Everything you need to know about the factors affecting channels of Distribution! Learn about: A. Factors Influencing Channel Selection 1. Factors Pertaining to the Product 2. Factors Pertaining to the Consumer or Market 3. Factors Pertaining to the Middlemen 4. Factors Pertaining to the Producer or Company B. Factors to Consider When Choosing a Distribution Channel 1. Environmental Factors 2. Financial Factors 3. External Factors C. Criteria for Selection of Distribution Channel 1. Nature of the Market 2. Nature of the Product 3. Degree of Competition 4. Size of the Organisation 5. Degree of Control 6. Financial Strength 7. Cost of Marketing 8. Environmental Factors.
Different factors affect the choice of a distribution channel and differ from firm to firm. The choice of suitable distribution channel is one of the most important decisions to be taken while marketing products because at the end of the day it will be the channel that will have an impact on the time and costs of distribution and the volume of the sales generated by the company. Channel infrastructure has also been found to impact pricing and promotion efforts of the distributors and often they clearly indicate the role to be played by the intermediaries in the distribution chain.
This article will also help you to get the answers of:
- Factors Affecting Channels of Distribution
- Explain the Factors that Influence Choice of Distribution Channel
- Factors Influencing Channel Selection in Marketing Management
- Factors Influencing Channel Selection
- Factors to Consider When Choosing a Distribution Channel
- Criteria for Selection of Distribution Channel
- Factors that Determine Selection of a Channel of Distribution
Some of the major factors affecting selection of channel are organization objectives, type of product, nature and extent of market, existing channel for comparable product, buying habits of consumers and channel availability. Company objectives need to be known before designing a channel that whether it wants to have mass appeal and rapid penetration of its products or it wants to be a niche player.
Factors Affecting Channels of Distribution in Marketing Management
Factors Influencing Channel Selection:
Every producer, in order to pass on the product to the consumer, is required to select a channel for distribution. The selection of the suitable channel of distribution is one of the important factors of the distribution decisions.
The following factors influencing the selection of the channel of distribution:
1. Factors Pertaining to the Product:
The selection of proper channel of distribution can only be made keeping in view the nature, qualities and peculiarities of the product.
The following factors concerning the product, affect the selection of the channel of distribution:
i. Price of the Product – The products of a lower price have a long chain of distributors. As against it, the products having higher price have a smaller chain. Very often, the producer himself has to sell the products to the consumers directly.
ii. Perishability – The products which are of a perishable nature need lesser number of the intermediaries or agents for their sale. Most of the eatables (food items), and the bakery items are distributed only by the retail sellers.
iii. Size and Weight – The size and weight of the products too affect the selection of the middlemen. Generally, heavy industrial goods are distributed by the producers themselves to the industrial consumers.
iv. Technical Nature – Some products are of the nature that prior to their selling, the consumer is required to be given proper instructions with regard to its consumption. In such a case less of the middlemen are required to be used.
v. Goods Made to Order – The products that are manufactured as per the orders of the customers could be sold directly and the standardized items could be sold off only by the middlemen.
vi. After-Sales Service – The products regarding which the after-sales service is to be provided could be sold off either personally or through the authorized agents.
2. Factors Pertaining to the Consumer or Market:
The following are the main elements concerned with the consumer or the market:
i. Number of Customers – If the number of customers is large, definitely the services of the middlemen will have to be sought for. As against it, the products whose customers are less in number are distributed by the manufacturer himself.
ii. Expansion of the Consumers – The span over which are the customers of any commodity spread over, also affects the selection of the channel of distribution. When the consumers are spread through a small or limited sphere, the product is distributed by the producer himself or his agent. As against it, the goods whose distributors are spread throughout the whole country, for such distributors, services of wholesaler and the retailer are sought.
iii. Size of the Order – When bulk supply orders are received from the consumers, the producer himself takes up the responsibility for the supply of these goods. If the orders are received piece-meal or in smaller quantities, for it the services of the wholesaler could be sought. In this way, the size of the order also influences the selection of the channel of the distribution.
iv. Objective of Purchase – If the product is being purchased for the industrial use; its direct sale is proper or justified. As against it, if the products are being purchased for the general consumption, the products reach the consumers after passing innumerable hands.
v. Need of the Credit Facilities – If, for the sale of any product, it becomes necessary to grant credit to any customer, it shall he helpful for the producer that for its distribution, the services of the wholesaler and retailer businessmen be sought. In this way, the need of the credit facilities too influences the selection of the channel of distribution.
3. Factors Pertaining to the Middlemen:
The following are the main factors concerned with the middlemen:
i. Services Provided by Middlemen – The selection of the middlemen is made keeping in view their services. If some product is quite new and there is the need of its publicity and promotion of sales, then instead of adopting the agency system, the work must be entrusted to the representatives.
ii. Scope or Possibilities of Quantity of Sales – The same channel should be selected by means of which there is the possibility of more sales.
iii. Attitude of Agents towards the Producers’ Policies – The producers generally prefer to select such middlemen who go by their policies. Very often when the distribution and supply policies of the producers are being disliked by the middlemen, the selection of middlemen becomes quite limited.
iv. Cost of Channel of Distribution – While selecting the channel of distribution, the cost of distribution and the services provided by the middlemen or agents too must be kept into consideration. The producers generally select the most economical channel.
4. Factors Pertaining to the Producer or Company:
The following factors, concerning the producer, affect the selection of the channel of distribution:
i. Level of Production – The manufacturers who are financially sound and are of a larger category, are able to appoint the sales representatives in a larger number and thus could distribute the commodities (products) in larger quantities. As against it, for the smaller manufacturers, it becomes necessary to procure the services of the wholesalers and the retail traders.
ii. Financial Resources of the Company – From the financial point of view, the stronger company needs fewer middlemen.
iii. Managerial Competence and Experience – If some producer lacks in the necessary managerial experience or proficiency, he will depend more upon the middlemen. The new manufacturers in the beginning remain more dependent upon the middlemen.
Factors Affecting Channels of Distribution – Factors to Consider When Choosing a Distribution Channel
Some of the major factors affecting selection of channel are organization objectives, type of product, nature and extent of market, existing channel for comparable product, buying habits of consumers and channel availability. Company objectives need to be known before designing a channel that whether it wants to have mass appeal and rapid penetration of its products or it wants to be a niche player.
In the context of type of products, it is generally understood that perishable products should have shorter distribution channel while the FMCG items need to have a wide reaching, intensive distribution channel. The distribution of consumer and industrial products requires different sets of channel structures.
In certain cases, a company may choose an existing channel of distribution for a relatively new product. The buying habits of consumers need to be properly known for setting up distribution channel.
The choice of suitable distribution channel is one of the most important decisions to be taken while marketing products because at the end of the day it will be the channel that will have an impact on the time and costs of distribution and the volume of the sales generated by the company.
Channel infrastructure has also been found to impact pricing and promotion efforts of the distributors and often they clearly indicate the role to be played by the intermediaries in the distribution chain.
We will delve into the various factors to be considered while choosing a distribution channels in greater detail:
1. Product Related Factors:
The nature and type of products have an important role to play in the choice of the channel.
Some of the main characteristics of the products that are to be considered in this matter are:
i. Unit Value:
Products of low unit value are generally sold through intermediaries as direct selling of such products have a negative impact on companies in question. Low priced and high turnover articles like cosmetics and stationery items have been found to flow through long channels.
ii. Perishability:
Perishable products like eatables have a short channel length as they cannot be stored for long. Similarly products of seasonal nature have short channel lengths. Products that are subject to frequent changes in style and other aspects are also distributed through short channels. Products that are considered durables are sold through agents and merchants.
iii. Bulk and Weight:
Heavy or bulky products are distributed through shorter channels so as to minimize the product handling costs.
iv. Standardization:
Customized products are found to have short channels as they require direct contact between the producer and the consumers. Standardized products on the other hand are found to be sold through various intermediaries.
v. Technical Nature:
Those products that require demonstration or installation or rigid after sales service are often sold directly to customers.
vi. Product Line:
Companies who have wide range of products are often found to set up their own retail outlets since it is economical to them. However those companies that have very few products are often found to sell those through middlemen.
vii. Age of Product:
New products or products that are at the introductory stage of the life cycle need greater promotional effort and there are very few intermediaries to handle the same.
2. Market Related Factors:
The nature and type of customers is an important consideration for the choice of distribution channel.
i. Consumer or Industrial Product:
Purpose of buying has an important impact on channel. However goods purchased for industrial use are sold directly through agents. This is because industrial users buy large quantities and manufacturers can effortlessly establish direct contact with them.
ii. Number and Location of Buyers:
When the number of customers (both existing and potential) are small the distribution channel covers a small area while in case of products that have large number of products, the channels is widely scattered having many wholesalers and retailers
iii. Size and Frequency of Order:
Direct selling is found to be appropriate in case of large and infrequent orders but in case of small and frequent orders, intermediaries are generally preferred. Companies often use different sorts of distribution channels for different types of products in their kitty
iv. Buying Habits of Customers:
The amount of time and effort customers are willing to spend on a product is an important consideration. Customer expectations have to be considered in a big way while deciding upon channel.
3. Company Related Factors:
Along with the objectives of a company, the nature and size of a company play an important role in channel decisions.
i. Market Standing:
Reputed companies often have the liberty to eliminate intermediaries than the lesser known or newly formed companies in the market.
ii. Financial Resources:
Large firms with sufficient funds have the ability to set up their own retail shops to sell directly to customers but then in case of weak enterprises, they need to depend on middlemen for their products to reach the end user.
iii. Management:
The competency level and the experience of the management have an influence on channel decision. If management of a company have proper knowledge and experience of distribution, it may prefer direct selling. Firms whose management lack know how about various aspects of business have to depend on middlemen.
iv. Volume of Production:
Big firms with large output find it suitable to set up their own retail outlets but with companies having small outputs, they find it economical to distribute through middlemen.
v. Desire for Control of Channel:
Firms interested in exercising proper control on the distribution chain intend at keeping short distribution channels. This helps them to go for aggressive promotions and understand the target audience in a better way. When such desires are absent in companies, they go on to employ middlemen.
vi. Services Provided by Manufacturers:
When companies plan to sell directly to customers, they have to consider the after sale part too but when firms are not in a position to offer such services, they have to depend on middlemen.
4. Middlemen Related Factors:
Middlemen or intermediaries play a defining role in the success of distribution policy set up by companies. There are many companies who are not quite confident about the intermediaries and coordinating with them and such companies aim at having direct contact with the end user.
i. Availability:
When competitive and cost effective middlemen are available, companies will like to go for having suitable number of intermediaries in the distribution chain but then, when such scope is not available, companies move out to have their own sales force reaching out to customers.
ii. Attitudes:
The success of marketing products depends on the attitudes of the middlemen. When middlemen believe in the policies of the company and are interested to carry on the mission of the company, they work as extensions of the company but then when such attitudes are absent and they rather pose hurdles for the company, firms need to have their own method of distribution.
iii. Services:
When the middlemen are found to provide such services like financing, storage, promotion etc., it is always better for a company to have the middlemen in the distribution chain.
iv. Sales Potential:
Intermediaries with proper sales potential are always required by firms since that will ensure greater penetration of products in a cost effective manner.
v. Costs:
There are costs involved in setting intermediaries and there are costs involved in having own distribution chain but then the two types of costs need careful evaluation and comparison and the necessary decision to be taken.
vi. Legal Constraints:
In certain products, government regulations play an important role in channel decisions. In cases of drugs and liquors, they are to be distributed only through licensed shops.
Carrying on with the topic of middlemen, there are two major types of middlemen viz. Agent middlemen and Merchant middlemen. Agent middlemen are functional middlemen do not take the ownership and delivery of goods. They only assist in the buying and selling of goods.
Any company needs to have a clear understanding of the market characteristics before beginning with the process of selecting middlemen:
i. Identifying specific target segments within a geography
ii. Specifying market goals in terms of volume, market share and profit margins
iii. Specifying financial and personal commitments for the development of distribution chain
iv. Identifying control and length of channels in terms of sale and channel ownership
Distribution channels vary depending on target market size and competition available within distribution intermediaries. Major elements in distribution decisions include the various functions performed by middlemen and also the cost of services along with their availability and the extent of control of the manufacturer.
There are two types of channel costs viz. capital or investment cost of developing the channel and the continuing cost of maintaining the same. The second type of cost can be in the form of direct expenditure for the maintenance of company’s selling force. The cost of intermediaries include transporting and storing of products, breaking bulk and providing credit to local advertising sales representatives and negotiations.
As far as capital requirements are concerned, a critical aspect is the cash flow patterns associated with using a certain type of middleman. Maximum investment is required by companies that sets their own distribution channels. Using middlemen has been found to reduce the overall distribution costs of a company in most cases.
There are various issues involved with channel design. What are the activities required for channel design and who will perform what function need to be considered. The relationship between activities and service levels has to be effectively understood.
Another major issue will include the number of channel members required and the relationship between various product categories. The roles, responsibilities, remuneration and performance of channel members have to be considered for channel design.
There are various steps involved in channel design:
a. Defining customer needs
b. Clarifying channel objectives
c. Considering alternate systems to meet objectives
d. Estimating cost of operating channel system
e. Evaluating alternatives
f. Finalizing the ‘ideal’ system
In the context of customer needs, there are various aspects like lot size, waiting time, variety and place utility. Lot size refers to the most convenient pack size which consumers can buy at a point of time. Waiting time refers to the time elapsed between the desire to buy a product and the time when the actual purchase is made.
Variety refers to choice of brands, packs and products. The choice of buying from a place where the customer wants to buy from is what place utility is all about. Some of the components of channel design is revenue generation and physical delivery of goods and services.
The first step of the channel design process is segmentation that refers to putting customers in similar clusters based on their needs. Each customer segment has a different need that needs to be serviced by the channel. The process of segmentation offers an idea to the sales manager regarding the kind of channel members required.
The second step of channel design process is positioning which defines the channel element required to service each of the identified segments. The number of each category of intermediary is decided based on the number of consumers to be serviced in each segment.
The service objectives and flows are also decided in this step. It is definitely not possible to service all the segments as a marketer and hence focus is required. Sales managers need to decide the segments that are to be serviced. Competitive scenario helps in deciding on the focus issue.
Development or the final step of channel design finds a channel system being put in place for achievement of certain business objectives. Selecting the best alternatives along with modifying existing gaps between ideal and existing is also a part of this step.
Cost of alternatives at different volumes can only be estimated for comparison. Any distribution system with the lowest cost among the alternatives is preferred. Any distribution channel needs to possess flexibility to handle different types of markets and the changes in market conditions.
Distribution network of any company is basically an extended arm of that company and hence the channel members have certain objections. The operating guidelines need to specify the rules and any channel system should enforce the rules ethically and equally on all channel members.
However there is one aspect to be understood over here that getting effective channel members is an extremely tough ask but then there are ways to source the effective channel partners like sales people, press advertising, references of exiting channel partners and references of competing channel members. The selection of channel members has to be done both on quantitative and qualitative analysis.
Once recruited, the channel members require suitable training to update themselves with a company’s requirements and SOPs and the power to adapt as per requirement of the company has be instilled them that actually will take care of their ability to handle suitable range and volume of products in the long run. Every company has a distribution channel to distribute products and there are aspects that differentiate the distribution network of one company form the other.
The efficiency of the distribution channel members along with their effectiveness at various tasks have been found to create strong differentiation for a distribution network. Channel members need to efficiently use their resources to achieve economies of scale in their operations.
They have to flexible with their operations as per the changing market conditions. The rigidity of the distribution network will disallow various necessary changes to be adopted by a company and this will in turn rob the company off its valuable customers. Consistency in delivering products and services is required.
There has to be certain standard maintained and that has to be consistent over a period of time. The dealings of channel members with the company and between themselves have to be reliable. There has to be certain level of ethics to be maintained in the dealings which has to be based on their honesty or integrity.
Factors Influencing Channel Selection – Market, Product, Company, Environmental and Financial Factors
Different factors affect the choice of a distribution channel and differ from firm to firm.
We can divide these factors under five heads:
1. Market Factors
2. Product Factors
3. Company Factors
4. Environmental Factors, and
5. Financial Factors
These are explained in Detail below:
1. Market Factors:
As per the modern concept of marketing, market factors influence marketing decisions. Similarly, the choice of distribution channel is also influenced by market factors.
This can be classified under three heads, viz., consumers, competitors, and middlemen:
(a) Consumers:
The number of consumers, their geographic location and purchase pattern affect the choice of a channel for distribution. If the number of consumers is large, spread over a wide area, and their purchases are frequent and in small lots, then the indirect channel is preferable. On the other hand, if the number of consumers is small, concentrated in a small geographic location and if the purchase is deliberative, then it is preferable to use the direct channel.
(b) Middlemen:
The terms and conditions of middle men also affects the channel choice. For example- if the wholesaler asks for more commission, then the manufacturer may have to go for a direct channel.
(c) Competitors:
The distribution channel used by competitors also influences the channel choice, because it may mean choosing a customary channel in the same line of business activity. For example- automobiles are sold in India through the indirect channel and a change from the indirect channel to direct channel is not possible.
2. Product Factors:
The nature of the product also affects the choice of the channel in the following manner:
(a) Industrial or Consumer Goods – If the product to be distributed is an industrial good, then the direct channel is adopted, because there are very few customers who can be given personal attention and provided with good after sales services. But for consumer goods, the indirect channel is preferable.
(b) Perishable Nature – If the goods are of a perishable nature, like milk, vegetables, fruits, etc., then it is better to adopt direct methods.
(c) Standardisation – If the goods are standardised (For example- ISI Mark, AG Mark, etc.) then the indirect method is preferable, because standardisation is a proof of uniformity and quality.
(d) Unit Value – If the unit price of the product is high, then it is preferable to use the direct method and if the unit price is less, then the firm can go for an indirect channel.
(e) Technicality – If the product is highly technical and complex, it is advised to go for the direct method. For example- for computers and machinery because they require actual demonstration, after sales service, warranty, etc.
(f) Seasonability – In the case of seasonal goods like woolen items, jams, pickles, squash etc., production is highly seasonal, according to the availability of raw materials. In such a situation, the manufacturer-retailer-consumer method is preferable, i.e., the indirect channel.
(g) New Products – In the case of new products which require aggressive marketing techniques, the indirect channel is adopted, usually by giving franchise rights.
(h) Style Obsolescence – In the case of ready-made clothes, which may go out of fashion within a short time, it is preferable to sell the items fast, through retail shops, i.e., the indirect channel.
(i) Number of Items in the Product-line – If the firm’s product mix consists of a large number of product items, it can sell the items directly to consumers through its ability to deal directly with them and the experience gained over the years.
(j) Price Stability – If the product is subject to frequent price changes, due to product upgradation and modification, then the direct channel is preferable.
3. Company Factors:
Strengths and weaknesses of the company also affect the choice of channel in the following way:
(a) Financial Strength:
For a reputed and financially strong company, it is possible to move from the customary methods of distribution to experiment with new methods. So these companies usually go for direct methods and financially weak companies go for customary methods.
(b) Past Channel Experience:
For a firm, if past experiences with middlemen have been satisfactory, then the firm may continue in the same line and if not the firm may change the line of distribution.
(c) Marketing Policies:
If the firm is advertising heavily and supported with sales promotion, then it can choose an indirect method. For example- Pepsi and Coke. The company has to use direct channels, if the product is not advertised properly or not aided by sales promotion efforts.
(d) Reputation:
For highly reputed companies, middlemen are ready to join in order to be associated with the firm. Firms like MRF Tyres and Bombay Dyeing may not find it difficult to find middlemen, to go for the indirect channel.
(e) Market Control Desired:
The channel of distribution is influenced by the degree of market control desired by the company. Market control refers to the efforts of a company to control intermediaries. A company may use a smaller channel to facilitate better coordination, communication and control.
4. Environmental Factors:
Elements of the marketing environment can also influence the choice of alternative channels available.
They are:
(a) Economic Conditions:
This affects the choice of a channel. During depression, economic activities are dull and therefore a shorter and cheaper channel is preferable. But in times of inflation, it is full of business activities and so a wider channel may be adopted.
(b) Legal Factors:
In India, various Acts prevailing in the country, viz., the Companies’ Act and The Monopolies and Restrictive Trade Practices Act influence the choice of a channel. These Acts have been passed with a view to control monopoly, to prevent retail price maintenance and to protect the rights and interests of companies. Therefore, channel selection is also influenced by various Acts passed in the country.
(c) Technological Factors:
Various inventions in the technological field also influence the choice of a channel. For example- if perishable items are to be distributed, proper refrigerated storage facilities are a must. Only if that is possible, can the firm can go for indirect channel methods, otherwise it has to restrict distribution through the direct method.
5. Financial Factors:
The financial factors which influence the choice of a channel are the desired sales volume and the rate of return on investment.
(a) Sales Volume:
The required sales volume will have to be predicted on the basis of trend analysis, past experience, industry-wise data, interpolation, extrapolation, regression, etc. Accordingly, the firm has to choose the distribution channel in order to achieve the targeted sales volume.
(b) Rate of Return on Investment:
This is the return expected from investments. If the firm has to achieve a targeted rate of return, it has to increase the sales volume accordingly. Therefore, the firm has to select as appropriate distribution channel. Thus various factors influence the selection of an appropriate distribution channel.
Factors Affecting Channels of Distribution – Product Characteristics, Market Factors, Company Characteristics, Middlemen Considerations, and Environments Factors
Factors affecting channel selection in marketing management may be classified as product characteristics, market factors, company characteristics, middlemen considerations, and environments factors.
1. Product Characteristics:
(i) Purchase Frequency:
The more frequently purchases are made, the more feasible it is for a manufacturer to use direct distribution. It requires extensive distribution which involves financial considerations.
(ii) Perishability:
Perishable products such as dairy, bakery products, fruits and vegetables or sea foods must be placed in the hands of the final users soon after their production. These require more direct marketing due to the dangers associated with repeated handling and delays.
(Iii) Weight and Technicality:
Products that are bulky, large in size, and technically complicated are usually sold directly by the company to their consumers because of the difficulty of finding middlemen for these lines.
(iv) Selling Price Per Unit:
If selling price per unit is low, the channel of distribution may be long as in case of cigarettes and watches. If selling price is more the channel is more direct as in case of television, washing machines, laptops, etc.
(v) Standardised Products or Ordered Products:
In standardised product each unit is similar in colour, weight size, quality, etc. these have indirect or lengthy channels of distribution. If products are not standardised and are produced on order, they would most likely be sold directly.
The product characteristics conducive to short channels are:
(a) Heterogeneous units,
(b) Heavy weight,
(c) Large size,
(d) Perishable, and
(e) Technically complicated.
Long channels are suitable in cases where the products are:
(a) Homogeneous,
(b) Light weight,
(c) Small size,
(d) Non-perishable, and
2. Market Factors or Consumer Factors:
(i) Consumer or Industrial Market:
The producer of consumer product may choose a long channel involving wholesalers and retailers depending upon the nature of product. In case of industrial product the channel is comparatively short because retailer’s services are not required in such cases.
(ii) Number of Purchasers:
If the number of consumers is large, the channel may be indirect and services of wholesalers and retailers become necessary. If customers are few, direct sale can be entertained through representatives.
(iii) Geographical Distribution:
If customers are geographically dispersed, the channel may be long. If they are concentrated, then direct selling may be done.
(iv) Size of Orders:
If customers purchase small quantities frequently and regularly, lengthier marketing channels are used. If the order from the consumer is large, the channel may be shorter.
3. Company or Enterprise Factors:
The choice of channel is also influenced by company characteristics such as its financial position, size, and product mix, morale of its employees, past channel experience and executive prejudices and overall marketing policies.
(i) Financial Resources:
The financial strength of the company determines which marketing tasks it can handle efficiently and which ones are to be delegated to the middlemen. a company having good financial resources may engage itself in direct marketing in a profitable manner. a weak financial position may force a company to use financially strong intermediaries even if this is not profitable.
(ii) Size of the Company:
A large company already handling a wide line of products is in a good position to take an additional product of the same line and handle it the same way, usually directly. A smaller firm or one with narrower lines would find middlemen more practical.
(iii) Product Mix:
A fresh expansion of plant capacity may require more aggressive channels. If the product mix of a company is already wide, it can deal with its customers directly. Consistency in the company’s product mix ensures homogeneity of its marketing channel.
(iv) Attitude of Company Executives:
The attitude of company executives may also influence the channel selection. Their experience of working with certain type of middlemen may tend to develop channel preferences or prejudices.
(v) Marketing Policies:
The company marketing policies such as speedy delivery, after-sale services, heavy advertising, and uniform-retail price also influence the decision of channel. If it believes that the intermediaries can provide the services to customers according to company marketing policies, it can delegate its selling activity to middlemen; otherwise, it may engage in direct selling.
4. External Factors:
(i) Economic Conditions:
During periods of recession, producers choose shorter channels to cut costs. If there is multipoint tax on sales, the line should be shorter to avoid the tax burden of the consumers and they prefer to sell directly to the retailers or consumers.
(ii) Legal Restrictions:
If there is any legal restriction on any selling activity, the producer will be restricted to do so. For example, companies cannot sell tobacco products to people under eighteen years of age, so the manufacturers of tobacco related products have to ensure that the distribution channel they follow does not enable this illegal act.
Factors Affecting Channels of Distribution – Factors that Determine Selection of Distribution Channel
Having known the distribution channel choices and intermediary options available, the marketing management of a company is now poised to make a suitable channel choice (s) and select the appropriate intermediaries in order to channelise the company’s products to markets.
Since these are external to the company and beyond its direct control, it is essential to understand factors governing their choices. It is only after identifying these factors, assigning them relative weights, and comparing their suitability that management is enabled to select and determine appropriate channel (s) and intermediaries.
Factors that determine selection of a distribution channel are as follows:
1. Product Factors:
Product manufactured by a company itself is a governing factor of great force in the distribution channel selection. The product attributes shape the channel decision in the following manner.
When the product being manufactured and sold is industrial in nature, direct channel is useful because of the relatively small number of customers, need for personalized attention, customer training requirements and after sale servicing. Such conditions products and as such indirect channels are usually most suitable.
I. Perishable Nature:
When product are of perishable nature, like milk, dairy products, bread, and meat, etc. it is useful to opt for direct channel or sell through retailers so that these products get moved to the market as fast as possible. Modern Bakeries makes use of this channel in metropolitan cities like Delhi. It is, however, important that the channel chosen must provide facilities and care to prevent or delay product deterioration.
II. Standardisation:
When products are made for consumer markets, and are ready and standardized, indirect, channel is the most appropriate choice. Product standardization as indicated in terms of substantial uniformity in product characteristics and quality, with or without brands and ISI markings, make direct contact with consumers usually irrelevant from the manufacturers’ stand point.
III. Unit Value:
When the unit value of a product is high, it is usually economical to choose direct channel (choices A and B) because the high cost of direct distribution constituted only a small percentage of the selling price of the product. But when the unit value is low and the amount involved in each transaction is generally small, direct channel becomes uneconomical unless the product order / indent is composed of an assortment of a large number of low unit value products making the whole transaction substantial.
IV. Technicality:
When a product is very technical and complex like computers, business machines, etc. direct channel (choice A) is relatively more useful. It is so because it requires highly skilled technician salesmen, personal solicitation, and actual demonstration custom-made manufacturing and before and after sale servicing. These a manufacturer alone is competent to provide except where intermediaries like Voltas Ltd and Larsen and Toubro are available and affordable by manufacturers.
V. Seasonality:
When product sale is subject to seasonal variations, like woolen textiles in India, production and consumption do not coincide. In such cases, intermediaries are seldom prepared to undertake the function of inventory carrying and as a consequence manufacturers build up vertical distribution channels.
In India however, selling agents play important role who underwrite the sale of production, book orders from the trade – usually retailers, and direct mills to dispatch goods when ready. Thus, channel choice B, is preferred for such seasonal products with agent middle men appearing in between.
VI. Newness and Market Acceptance:
For new products with high degree of market acceptance, usually there is need for an aggressive selling effort. But because intermediaries carry a wide range of competitive products, it is often not possible to achieve any special treatment for such products. In such cases, the indirect channel may be used and exclusive franchise may be offered by appointing wholesalers as distributors and retailers as dealers (where intensive distribution is desired). This may ensure channel loyalty and aggressive selling by intermediaries.
VII. Style Obsolescence:
When there is a high degree of style obsolescence in products like fashion garments, it is essential that product should spend considerably less time in the channel and should receive maximum sale exposure. These objectives are achieved by selling direct to institutional buyers or to retailers who specializes in fashion goods.
VIII. Product Breadth:
When a company’s product mix is composed of a large number of product items, it has greater ability of deal directly with buyers because the breadth of the product line enhances its ability to clinch the sale. The direct channel, therefore, is the obvious choice.
For example, Delhi cloth and General Mills, Mafatlal Group of Cotton Mills, Bombay Dyeing, a Calico Mills, which have a wide product range, also sell direct through their own or authorized retail shops. On the other hand, cotton textile mills such as new commercial mills of Ahmedabad, hukamchand mills of Indore and Maharaja Umaid Mills, Pali Marwar(Rajasthan) have opted for the indirect channel on account of inter alia, their relatively narrow product range.
IX. Price Stability:
When a company cannot help frequent price changes in products owing to product newness or unpredictable market variations, it is always useful to use the direct channel. It will absolve it of the problems stemming from demands for compensating loss to intermediaries arising out of price changes and resultant unsold stocks. As such, direct channel will ensure lesser need for such adjustments which are always cumbersome, difficult and expensive.
2. Company Factors:
Like markets and products company’s own strengths and weaknesses significantly influence and shape channel choices. In this regard, some of the relevant company factors may be given below.
I. Number of Decision Makers:
When selling to consumers or businesses, the more individuals or groups involved in the purchase decision, the more difficult the sale. Marketing costs for selling bread can stay low because one person normally makes the purchase decision. Car purchases are more complex because the purchase decision normally involves a husband and wife. Business sales to committees often require months to achieve a decision.
II. Financial Strength of the Prospect:
Less affluent prospects may desire time payments versus a cash purchase and Chevrolets instead of Cadillac’s.
A new but financially strong company is better placed to select and design its distribution channel from the scratch and need not always follow the customary channels. Such a company also need not depend for financial assistance on intermediaries as usually is the case with many weak companies in India. They engage selling and commission agents for this reason also.
Likewise its management need not be unduly worried about financial liquidity and cash inflow. As a result, a strong company may conveniently opt for direct channel even by taking over some of the functions usually per formed by intermediaries like carrying inventory and extending credit to buyers. A financially weak company, on the other hand, has to depend on intermediaries and therefore, has to select an indirect channel out of financial logic and compulsion.
III. Quantity/Volume Requirements:
Restaurants will want large jars of pickles while individuals want small jars. Businesses use large amounts of electricity at predictable times.
IV. Ability to Use the Offering:
Trying to sell to a prospect who lacks either the knowledge or resources to properly benefit from your offering will result in a ‘no sale’ situation or an unhappy customer. The prospect should have knowledge and resources such as time, equipment, facilities, personnel and complementary products/ services.
V. Commitment Required:
If the offering requires a high commitment in terms of time, resources or money by the customer then the target should be prospects who ‘really need’ the offering rather than prospects” who get some, but not a lot, of benefits.
VI. Brand Awareness/Users:
Examples are prospects who ask for IBM compatible PC’s or Pitney Bowes mailing machines or Winnebago R.V.s
For example, purchasers of collectors items aren’t price sensitive while purchasers of commodity items are price sensitive.
Factors Affecting Channels of Distribution – Criteria for Selection of Distribution Channel
The producer has to make the choice of distribution channel or channels out of the many available to him. He has many outlets for his goods—from the single channel to multiple channel systems. He has to decide whether he should opt for direct channels or indirect channels, for it impinges directly on the success and efficacy of the marketing of the goods. A number of criterion are required to be checked for the choice of the distribution channels.
Criteria # 1. Nature of the Market:
The term nature of the market includes not only the size market decisions regarding t its area as well. The size of the market refers to the number of customers and potential customers in a given area. For example, Bombay City is geographically a small area; but the size of the market is vast because the number of customers and potential customers is very large. It is a central and concentrated market area.
The area of the market means whether the market for the products is local, regional, national or international. If the market for the product is national or international, there would be a need for a substantial distribution network. The marketer, moreover, will have to depend upon indirect channels of distribution and will have to enlist the assistance of wholesalers and retailers.
Again, if the demand for the product is local, or if there are only a few customers, direct distribution may be possible and may even be advisable. The length of the distribution channel to reach the ultimate customers will be another factor to be taken into account while considering the nature of the market.
In such a case, intermediaries will be essential, to a successful marketing of the goods and coverage of the market area. Short channels, that is, direct sales, are possible when there is a concentration of consumers in a given geographical area, and a large number of potential customers are situated in that area.
Criteria # 2. Nature of the Product:
The nature of the product has to be considered while selecting a particular distribution channel, for it has a direct bearing on the choice. For example, perishable products like food and fruit require short channels because any delay in distribution would result in losses.
Specialized products, such as high technology machines which require complex service, costly luxury products and specialty products, need short channels and may be directly sold. But if a product is a new one or a standardized and branded article, or a product which has a seasonal demand and perishability is not a factor, it is generally sold indirectly through the sales force of the company, or with the help of middlemen like wholesalers and retailers.
Where the goods are subject to a highly fluctuating demand, the appropriate channel for their distribution is the intermediary. It is clear, therefore, that the nature of the product plays a vital role in the choice of the channel.
Criteria # 3. Degree of Competition:
It is necessary for the marketing manager to gauge closely the level of competition to the product from other producers. He should study the methods of marketing adopted by his rivals. It does not mean that he should adopt the same methods or should imitate them. But a careful study will give him clues to the effective way in which he may counter the competition.
When the competition is keen, there is a need for a better sales effort and vigorous marketing plans. The services of efficient and competent middlemen—the wholesalers and retailers who are well entrenched and organised and who have an efficient network of distribution—will also be required. The services of vigorous middlemen and sales force have to be utilised when the product faces a keen competition in the market. In such a situation it is appropriate to choose indirect channels of distribution.
Criteria # 4. Size of the Organisation:
In selecting the distribution channel, the size of the company and the complexity of its operations is a major factor. If the operations of the company are national, it would require a substantial distribution network.
Again when a company has a large product mix and produces a large number of products on a big scale and sells them nationally, it requires a wide network of distribution. In either case, in order to keep the costs down and spread the risk, the company prefers to enlist the help of wholesalers and retailers in the distribution of the goods.
However, some specialty items may be sold directly to customers. It is evident from these facts that when the size and operations of the organisation are very wide, the services of the intermediaries are usually preferable and advisable.
Criteria # 5. Degree of Control:
A company always desires to maintain sufficient control on the prices of its products and on their sale and distribution. If it adopts the normal trade channels of distribution, it can exercise some control on its operations. However, the greater its dependence on intermediaries, the less control will it have over the distribution channel.
The company will not be able to fix the minimum level of stocks a middleman should maintain, or how the middleman should promote or even sell the product. In India, resale price maintenance (RPM) is considered to be a restrictive trade practice under the MRTP Act and is unlawful. Producers can only recommend what retail prices should be charged.
Usually, the retailers charge the prices recommended by the producers; but in highly competitive situations, the retailers may not adhere to these prices and may charge their own prices. A producer can exercise better control on distribution when he sells directly to his customers. This is possible when the channel of distribution is short and the nature of the product enables him to sell directly to customers.
Criteria # 6. Financial Strength:
A company may build its own distribution network if its activities are on a national scale, if it has a large product mix, and if its financial position is strong and sound. If the financial strength of the company is satisfactory, it can finance its own distribution network for the marketing of its products. It can build its own marketing organisation. But if the firm is small and its financial structure is weak, it will have to depend upon middlemen for the distribution of its products.
Large sales, service and distribution networks, several depots, substantial total inventories of finished products and their resultant high operational costs—all these have become impractical for many companies. However, a possible solution is the appointment of sole agents and authorized dealers.
Criteria # 7. Cost of Marketing:
The cost of marketing may be said to exert the greatest influence on the decision of the producer in regard to the choice of the distribution channel. He will always desire to keep the cost of marketing to the minimum, for his profits are directly related to the cost of selling.
If he adopts an indirect channel with a network of wholesalers and retailers, it will result in high costs because of the commissions and margins paid to them, though it would help him to reach a wider market and market the goods more efficiently and vigorously.
The cost of commission and other expenses incurred on, and paid to, the wholesalers and retailers may be prohibitive. This is one of the reasons why producers try to sell directly to consumers. They want to reduce the cost of marketing by eliminating the middlemen. But it is not always possible to do so.
Criteria # 8. Environmental Factors:
It is a truism to say that market conditions are not static and that they keep constantly changing. When there is a change in the overall marketing environment, it is essential to review the channel policies and decisions. When there is an economic slump, producers try to cut their marketing expenses and resort to the shortest and the least expensive channels of distribution.
Technological innovations can also have a dramatic influence on the strategy of distribution; for example, the development of refrigeration has revolutionized the distribution of perishable products. The resulting storage capacity has led to an expanded role for the middlemen between the producer and the consumer.