Everything you need to know about factors influencing choice of distribution channel. Deciding or selecting channels of distribution is a strategic decision for any manufacturing or trading concern.
The choice of channels depends on various factors. Usually, manufacturers consider which distribution channel would be objective and efficient.
The selected channels must have lowest cost with maximum overall profit. It should also be remembered that there is no single channel of distribution that will always result in optimum profit. The integrated marketing concept has prompted many manufacturers to employ several kinds of channels.
There are various constraints that are to be considered before deciding channel objectives.
Learn about the factors influencing choice of distribution channel are:- 1. Market Related Factors 2. Product Factors 3. Company Factors 4. Channel Related Factors 5. Environmental Factors.
Factors to Consider When Choosing a Distribution Channel: Market, Product, Company, Channel and Environmental Factors
Factors Affecting Choice of Distribution Channel – 5 Important Factors: Market, Product, Company, Channel and Environment Related Factors
There are several channels available for the purpose of distribution of goods. Each channel has its own advantages and limitations and every company has to make difficult choice about channels of distribution. This decision about choice of a channel of distribution depends on several factors. A company has to consider all these factors and make an appropriate choice.
The following are the factors:
1. Market Related Factors:
Since the channels of distribution operate in the market. The market related factors are very important. There are several forces in the market which dictate the choice of channels of distribution.
The following are the market related factors to be considered:
The ultimate purpose of any channel of distribution is to distribute the goods to the customers. Therefore the requirements and the nature of the customers should be considered while deciding the channel of distribution.
If the customers are widely scattered the channels must be in a position to reach them out effectively. This requires appropriate channels but if the customers are not widely scattered smaller channels would be sufficient. If the customers are very large in number such as individuals, very wide channels of distribution will be necessary, but if the customers are small in number and purchase in large quantities such as the industrial purchasers, small channels or even direct distribution will be sufficient.
One has to consider the channels of distribution arranged by the competitors. This choice represents the wisdom and experience of the competitors. It also means that the competitors have been successful in using such channels over the long run. A company can adopt such channels of distribution if found suitable to itself. Unless there are compelling reasons, a company should not try to change the pattern of distribution as compared with that of the competition.
c. Existing Channels of Distribution:
One has to make study of the existing channels of distribution. The functions performed by these channels, their strengths and weaknesses, their suitability and such other factors affect the choice of channels. Their relative advantages must also be studied.
2. Product Factors:
Since it is the product which is to be distributed, the product characteristics also have to be analyzed while choosing a channel of distribution. Different products are different in nature and this nature of the products requires different types of channels.
The following product factors have to be considered:
If the products are highly perishable, the channel must be short or even direct marketing would be suitable. This is because long channels of distribution with a large number of intermediaries delay the distribution of goods. Products like milk, flowers etc. require very fast distribution.
b. Nature of the Product:
Consumer goods are purchased by a larger number of people, in smaller quantities and more frequently. Therefore such goods require longer channels of distribution which have a wide range. The presence of retailers is a must. Industrial goods on the other hand are purchased in larger quantities by a smaller number of purchasers and less frequently. Moreover the industrial goods purchaser is well informed, knowledgeable and rational. Such goods require shorter channels of distribution.
Some products are highly technical in nature such as computer hardware and software, medical diagnostic equipments etc. Such goods require a high amount of technical support which can be provided only by the manufacturer. Therefore, such goods are best distributed by manufacturers’ salesmen. Goods which do not require such technical support, for example-ready-to-wear garments can be distributed by longer channels of distribution.
Some goods have a seasonal nature either in terms of production (agricultural goods), or consumption (woolen goods) and such goods require different types of distribution channels.
e. Variety Offered:
If a manufacturer has a wide range of goods, he can opt for direct distribution of the goods since a large number of products are available. If a manufacturer has very few products, he has to distribute them through long channels of distribution.
f. Unit Value:
Products of high unit value suit shorter channels of distribution or even direct marketing, but products of low unit value which are mass consumed require longer channels of distribution.
3. Company Factors:
A company has to look within and understand itself while choosing a channel of distribution. It has to understand its requirements, strengths and weaknesses.
The following specific factors have to be understood:
a. Company’s Financial Strength:
A financially strong company can design its own channel of distribution because of its financial strength. It can negotiate with people and establish an altogether new channel of distribution. A company which is not financially strong has to settle down for existing channels of distribution because establishing a new channel of distribution requires huge amounts of money.
b. The Extent of Control Desired:
Control desired in this context means the ability of the company to exercise control over the channels of distribution in matters like resale price maintenance, territory restrictions etc. Longer the channel, lesser will be the control.
c. Reputation of the Company:
A well-established company with a strong reputation will find it easy to have longer channels of distribution. This is because channel intermediaries are generally willing and enthusiastic to be associated with strong companies.
d. Company’s Marketing Policies:
Every company will have policies regarding marketing and these policies will also lay down norms relating to channels of distribution and these policies will also have a strong influence on the choice of channels of distribution.
e. Past Experience:
An established company will already have well established channels of distribution. The company will also have experience in matters of dealing with such channels of distribution. A company should consider such past experience while deciding the channels of distribution.
4. Channel Related Factors:
The channels of distribution choosing should be appropriate from the view point of the company. These channels must be examined and then a proper choice must be made.
The following factors of the channel must be considered:
a. The Ability of the Channels:
Well established and strong channels have the ability to distribute goods effectively over a wide area. They can promote and sell even unknown products. Newly established channels of distribution however cannot do these. Therefore a company has to consider the ability of the channels before deciding on the channels of distribution.
b. The Financial Strength of the Channels:
Financially strong channels of distribution can distribute the goods well and also finance the manufacturers directly or indirectly. They can lift the goods from the manufacturers by paying cash immediately which indirectly amounts to financing the manufacturers. Therefore, such financial ability is also a factor that must be considered by a company regarding choice of channel of distribution.
c. Ability to Provide after Sales Service:
Some products require a long term after sales service. In such a case it should be decided as to who has to provide the after sales service whether the manufacturer or a member of the channel of distribution. In such a case a company has to look into the ability of the channels of distribution to provide effective after sales service in a sustained manner.
A company’s channel choice depends on certain environmental factors. Environment in this context means the environment within which the company, the channels of distribution, the customers etc. are present.
The following are certain environmental factors which must be considered while deciding channels of distribution:
a. Economic Situation:
The prevailing economic situation in the country affects all the economic activities. Therefore, a company has to be aware of the prevailing economic conditions. During an economic boom, the sales of all the products will naturally good and channels of distribution will be more than willing to take up distribution of products.
During a recessionary period, the general sales come down as a result of h which channels of distribution become reluctant to take up distribution. These are the factors to be considered by a company while deciding on a channel of distribution.
b. Legal Factors:
A company is free to decide about its channels of distribution as long as its activities are legal. There are certain legal factors however which must be considered while deciding channels of distribution and arrangements with them. Certain types of arrangements with the channels of distribution in the form of sole distributorship and in the cases of certain essential commodities may be objectionable under law. Therefore, such legal factors are to be considered.
c. Fiscal Structure:
Fiscal structure in this context refers to certain indirect taxes levied by the state governments on products. There is no uniformity in this matter and clarity is absent in certain cases. Therefore, such matters must also be considered while deciding on, channels of distribution.
Factors Influencing Choice of Distribution Channel – Product, Consumer, Company, Middlemen and General Considerations
A. Product Considerations (Nature of Product):
1. UNIT Value – Use short direct sales type channel for high value goods. Use large channels for low value goods.
2. Perishability – Short channels or direct to consumer for perishable goods e.g. fruits, vegetables, perfumes. Long channel for durable goods.
3. Bulky and Weighty (like iron & steel, cotton etc.) – To be sold directly by manufacturer or short channel to reduce distance and number of handlings.
4. Highly Technical Products – To be sold through shortest channel / directly by Manufacturer.
5. General Goods (with Substitutes) – Sell through long channels.
6. Limited Product Line – Direct Selling .
7. Standardized / Branded Products – Sell through long channels.
8. Ordered Goods (goods as per customer specifications) – Sell direct by Manufacturer.
9. Expensive High Unit value Products – Sell direct by companies.
10. Inexpensive products – Sell through indirect / long channel.
11. Tangible and intangible Products – Tangible goods sold through indirect, longer channel. Intangible services are sold through direct or shorter channel.
12. Repeated Handling (like delicate jewelry) – Short channel.
13. Customer-Specifications Goods – Shorter channel (direct channel).
14. After Sales Service Requirement – Direct/short channel.
15. Nature of product – For consumer products, indirect channels are preferred and for industrial goods direct channel.
16. Goods subject to Fast Style Changes – Manufacturers prefer selling direct to retailers.
B. Consumer Considerations:
1. Dispersed geographically Customers – Sell through Middlemen (one or more layers).
2. Large no of customers – Sell through Middlemen (one or more layers).
3. Credit and other facilities – Better use intermediaries; for wholesalers, retailers can better asses creditworthiness of customer.
4. Order Size Manufacturer – he can sell direct to big organisation and use wholesalers to sell to retailers.
5. Buying Habits of Customers – For consumers buying frequently but in small quantities -Indirect channel.
If customer buying in large amount – Direct channel is profitable.
C. Company Considerations:
1. Large scale Manufacturers – Distribute their products directly.
2. Small Manufacturers – Sell through wholesalers as they cannot afford heavy expenses of sales force.
3. Custom of the Industry may decide the channel.
4. Financial Position – Direct sales by financially strong companies. Weak co (with lesser financial/human resources) to depend upon intermediaries.
5. Maximizing short-run profits – Sell through direct channel.
6. Managers with Expertise to Sell – Sell direct.
D. Middlemen / Intermediaries Considerations/Factors:
1. Manufacturers may choose to avail middlemen’s important services;
2. Middlemen’s Liberal and co-operative attitude helps their use;
3. Rigid attitude restricts their use;
4. Use middlemen if they can assure maximum sale and have necessary capability; and
5. Producers would use channels if they are not costly and such channels which have low costs.
E. General Considerations:
Choose channels which satisfy following criteria viz.:
1. Suitability – Suitable channel be adopted.
2. Efficiency – Efficient channel be adopted.
3. Flexibility – Channel should be capable of being changed.
4. Competitors’ Channels be kept in mind and sell through same channels or devise alternatives.
5. Social Considerations – Attitude of society towards a channel be considered.
6. Inflationary / Recessionary conditions – In Inflation sell through longer channels to penetrate deep into market and generate greater sales revenue. In recession, use shorts channels to prevent undesirable price increase in products.
Factors Influencing Choice of Distribution Channel – 8 Major Factors: Type of Product, Market Consideration, Size and Structure of Manufacturing and a Few More
The choice of a suitable channel of distribution which can be utilised for canalising the flow of existing products from the producers to the ultimate consumers is generally governed by the following eight factors –
Factor # 1. The Type of Product:
The peculiarities of the product influence and determine the number of middlemen through whose hands the products will pass before it gets into the hands of the consumers.
(a) Perishability – As a rule, fewer middlemen are required for selling perishable goods and commodities. Most of the bakery products and food products, generally, pass through only one middleman—the retailer—and may in many cases be sold directly by the producer.
(b) Servicing required – Products like automobiles and sewing machines which require servicing, expensive handling equipment, or instructions before use also pass through the hands of a few middlemen. Fashion goods generally require direct selling since their special features have to be explained to the consumers effectively. Retailers may not do this very well.
(c) Seasonal character – If a commodity is in seasonal demand there may be no need for middlemen.
(d) Unit value – Generally, products of lower unit value and high turnover are distributed extensively through indirect channels, e.g., hosiery goods, cosmetics, etc.
(e) Bulk or weight – Where the movement of goods involves heavy freight and poses problems of transportation, limited channels may be employed. Selling may be mostly direct in such cases.
Factor # 2. Consumers or Market Considerations:
The consumers influence the choice of the distributive channels in the following ways:
(a) Number – If the number of consumers is small, as in the case of bulky and expensive machinery, the manufacturer can employ his own sales force to sell directly to the consumers. If, however, there is a large number of a consumer interested in a product, the producer has to make use of the services of wholesalers and cannot afford to employ sales staff for direct selling or even deal with the host of retailers. Cigarettes and other consumer goods belong to this category.
(b) Geographical location – If most of the consumers using a particular product (say, bread) live in the same city or locality as the producer, the producer can sell his products through his own salesmen. On the other hand, if the consumers are large in number and are scattered over a wide area, the producer will have to depend upon wholesale and retail channels for the sale of his products.
(c) Consumer or industrial market – The purpose for which the product is purchased by consumers also influences the choice of channels of distribution. If a product is used for an industrial purpose, direct purchase from the manufacture will suit the consumer better and the manufacturer will adopt direct selling.
(d) Order size – The size of orders received and the volume of goods supplied to individual firms will influence the channels used to reach them. A food products manufacturer will sell directly to large grocery chains because the total volume of business makes this channel economically feasible.
(e) Consumer buying habits – The channel policies are affected by the buying habits of consumers and industrial users, the amount of effort the consumer is willing to expend, the desire for credit, the desire for after-sales service etc.
Factor # 3. Size and Structure of Manufacturing:
The larger the producer, the more profitable it may be for him to establish direct contact with consumers through his own sales force. A small producer, on the other hand, finds it more profitable to rely on indirect channels making use of wholesalers and retailers. Also, if the manufacturing is widely dispersed geographically, in relation to the demand, the greater will be the necessity of using indirect channels, particularly wholesalers.
This is so because the wholesalers will have to collect products from a wide area. Further the width or the range of the product-line also determines the broad pattern of distribution that a firm will adopt. If a manufacturer deals in a wide range of products, he will tend to serve the retailer directly eliminating the wholesaler because it is more convenient for the retailer to purchase from as few a sources as possible. Besides, it may mean some saving in the personal selling cost per unit as the salesmen will be able to handle large sales volume for the same salary.
Factor # 4. Company Considerations:
The character of the firm making the choice of channels of distribution will also affect the channel policies of firms.
Some of the important factors in this regard are:
(a) Reputation – Firms with established goodwill can usually make their own choice of middlemen and enter into advantageous agreements with them.
(b) Financial resources – A financially strong firm will have a tendency to set up its own channels rather than depend upon middlemen.
(c) Experience and competence of management – Where the management lacks marketing know-how, it may prefer to depend upon indirect selling through middlemen.
(d) Desire for control of channel – A manufacturer may establish a short channel just because he wants to control the distribution. Moving closer to the final customer affords the manufacturer greater opportunity to gather current market information and control the freshness of the product and its retail price.
Factor # 5. Structure of Retailing:
The structure of retail trade in a product has also an important bearing on the choice of channels. One important aspect of this factor is the number of stores selling mainly the product in question. Generally, if there are many such stores, the manufacturer will like to make use of the available retail channels instead of selling direct to the consumers. Also, retailers will be used for marketing a product if the retail stores provide convenience of shopping to the potential consumers.
In short, the important considerations relating to the structure of retailing are:
(a) Services provided by retailers.
(b) Availability of desired retailers.
(c) Attitude of middlemen toward manufacturer’s policies.
(d) Sales volume possibilities.
Factor # 6. The Customary Channels:
In cases where an established network of channels exists, the manufacturer may make use of such customary channels. For example, if washing soap is being marketed through grocers, a manufacturer may find that selling it through general merchants does not add substantially to the sales volume. However, the firm must be on the lookout for new channels and should explore them and experiment with them.
Factor # 7. Selectivity of Distribution:
An important decision in regard to the choice of channels is the one relating to the number of middlemen to be used.
Three alternative policies are available to the manufacturer:
(a) Extensive distribution,
(b) Selective distribution, and
(c) Exclusive distribution.
(a) Extensive Distribution:
Extensive distribution means that the manufacturer is willing to make use of any and all distributive outlets prepared to handle his product. A good example is provided by cigarettes. In following this policy, the manufacturer may use an independent wholesaler through whom he can reach all the retail outlets, or he may sell direct to the large retailers and reach the rest of the market through wholesalers.
(b) Selective Distribution:
Selective distribution means that the manufacturer will select from among the available outlets rather than use all of the outlets. The purpose of this policy is to provide the channels chosen with large enough sales to keep them selling the manufacturer’s product in a satisfactory way. This may increase the sales at reduced distribution costs and bring forth better co-operation from the dealers.
The manufacturer may be able to achieve a good measure of control over distribution through -this policy. On the other hand, it may happen that this market coverage is weak in that potential customers are not able to find his product because it is being marketed through selected channels.
(c) Exclusive Distribution:
This implies the grant of sole selling rights for a product in a certain territory to a middleman under a contractual agreement. Generally, the middleman acting as the sole distributor for a territory does not handle competing products. The benefits and drawbacks of this policy are extensions of those arising from selective distribution.
Factor # 8. The Profit Criterion:
After the qualitative criteria have been applied and a broad choice regarding the type and number of channels made, the next step will be the use of the quantitative criterion in the form of estimates of profit. This means that estimates of demand, revenue and costs for each channel should be prepared and compared to make the final choice regarding the channels of distribution.
The sales volume potential differs considerably channel by channel and the costs tend to move in direct relationship to the directness of the channel. As we move progressively from a direct manufacturer-to-user channel to the most indirect channel through one or more independent wholesalers, the costs of distribution tend to become progressively lower.
At the same time, the manufacturer’s control over his products also gets reduced thus limiting the sales that might be achieved. The net gain from a comparison between these variables will be the criterion for the choice of a channel.
In case of a product being put on the market for the first time, it is important to ensure that the potential buyer learns from some source that the product exists and that it will satisfy certain specific needs of his. If it is an important product, the buyer will seek considerable information (whether from the advertisement or from the middleman) before deciding to go in for it.
This may be said of items like refrigerators, room coolers, air- conditioners, etc. If, however, it is a relatively unimportant thing, the potential buyer may not want much information and may be inclined to make a purchase just as soon as the product is made available. The choice of a channel or a set of channels will be dictated by the kind of product that is being introduced.
The seller of a new consumer product can generally choose from among a number of alternatives. A wholesaler may not promote the product aggressively but he does usually have useful connections with retailers and charges a lower margin of profit. If the manufacturer can create a response for the product through advertising, the wholesaler will be a good choice.
A speciality shop may promote the product with force but will generally demand higher profit margin. Direct sales could also be made to the retailer. This will call for a large sales force. As a further alternative, missionary salesmen may be employed to call on the retailer and the product may be marketed through wholesalers. This may mean more cost but it will ensure better dealer co-operation.
In practice, a beginning may be made with a channel that ensures aggressive promotion of the product even though the cost in the form of margin is high. As the product becomes accepted in the market, the manufacturer can switch over to the channels that mean less cost (say wholesalers).
Of course, in making this switchover, utmost care should be taken to avoid ill-will on the part of the original channel as it may be required again to promote another new product.
While selecting a particular dealer for the sale of his products, a manufacturer must consider the following points:
(i) The ability and the willingness of the dealer to handle the product.
(ii) Credit standing of the dealer.
(iii) Dealer’s knowledge about the product characteristics and its market.
(iv) Ability to maintain sufficient stocks of the product.
(v) Capacity to secure business.
(vi) Ability to cover the territory or areas over which goods have to be sold.
(vii) The other goods or products dealt in by the dealer—whether they are allied products or competitive ones.
(viii) Ability to arrange for repair and maintenance of the product, if need be.
(ix) The dealer’s willingness to co-operate with the manufacturer in maintaining stable prices.
Factors Influencing Choice of Distribution Channel – Top 10 Factors: Nature of Product, Market, Size of Business, Cost of Channel, Nature of Middlemen and a Few More
1. Nature of Product:
The nature of the product has a bearing on the choice of distribution channel. The durability of the product, unit cost of product, type of product must be considered while determining the distribution channel. Perishable goods like bread, milk are distributed through short channels, while durable goods like television, refrigerator may be marketed through long channels. Products that require specialized selling and technical skill need short channel.
Products with lesser unit value and high turnover are distributed by employing longer channels of distribution. Household products like utensils, cloth, cosmetics etc. are distributed through longer channel while products like jewellery having high product value are directly sold to the consumers by the jewelers.
2. Nature of Market:
The geographical width of the market, number of potential buyer, nature of competition has a bearing on selection of distribution channel. In case of industrial markets where number of buyers is less; a shorter channel of distribution can be adopted. These buyers usually purchase directly from the manufacturers.
But in case of consumer markets, where there are a large number of buyers, a longer channel of distribution is employed as distribution process cannot be effectively carried out without the services of wholesalers and retailers. If the manufacturer wants to reach customers who are concentrated at one particular place or market, distribution channel will be short and the manufacturer can directly supply the goods in that area by opening his own shops or sales depot.
While if the buyers are widely scattered, it is very difficult for the manufacturer to establish a direct link with the consumers, hence services of wholesalers and retailers will be used.
3. Size of Business:
The size of the business, financial strength of the concern determines the channel of distribution. A small manufacturer may sell his product directly. While a large manufacturer may use a longer distribution channel. If the manufacturer wants to control the entire distribution process, it will prefer direct selling or adopt short distribution channel.
4. Cost of Channel:
Distribution process involves cost of transportation, warehousing, storage insurance, material handling, distribution personnel’s compensation and interest on inventory carried at different selling points. Higher cost of distribution will result in the increased cost of product. On the other hand the services delivered by the distribution channel intermediaries may be indispensible. Hence the marketer must carry out a cost benefit analysis while selecting the distribution channel.
5. Nature of Middlemen:
The manufacturer must select those middlemen who provide the best marketing services like storage, transportation, credit and packing etc. At the same time the middlemen should ensure various services to customers. A manufacturer would like to appoint that middlemen who assure greater sales volume.
In appointing middleman, the manufacturer must take into consideration the financial stability and reputation of the middleman. A financially sound middleman can provide credit facilities to customers and make prompt payment to the manufacturer.
6. Distribution Intensity:
The selection of distribution channel depends upon the intensity of distribution. If the marketer intends to undertake extensive distribution will make his products available through all distribution outlets, if the manufacturer intends to undertake selective distribution will make products available through few selected outlets. If the manufacturer intends to undertake exclusive distribution will make the products available thorough one outlet.
The selection of distribution channel depends upon time taken by the distribution channel. The manufacturer needs to compare the time taken by different distribution channels and should select the one that takes minimum time for delivery of goods to customers.
Government policies and regulations also influence the choice of distribution channels. The Government may impose certain restrictions on distribution of certain products like wine, narcotic goods.
The distribution channel used by the competitors determines the channel of distribution to be adopted.
The channel of distribution selected by the company must be easily accessible by customers and prospects. If company intends to sell products locally, may choose a retailer or distributor in the area who knows the local market. If company wants to expand its business and to sell products in other states, may choose a distribution network that provides coverage of the selected markets.
Factors Influencing Choice of Distribution Channel – 5 Important Factors: Product, Company, Competitive, Market and Environment Related Factors
Deciding or selecting channels of distribution is a strategic decision for any manufacturing or trading concern. The choice of channels depends on various factors.
These factors may be discussed as follows:
1. Product Related Factors:
Nature of product is an important factor in deciding channels of distribution. Consumer products are usually standardised, less expensive, and non-technical and have large number of buyers spread over a wide geographical area thus will require wider network of channels involving many middlemen to sell and distribute products. On the other hand, industrial products are technical, expensive, usually customised as per customer’s demand, have lesser number of buyers thus will require personal or direct selling with short channels involving fewer middlemen. Perishable goods need to be sold faster thus will adopt short channels of distribution.
2. Company Characteristics:
Another factor in deciding the channels of distribution is the company’s financial strength and its decision to share the degree of control with its channel partners. To sell products through direct selling, company will require huge investment to open their retail outlets and employ large workforce to sell its products. On the other hand, indirect selling requires intermediaries to sell products. Thus, if a company has enough funds and prefers to retain control with the management, may opt for direct selling, and if company has lesser funds to invest and is willing to share control with its channel partners may opt for indirect selling.
3. Competitive Factors:
The decision to choose channels of distribution is affected by the channels adopted by competitors in the same industry. It is the company policy which decides whether to go with competitors or be different from them. A company may choose to adopt the similar channels of distribution which are used by other business concerns in the same industry or may use different channels to be different from other firms. For example, some firms may choose to sell through retail shops where other manufacturers are also selling their products whereas others may choose different channel like door to door selling.
4. Market Factors:
The market forces like size of market, geographical concentration of potential customers, quantity demanded etc. affect the decision to choose channels of distribution. If the market size is small and buyers are concentrated in a particular region then companies may choose short channels for distributing their products. On the other hand, companies dealing in consumer products will have a larger market size with consumers scattered over a wide geographical area. In such cases they need to supply goods at the convenience of their customers thus may adopt longer channels of distribution and have more number of intermediaries.
5. Environmental Factors:
The environmental factors like economic condition and legal constraints also affect the decision of choosing channels of distribution. In a depressed economy marketers may choose shorter channels as they are most economical in terms of cost.
Factors Influencing Choice of Distribution Channel – 6 Most Important Factors: Nature of Market, Product, Consumer’s Buying Habits, Competition and a Few More
Usually, manufacturers consider which distribution channel would be objective and efficient. The selected channels must have lowest cost with maximum overall profit. It should also be remembered that there is no single channel of distribution that will always result in optimum profit. The integrated marketing concept has prompted many manufacturers to employ several kinds of channels. There are various constraints that are to be considered before deciding channel objectives.
These are discussed below:
The selection of channels depends firstly on the requirements of the market i.e., what the consumer wants and how much is wanted? A manufacturer must also determine what he himself wants; what share of the market he wishes to attain and how much he is willing or able to invest in order to attain it.
He must also make it sure how best he can reach the market in order to attain this share. Besides these one should also assess various factors such as buying habits of consumers, the size of average sale, the concentration of purchases, repeat sales, the seasonality of sales, scope of distribution and competition.
Product features also will exert influence on the decision of suitable channels:
i. Perishability – Perishable products require more direct marketing because of the dangers associated with delays and repeated handlings.
ii. Size – Products that are bulky (e.g., iron and steel, cotton, etc.,) usually need short channels so that distance and number of handlings from producer to ultimate consumers may be reduced.
iii. Style – This is a dangerous element and often necessitates frequent changes in the channels. Manufacturers prefer selling direct to retailers, especially when goods are subjected to fast style changes.
iv. Unit value – Products of high unit value are often sold through company’s own sales force than through middlemen.
v. Newness of the Products – When new products are introduced, new channels are preferred.
As far as convenience goods are concerned, long channels are preferred. Shopping and specialty goods, on the other hand, are marketed more directly. This difference in channels is caused by differing buying habits followed by the buyers. Industrial goods of high value are also marketed directly.
On the basis of buying habits, following patterns in channels are suggested:
i. Size of the average sale – When the quantity sold is small the channels should be elaborate. For example – Cigarette and Matches. If direct selling is followed in this case marketing cost will tend to become high.
ii. Seasonal character of sales – In spite of the fact that seasonal goods (e.g., Woolen clothes) will have only seasonal markets, the distribution must be arranged on a continuous basis. Prima facie, it is a case for direct sales but as a long-run strategy, continuous marketing channels must be used.
iii. Concentration of customers – If the market for a product is fully concentrated and localised, direct selling would be beneficial.
This also influences the decision of a seller to decide on the channel to be selected. This factor needs thorough analysis and careful consideration. Mostly, in practice, similar types of channels used by die competitors are preferred two reasons could be accounted for this – First the competitor’s channel is familiar to the purchasers and hence could reach the customers easily.
Secondly, by using a totally different channel the initial difficulties may affect the sales and even increase the cost of distribution. Therefore, manufacturer should prefer a new channel only if he is convinced that it would be more efficient.
Financial strength of the channel members also is considered when selection is made. This is needed to tide over the temporary and seasonal difficulties that may arise in course of time.
Yet another factor considered is the cost involved in distribution. Needless to say, cost of distribution would reflect in the price of the product. Direct marketing generally is costlier and distribution arranged through middlemen is more economical. Moreover, direct marketing would involve the manufacturer to always keep sufficient funds for moving the products to markets.
Thus, the individual manufacturer or seller, making a choice of how he will get his goods most economically and efficiently into the hands of potential customers, has to consider the above factors. There are also no readily available set guidelines which could state what the best channels are. In each instance, therefore, the seller has to consider his own objectives, resources and, of course, the channels that are available to him.
Factors Influencing Choice of Distribution Channel – Nature of Product, Market, Firm and Middlemen
Selection of distribution channel is a crucial decision. This can be discussed with the help of a real life example. A small manufacturer of grape juice started selling it through food brokers who delivered exclusively to warehouses and replenished retailer’s shelves in a month. There were frequent out of stock situations and poor display. The producer replaced food brokers with distributors. The distributors delivered the beverage to stores thrice a week. Very soon his marginal product became a very successful item.
While selecting a distribution channel, the producer should compare the costs, sales volume and profits expected from alternative channels of distribution.
1. Nature of Product:
Generally, bulky and heavy products are distributed directly to minimise transportation of products. Similarly, perishable and expensive items are sold directly or through a short channel. When product is technically complex dependable installation and maintenance services are required. Therefore, computers, and other such products are sold directly. In case of easily substitutable products with low brand loyalty direct selling is desirable.
But standardised and highly branded products like toothpaste, talcum powder, bathing soap, detergents, etc. can better be sold through a long channel. If one product is complementary to another (e.g., tooth paste and tooth brush) the same channel can be used.
2. Nature of Market:
Direct selling is preferable when the market is small and it is located in a narrow area. On the other hand, in case of mass market and geographically scattered customers, a longer channel becomes necessary. Industrial buyers prefer to deal directly with manufacturers while consumers prefer to buy from retailers. Direct selling is convenient where the purchase order is large and the number of orders is small. Customers’ requirements for credit, home delivery, etc. also influence choice of channel of distribution.
3. Nature of the Firm:
Direct selling is possible only when the manufacturer is financially strong and possesses marketing expertise. For a single-product firm, direct selling is not economical. In case the manufacturer desires control over distribution, direct selling is preferable. Distribution policy of the firm also influences the choice of distribution channel.
4. Nature of Middlemen:
When desired type of middlemen are not available, direct selling may be necessary. Same is the case when middlemen are not able/willing to provide transportation, storage, display and other services. Preferences, costs, financial standing, etc. of middlemen are also important. Customary channel in a particular trade should also be considered. Legal restrictions are important. For example, liquor and drugs can be marketed through licensed shops only.
Factors Influencing Choice of Distribution Channel – 4 Major Factors: Product, Market, Middlemen, Company and Marketing Environment
The following are the factors that determine the channel decision:
i. If a commodity is perishable or fragile, a producer prefers a few and controlled levels of distribution. For perishable goods, speedy movement needs shorter channel or route of distribution.
ii. For durable and standardized goods, longer and diversified channels may be necessary.
iii. For custom-made products, direct distribution to consumer or industrial user may be desirable.
iv. System’s approach needs a package deal and a shorter channel serves the purpose.
v. For technical products requiring specialized selling and serving talents, shortest channel is desirable.
vi. Products of high-unit value are sold directly by travelling sales force and not through middlemen.
vii. For food products, both wholesaler and retailer are required. Here, size and average frequency of customer orders influence channel decision.
i. If the market size is large, it may require many channels, whereas in a small market direct selling may be profitable.
ii. For highly concentrated markets, direct selling is enough but for widely scattered and diffused markets, many channels are necessary.
i. Middlemen who can provide the required marketing services will be given first preference.
ii. The selected middlemen must offer maximum cooperation, particularly in promotional services. They must accept marketing policies and the programmers or the manufacturers actively help them in their implementations.
iii. The channel generating the largest sales volume at lower unit cost will be given top priority. This will minimize distribution cost.
i. The company’s size determines the size of the market, the size of its accounts and its ability to get middlemen’s cooperation. A big firm may have a shorter channel.
ii. The companies with substantial financial resources need not rely too much on the middlemen and can afford to reduce the levels of distribution. A weaker company has to depend on middlemen to secure financial and warehousing relief.
iii. New companies rely heavily on middlemen due to lack of experience and ability of management.
iv. A company desiring to exercise greater control over the channel will prefer a shorter channel as it will facilitate better coordination, communication and control.
Marketing environment can also influence the channel decision. During recession or depression, shorter and cheaper channels are always preferable. In times of prosperity, there is a wider choice of channel alternatives. Technological innovations also have an impact on distribution. The distribution of perishable goods, even in distant markets, has become a reality due to cold storage facilities in transport and warehousing.
Factors Influencing Choice of Distribution Channel – 2 Main Factors: Product and Market Considerations
The entrepreneur must take into account the following factors namely product considerations, market considerations, and other considerations before selecting a distribution channel. All these factors or considerations affecting the choice of a distribution channel are inter-related and interdependent.
Hence, an entrepreneur must choose the most efficient and cost effective channel of distribution by taking into account all these factors as a whole in the light of the prevailing economic conditions. Such a decision is very important for a business to sustain long term profitability.
These have been briefly discussed below:
Factor # 1. Product Consideration:
The type and the nature of products manufactured is one of the important factors in choosing the distribution channel.
The major product related factors are:
i. Low value Products – these are ordinarily sold through middlemen, whereas, expensive consumer goods, and industrial products are sold directly by the producer.
ii. Perishable products – these kinds of products are short life products that are subjected to frequent changes in fashion or style as well as heavy and bulky products follow relatively shorter routes and are generally distributed directly to minimize costs.
iii. Industrial products – these products require demonstration, installation and after sale service therefore, they are often sold directly to the consumers. While the consumer products of technical nature are generally sold through retailers.
iv. Wide range of products – the producer of these products may find it economical to set up own retail outlets and sell directly to the consumers. On the other hand, firms producing a narrow range of products may sell or distribute through wholesalers and retailers.
v. A new product – a new product needs greater promotional efforts in the initial stages and hence few middlemen may be required. All the direct marketing effort has to be put by the producer.
Factor # 2. Market Consideration:
Another important factor influencing the choice of distribution channel is the nature of the target market.
Some of the important features in this respect are:
i. Industrial user – If the market for the product is meant for industrial users, the channel of distribution will not need any middlemen because they buy the product in large quantities.
ii. Small customer market – lf the number of prospective customers is small or the market for the product is geographically located in a limited area, direct selling is more suitable. While in case of a large number of potential customers, use of middlemen becomes necessary.
iii. Bulk buying market – lf the customers place order for the product in big lots, direct selling is preferred. But, if the product is sold in small quantities, middlemen are used to distribute such products.
There are several other factors that an entrepreneur must take into account while choosing a distribution channel.
Some of these are as follows:
i. A new business firm may need to involve one or more middlemen in order to promote its product, while a well-established firm with a good market standing may sell its product directly to the consumers.
ii. A small firm which cannot invest in setting up its own distribution network has to depend on middlemen for selling its product. On the other hand, a large firm can establish its own retail outlets.
iii. The distribution costs of each channel are also an important factor because it affects the price of the final product. Generally, a less expensive channel is preferred. But sometimes, the customers prefer a more convenient channel even if it is more expensive.
iv. If the demand for the product is high, more number of channels may be used to profitably distribute the product to maximum number of customers. But, if the demand is low only a few channels would be sufficient.
v. The nature and the type of the middlemen required by the firm and its availability also affect the choice of the distribution channel.
Distribution or Marketing channels are an important part of any organization to deliver their products and services to consumer properly. This is a set of interdependent organizations or parties involved in the process of making a product or service available for consumption or use by consumer or end users.