Chapter:12 Distribution Channels

Concept:

Channels of distribution refer to a middle men or people who help in distributing

the goods. It is path through which product moves from the place of production to
the place of consumption. It is the connection link between the producer and the
consumer to sell the product.

The word distribution means the allocation of goods to its consumer. It is the
network of individual and organization involved in getting a product or services
from the producer to the customer. It is also known as marketing channel or
marketing distribution channel. Every producer reaches to the consumer with the
help of intermediaries.

Producer Intermediaries Consumer

For Eg: A manufacturer of fan may produce the fan the distribution channel takes
them from factory to customer is lightly to include wholesaler and retailer.

Distribution channel is the network of intermediaries that facilitate product

delivery from the manufacturer to the end user transfer payments from the buyer
to the producer. It is a route through which a product travels from the production
to the point of consumption.

Function of Distribution Channel:

1. Shorting or Grading: Middle men produces goods from various manufacturer

and than do sorting i.e. pack them according to quality, size or prices.
2. Packing: Generally middle men buy the goods in back and then they repack
them in small lots/quality. For Eg: Wholesaler buy bag of 100kg of wheat and
then repack it in the convient packet of 1kg,2kg,5kg.
3. Connect between producer and consumer: Through distribution channel,
producer may communicate with the consumer which is useful to collect
important information regarding product and behavior of the consumer.
4. Helpful in promotion activities: Promotional techniques are generally used by
producer but middle men also offered some sales promotional tools to
attract the customer. For Eg: Discount, rebate, content.
5. Helpful production function: Leaving the marketing problems to the
middlemen who specialize in the profession the producer can concentrate on
production function, finance required for organization marketing can
profitably used by product where the role of return could be greater.
6. Helpful in fixing prices: While pricing a product the producer should invite
the suggestions from middlemen as they are very close to unlimited users.
Pricing may be different from different market depending upon the channel
of distribution.
7. Accumulation: Middlemen maintain a large stock of goods so that there is
smooth supply of goods without any delay.
8. Link between manufacturer and consumer: Goods and services produce
anywhere in the world are available to us with the help of channels of
distribution. Channel of distribution the link between manufacturer and
ultimate consumer.
9. Risk bearing: Middlemen maintain large stock of goods. They transport goods
from one place to another till goods are with them in stock or when these
are transport to one place to another then middlemen bears the risk of
spoilage or damage of goods.
10. Creating time and place utilities: Distribution channels create time and place
utilities by providing products to the consumer at the proper place and at
the proper time, taking into consideration the reason and requirement of
consumers.
11. Transferring the title: Distribution channel materializes the transfer of
product title. It delivers right product at right place at right time and at
right price to consumer.

Types of Distribution Channel

Conventional Distribution Channel

In conventional distribution channel each enterprise (i.e. producer,
wholesaler, retailer) working in the channel is separately owned and operate
concern. In conventional distribution channel there are four channel design
such as
i. Zero level
ii. One level
iii. Two level
iv. Multi level
1. Direct distribution channel: This type of channel is the one where the
company sells the good directly to the consumer without the help of
middlemen. Manufacturer makes the good and sales them to the consumer
directly without intermediaries. For Eg: A bakery make sells cakes directly
to customer.
Direct distribution work in a direct to consumer approach this usually
requires that the manufacturer or producer have their own transportation
facility.
Manufacturer Ultimate Consumer
 Many direct distribution channel are online, which include processing order
for their consumer through their company’s website with more control over
channel including shipment direct distribution may offer faster delivery.
This can help to improve customer satisfaction.

Direct Distribution channel is suitable in the following situation

 When goods are produce in small quantity.
 When there are few potential buyer.
 When the product is highly perishable.
 When the channel costs are higher than the direct selling.
 When the manufacturer decides not to use the middlemen.
2. Indirect distribution channel: It is one which the manufacturer sells his
product with the help of intermediaries such as agents, wholesaler, retailer.
A wholesaler is a person who buys good in large quantity from the producer
where as retailer is born who buys goods from wholesaler and sales to
ultimate consumer as per their requirement.

One Level Manufacturer Retailers Consumer

One Level Manufacturer Wholesalers Consumer
Two Level Manufacturer Wholesalers Retailers Consumer
Multi Level Manufacturer Selling Agent Wholesalers Retailers Consumer
 One Level Channel Distribution: One Level channel is one in which
there is one intermediaries between the manufacturer and the
consumer i.e. retailer. Under these system the producer sells the
goods to retailer who in turn sell the goods to the consumers.
Manufacturer Retailers Consumer
These channels is suitable in perishable products like sweet, milk,
fruit etc. One Level distribution channel is also used with the help of
wholesalers
Manufacturer Wholesalers Consumer
Manufacturer to wholesaler to consumer is preferred in industrial
goods which is further used for production.
 These channel can also be used for consumer product when there are
large industrial buyer such a government and educational institutions,
hospital etc.

One level distribution channel is suitable in the following

circumstances.
 When the product are perishable either physically or due to
changes in fashion.
 When the speedy distribution is required.
 When the demand for the product is constant.
 When the retailers are large enough to carry on distribution
work.
 Two Level channel of distribution: In these channel two
intermediaries are involved between the producer and the consumer
i.e. wholesaler and retailers. Under this channel the wholesaler after
purchasing the material in large quantity and from the manufacturer
and sales it in small quantity to the retailer. These channel is mostly
used in durable items such as groceries, soap, tea leaves etc.
These channel is most suitable for the product which are widely
scattered.
Manufacturer Wholesalers Retailers Consumer
Two level distribution channel is suitable in the following
circumstances.
 When the retail outlets are more and widely spreaded.
 When the financial resources of the manufacturer are limited.
 When the product are durable and have regular demand.
 When the manufacturer has a narrow product range.

 Multi Level/ Three Level Distribution: This is the longest channel of

distribution/ Three Level channel means that they are three
intermediaries involved between the manufacturer and the consumer
foe the sale of a product.
Under this channel i.e. Agent, Wholesaler, Retailers
 Under this channel an agent fails to reduce the distance between the
manufacturer and the wholesaler.
It is usually used when the goods are distributed across the country
and for that difference distribution are appointed for different
areas. Some big companies who cannot directly contact with
wholesalers, they take the help of agent. Such companies appoint their
agent in every region and sale the goods to them.
Manufacturer Selling Agent Wholesalers Retailers Consumer

Factor Affecting Channel choice:

There are several channel available for the purpose of distribution of
goods. The manufacturer or the marketer has to make a decision
regarding the choice of the most suitable distribution channel at
minimum cost and achieving the desired level of sales volume.

Factor Affecting channel Choice

Product consideration Market Consideration Company Middlemen Enviromental

 Nature of  Consumer or Consideration Consideration Consideration
product industrial  Financial  Availability  Competion
 Pershability Market strength of middlemen and legal
 Unit value  Number of  Size of  Attitude of constraint
 Weight & customer company middlemen s
Technicality  Geographical  Past channel  Services  Economic
 Standardized Distribution experience provided by Condition
product  Buying habit  Reputation middlemen
 Product Line of consumer of company  Cost of
 Seasoanality  Size of order  Product mix channel
 Need product  Marketing  Sales volume
Policies potential
 Financial
Ability
A. Product Consideration
The type and nature of product influence the number and type of middlemen
to be chosen for distributing the product. Different products are different
in nature and this nature of the product requires different type of channel
1. Perishability: Product which are highly perishable in nature such as milk,
dairy product, fruits, flowers, etc. are distributed through shorter
channel so that goods would be delivery to the consumer without any
delay.
2. Nature of product: Industrial goods which are highly technical are
purchased in larger quantity by a smaller number of purchaser. Such
goods require shorter channel of distribution. Consumer goods on the
other hand are purchase by a large number of people in smaller quantity
and more frequently. Therefore such goods requires longer distribution
channel
3. Unit value: Product with low unit value like cosmetics stationary, utensils
etc. are distributed through longer channel of distribution but product
with high unit value such as jewelers machinery etc are directly sold to
the consumer.
4. Technicality: When the product are bulky and technical in nature such as
plant and machinery, computer hardware etc. Such goods requires direct
channels of distribution. However goods which are light weight, small in
size and do not requires technical support. For Eg: Ready to wear
garments can be distributed by longer channel of distribution.
5. Standardized products: Product of standard size, shape, weight, quality
etc are generally used longer channel of distribution. For Eg: utensils of
Milton.
On the other hand if the product is not standardized such as furniture
are require shorter channel of distribution.
6. Seasonality: When the product is seasonal variation such as cooler goods,
agricultural goods, it is desirab to appoint sole selling agents.
7. Product line: A manufacturer producing different product with greater
consistency sell directly on through retailer.
 On the either hand a manufacturer dealing with only one item may have
to use middlemen to sell his product.
B. Market consideration
Market consideration refers to buying habits, location of market, size of a
orders, etc.
1. Nature of customer: If the number of buyer or customer is likely to be
more the distribution channel will be longer.
On the other hand if the number of buyer is small the manufacturer can
sell directly to the consumer.
2. Consumer or industrial market: In case of industrial market where the
number of buyer is less a shorter channel of distribution may be adopted.
This buyer generally purchase directly from the manufacturer.
In case of consumer market where there are large number of buyer a
longer channel of distribution is suitable.
3. Geographical distribution: Where the consumers are concentrated at one
particular place, distribution channel will be short. But if buyer are widely
scattered over a geographical area than company should opt for indirect
channels.
4. Size of order: It is economical to use more intermediaries if the size of
the market is large with numerous customers. Direct or short channel are
preferred if the market size is small with the limited number of
customer.
5. Buying habits of consumer:
C. Company Consideration
The choice of distribution channel is also influenced by financial postion,
reputation etc.
1. Financial Strength: A financially strong company can design its own
channel of distribution because of its own channel of distribution because
of its financial strength. On the other hand a company which is financially
weak has to depend on middlemen with sound/good financial background.
2. Past experience: Companies having emple(enough) marketing ability and
experience can effectively manage the selection of distribution channel
they are lesser depend on intermediaries. On the other hand marketing
 units possessing low marketing ability and experience depend more on
middlemen for the distribution of goods.
3. Reputation of company: All well established company with strong
reputation have longer channel of distribution because middlemen are
generally willing to be associated with strong company. Such as Tata
Steel, Godrej, Hindustan Liver etc.
4. Marketing policies: Every company have their policies regarding market,
the companies marketing policies such as fast delivery system, after sale
services are relevant to the channel decision, company which have these
policies the consumer may prefer direct selling.
5. Attitude of company’s execution: The attitude of company execution may
also influence the channel selection. Their experience o working with
certain type of middlemen may tend to develop channel prederence or
prejudices.
D. Middleman Consideration
The choice of channel also depends upon the strength and weakness of
different type of middlemen performing various functions.
1. Availability of middlemen: Availability of right type of middlemen is an
important consideration in making the choice of channel. Sometimes the
desired middlemen may not be available for the distribution of goods. In
such cases the manufacturer has to make his own arrangement buy
opening the branches to distribute the goods to the consumer.
2. Service provided by middlemen: The manufacturer should select those
middlemen who provide various services such as storage credit facility,
packaging repair services etc.
3. Cost of channel: Cost of distribution is added to the price of the product.
Higher cost of distribution will result in increase of the cost of product.
In this connection it must be kept in mind that the channel which ensure
efficient distribution at the least expenses and secure the desire volume
of sales should be chosen.
4. Sales volume potential: A manufacturer would appoint that middlemen
who assure greater sales volume over the long run. The sales volume
potential of the channel may be estimated through market survey.
 5. Financial ability: In appointing middlemen the manufacturer must that
into consideration the financial stability and reputation of the middlemen.
A financially sound middleman can provide credit facilities to the
customer and make prompt payment to the manufacturer.

E. Environmental Consideration
The environmental factor such as economic, social, legal, political factors
also influence the channel decisions.
1. Competition and legal constraints: There are certain competitions and
legal factor which must be consider while deciding channels of
distribution.
Many a times middlemen are not available in adequate number in such
cases manufacturer are compelled to use the same channel of
distribution which are used by the competitor.
Government regulation also affects the choice of middlemen. For Eg:
Pharmaceutical company can market is product through licensed chemists
only.
2. Economic Condition: The prevailing economic condition affects all the
economic activities during an economic boom. The sales of the entire
product are increased so the producer prefers indirect channels of
distribution.
On the other hand in recession period are depressed, the sales come
down so the producer should opt shorter distribution channel to avoid tax
burden from the consumer.