The easier it is for customers to access the products, the more attracted they will be to buying them. Marketing managers need to know how to choose a channel of distribution properly.
One on hand manufacturers might be reluctant to use different intermediaries in the channel of distribution due to desire for cost savings. But, on another hand, traditional intermediaries such as wholesalers and retails continue performing their functions linking production with consumption.
This is especially important when customers regularly buy products in small quantities and in the same location, and businesses lack flexibility and IT infrastructure to sell online.
Typical channels of distributions
Every business must decide the best way of getting its product(s) to the final consumer. The following shows some examples of the most popular channel levels of distribution.
A 0-Level Channel of Distribution: Direct Selling to customers
The producer sells the product directly to the final consumer. This is called direct selling.
A 1-Level Channel of Distribution: One-intermediary channel
The producer sells the product to retailers. The retailers then sell the product in their shops to the final consumer. There is one middle man here.
A 2-Level Channel of Distribution: Two-intermediaries channel
The producer sells large quantities of the product to the wholesalers. The wholesalers then sell the product in smaller quantities to retailers. The retailers then sell the product in their shops to the final consumer. There are two middle men here.
A 3-Level Channel of Distribution: Three-intermediaries channel
The producer uses an agent (broker) to enter into a new market or the foreign market for the first time. The agent has specialist knowledge about the country and its markets. The agent helps the producer to place the product with wholesalers. The wholesalers then sell the product in smaller quantities to retailers. The retailers then sell the product in their shops to the final consumer. There are three middle men here.
Basic questions before choosing a channel of distribution
In choosing an appropriate distribution strategy, business organizations need to first consider several factors like:
- Should the product be sold directly to consumers, or should the business use intermediaries?
- Does the producer have the resources to perform the functions of the channel?
- Which approach to distribution should the firm use?
- Should the product be sold through retailers?
- How long should the channel of distribution be? Short channels of distribution use few intermediaries while long channels of distribution use several intermediaries.
- In which outlets (shops) should the product be available for customers to purchase?
- How much will it to deliver the product to the final consumers?
- How much control over the distribution process does the business want to have?
- Will the distribution channel selected align with components of Marketing Mix?
- Will it be possible to change between different channels of distribution in the future?
Factors influencing a choice of distribution channel
The best method for the distribution of a business’s goods should be selected after a very careful consideration as it is not easily reversible. The following describes many factors influencing choice of a channel of distribution by a business.
PRODUCT:
Nature of the product. The type of the product will determine which channel of distribution to choose.
– Perishable products: Perishable products such as fresh milk, bread, vegetables or fresh meat require relatively short distribution channels because they to get to the final consumer as quickly as possible so a long channel of distribution might not be appropriate. Use direct selling and/or retailers.
– Special products: Some goods such as frozen seafood, fresh fruits or frozen meat need special delivery conditions such as special vehicles with cooling conditions to maintain the correct temperature preventing the products from turning bad.
– Fragile products: Fragile items such as glass, windows or consumer electronics need to be handled as few times as possible during transportation to reduce the risk of damage.
– Tailor made products: Customer-made products such as clothes, wedding dresser or high-end leather shoes need direct contact with customers and even require their presence when the product is being made. Use direct selling.
– Complex products: Technologically advances products such as surgical equipment sold to hospitals or corporate software for banks are often supplied directly to customers. It is because these products require a great deal of technical know-how among the sales staff and a supporting service team. Use direct selling.
– Heavy or non-standard products: Customized products such as cars usually need specific technical assistance to purchase, install and service. Intermediaries are often best placed to provide ordering and maintenance rather than the original producer. Use direct selling and/or distributors.
– Industrial products: Industrial products such as excavators, elevators or trucks tend to be sold more directly through shorter distribution channels with fewer intermediaries than consumer goods. Use agents.
– Fast Moving Consumer Goods (FMCG): Every-day convenience goods of low value are sold often in large quantities, hence intermediaries are very appropriate to take over some sales responsibilities. Use wholesalers and/or retailers.
Product Life Cycle. Place must be considered in terms of the Product Life Cycle. At the beginning of the product life in the growth stage, the product might be sold only in one location as the number of customers is rather small. Then, as the product grows into the maturity stage, it might be good to have the product sold in multiple locations to target large number of customers. In the decline stage, the business may have to change locations to make it more convenient to purchase the product for customers who are no longer that strongly interested in buying.
Unit value of the product. When a unit value of the product is very high, hiring specialized sales staff is recommended. They will sell highly expensive products such as sports cars worth USD$2,000,000 directly to individual customers. On another hand, when a unit value of the product is low such as chocolate bars worth USD$1.5, then distribution can be handled by any general wholesaler.
MARKET:
Size of the market. Larger markets may need a longer channel of distribution with many intermediaries aka middle men. Mass international markets will most likely need a robust 3-Level Channel of Distribution. Smaller markets may need a shorter channel of distribution with few or no intermediaries. Niche local markets will most likely need a more direct 0-Level Cannel of distribution. Market segments needs to be considered as different segments may influence the choice of retail outlet.
Dispersion of customers. This means location and geographical dispersion of the target market. Markets that cover a wide geographical area are large and dispersed; hence the need to use more intermediaries is more likely. These markets will be best served through wholesalers who can break down buy the product in bulk from producers into smaller units for retailers. Smaller markets that are regionally concentrated and not dispersed will need fewer intermediaries. These markets will be best served by direct selling.
CUSTOMERS:
Number of potential customers. When the number of potential customers is limited, direct selling will be used, or a shorter channel of distribution. On another hand, when the firm has very large number of customers, then it will use many intermediate channels to distribute their products. Usually, the more customers the business has, the longer the channel of distribution is going to be. Many intermediaries in the channel will focus heavily on the customer satisfaction as a way to create competitive advantage for the firm.
Customer preferences. Buyer’s behavior and preferences where they want to purchase the product also determines the choice of distribution channel. While some customers prefer to shop at local retailers, others like buying over the Internet. However, after-sales services for many products such as cars or motorbikes can only be offered in physical locations hence online selling is not appropriate for most manufacturers.
Customer expectations. Customers also need product information before making a buying decision. Level of service expected by customers will determine channel choice as different distribution channels provide details in different ways about the product features, installation instructions and terms of servicing.
BUSINESS:
Size of the business. Here, the availability of financial resources to perform the functions of the channel will determine whether a business will use its own distribution or rely on other intermediaries. Large businesses set up their own distribution channels including warehouses, transportation and outlets. Small businesses will rely on using middle men who have the necessary infrastructure readily available. Secondly, certain manufacturers may not have other resources such as the ability to recruit, train and equip a sales team or the customer-based skills to distribute their products. That is why they will have to rely on using other intermediaries.
Type of the business. It is easier for a younger business such as sole trader or a partnership with less Fixed Assets and weaker brand association to a certain location to change a place. As the firm moves through the private limited company to a large public limited company, it is becoming very hard to change places as large businesses own a lot of Fixed Assets. This would become pricey as distribution involves real estate which is expensive these days. In the end, place decisions are the least flexible among all Marketing Mix decisions.
Control over distribution. This applies to the level of power producers want to have over distribution issues. These may include the following: to whom the products are sold, the quantity of products sold, at what price the products are sold, how much discounts are given, any promotional offers included, are the products always stocked by retailers, etc. Direct selling to customers gives producers a lot of control over place and distribution decisions while selling via wholesalers and retailers gives much less control.
DISTRIBUTION:
Cost of transportation. The product needs to be delivered to the final customer without any damage and on time. Different transportation methods used to bring the product to the end-user need to be considered as some of the methods have lower distribution cost than others. While the cheapest methods might delay or damage the goods, the most expensive ones will cut into profit margins. Another issue is whether or not the firm owns its own delivery vehicles with qualified drivers. Obviously, direct selling reduces costs of transportation, and the 2-Level Channel of Distribution as well as the 3-Level Channel of Distribution increase the cost of transportation. Ideally, producers need to find the low cost, reliable, fast and secure method.
Cost of intermediaries. The longer the channel of distribution is the higher the total cost of intermediaries as each intermediary typically charges a mark-up (for wholesalers and retailers) or commission (for agents and distributors) for participating in the channel. Distribution channels typically account for 15% to 40% of the retail price of goods. So, when this is not acceptable for the producer business, then other ways of distribution should be considered.
Attitudes of intermediaries. Channel intermediaries might be willing or unwilling to market products manufactured producers. Wholesalers who invest heavily in storage space and security of premises, and retailers who focus on location of their properties and shop fittings might have their own strategies that do not align with what the producer wants. Intermediaries may decide not to support a particular producer, especially when it would require substantial investments, e.g. changes into current warehousing methods, additional display equipment, staff training, etc.
Time. How urgently does the product need to be delivered to customers? Are any time lags for delivery acceptable in the customer mind? Does the manufacturer need to wait for customer response? How long can customers wait for the product? Some of these questions shall also be considered when arranging a distribution channel in a business organization.
To sum up, place in general is an outlet where people can buy products. And the channel of distribution describes the route how products are sold and delivered from the producer to the customer.
