Distribution channels are an important part of the ‘marketing-mix’ of any business enterprise. Selection of appropriate distribution channel is very important because several elements of the marketing-mix like price and promotion are closely inter-related with and inter-dependent on the distribution channels.
A large number of middlemen are available through which a product can be distributed. Each middleman involves some cost which enters into the price of the product that the ultimate consumer has to bear. If a wrong choice of distribution channel is made, it will lead to increase in the distribution cost which will lead to either lowering down of profits or increasing the cost of the product to the customer.
However, both the alternatives are not good for the long run survival and growth of the business firm. Hence, it is essential to make a right choice of the channel of distribution. Only the appropriate channels can help the manufacturer to sell his products in predetermined quantities and at right time.
The choice of the appropriate channels of distribution is not a simple job.
While taking a decision in this regard, management should carefully consider the following factors:
Factor # 1. Market Considerations:
The nature of the market is the key factor influencing the choice of channels of distribution.
The following features of the market should be analysed to determine the channels:
(a) Consumer or Industrial Market:
If the product is intended for industrial market or industrial users, the channel of distribution will be a short one. Since industrial users purchase in large quantities, they can purchase directly from the producers or manufacturers, i.e., there is no need of retailers. The manufacturer can establish contacts with the industrial users by sending his agents. But in case of product meant for the consumers, retailers may have to be included in the channels of distribution.
(b) Number of Potential Customers:
A large potential market is likely to put weight in favour of the use of middlemen. If the number of customers is relatively small, the manufacturer may be able to sell directly by using his own sales force as customer handling would not be difficult.
(c) Size of Order:
Direct selling is convenient and economical where customers place order in big lots as in case of industrial goods. But where the product is sold in small quantities, middlemen are used to distribute such products. The same manufacturer may adopt different channels to distribute his product. For instance, a manufacturer of food products may sell directly to big retail stores and may use wholesalers to sell to small retailers.
(d) Buying Habits of Customers:
The customer buying habits like the time he is willing to spend, the desire for credit, the preference for personal attention and the preference for one stop shopping significantly affect the choice of distribution channels. For example, cigarettes are purchased in ones and twos, and rarely in packets. This calls for need for retail stalls.
(e) Geographical Concentration of Market:
Where prospective customers are located in a particular geographical region, direct selling is more feasible than it would be, if the market were spread over the whole country. Use of wholesalers and retailers may become essential to sell the product to the widely dispersed consumers or industrial users.
Factor # 2. Product Considerations:
The type and nature of the product influences the number of type of middlemen to be chosen for distributing the product.
The important factors with regard to the product are as follows:
(a) Unit Value:
Usually, if the unit value of the product is lower and the turnover is higher, the channels of distribution will be longer. For instance, products like cosmetics, stationery and small accessory equipment are distributed through agents, wholesalers and retailers. Products of high value like jewellery and industrial machines are sold directly to the users.
(b) Product Line:
A manufacturer manufacturing several products in the same line will sell directly or through retailers since it is economical. But a manufacturer with only one item may have to use wholesalers and retailers to sell his product.
(c) Standardised Product:
Standardised products can be distributed through longer channels because their brand names are very popular. But custom made and unstandardised products can more easily be sold directly by the producers to the user.
(d) Technical Nature:
Industrial products which are highly technical, say air conditioners and super computers, are often distributed directly to the industrial users. The manufacturer of such a product can appoint sales engineers who can explain the product to the potential customers and provide presale and after sale service to them.
But consumer products of technical nature are generally sold direct and through retailers. This is because of the fact that consumer products are sold in large number and it is not feasible for the manufacturer to provide after-sale service to the consumers as in case of television sets and refrigerators.
(e) Bulk and Weight:
Bulky and heavy goods are distributed directly to users in order to minimise the physical handling of the product because transportation of such a product involves huge cost.
(f) Perishability:
The channels of distribution are short in case of products subject to physical decay or fashion change. The producers of perishable products generally sell directly to the consumers or sell through the middlemen who have the special storage facilities. Manufacturers of non-perishable commodities have a wider choice in the channel selection.
Factor # 3. Company Considerations:
The nature and size of the business firm have an important impact on the selection of channels of distribution.
Following factors are important in this regard:
(a) Volume of Production:
A big manufacturer may find it profitable to sell directly to customers through his sales force. If he is manufacturing a wide range of products, he may sell his products by opening retail outlets in different parts of the country. But a small manufacturer with only a small number of items cannot afford to sell directly because of his small scale operations.
He can engage wholesalers and/or retailers to sell his products. And if a big manufacturer has his manufacturing units scattered in different parts of the country, it is more economical to engage wholesalers and retailers to sell his products.
(b) Financial Resources:
A financially strong company can distribute products by employing its own sales force and opening retail outlets. But a financially weak company which cannot invest money in distribution will have to use middlemen to sell its output.
(c) Experience and Competence of Management:
If a company’s management is having sufficient experience and know-how to market its products, preference should be given to distribute products directly. A company lacking this ability and experience will often rely heavily on middlemen to do the marketing job.
(d) Services Provided by the Channels:
The choice of a channel of distribution is also influenced by the services provided by the manufacturers. A manufacturer can find good retailers only if the marketing department undertakes sufficient advertising. Some manufacturers of technical products undertake to provide after- sale service. Such manufacturer can also get reputed retailers for selling its products.
(e) Desire for Control of Channels:
A manufacturer who wants to control the distribution of his product will select a short channel of distribution. He may do so even though the distribution cost is higher if he feels that the marketing department can give aggressive promotion to the product.
Factor # 4. Middlemen Considerations:
Certain factors related to the middlemen which influence the channel selection are as follows:
(a) Availability of Desired Middlemen or Intermediaries:
A manufacturer will rely on middlemen if they operate according to his desire. The marketer may not entrust product to a middleman who is carrying competitive products. In such a case, it may prefer to open branches to sell products directly.
(b) Financial Ability:
A large manufacturer will generally select those middlemen who are financially strong, can provide credit facilities to the customers, and pay their bills to the manufacturer regularly and promptly.
(c) Attitude of Middlemen:
Sometimes, middlemen are not prepared to carry a manufacturer’s product because of the non-acceptability of marketing policies. For instance, a retailer may want sole selling agency for a particular region or a guarantee against price reduction for handling the products of the manufacturer.
(d) Sales Potential:
A manufacturer will generally select a channel offering the greatest potential sales volume over the long-run, though it is very difficult to assess which channel will generate the largest sales volume.
(e) Cost:
The manufacturers also consider the cost of selling through alternative channels. But it does not mean that a middleman charging high cost would be excluded from consideration. A manufacturer may select even a high cost charging middleman who provides many services to the customers which are not provided by other middlemen. This would provide added value to the customer.
(f) Competition and Legal Constraints:
Many times, the manufacturers are compelled to use the same channels of distribution which are being used by the competitors. Government regulations also affect the choice of middlemen. For instance, a pharmaceutical company can market its product through licensed chemists only.