Marketing distribution channel (also known as the distribution channel) refers to the functions performed by the producer (marketer) or intermediaries to make a firm’s goods or services available to the end-user (customer).
Most producers do not sell their goods directly to the end users. Between the producers and final users exist one or more marketing channels that are a host of intermediaries performing a variety of functions.
Marketing-channel decisions are among the most critical decisions facing management as the company’s chosen channel(s) profoundly affect all other marketing decisions.
Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing is not feasible and when they can earn more by doing so.
The most important functions performed by intermediaries are information, promotion, negotiation, ordering, financing, risk taking, physical possession, and payment.
Manufacturers have many alternatives for reaching a market. They can sell direct or use one-, two- or three-level channels. Deciding which type(s) of channel to use calls for analysing customer needs, establishing channel objectives and identifying and evaluating the major alternatives, including the types and numbers of intermediaries involved in the channel.
Effective channel management requires selecting intermediaries and training and motivating them with the goal of building a long-term partnership that will be profitable for all the channel members.
Here we take a closer look at the nature and characteristics of a distribution channel, the different types of intermediaries and their roles in the distribution channel, the different marketing channel structures and their core characteristics, and the factors that influence the design and structure of distribution channels.
What is Distribution Channel?
Place in the Marketing Mix refers to the the channels of distribution that a company uses to get its products to the end users.
A channel of distribution is an organized network of agencies and institutions that, in combination, performs all the activities required to link producers with users to accomplish the marketing task (AMA).
Physical distribution refers to the movement of goods through channels.
The distribution channel considers the journey a product goes on to get from the source to the end user. Organisations that combine together to reduce risk and uncertainty do so by exchanging offerings which are of value to others in the channel. (Baines, Fill and Rosengrum, 2016)
Importance of Distribution Channels
Distribution channels (along with marketing channels) exist to create utility for customers. The major categories of channel utility are:
- Place utility: the availability of a product or service in a location that is convenient to a potential customer
- Time utility: the availability of a product or service when desired by a customer
- Form utility: the availability of the product processed, prepared in proper condition and/or ready to use
- Information utility: the availability of answers to questions and general communication about useful product features and benefits.
The Case of Coca-Cola
The motto is to always be “within an arm’s reach of desire”. This is to create utility (and temptation) which results in more units being consumed.
“We are able to create global reach with a local focus because of the strength of the Coca-Cola supply chain, which comprises our company and our bottling partners worldwide.”
Distribution Channels vs Marketing Channels
There are some who confuse marketing channels with channels of distribution; however, they are different.
A marketing channel helps create awarness about products so that potential customers can consider buying what you sell. Distribution channels on the other hand helps get the products into the hands of buyers.
- Example of channel marketing: Using Facebook ads to get targeted traffic to your ecommerce site.
- Example of channels of distribution: Using a fulfillment center to ship products sold from your ecommerce site.
Advantages and Disadvantages of Distribution Channels
Advantages
Fewer buyers to communicate with on each channel: time and relationship with buyer is important.
Less capital needed to invest in direct consumer communication, distribution etc.
Potential to leverage market in line with distribution channels, gaining wider market coverage quicker.
Dis-advantages
High-value, infrequent buyers are high-risk: need for identification & detailed information about buyer incentives.
Lack of direct influence & control over end consumer.
Buyer may have dominant negotiating position regarding price.
Buyer may de-emphasize brand & not cement consumer loyalty.
Structure of Distribution Channels
Distribution channels can link manufacturers to customers directly or indirectly (via agents, wholesalers, distributors or retailers).
Channel Structure
Distribution channels can be:
- Direct: Producer to Consumer
- Indirect: Producer to Consumer via Intermediaries
- Multichannel: Direct plus Indirect channels
Related: Omnichannel retailing explained
Distribution channels are systems that link manufacturers to customers. The link can be direct or indirect via agents, wholesalers, distributors or retailers.
Direct Involvement: If the company choses direct involvement the company establishes its own sales force, operates it’s own retail stores, accepts Internet orders etc.
Direct involvement in distribution in a new market can entail considerable expense. Sales representatives and sales management must be hired and trained.
Indirect Involvement: If the company choses indirect involvement the company uses independent agents such as distributors or retailers to move the goods to the end customer.
Types of Intermediaries
The benefits of using intermediaries include: Improved Efficiency, Product Assortment, Accessibility, Time Utility, Information Utility, Ownership Utility, Specialist Services.
The various types of Intermediaries include:
Agents or brokers: Are principal intermediaries between the seller and buyer, bringing them together without taking ownership of the offering. Have legal authority to act on behalf of manufacturer. Eg Unis using agents to recruit abroad.
In Global Marketing, these independent agents are also called “Foreign-Market Channel Members”.
Merchants: Same as agent but takes ownership of a product.
Franchises: Hold a contract to supply and market an offering to the requirements or blueprint of the franchisor.
Distributors or dealers: Distribute the product. Offer value through eg credit, after sales service – eg automotive distributors. They sometimes receive exclusive distribution rights for a specific geographic area or country.
Wholesalers: Stocks goods before the next level of distribution and takes both legal title and physical possession of the goods. They move manufacturer’s products to retailers. In B2C – not normally dealing with end consumer; B2B sales made direct to end user.
Retailers: They are the final member of the consumer distribution channel. They sell directly to end-consumers and may purchase directly from manufacturers or wholesalers. The size and accessibility of retail channels vary greatly by country.
Import Intermediaries: They identify consumer needs in their local market and search the world to satisfy those needs. They normally purchase goods in their own name and act independently of manufacturers. They are a good way to reach wholesalers and retailers in an area. They use their own marketing strategies and keep in close contact with the markets they serve.
When choosing individual channel members, the producer must ask the questions below through research.
Is intermediary convenient for customer support? Does intermediary have capable sales/ support staff? Can intermediary process, store, display adequate quantities and/ or varieties of product? Is intermediary financially sound? Will intermediary be a strong marketing partner? Is image/reputation compatible with brand and product?
Planning Distribution Channel Strategy
Organisations have to make several decisions related to distribution channels such as how many channel levels to use, how many and what type of channel members to choose, which channel functions must be covered by someone other than the organisation, who will handle each function, and so on.
A distribution strategy is a key part of the distribution system and it needs to be consistent with other aspects of the marketing strategy: product polices, pricing strategy and communication strategy.
Factors influencing channel decision are:
- Market factors: Buyer behaviour & preference, expectations, e.g. cars require local service facilities
- Producer factors: Producers lack adequate resources to perform as a channel, e.g. trained staff, finance,..
- Product factors: Perishables such as milk, bread, frozen food, etc. require facilities & short channels
- Competitive factors: Choosing franchise or exclusive dealing arrangement using trained staff to sell to target markets exclusively.
Elements of a Distribution Strategy
Four aspects need to be considered when designing the distribution strategy in an international market.
Channel Strategy: Distribution Density/Intensity
Density is the amount of exposure or coverage desired for a product, particularly the number of sales outlets necessary to provide for adequate coverage of the entire market.
It is the number of sales outlets or distribution points required for the efficient marketing of a firm’s products.
The density is dependent on the shopping or buying habits of the average customer. This behaviour varies greatly from country to country.
Choosing the optimum distribution network requires the marketer to examine how customers select dealers and retail outlets by product category:
For many consumer goods an extensive or wide distribution is required.
Convenience goods are bought frequently and in nearby outlets. Appliances or clothes require a more limited and or selective distribution with fewer outlets per market area. Speciality goods require a very limited or exclusive distribution.
- How many channel members to use at each level?
- What type of channel members to use at each level?
- Intensive distribution: Many intermediaries to allow for maximum market coverage.
- Selective distribution: In a small number of outlets or intermediaries, e.g. Gucci
- Exclusive distribution: In a few outlets for exclusivity within each market or given area.
Channel length Decisions
The concept of channel length involves the number of intermediaries involved in bringing the product from the firm to the consumer (direct versus indirect).
The number of intermediaries directly involved in the physical or ownership path of a product from the manufacturer to the customer is indicative of the channel length.
Long channels have several intermediaries; short or direct channels have few or no intermediaries Products with extensive distribution, or large numbers of final sales points, tend to have longer channels of distribution.
Channel length is usually influenced by two factors: A product’s distribution density & The availability of channel members.
- Zero-level channel: A direct channel in which marketers maintain more control over customers transactions. (B2B: Pepsi to Pizza Hut)
- Indirect channels: This may be one-level, two-level or three-level. (Level of services offered & cost)
- Intermediaries: These help marketers reach multiple or dispersed markets, offer customers with specialised needs, offer training or service. (Pet food / organic food)
Channel Alignment and Leadership
Alignment is the structure of the chosen channel members to achieve a unified strategy.
The longer the channel the more difficult it becomes to ensure that various channel members coordinate their actions so that a unified approach to the marketing of a product or service can be achieved.
The international company will find it much easier to control the distribution channel if a local subsidiary with a strong sales force exists.
In countries where the company has no local presence and depends on independent distributors, control is likely to slip to the independent distributor.
Distribution Logistics Decisions
Distribution Logistics involve the physical flow of products as they move through the channel.
Planning, Implementing & Controlling the physical flow of materials and finished products from points of origin to points of use.
The mechanics of managing the flows through the value chain from point of origin to point of sale or consumption are addressed by logistics. Marketers aim for a logistics strategy that is responsive to customer needs yet meets internal financial targets. When planning for logistics it is important to weigh the total cost of logistics against the level of consumer responsiveness that is appropriate to meet the organisation’s marketing plan objectives.
As geographic distances to foreign markets grow, competitive advantages are often derived from a more effective structuring of the logistics system either to save time or costs.
Many manufactures and retailers are restructuring their logistics efforts; they divest their distribution in favour of outside specialists.
Key factors to think about when planning logistics:
- Storage of goods, where will supplies, parts, and finished products be stored, for how long and under what conditions?
- Inventory, how goods are available and ready for customers?
- Order processing / fulfillment- who will be responsible for taking orders, confirming product availability, packing products for shipment, tracking orders in transit etc..?
- Transportation- how will parts, and finished products be transported?
- Warranties / returns
- Market knowledge (forecasts)
Ethical Issues in Distribution
Here are some of the ethical issues that firms face when it comes to Distribution:
- Slotting allowances (shelf rent vs. s/s manufactures)
- Grey markets (Levi vs. Tesco imports – price/position)
- Exclusive dealing (forced to stop selling competitor goods)
- Restrictions in supply (UK farming cutting down supply)
- Fair-trading (Big buyers force down prices vs. companies pay for low set prices)
Marketing Channel Management
Marketing Channel Management requires the balancing of three main elements:
Economics – the management of resources / costs in order to achieve the targeted return on investment.
Coverage is about optimizing the exposure, availability and access by customers to the proposition.
Control refers to achieving the optimum channel performance by balancing decisions about all aspects of the mix, within targeted channel costs and sales goals.
Read: Marketing Mix (4P’s and 7P’s)
Designing Global Distribution Systems
When designing a Global Distribution System, it is important to keep in mind that an efficient channel in one market might not be efficient in another market.
Channel strategy in a global marketing programme must fit the company’s competitive position and overall marketing objectives in each international market.
Global marketers need to understand how environmental influences (internal, macro and micro factors) may affect distribution strategies and options in each international market.
Factors (internal and external) might affect the distribution channel decision in global marketing?
cost of distribution, quality of infrastructure such as roads and telecommunication, cultural preferences and shopping habits of consumers, desired control , level of economic development, disposable income of consumers, legal and political system.
Questions to ask:
- Who are the target customers, and where are they located?
- What are their information requirements?
- What are their preferences for service?
- How sensitive are they to price?
- What is the cost of providing the channel services for each market?
Process of Designing a Global Distribution System
- Develop a Distribution Strategy: distribution density, channel length, channel alignment, distribution logistics
- Establish Criteria for Selecting Distribution Partners: geographic coverage, managerial ability, financial stability, annual volume, reputation
- Locate Potential Distribution Partners
- Solicit the Interests of Distributors
- Screen and Select Distribution Partners
- Negotiation Agreements
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