication Gaps……

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Conflict & Channel EfficiencyConflict & Channel Efficiency

Can conflict increase efficiency?

Does conflictdecrease

efficiency?

Does conflict have any affect?

How does conflict affect channel

efficiency?

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Effects of Channel Conflicts

1. Negative Effect

2. No Effect or

3. Positive Effect ….

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Effects of Channel ConflictEffects of Channel Conflict

1. Negative Effect: Reduced Efficiency

As the level of conflict increases,

Channel efficiency declines

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Effects of Channel Effects of Channel ConflictConflict

2.No Effect: Efficiency Remains Constant

Exists in channels characterized byhigh level of dependency amongmembers

Channel efficiency is not affected

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Effects of Channel ConflictEffects of Channel Conflict

3. Positive Effect: Efficiency Increased

Conflict might drive for eitheror both members to reappraise theirpolicies

Channel efficiency increases

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Channel Conflict

Horizontal conflict is conflict between firms at the same level of the channel i.e. retailer to retailer

Vertical conflict, which is more common, refers to conflicts between different levels of the same channel i.e. retailer to wholesaler…

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Managing Channel ConflictManaging Channel Conflict

Detectingconflict

Appraising theeffect ofconflict

ResolvingconflictManaging

Conflict

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Detecting Channel ConflictDetecting Channel Conflict

Regularly survey other members’perceptions of firm’s performance

Perform marketing channel audit

Form distributors’ advisory councilsor channel members’ committees

OR

OR

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Communication ProcessesCommunication Processes

Five Behavioral Problems in Channel Communications

1.Differences in goals

between manufacturers &

their retailers

2.Differences in the kinds of

language they useto convey information

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Communication ProcessesCommunication Processes

Behavioral Problems in Channel Communications

3.Perceptual differences

among members

4.Secretive behavior

5.Inadequatefrequency

ofcommunication

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Power in Marketing Channels

Power Defined:

The capacity of one channel member to get another channel member to do

something that he otherwise would not have done.

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Bases of Power for Channel Control

1stPlace

Reward Power

Coercive Power

Legitimate Power

Referent Power

Expert Power.

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Reward PowerReward Power

Coercive PowerCoercive Power

Legitimate PowerLegitimate Power

Referent PowerReferent Power

ExpertExpert

Extent to which an entity can control the dispensing of rewards or benefits.

Extent to which an entity can control the dispensing of rewards or benefits.

Power derived through the ability to punish.Power derived through the ability to punish.

influence we have because of our formal position or role

influence we have because of our formal position or role

Individual power based on a high level of identification with, admiration of, or respect

for the power holder.

Individual power based on a high level of identification with, admiration of, or respect

for the power holder.

Power derived through advanced knowledge or experience in a particular subject.

Power derived through advanced knowledge or experience in a particular subject.

Nature Function

Types of Power

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Involves entire supply chain Increasing importance of logistics

effective logistics is becoming a key to winning and keeping customers.

logistics is a major cost element for most companies.

the explosion in product variety has created a need for improved logistics management.

information technology has created opportunities for major gains in distribution efficiency….

Logistics

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Goals of Logistics systemGoals of Logistics system• Provide a Targeted Level of Customer Service at

the Least Cost.

• Maximize Profits, Not Sales.

Higher Distribution Costs/ Higher Customer Service Levels

Lower Distribution Costs/ Lower Customer Service Levels

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Logistics FunctionsLogistics Functions

Order Processing Warehousing Inventory Management Transportation Design system to minimize costs of attaining

objectives….

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Transportation ModesTransportation Modes

RailNation’s largest carrier, cost-effective for shipping bulk products, piggyback

RailNation’s largest carrier, cost-effective for shipping bulk products, piggyback

TruckFlexible in routing & time schedules, efficient

for short-hauls of high value goods

TruckFlexible in routing & time schedules, efficient

for short-hauls of high value goods

WaterLow cost for shipping bulky, low-value

goods, slowest form

WaterLow cost for shipping bulky, low-value

goods, slowest form

PipelineShip petroleum, natural gas, and chemicals

from sources to markets

PipelineShip petroleum, natural gas, and chemicals

from sources to markets

AirHigh cost, ideal when speed is needed or to

ship high-value, low-bulk items

AirHigh cost, ideal when speed is needed or to

ship high-value, low-bulk items

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