CLASS XII-MKT-Unit-3.pdf explaining about plac and distrubution
- 1. 1 | P a g e MEANING OF DISTRIBUTION CHANNEL According to Philip Kotler, “According to Philip Kotler, “Every producer seeks to link together the set of marketing intermediaries that best fulfil the firm’s objective, This set of marketing intermediaries is called marketing channel.” William Stanton, “A distribution channel for a product is the route taken by the title to the goods as they move from the producer to the ultimate customer.” PARTICIPANTS OF CHANNEL OF DISTRIBUTION Channels of distribution are mainly concerned with the transfer of title to a product which may be affected directly or through a chain of intermediaries. It comprises of set of four participants of distribution system: (1)Manufacturers: The starting point of distribution is the Manufacturer who produces the goods after identifying the needs of the consumers. For Example the manufacturer might be a remote location and consumers are scattered geographically throughout India. The goods can only reach the consumers with the help of intermediaries in between the manufacturer and consumer (2) Intermediaries: The second participant being Intermediaries, they are in direct negotiation between buyer and seller. They identify the needs of the consumers and the manufacturers who produce various products. In the process, they perform various functions like buying, selling, assembling, standardisation and grading, packing and packaging, risk bearing. etc. (3) Facilitating agencies: The third participant being the Facilitating agencies are the independent business organisations other than intermediaries. These agencies facilitate the smooth distribution of goods from producers, through intermediaries, to consumers. The major facilitating agencies are banking institutions, insurance companies, and transportation agencies and warehousing companies. Participants of channel of Distribution Manufacturers Intermediaries Facilitating agencies Consumers CLASS XII MARKETING UNIT 3: PLACE AND DISTRIBUTION
- 2. 2 | P a g e Transactional Functions Functions Performed by Channel of distribution Logistical Functions Facilitating Functions (4) Consumer: The fourth category of participants in the distribution system i.e., consumers, are the final destination for goods in the distribution system. Who consumes the goods for the satisfaction of wants. FUNCTIONS PERFORMED BY CHANNEL OF DISTRIBUTION The functions performed by the middlemen in distribution channels may be grouped into three categories as follows: 1) Transactional Functions: the primary function of distribution channel is to bridge the gap between production and consumption for which various transactions performed for movement of the goods from one place to another are called transactional functions. Buying, selling and risk bearing functions come under this category. Buying takes place as producers sell the goods and intermediaries buy them. Later intermediaries sell the goods and consumers buy them. Because of this buying and selling by the channel participants, title to goods changes hands and goods flow from producer to consumer. 2) Logistical Functions: The functions involved in the physical exchange of goods are called logistical function. The goods are produced by producer /manufacturer and assembled in different assembly lines. Assembling refers to the process of keeping the goods, purchased from different places, at a particular place. Assembling of goods is done only after they have been bought. Not only assembling but also storage, grading, sorting and transportation are essential for physical exchange of goods which forms logistical functions of physical distribution.
- 3. 3 | P a g e One level channel Two level channel Three level channel Types of channel of distribution Direct Channel Indirect Channel 3) Facilitating Functions: These functions facilitate both the transaction as well as physical exchange of goods. These facilitating functions of the channel include post- purchase service and maintenance, financing, market information etc. Sellers provide necessary information to buyers in addition to after sales services and financial assistance in the form of Sale on credit. Similarly, traders are often guided by manufacturers to help them in selling goods, while the traders also inform manufacturers about the customers' opinions about the products. MEANING OF PRODUCT PROMOTION It involves advertising and sales promotion activities organised by manufacturers. Middlemen are also involved in various activities like demonstration of product, display and contest etc. to increase the sale of products. MEANING OF NEGOTIATION Negotiation takes place between manufacturers and customers before closing a deal. Negotiation in terms of quality of product, guarantee, after sale services and finally price takes place before the transfer of ownership is done. TYPES OF CHANNEL OF DISTRIBUTION A manufacturer can choose from direct distribution channel to indirect distribution depending upon the kind of product or market they serve. The two main types of distribution channels are as follows: I. Direct Channel II. Indirect Channel
- 4. 4 | P a g e I. Direct Channel (Zero level) The most simple and the shortest mode of distribution is direct channel. In this channel, the manufacturer directly provides the product to the consumer. In zero level there are no intermediaries involved, the manufacturer is selling directly to the customer. This is called the 'direct channel’ or direct selling. In this the manufacturer or producer supplies the product to the customer through its own retail outlets and salesmen present there (e.g. Mc Donald, Patanjali stores). Example: Maruti Udyog selling it cars through NEXA company owned showrooms is direct channel. II. Indirect Channel: In this channel, a manufacturer doesn’t sell directly to the consumer rather chooses various intermediaries to sell a product to the consumer that is why called indirect channel. When a manufacturer/producer employs one or more intermediary to move goods from point of production to point of consumption also called indirect marketing channel. a. One level channel (Manufacturer-Retailer-Consumer): In this only one intermediary is involved. Normally the manufacturer supply goods directly to retail which finally sell to the end consumer. In this case the producer ascertains the requirements of retailers at periodical intervals and goods are supplied accordingly. As and when required, the retailer may also procure goods from the producer's godown located in that region. For Example: Maruti Udyog selling it cars through company approved retailers like DD Motors is called indirect channel.
- 5. 5 | P a g e b. Two level channel (Manufacturer-Wholesaler-Retailer-Consumer): When the manufacturer can use the services of the wholesaler as well as the retailer. This is the most common adopted distribution network for consumer goods. In this case the manufacturer may supply his products in bulk to wholesalers. The retailer may buy periodically from the 'wholesaler and sell the same to the consumers located in his locality. As there are two middlemen (both wholesaler and retailer) in this channel, it is referred to as two level channels (2 level channel) and helps in covering a larger market. For Example: Consumer goods like oils, cloths, sugar, pulses and soaps etc sold through nearby retail outlets. c. Three level channel (Manufacturer-Agents-Wholesaler-Retailer- Consumer): Another alternative channel of distribution consists of mercantile agents, wholesaler and retailer. In this case, the manufacturer deals with a mercantile agent. Then the wholesalers buy the goods from the agents and sell the same to retailers. In turn the retailer sells it to the ultimate consumers. This type of channel is referred to as three level channel as there are three types of middlemen involved in the distribution. This level is used particularly when the manufacturer carries a limited product line and has to cover a wide market where an agent in the major areas are appointed who further contact wholesalers and retailers. _______
- 6. 6 | P a g e TYPES OF MARKET INTERMEDIARIES The four basic types of marketing intermediaries are agents, wholesalers, distributors and retailers. Middlemen: Anybody acting as an intermediary between the manufacturer and consumer Agents: The agent as a marketing intermediary is an independent individual or company whose main function is to act as the primary selling arm of the producer and represent the producer to users. Agents take possession of products but do not actually own them. Agents usually make profits from commissions or fees paid for the services they provide to the producer and users. For Example: travel agents, insurance agents and the organisers of party- based selling events of Tupperware. Wholesalers: Wholesalers are independently owned firms that take title to the merchandise they handle. In other words, the wholesalers own the products they sell. Wholesalers purchase product in bulk and store it until they can resell it. Wholesalers generally sell the products they have purchased to other intermediary usually retailers, for a profit. Distributors: Distributors are similar to wholesalers, but with one key difference. Wholesalers will carry a variety of competing products, for instance Pepsi and Coke products, whereas distributors only carry complementary product lines, either Pepsi or Coke products. Distributors usually maintain close relationships with their suppliers and customers. Retailers: The retailer will sell the products it has purchased directly to the end user for a profit. A retailer takes title to, or purchases, products from other market intermediaries. Retailers can be independently owned and operated, like small “mom and pop” stores, or they can be part of a large chain, like Aditya Birla’s More Mega Stores. CLASS XII MARKETING UNIT 3: PLACE AND DISTRIBUTION
- 7. 7 | P a g e Buying and Selling Storage Transportation Grading and Packing Financing Risk-taking Promotion FUNCTIONS OF INTERMEDIARIES (a)Wholesaler: The term wholesaler applies to all merchant or traders who purchase and sell in large quantities. A wholesaler provides an important link between the manufacturer or producer and the retailer. It takes title to the goods he handles and assumes marketing risks in the process of distribution of goods. He purchases in bulk and sell in small lots to the retailer or industrial users and is generally away from the ultimate consumers. Functions performed by wholesalers (i)Buying and Selling: The wholesaler make an estimate of demand for the goods, and then purchase and assembly different varieties of goods from different manufacturers spread throughout the country. They also undertake import of goods from different countries. (ii) Storage: Wholesaler keep the goods assembled by them in their warehouse to supply them to retailers whenever require. They help the manufacturers and retailers by making storage arrangement. (iii) Transportation: Wholesalers make transportation arrangement from the premises of manufacturers to their godowns and from their godowns to the retail stores. They often maintain their own fleet of vehicles for this purpose.
- 8. 8 | P a g e Collection of goods Time Utility Transportation Financing Customer Education Spokesperson of Customers (iv) Grading and Packing: Wholesalers grade the goods according to certain standards which they have purchased from different manufacturers. Some manufacturers also give brand names to graded products to convince the consumers or industrial users about the quality of the products they deal in. They also undertake the packaging of goods in convenient lots. (v)Financing: Wholesalers provide financial accommodation to both the manufactures and the retailers. They generally purchase goods on cash basis from the manufactures and sometimes also give advance to the manufactures. Thus, the manufactures need not wait till product are sold. The wholesalers help the retailers by selling the goods on credit. (vi) Risk-taking: Wholesalers assumes a large number of risks in the process of distribution of goods. These risks may occur on account of charges in prices and demands, spoilage of goods, and bad debts. Thus, they undertake many marketing risks which would have been undertaken by the manufacturers and retailers. (vii) Promotion: The wholesalers job’s does not end with the selling of goods to the retailers. They also assist in the dispersal of goods by the retailers situated in various markets. They perform advertising and other sales promotion activities in order to promote the sale of their product. (b)Retailers Retailing or retail trade involves all such activities which are related to direct sale of goods to the ultimate consumer. Retail trade is usually done by the retailers. A retailer may be defined as a dealer in goods and services who purchases from manufacturers and wholesaler and sells to the ultimate consumer. Function of Retailers
- 9. 9 | P a g e (i)Collection of goods: Retailers purchase and collect goods from large number of wholesales and manufactures to meet the needs of the ultimate consumers. (ii)Time Utility: Retailers keep a large number of products of different varieties in stock to sell them to the customers whenever they require. Thus, they create time in searching variety of products. (iii) Transportation: Retailers perform transportation function by carrying the goods from the wholesaler and handing them over to the ultimate consumers. Sometimes, they also provide free home delivery of products to the customers. (iv) Financing: Retailers sell the goods on credit to the consumers and thus they increase their short-term purchasing power. In this process, they undertake the risk of bad debts. (v)Customer Education: Retailers educate the customers by informing them about the availability and diverse uses of new products along with their demonstration. (vi) Spokesperson of Customers: Retailers act as the spokesperson or agents of the customers. They communicate the needs or demands of their customers to the wholesalers and manufactures. Thus, they help the customers in getting the want- satisfying products and help the manufacturers in producing the products which are desired by the customers. Basis Wholesaler Retailer 1.Quantity Deals in large quantities and on a large scale. Deals in small quantities and on small scale 2. Number of Items Handles a small number of items and varieties Handles a large number of items and varieties 3.Outlet First outlet in the chain of distribution Second outlet in the chain of distribution 4. Sale Sells to retailers and industrial users Sells to consumers 5.Location Location of a wholesaler’s shop is not very important Location of retailers’s shop near the residential areas is very 6.Window Display Window display is not very important Window display is a must to attract customers 7. Profit Margin Sells at a very low margin of profit as turnover is very fast Sells at a higher margin of profit as he has to spend on window display and pay higher 8. After sale services Do not provide after-sale service Provide after-sale service
- 10. 10 | P a g e FACTORS AFFECTING CHOICE OF CHANNEL OF DISTRIBUTION Price of Product Perishability Size and Weight Technical Nature Goods made to Order After Sales Services FACTORS AFFECTING THE SELECTION OF CHANNEL OF DISTRIBUTION The following factors affect the selection of the channel of distribution: 1) Factors Pertaining to the Product Keeping in view the nature, qualities and peculiarities of the product, could only the channel for distribution be properly made. The following factors concerning the product, affect the selection of the channel of distribution: Factors Pertaining to Product Factors pertaining to Consumer Factors perataining to Middleman Factors pertaining to producer Other Factors
- 11. 11 | P a g e Number of Customers Expansion of the Consumers Size of the Order Objective of Purchase Need of the Credit Facilities (a)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. (b)Perishability. The products which are of a perishable nature need lesser number of the intermediaries or agents for their sale. Under this very rule, most of the eatables (food items), and the bakery items are distributed only by the retail sellers. (c)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. (d)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 arc) required to be used. (e)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. (f)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:
- 12. 12 | P a g e (a)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. (b)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. (c)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. (d)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. (e)Need of the Credit Facilities. If, for the sale of any product, it becomes necessary to grant credit to any customer, it shall be 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: FACTORS PERTAINING TO MIDDLEMAN • Services Provided by Middlemen • Scope or Possibilities of Quantity of Sales. • Attitude of Agents towards the Producers' Policies • Cost of Channel of Distribution
- 13. 13 | P a g e Level of Production Financial Resources of the Company Managerial Competence and Experience (a)Services Provided by Middlemen. The selection of the middlemen be 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 (b)Scope or Possibilities of Quantity of Sales. The same channel should be selected by means of which there is the possibility of more sales. (c)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 being disliked by the middlemen, the selection of middlemen becomes quite limited. (d)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: (a)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 they 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. (b)Financial Resources of the Company. From the financial point of view, the stronger company needs less middlemen. (c)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.
- 14. 14 | P a g e 5)Other Factors (a)Distribution Channel of Competitors. While determining the channel of distribution, the channels of distribution of the competitors too must be borne in mind. (b)Social Viewpoint. What is the attitude of society towards the distribution, this fact too must be kept into consideration while selecting the middlemen. (c)Freedom of Altering. While selecting the agents, this fact too must be kept into mind that in case of need, there must be the liberty of changing or replacing the agents (middlemen).