CHAPTER 7 CHANNELS OF DISTRIBUTION

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CHAPTER 7 CHANNELS OF DISTRIBUTION

The route through which the goods move from producer buyer is called the Channel of Distribution. The distribution process includes the physical handling and distribution of goods, the passage of ownership, and the most important from the standpoint of marketing strategy, the buying and selling negotiations between middlemen, producers and consumers. To complete the components of the marketing mix and to get the product to the target market, channels of distribution must be developed. Every country or the target market presents the exporter with unique middlemen and distribution patterns. In essence, a channel of distribution includes the original producer at one end, the final buyer at the other end and the middlemen between the two i.e.. wholesalers, retailers etc. The term middlemen refers to those institutions or individuals in the channel which either take title to the goods or negotiate or sell the goods in the capacity of a broker or an agent. The following figure shows many of the possible channels of distribution alternatives.

INTERNATIONAL CHANNEL OF DISTRIBUTION (ALTERNATIVES) There is a diversity of channels of distribution in the international market. One particular channel may be used to distribute a specific product in one country, while another may be used to distribute a specific product in another country. One may find the existence of long channels in one country and short ones in another country. There is absolutely no uniformity in the channels that may be selected by the producer. The structure and composition of the channel will depend on the nature of the product and the producing unit's strategy. Normally the channel of distribution of a consumer product is longer than that for an industrial product. In the case of consumer goods the most common form of distribution channel is as shown below :

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The four possible alternative channels are shown. Appointing an agent is considered necessary where the producer cannot afford to invest the amount required to develop a sales force of his own. If he appoints an agent he moves to wholesalers and retailers only through the agent. If agents are not appointed, the alternative will be to go for wholesalers directly and through them to the retailer. If the producer can or the Importer has a good sales force, he need not appoint any wholesalers also; he can directly contact retailers through his efficient sales force. Sometimes, the producer may directly sell to the consumer, but this is rare in foreign marketing. For industrial goods the common channels are as below: When the number of potential buyers is small, the producer may sell directly or through agents/brokers. If the number of buyers is large and area of the market big, one can use a distributor and through him retailers to reach the consumer. For linking the domestic and overseas channel, the Exporter can use many of the entry alternatives available. One may choose to export indirectly through export house, domestic export merchants, etc. It is also common to see one exporting directly and using the various channels of distribution explained above in the foreign land. The first task of the Exporter is hence to find out the possible distribution channel through which he can reach the consumer. FACTORS AFFECTING SELECTION OF CHANNEL : The best channel decision is one that works best in the marketing strategy selected by the company. The channel should be an ideal one which satisfies the consumer's needs and preferences. In choosing the channel the producer has to struggle usually with what is ideal and what is available. Ideally every company wants to select the lowest cost channel, but the lowest cost channel is not necessarily the best for the product. Various factors influence the selection of channels of distribution. They may be classified as factors relating to (A) Product Characteristics (B) Market Characteristics (C) Company Characteristics (D) Middlemen Considerations and (E) Environment. A) Product Characteristics One should study the various attributes of a product such as perishability, 03-01-2012 17:40

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bulk, unit prices, uses, frequency of purchase, etc. i. Perishability The more perishable the product, the shorter should be the channel. Dairy and bakery products, fruits, vegetables sea food, etc., must reach the consumer soon after their production. They usually require direct marketing to the consumer, because of the dangers of repeated handling and delays ii. Unit Value Products whose selling prices are very high (e.g. Diamonds) are often sold directly through company's sales force. IF unit cost is very high, it is invariably associated with complexities and product features that needs to be explained in greater detail (e.g.. Computers) On the other hand when the channels of distribution can be long because they are frequently purchased and their turnover is high. iii. Weight & Bulk Products that are bulky and large are usually sold directly to the consumer because of transportation difficulties. If the products can be handled lightly and transported easily, the channel may be long. iv. Standardisation: Standardised products, each unit of which is similar in colour and size, weight, quality, etc. have usually indirect and lengthy channels because they are sold extensively and by brand. v. Stage of Market Development: New products are marketed by direct sales because they have low demand. Long or indirect channels can be used for established products as they can bear the cost due to higher sales. B) MARKET CHARACTERISTICS: i. Number of Purchasers: In general, it may be observed that the larger the number of customers, greater is the need for channel agents. For e.g.., if a Company produces or sells mass consumption items like soap, garments, etc., it has to select a longer chain of middlemen. ii. Geographical Distribution: If the customers of the product are widely dispersed geographically, long channels may be required to avoid delays in supplying the goods. Conversely if the suppliers are concentrated geographically, it is easy to approach them with a shorter channel or by direct selling. iii. Size & Number of Orders: When customers make frequent and regular purchases in small quantities, lengthier marketing channels may be required. iv. Buyer of Products: In some countries, Government Departments purchase commodities often in large quantities and on long term basis, and hence calls for direct selling. C) MIDDLEMEN CONSIDERATIONS: The choice of channel also depends on the strengths and weaknesses of various types of middlemen performing various functions. i. Service Provided by Middlemen: The middlemen who provide the

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services which the company wish to provide the customers, may be chosen. Otherwise the company will go for its own sales force. ii. Attitude of Middlemen: The middlemen are notoriously known for maximising their profits rather than their manufacturers. If the company allows them to fix the prices of the product, they may happily agree to sell the product of the company. They will also select the product with higher returns and brands which sell most. New entrants find it difficult to sell the products unless, may be, if they agree to share the marketing expenses. iii. Availability of Middlemen: The kind of specialists a producer wants may not be available or willing to co-operate. If the desired channel does not exist or the available one may belong to the competitor, it is then imperative for the firm to collect all necessary information on the distribution pattern in a given foreign market. Only then a decision on channel choice should be made. iv. Cost of Channel Usage: The cost of performing marketing functions at each level of distribution and the overall cost of performing total marketing task have an important bearing on the choice of channel. The relative cost of working on different channels and the cash flow effectiveness should be closely examined. The channel which ensures efficient distribution at least cost and desired volume of sales is chosen. D) COMPANY CHARACTERISTICS: The choice of channel is also dependent on the company's factors such as: i. Financial Resources: A financially weak company may engage financially strong intermediary so that it may push its sales well. On the other hand, a financially strong company will establish its own sales and distribution force in the overseas market. ii. Size of the Company A large company already marketing a wide range of products will be in a good position to take up an additional product of the same kind and handle it in the same way. It need not think of the channel choice again. iii. Marketing Policies: The company's marketing policies such as speed of delivery, after sales service, promotional efforts etc., also affect the choice of channel. E) ENVIRONMENTAL FACTORS; Another important constraint in the channel decision is the general characteristics of the total environment of the foreign market. This factor includes the social, economic and political environment. When the economic conditions indicate depression, one may go in for shorter channels to cut costs, If there is multipoint tax, then short channels are cheaper. Social and ethical considerations such as distribution of goods through black marketing involves questions of ethics and is bad for the society. From the above it is clear that the channel decision of the company or a manufacturer is influenced by a number of factors and does not enjoy complete freedom in selecting an ideal channel. One has to consider the various ethical, legal, marketing and product considerations before reaching a final decision. In taking the decisions, one has to think over the cost and control aspects of the channel.

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Main Points 1. Channel of distribution: is the route through which goods and Services move from producer to buyer It includes producer, exporter, middle-men Buyer, physical handling and distribution of goods and services 2. Channels of distribution for consumer goods: Producer->Agent (Domestic/Overseas)-> Wholesaler-> Retailer Consumer Producer-> Wholesaler->Retailer->Consumer Producer-> Retailer->Consumer Producer->Consumer 3. Channels of distribution for industrial goods: 4. Factors considered in selecting channels of distribution in international export Product Characteristics 1. Perishable Products-shorter distributors channel (SDC) 2. Unit value-Computer diamond-direct selling (SDC) daily consuming items (Long Distribution Channel) LDC 3. Weight and Bulky-bulky items direct selling-light item-LDC 4. Standard products _LDC (In quality Col.ck) 5. New established products LDC produces-direct selling (SDC) Market characteristics: 1. No of purchase (soap /garments) -LDC 2. Geographical nature widely dispersed buyers (LDC) 3. Size and No of orders requiring frequent purchase LDC 4. Nature of Buyer and produce-Govt. buying's Direct selling Middlemen considerations 1. Service and attitude of middlemen-> higher profit-LDC 2. Specialist middlemen availability 3. Cost of DC in overall cost will decide type of DC Company Factors 1. Size of the company/exporter 2. Financial strength of the company 3. Marketing policy of the company

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