Distribution channel

Nature and importance of channels
Most businesses use third parties or intermediaries to bring their products
to market.
They try to forge a "distribution channel" which can be defined as
“All the organizations through which a product must pass between its
point of production and consumption“

Why does a business give the job of selling its
products to intermediaries?
• The answer lies in efficiency of distribution costs.
• Intermediaries are specialists in selling.
• They have the contacts, experience and scale of operation
which means that greater sales can be achieved than if the
producing business tried to run a sales operation itself.

Channel behavior and Organization
For example,
•A Toyota dealer depends on the Motor company to design cars that meet
consumer needs.
•In turn, Toyota depends on the dealer to attract consumers, persuade them to
buy Toyota cars, and service cars after the sale.
•The Toyota company also depends on other dealers to provide good sales and
service that will uphold the reputation of Toyota and its dealer body.
•In fact, the success of individual Toyota dealers depends on how well the
entire Toyota distribution channel compete with the channels of other
automobile manufacturers.

Channel Conflicts  Horizontal and Vertical
Horizontal conflicts occurs among firms at the same level of the channel.
 For example, some Ford dealers in Chicago complained about other
dealers in the city who stole sales from them by being too aggressive in
their pricing and advertising or by selling outside their assigned territories.
Vertical conflicts refers to conflicts between different levels of the same
channel.
 For example, General Motors came into conflict with its dealer some
years ago by trying to enforce service, pricing, and advertising policies.
Solution : “For ensuring good performance of the channel, each channel
member’s role must be specified and channel conflict must be managed.”

 Analyzing customer needs
(a) Lot size (b) Waiting and delivery time (c) Spatial convenience
(d) Product variety (e) Service backup
 Establishing channel objectives
Channel objectives should be stated in terms of targeted service
output levels. Channel design must take into account the strengths
and weaknesses of different types of intermediaries.
 Identifying major channel alternatives
A channel alternative is described by three elements : (a)the types of
available business intermediaries, (b) the number of intermediaries
needed, (c) and the terms and responsibilities of each channel
member.
Channel design decisions

Analyzing customer needs
(a)Lot size :
 In buying cars for its fleet, Hertz prefers a channel from which it can buy a
large lot size.
 A Household wants a channel that permits buying a lot size of one.

(b) Waiting and delivery time :
The average time customers of that channel wait for receipt of the goods.
Customers increasingly prefer faster and faster delivery channels.

(c) Spatial convenience :
 The degree to which the marketing channel makes it easy for customers to
purchase the product.
 Example : Maruti Suzuki offers greater spatial convenience than
Chevrolet, because there are more Maruti dealers.
 Maruti’s greater market decentralization helps customers save on
transportation and search costs in buying and repairing an automobile.

(d) Product variety :
 The assortment breadth provided by the marketing channel.
 Normally, customers prefer a greater assortment because more
choices increase the chance of finding what they need.
 United Spirits Limited (USL) is the largest spirits company in
the world by volume, selling 114 million cases for the fiscal
ending March 21, 2011.

(e) Service backup :
• The add-on services are the credit, delivery, installation,
repairs and others provided by the channel. The greater the
service backup, the greater the work provided by the channel.

Establishing channel objectives
 Channel objectives are a part of and result from the company‘s marketing
objectives that need to be stated in terms of targeted service output levels.
 It should be the Endeavour of the channel members to minimize the total
channel costs and still provide with the desired level of service outputs.
 For example,
1. Perishable products require more direct marketing because of the
dangers associated with delays and repeated handling.
2. Products requiring installation and/or maintenance services are usually
sold and maintained by the company or exclusively branches dealers.
3. Custom-built machinery and specialized business forms are sold
directly by company sales representatives because middlemen lack the
requisite knowledge.

Identifying major channel alternatives
 Companies can choose from a wide variety of channels for reaching
customers from sales forces to agents, distributors, dealers, direct mail,
telemarketing, and the internet.

Evaluating major channel alternatives
 Economic criteria :- Each channel alternative will produce a different
level of sales and cost.
 Example : Company sales representatives are better trained to sell the
company’s products.
 Control criteria :- Channel evolution has to include control issues.
Using a sales agency poses a control problem.
 Example : The agent might not master the technical details of the
company’s product or handle its promotion materials effectively.
 Adaptive Criteria :- Each channel involves some duration of
commitment and loss of flexibility.
 Example : A manufactures seeking a sales agency might have to offer a
five year contact. During this period, other means of selling such as direct
mail might become more effective, but the manufactures is not free to drop
the sales agency

Channel Management decisions
Channel management warrants :
 Selecting channel members :
characteristics of intermediaries  channel member’s length of
business, other lines carried, growth and profit record, cooperativeness
and reputation.
 Motivating individual channel members :
Positive motivators  higher margins, special deals, premium,
cooperative advertising allowances, display allowances and sales
contests.
Negative motivators  threatening to reduce margins, to slow down
delivery, or to end the relationship altogether.
 Evaluating their performance over time :
Evaluating standards  sales quotas, average inventory levels,
customer delivery time, treatment of damaged and lost goods,
cooperation in company promotion and training programs and customer
service.

For example,
•when IBM first introduced its PS/2 personal computers, it re-
evaluated its dealers and allowed only the best ones to carry the
new models .
• Each IBM dealer had to submit a business plan, send a sales and
service employee to IBM training classes and meet new sales
quotas.
• Only about two-thirds of IBM’s 2,200 dealers qualified to carry
the PS/2 models.

Distribution channel

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Distribution channel