Everything you need to know about the types of distribution channels. A manufacturer may plan to sell his/her products either directly or indirectly to the customers.
In case of indirect distribution a manufacturer has again an option to use a short channel consisting of few intermediaries or involve a large number of middlemen to sell his/her goods.
Therefore, there are various forms of channel networks having different number and types of middleman.
Channels can be long or short, single or multiple (hybrid), and can achieve intensive, selective or exclusive distribution. The length of channel could have any number of intermediaries or be direct to customers.
Some of the types of distribution channels are:-
A. Direct Channel –
1. Selling at Manufacturer’s Plant 2. Door-to-Door Sales 3. Sales by Mail Order Method 4. Sales by Opening Own Shops
B. Indirect Marketing Channel –
1. One-Level Channel 2. Two-Level Channel 3. Three-Level Channel 4. Four-Level Channel C. Hybrid Distribution Channel or Multi-Channel Distribution System.
Types of Distribution Channels – 3 Major Types: Direct, Indirect and Hybrid Distribution Channels
Types of Distribution Channels – Top 2 Types: Direct and Indirect Distribution Channels
The channels of distribution, which are sometimes referred to as trade channels, may be broadly classified into two categories:
1. Sale through direct channels; and
2. Sale through indirect channels.
Type # 1. Direct Channels:
The producer can sell directly to his customers without the help of middlemen, such as wholesalers of retailers:
(i) By opening retails shop;
(ii) Through travelling salesmen;
(iii) Through mail order business.
These channels take the shortest route to the consumer. Certain goods, like the industrial machinery, are directly sold to the consumers. Costly goods like computers and luxury automobiles, are also directly sold. Some manufacturers open their own retail shops in many localities and sell goods directly to consumers. The best example is that of the Bata Shoe Company Shops. The manufacturers also try to sell through their own mail order departments.
All these indicate that producers are now taking steps to approach the consumers directly. Though this is possible for some types of goods, the fact remains that the services of intermediaries, such as wholesalers and retailers, are often essential in the distribution of goods to consumers.
Type # 2. Indirect Channels:
The indirect channels of distribution are:
(i) Producer-Consumer (industrial goods with high technical content)
(ii) Producer-Retailer-Consumer (via large department ‘ stores)
(iii) Producer—Wholesaler—Consumer (most industrial products)
(iv) Producer-Wholesaler-Retailer-Consumer (most consumer goods)
(v) Producer-Sole Agent -Wholesaler-Retailer-Consumer (usually for a prescribed geographical area).
The first channel, from the producer to the consumer, is preferable when buyers are few and the goods are costly and mostly purchased by industrial users. In this category fail such goods as complex machinery involving high technology, computers and luxury cars. In this case, buyers can be directly contacted and goods can be sold by direct personal approach.
The second channel, from the producer-retailer to the consumers, is preferable where the purchasers of goods are big retailers like department stores, chain stores, super markets or consumer co-operative stores. In these cases, the wholesalers may be by passed because the bulk of the goods are purchased by these large retail distributors to be sold to the consumers.
Goods like electrical appliances, fans, radios, ready-made garments and a host of other articles fall in this category. This channel is also suitable when the goods are of a perishable nature, and quick distribution is essential. However, the manufacturer will have to undertake such functions as transportation, warehousing and financing.
The third channel, from the producer-wholesaler to the consumer, can be successfully used in distributing industrial goods. Under industrial goods are included goods which are used for further production and not for resale. This is a shorter channel, and the producer eliminates the retailer in this channel link. In this case, the buyers are business houses, government agencies, consumer co-operative stores, etc.
The fourth channel, from the producer-wholesaler-retailer to the consumer, is the longest route in the distribution link but is very popular. It is used for the marketing of a variety of consumer goods of daily use, particularly where the demand is elastic and a large number of similar products are available. This channel is preferable when the market for the goods is highly competitive.
This channel is also suitable when the producer operates under the following conditions:
(a) The producer has a limited line of products.
(b) The finance available to the producer is limited.
(c) The wholesalers handle specialised goods.
(d) Products are not subject to change due to changes in fashion.
(e) Wholesalers and retailers can provide good promotional support.
The last channel, from the producer-sole agent-wholesaler- retailer to the consumer, the used by some producers. The entire production of goods is delivered to the sole agent for further distribution. The sole agent, in turn, may distribute to wholesalers who, in their turn, distribute to retailers. The manufacturer may appoint a single sole selling agent or he may appoint sole agents area-wise.
He wants to pass on the risk of marketing the goods to the selling agents. He avoids the risk involved in selling and, wants to concentrate on production. He cuts down on his marketing expenditure and the expenditure incurred on maintaining a sales organisation and a sales force.
But, in doing so, he takes a big risk of relying only on the sole selling agents, he places himself at the mercy of his selling agent. If the relations between the producer and the selling agent become strained, or if the selling agent fails to distribute the goods, the producer will be put to a great loss. In the marketing of agricultural goods, however, it is a common practice to sell through selling agents.
Types of Distribution Channels – Direct and Indirect Channels of Distribution with Examples
A manufacturer may plan to sell his/her products either directly or indirectly to the customers. In case of indirect distribution a manufacturer has again an option to use a short channel consisting of few intermediaries or involve a large number of middlemen to sell his/her goods. Therefore, there are various forms of channel networks having different number and types of middleman.
Various Types of Channels of Distribution:
1. Direct Channel (Zero Level):
It is the shortest and simplest channel of direct distribution of goods from manufacturer to customers.
It is called as zero level channel of distribution as it does not involve any intermediary.
It facilitates direct relationship between the manufacturer and the customer.
Examples – e-business (selling through internet); Direct Mail Order Houses; Chain Stores (Colourplus, Nike, Bata etc.); Direct selling (Amway; Oriflame etc.)
2. Indirect Channel:
When a manufacturer employs one or more intermediaries to sell and distribute their product to the customers it is called as indirect selling. In this, goods move from the point of production to the point of consumption through a distribution network.
The various forms of indirect distribution networks are:
(a) One Level Channel:
This channel of distribution involves one intermediary to transfer goods from the manufacturer to the customer. In this, the title and risk transfers from manufacturers to retailers who in turn sell goods to customers. This distribution channel enables manufacturers to retain control and approach large number of potential customers.
Examples – Automobile manufacturers sell their cars through authorised dealers.
(b) Two Level Channel:
This channel of distribution involves two intermediaries to transfer goods from the manufacturer to the customer. In this wholesalers and retailers act as a connecting link between manufacturers and consumers. This network enables manufacturer to cover a large market area. It is a most adopted distribution channel for consumer products.
(c) Three Level Channel:
This channel of distribution involves manufacturers using the services of agents or brokers to connect with wholesalers and retailers. Manufacturers appoint agents in major areas who in turn connect them to wholesalers and retailers. It is suitable for manufacturers of limited product line with customers spread over a wide geographical area.
Types of Distribution Channels – 3 Important Types: Direct, Indirect and Hybrid Distribution Channels
1. Direct Channel (Zero Level):
The shortest channel of distribution of goods and services adopted by a producer is the zero level channel, where are absent between the producers and consumer.
A producer chooses direct distribution due to the following reasons:
(i) If the firm has marketing expertise.
(ii) If the firm is able to perform the marketing activities at a reasonable cost.
(iii) If the firm has adequate financial resources for investing in marketing.
(iv) Non-availability of suitable middlemen to handle the product.
(v) If the buyers prefer direct marketing.
(vi) If the competitors are following direct marketing.
It was widely used by producers to sell goods and services prior to the advent of industrial revolution and is the one of the oldest method.
Under direct channel of distribution, the manufacturer can adopt one of the following methods of selling:
(i) Selling at Manufacturer’s Plant:
It is one of the earliest, easiest and cheapest methods of distribution of goods and known as direct selling. The goods are sold by the producers directly to the consumers under this system, and it is usually preferred in case of perishable products like bread, milk, ice-cream, fish, meat, egg, vegetables and agricultural products, etc.
These products are directly sold to the consumers for the reason they lose their value or become unfit for use if they are stored or transacted for a long time.
(ii) Door-to-Door Sales:
Manufacturer employed salesmen for a door-to-door marketing. They move door-to-door to introduce the new product at the door of a customer. Dealers may not have knowledge of the goods or they require a good margin of profit or they do not want to stock unknown products; for them this system is good.
Selling under this system may be costly but when the market is known, it can be reduced. But, at the first stage, when the market is unaware of the product, even at higher cost, this system is better.
(iii) Sales by Mail Order Method:
Here the post office plays a significant role and it is known as shopping by post or mail order business or selling by post. It is an impersonal selling, branding, grading, standardising, packaging etc., facilitating the growth of this system.
By Post, customers are approached by sending catalogues, price lists, pamphlets, etc. Advertising adds further speed in the selling; e.g., books, copies, Magazines, Medicines, watches, toys, small appliances, clothes, seeds, jewellery, etc.
(iv) Sales by Opening Own Shops:
The producers of perishable and non-perishable goods sell their products to customers, by opening their own retail shops. Manufacturers can push the goods quickly through retail shops and can offer satisfactory service to customers, thereby building goodwill. It also helps the producers to study the market trends, fashion preferred by buyers and style trend of people. This system offers a two way communication and the price is regulated.
Perhaps, there are few drawbacks of adopting Direct Marketing Channels are given as under:
(i) When customers are innumerable and spiral over a large area, it may be difficult to have direct contact with them economically.
(ii) When customers are multi-millions in number, it may be difficult to establish a direct contact with them.
(iii) When the producers do not prove to be good salesman, the process suffers.
2. Indirect Channel:
Under this system, distribution of goods is performed by middlemen or intermediaries like wholesalers’ stockiest distributions etc. There is one middleman like a Sole Selling Agent who distributes the goods through a number of middlemen subsequently or, there may be a number of middlemen when the producer distributes the products through a number of agents or wholesalers or even retailers. Retailer sells directly to the consumers whereas wholesalers sell through them.
Typical Indirect Channels of Distribution has four level of channels discussed as under:
(i) One-level Channel Only one intermediary between producer and consumers is present here. It may be a retailer or a distributor.
In case the intermediary is a distributor, this type of channel is used for specialty products like washing machines, refrigerators or industrial products.
(ii) Two-level Channel – Two intermediaries, namely, wholesaler/distributor and retailer and present here.
(iii) Three-level Channel – Three intermediaries, namely, distributor, wholesaler and retailer are present and it is also used for convenience products.
(iv) Four-level Channel – Four intermediaries, namely, agent, distributor, wholesaler and retailer are present here. This channel is similar to the previous two. This type of channel is used for consumer durable products also.
3. Hybrid Distribution Channel or Multi-Channel Distribution System:
Of late, many companies used a single channel to sell to a single market or market segment. Recently, with the proliferation of customer segments and channel possibilities, several companies have adopted multi-channel distribution systems, it is often called hybrid marketing channels. Multi-channel marketing like these occurs when a single firm sets up two or more marketing channels to reach one or more customer segments. The use of hybrid channel systems has increased greatly in recent years.
The producer sells directly to consumer segment 1 using direct mail catalogues and telemarketing, and reaches consumer segment 2 through retailers. It sells indirectly to business segment 1 through distributors and dealers, and to business segment 2 through its own salesforce.
Hybrid channels have advantages to offer to companies facing large and complex markets. With each new channel, the company expands its sales and market coverage and gains opportunities to tailor its products and services to the specific needs of diverse customer segments.
But such hybrid channel systems are harder to control, and they generate conflict as more channels compete for customers and sales. For instance, when IBM began selling directly to customers at low prices through catalogues and telemarketing, many of its retail dealers cried “unfair competition” and threatened to drop the IBM line or to give it less emphasis.
Types of Distribution Channels – Direct and Indirect Channel (With Examples and Methods)
A. Direct Channel:
1. Producer → Consumer…. (Zero Level/No Intermediary)
B. Indirect Channel:
1. Producer Retailer → Consumer…… (One Level/Intermediary)
2. Producer → Wholesaler → Retailer → Consumer (Two Level/Intermediaries)
3. Producer Agent → Wholesalers → Retailer → Consumer (Three Level/Intermediaries)
1. Producer → Consumer……….. Zero Level
Example – Eureka Forbes
2. Producer → Retailer → Consumer ……. 1 Level
Example – Specialty products like Washing Machines, TVS, Refrigerators, or industrial products are sold
3. Producer → Wholesaler Distributor → Retailer → Consumer ………. 2 Level
Example – Goods like food items drugs etc., small manufacturers’ goods which are widely sold to consumers
4. Producer → Distributor → Wholesaler → Retailer → Consumer ……… 3 Level
Example – Items like cloth, grocery where producer wishes to totally pass on the burden of distribution to intermediaries.
1. Producer → Consumer:
Here producer sells direct to final users without any intermediaries. Shortest Distribution Channel.
Methods used are:
i. Opening sales counter at manufacturers plant, e.g., bakery items, ice cream etc.
ii. Door to door sales e.g., Utensils, ladies garments, cosmetics, items of daily use Vim, Surf etc.
iii. Sales by opening shops e.g., Raymonds, Bata etc.
iv. Sales through mechanical devices e.g., Parag milk through ATM, etc.
Usefulness of Methods / When Suitable:
1. Marketing highly perishable goods like milk
2. Products which could be sold by post
3. New product requiring effective salesmanship
4. Industrial goods requiring effective servicing by expert for which producer is the best
5. Closeness with Consumer
2. Producer → Retailer → Consumer:
Here, goods are sold by manufacturer to retailer who sells to consumer. Also known as One – level Channel
i. Salesmen of manufacturers visit and collect orders from retailers
ii. Orders by Post
iii. Sales made at factory
Usefulness/ When suitable:
i. Perishable products, physically or fashion wise, in order to speed up their distribution.
ii. Large Retailers want to deal directly (without wholesalers) with producers.
3. Producer → Wholesaler → Retailer → Consumer:
Two parties in between producer and final consumer. Hence also called Two Level Channel/PWRC. A traditional, normal, regular and popular channel.
i. When there is large number of consumer who purchase in small quantities.
ii. When products need a balanced or equitable distribution.
iii. Small manufacturers whose goods are to be sold to consumers widely scattered in different localities.
4. Producer → Agent / Distributor → Wholesaler → Retailer Consumer:
Here producer sells first to Agent who sells to wholesaler in turn selling to retailer. Agent or Distributor acts as facilitating party on commission basis and does not assume title to goods. Agents are used by manufacturers to free themselves from marketing and pass on the burden of distribution to intermediary.
In addition to above channels, some different types of channels are also possible and there is no water tight classification of channels. We can say that for different types of product there can be different types of channels.
Types of Distribution Channels
Type # 1. Wholesalers:
The wholesalers are those merchants who act as intermediaries between the primary producers, manufacturers, or importers on one side and retailers or industrial consumers on the other. They generally buy goods and commodities in large quantities with a view to selling them to the retailers who further sell them to individual consumers on a piecemeal basis.
The wholesalers do not deal directly with individual consumers and do not sell goods on a piece-meal basis. The wholesale establishment can be described as the link-road along which goods and commodities move from producers to those who sell on retail basis.
From this description, it will appear that a wholesaler does not produce or manufacture commodities or goods himself but works only as a trader engaged only in buying and selling activities. But, in practice, there are cases where the wholesaler combines manufacturing and retailing operations with his main function of buying and selling in large lots.
In accordance with the prevalent practice, the wholesalers may be divided into three types:
(i) Manufacturer Wholesalers:
Such wholesalers engage in manufacturing activities to some extent. They may, however, not only sell their own products to the retailers but may also make large-scale purchases from other manufacturers to meet the demand of the retail traders. In this way, the wholesalers carry a comprehensive stock of goods, increase their turnover considerably, and by their dual role reduce their overhead expenses.
(ii) Retailer Wholesalers:
These wholesalers purchase goods in large parcels (say, truck-loads or wagon-loads, etc.,) from the manufacturers and retail them to the consumers through their own shops. In this manner, they combine the twin functions of wholesaling and retailing.
(iii) Wholesalers Proper:
The pure wholesalers are, however, those merchants who concentrate entirely on the functions of buying and selling in large lots, and do not engage in the manufacturing or retailing activities. They are also called distributors. Generally, they maintain a warehouse or godown in some well-located part of the city.
The goods are collected from different manufacturers in these warehouses. The goods are then sent to the retailers who place orders for them. Sometimes, the retailers may send their own messengers to procure supplies of goods from them.
Some of the pure wholesalers have vans which visit outlying retailers and supply goods to them. The wholesalers rely mainly on trade discounts, rebates or cash discounts granted by manufacturers for their gross profits.
Type # 2. Retailers:
The retailer is the last link in the chain of distribution commencing with the consumer. The word ‘retailer’ is an adaptation of ‘retailer’, a French word which means ‘to cut’. “Evidently, the retail trade was viewed as one that cut off small portions from larger lumps of goods.” This .is the direct opposite of wholesale which means handling of the whole rather than of the whole bulk divided into small parts.
The retailer can easily be referred to as the most important intermediary. Under the present-day industrial set-up mass production is geared to the requirements of the ultimate consumes. Retailers, being directly and intimately in touch with the consumers, occupy a strategic position in the whole system of distribution.
Though there is a large variety of a retail trading organisation, the basic underlying feature of retail trading is purchase of goods from wholesalers and selling it in small lots to the consumers. Since the retailer is connected with the transfer of goods to the ultimate consumers, he has to deal with people of varied tastes and temperaments.
He has, therefore, to be very tactful in his dealings with customers of different types. His efforts should be to please the custodies with the best of personal attention and service possible. In competitive retailing, the retailer may have to extend certain extra facilities (like home delivery service). In short, service is of essence in retail selling.
Types of Distribution Channels – 4 Important Types: Direct Sale, Sale through Retailer, Wholesaler, Agent
This is the simplest form of distribution channel which involves the manufacturer and the consumers. Goods and services are directly delivered to final consumer. The manufacturer may have its own retail outlet like Bata shoe store or may sell directly by appointing travelling sales force by house to house canvassing like Eureka Forbes. Modern manufacturer may also sell their product online through their official website.
Manufacturer → Consumer
Retailers may be individual shop owners or large retail stores, departmental stores, retail chain stores that purchases goods from the manufacturer and resell it to final consumer. Retailers are sometimes referred to as dealers or authorised representatives.
Manufacturer → Retailer → Consumer
In this method a manufacturer sells the material to a wholesaler also called stockist or distributor, the wholesaler to the retailer and then the retailer sells to the consumer. Here, the wholesaler after purchasing the material in large quantity from the manufacturer sells it in small quantity to the retailer. Then the retailers make the products available to the consumers. This medium is mainly used to sell FMCG etc.
This channel is more clarified in the following diagram:
Manufacturer → Wholesaler → Retailer → Consumer
Big manufacturing firms in order to avoid the complex responsibilities of marketing may appoint an agent who acts as a link between the manufacturer and the wholesaler. The agents may be sole selling agents who have a wide distribution network, wide network of sales person, wholesaler and retailer. These agents perform the marketing and distribution functions on behalf of the manufacturers and earns a large margin.
Companies also appoint another type of agent called carrying and forwarding (C&F) agents who on behalf of the manufacturer distributes the goods to wholesaler and retailer but do not resell. They only act as an agent and transfer the goods on behalf of manufacturer.
Manufacturer → Agent → Wholesaler → Retailer → Consumer
Types of Distribution Channels – 3 Main Types: Direct, Indirect and Hybrid Channels
Channels can be long or short, single or multiple (hybrid), and can achieve intensive, selective or exclusive distribution. The length of channel could have any number of intermediaries or be direct to customers.
Type # 1. Direct Channels:
A direct channel is said to exist when there are no intermediaries between the supply organisation and its customers.
Such an arrangement could be:
Insurance → (own sales team) → Customers
General trader → mail order catalogue → Customers
Garden bulb → direct mail leaflet → Customers
Clothing manufacturer → part plan → Customers
Library service → mobile library → Customers
Small bakery and cake shop → own retail outlet → Customers
The last is also an example of vertical integration. In these examples the supplier will decide all aspects of the contact with the customer. This could include how often the sales person should contact the customer or how frequently to send out a catalogue. In this type of direct channel there is no doubt who has control of the many decisions regarding the exchange. The situation is more complicated in indirect channels. There are many reasons for using direct channels, but equally there are a number of reasons why such channels are not always used.
Type # 2. Indirect Channels:
The roles of wholesaler and retailer could be filled by any of the intermediaries relevant to a particular market.
The links are important with a marketing exchange taking place at each stage. The link provided by negotiation is not necessarily formal, but it certainly takes place in the legal sense of an offer and acceptance.
It is important to realise the effect of the indirect nature of the channel, and the supply pipe line, on these indirect channels. One well-known British company launched its product into the USA with apparently great success. It more than met the year 1 estimates of sales. In year 2, sales did not increase. In fact they fell.
On investigation it was found that many wholesalers had bought large quantities in the first year, being encouraged by attractive promotional deals. However, the retailers and consumers were not buying, and so the pipeline was blocked by large stocks of the old product.
It was an expensive lesson as the British company attempted to sort out the problems. This example shows the importance of information and feedback from all parts of the distribution channel. It also illustrates the problem of loss of control that a supplier can have in an indirect channel.
Another common problem is the extent to which products are ‘out-of-stock’ at one level in a distribution chain. The longer the channel, the more difficult it is to cope with the variations of consumer demand. If a product is not available when required it could lead to a lost sale. This again emphasises the need for monitoring all levels of any indirect channel.
Type # 3. Hybrid Channels:
There is no reason why a supplier should stay with a single channel. Educational toy supplier, Early Learning, started with most sales via its mail order catalogue. It carefully monitored sales in large areas of population and, when it considered the time was appropriate, a retail outlet was opened in a secondary shopping area.
Note that these areas were not in the prime High Street sites. It was considered customers would be prepared to seek out an Early Learning outlet because the company felt they offered a unique type of product. So it was decided there was no point in paying the highest retail rents for prime High Street sites. The catalogue still continued and sales justified both channels running alongside each other.
Intensive, Selective and Exclusive Distribution:
i. Intensive distribution involves maximising the number of outlets where a product is available. This wide exposure means more opportunities to buy. It is typified by confectionery, soft drinks and other FMCGs (fast-moving consumer goods).
ii. Selective distribution is used where the choice of outlet or service offered is specifically relevant to the buying situation. Examples are electrical or photographic specialists who can offer professional advice or plumbers who can install purchases. However, this type of restricted distribution is becoming less common, with supermarkets and chemists, as well as department stores, offering ever wider ranges of household and electrical goods.
iii. Exclusive distribution is much more restrictive. In this case there is often only one exclusive company in any one geographic area. The major main dealers for motor cars come into this category but, in addition to sales, they offer service, repair and warranty facilities. They receive the benefit of exclusivity which reduces competition.
It is likely that the relationship will be formalised with a legal contract including targets, and obligations on the distributor. In return for acting as the local distributor for Ford or BMW or Rover, the distributor could receive promotional help.
Types of Distribution Channels – Classified into 3 different Categories
Depending on the number of middlemen involved, channels of distribution may be classified as follows:
(i) Manufacturer→ Customer:
This is also known as direct setting because no middleman is involved. A producer may sell directly through his own retail stores (e.g., Bata), through mail or through door-to-door selling. This is the simplest and the shortest channel. It is fast and economical. It enables the producer to have direct contact with customers and full control over the distribution of his product. But a small-scale manufacturer can rarely afford the investment and expertise required for direct selling. This channel is more common in the distribution of industrial goods like heavy machinery, industrial chemicals, etc.
(ii) Manufacturer → Retailer → Customer:
In this channel, the producer sells to big retailers like departmental stores and chain stores who in turn sell to consumer. This channel is very popular in the distribution of consumer durables such as refrigerators, TV sets, washing machines, type writers, automobiles, etc.
(iii) Manufacturer → Wholesaler → Retailer → Customer:
This is the traditional channel of distribution. It is widely used in the distribution of consumer products like groceries, drugs, cosmetics, etc. It is quite suitable for small-scale producers whose product line is narrow and who require the expert services and promotional support of wholesalers. But in this channel the producer loses direct contact with his customers and control over distribution. In some cases, an agent is employed in place of/in addition to the wholesaler. For instance, in the distribution of cloth, mills generally appoint a sole selling agent/distributor in addition to wholesalers and retailers.
Types of Distribution Channels – 2 Main Primary Channels: Direct and Indirect Channels
The two primary channels through which distribution of products can be made:
1. Direct channel
1. Direct Channel:
Here the vendor of a product or service sells product directly to the customer. The vendor may maintain its own sales force to close deals with clients or sell its products or services through an e-commerce website. The direct sales approach requires vendors to take on the expense of hiring and training a sales team or building and hosting an e-commerce operation.
Selling through Direct Channels:
This is the oldest, shorter and the simple channel of distribution. The producer sells the product directly without involvement of any middle man. The sale can be made door to door through salesman, retail stores and direct mail.
Advantage of Selling through Direct Channels:
i. It is simple and fast
ii. It is economical
iii. The producer has full control over distribution
iv. It satisfies the desire to reduce dependence on middle men
v. It results in Cash sales
Disadvantages of Selling through Direct Channels:
i. Non-availability of expert services of middle man
ii. Large investment is required.
iii. Unsuitable for small producers
iv. Methods of selling through direct channels
v. Selling goods through own retail outlets
vi. Selling goods through postal services
vii. Selling goods through courier services
viii. Selling goods against orders received, by telephone, email in case of telemarketing
2. Indirect Channel:
Here the sales activities for individuals and organizations are carried on by third persons, known as intermediaries. Examples of intermediaries include value-added resellers, systems integrators, managed service providers, wholesalers, retailers and distributors. Each type of intermediary represents a channel, with its own distinct characteristics. A vendor develops a channel strategy to determine what types of intermediaries to target and how to optimize partner relationships to increase sales and improve distribution.
Selling through Indirect Channel:
According to this method of indirect selling, product is passed on to the customers through intermediaries, known as wholesalers, retailers and agents. A firm can design any number of channels. Channels are classified by the number of intermediaries between producer and consumer.
The Different levels of Channels of Distribution or Marketing channels/Trade Channels are given as under:
i. A level zero channel
ii. A level one channel
iii. A level two channel
iv. A level three channel
v. A level four channel
i. Zero Level Channels – (Producer-Customer):
As the name implies, this channel does not have an intermediary and is used in direct marketing. This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is fast and economical channel of distribution.
Under it, the producer or entrepreneur performs all the marketing activities himself and has full control over distribution. A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial products of high value. Small producers and producers of perishable commodities also sell directly to local consumers.
ii. One Level Channel – (Producer-Retailer-Customer):
This channel of distribution involves only one middlemen called ‘retailer’. Under it, the producer sells his product to big retailers who buy goods in large quantities and who in turn sell to the ultimate consumers. This channel relieves the manufacturer from burden of selling the goods himself and at the same time gives him control over the process of distribution. This is often suited for distribution of consumer durables and products of high value.
iii. Two Level Channel – (Producer-Wholesaler-Retailer-Customer):
This is the most common and traditional channel of distribution. Under it, two middlemen namely the wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally sell the product to the ultimate consumers.
This channel is suitable for the producers having limited finance, narrow product line and who needed expert services and promotional support from wholesalers. This is mostly suited for the products with widely scattered market.
iv. Three Level Channel – (Producer-Agent-Wholesaler-Retailer-Customer):
This is a very long channel of distribution in which three middlemen are involved, namely agent, wholesaler and retailer. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents. The agents distribute the product among a few wholesalers.
Each wholesaler distributes the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products.
v. Four Level Channel – (Producer-Distributor-Agent-Wholesaler-Retailer-Customer):
This is the longest channel, where the goods pass through four intermediaries before they reach the end-user. Mostly, in case of crop, vegetables, wheat, fruits etc., this channel is most popular, although with the intervention of central and state governments, some intermediaries are chopped off from the list. The price of a product tends to be quite high in this channel.
Types of Distribution Channels – 3 Other Types: Hybrid Distribution System, Wholesaler and Physical Distribution
Type # 1. Hybrid Distribution System:
A Company must manage a hybrid distribution system to avoid chaos and maximize efficiency, Responsibilities, relationships and compensations among various channel members must be made clear.
A company receives its distribution system in legacy. The company starts its journey with serving a particular type of customers. The company may have targeted big businesses initially, so it set up a team of salespersons to serve and manage these big accounts. But soon it found that smaller businesses were interested in its product.
It used its existing sales force to serve these small accounts as well but soon discovered that it was not economical to serve these small accounts with their existing sales force. So the company appoints a team of telemarketers to serve these small accounts. But the salespersons remained accountable for the smaller accounts lying in their territory.
The telemarketers were also asked to deal with routine matters of the big accounts to free up some precious time of the salespersons. As the markets for the product grew, the company decided to appoint independent distributors to stock and sell its products. A separate group of marketers looks after this part of this business.
Soon there was confusion galore. Nobody knew to whom he had to sell to, and who was someone else’s customer. The same customers were being solicited by different members of different channels with different types of offers. More than one person claimed compensation for one sale. The customers did not know whom to contact for specific queries or problems.
It is not that the company could have avoided this chaos by continuing to sell only by employing correct sales force. It would be prohibitively costly to serve small accounts by using direct sales force. Similarly if the company had started out with independent distributors serving small accounts, it would have had to appoint salespersons to serve big accounts if such opportunities came their way. Independent distributors cannot be trusted to provide the services that big accounts expect.
Therefore, as the customer set of a company becomes more diverse, maintaining a single channel of distribution will either become ineffective or uneconomical. Adding new channels is imperative when requirements of customers become diverse. But the process can be accomplished in a more thoughtful and deliberate many, rather than being a knee-jerk reaction to growing diversity among customers.
Three issues are important in this task. Which channel is supposed to serve which customers? Which channel does what tasks of the sales function, and for which customers? Which channel gets compensated for which customers and for what tasks? These are tricky questions and there will be no straight answers.
But it is important to ask these questions each time the company decides to add another channel because each time a channel is added the existing relationships, responsibilities, and compensation structure among various channel members are altered.
And the company has to debate and fix the new relationships, responsibilities and compensation structures as precisely as possible. Customers’ reactions to these new relationships and responsibilities are very important. If a customer is inconvenienced by the new arrangement, he is likely to shift his business.
For example, assume that telemarketers are added as a new channel over the direct sales force that the company previously deployed. Earlier the sales force did all the tasks 01 the sales function for the existing accounts, most of which were big, though the company had started focusing on acquiring small accounts. The sales force received all the commission emanating from these accounts.
The new responsibilities may run as follows. The telemarketers do all the tasks of the sales function for the small accounts but if they feel that a visit by a salesperson would help them clinch a lucrative deal, they can ask the salesperson serving the big accounts of that territory to solicit the account by making a visit.
The salespersons would do most of the tasks of the sales function for the big accounts but the telemarketers would be required to take manage routine matters with them under the guidance of the respective salespersons. Compensation structure has to be designed in a manner that salesperson is happy to seal a small account at the request of a telemarketer because he will get compensated for the task of making a visit.
Similarly, the telemarketer would not mind sharing a part of his commission because he understands that if it were not for the salesperson’s help, the smaller Account would not have been converted. Similarly the salesperson is content to part with a portion of his commission from the big accounts as he has more time to pursue new accounts and the telemarketers do not mind some extra income for making a few extra calls.
The big accounts are happy that there are also some people in the seller’s company besides their salesperson who can sort out small difficulties, and they do not have to be completely dependent on him or wait for his visit to get their problems solved. The small accounts are happy as their objections and queries have been personally taken care of by a representative of the seller’s company.
The new responsibilities, relationships and compensation structures may not looks neat especially if many channels are trying to serve a large pool of diverse customers but need not necessarily be as messy as most hybrid channels are. The essential idea is to raise these tough questions and answer them as squarely as possible.
There may still be confusion and conflicts and they have to be constantly addressed and redressed. A company usual gets into problems by pushing the uncomfortable questions of responsibilities, relationship and compensation structure under the carpet, and hoping that the members of various channels will automatically sort out these issues among themselves in due course of tin. They may, but that will not be in the best interests of the company and its customers. Who it comes to managing a hybrid distribution system it does not help to be expedient.
Type # 2. Wholesaler:
A wholesaler is an organization that serves as an intermediary between manufacturer retailer to facilitate the transfer of products, or the exchange of title to those products- an organization that sells products to manufacturers or institutions that resell the prod!
The functions of a wholesaler are:
i. Bulk breaking function – This consists of buying products in relatively large quantity and selling in smaller quantities.
ii. Bulk accumulating Junction – This consists of buying small quantities of a participating product from many small producers and then selling the assembled large quantity.
iii. Selling Junction – This consists of classifying accumulated products as to grade size, and then grouping them accordingly.
iv. Assorting function – This consists of combining products purchased from several manufacturers to create assortments.
v. Buying function – This is associated with making a purchase and thus affecting the transfer of ownership of goods.
vi. Service function – This consists of activities that increase the efficiency and effectiveness of the exchange process. Repair services and management services are examples of such services.
vii. Credit function – It consists of providing credit to another member of a distribution channel.
viii. Risk taking function – This means assuming the responsibility .for losses when the future is uncertain.
Type # 3. Physical Distribution:
Physical distribution focuses on an efficient movement of goods from manufacturer’s intermediaries and the consumer. Channel and physical distribution decisions are interrelated but channel decisions tend to be made earlier.
i. The aim of physical distribution is to provide intermediaries and customers with the right products, in the right quantities, in the right locations, at the right time.
ii. Effective physical distribution saves cost and improves customer service levels. Co-savings can be achieved by reducing inventory levels, using cheaper forms of transport and shipping in bulk. Customer service levels can be improved by fast and reliable delivery, holding high inventory so that customers have a wide choice and the chance of stock out are reduced, fast order processing and ensuring products arrive in the, right quantities and quality.
iii. Physical distribution management concerns the balance between cost reduction and meeting customer service requirements. Tradeoffs are often necessary, for instance, low inventory and slow, cheaper transportation methods reduce costs but lower customer service levels and satisfaction as well. Determining this balance is a key marketing decision as physical distribution can be a source of competitive advantage.
iv. Analyzing the market in terms of customer service needs and price sensitivity will reveal two segments.
v. It is important to define the target market segment and design an appropriate marketing mix. In industrial markets, large companies may possess their own service facility while smaller firms may require manufacturer or distributor services as a part of product offering and may be willing to pay a higher price.
vi. Low service needs high price sensitivity.
vii. High service needs, low price sensitivity.
viii. Besides tradeoffs between physical distribution costs and customer service levels, there are possible conflicts between elements of physical distribution itself. Inventory management may favor low stocks to reduce costs but if this leads to stock out this may raise costs elsewhere. Freight management may have to accept higher costs resulting from faster aircraft delivering.
Low cost containers may lower packaging costs but raise cost of goods damaged in transit. This fact and the need to coordinate order processing, inventory and transportation decision means that physical distribution needs to be managed as a system with management overseeing the whole process.
It is important that a single manager manages the physical distribution of a company and should prevent managers managing individual functions, like transportation, from maximizing their performance and causing harm to the overall efficiency and effectiveness of the system. Physical distribution manager should reconcile the conflicts inherent in the system so that total costs are minimized, subject to required customer service levels.
Elements of the Physical Distribution System:
The purpose of physical distribution system is to make the product available to the customer. Infrastructure facilities like number and locations of warehouses, availability of suitable modes of transport, and the level of inventories that have to be maintained at various locations determine die responsiveness of the physical distribution system.
1. Customer service – What level of customer service should be provided?
2. Order processing – How should the orders be handled?
3. Inventory control – How much inventory should be held?
4. Warehousing – Where should inventory be located? How many warehouses should be used?
5. Transportation mode – Which modes of transport should be used to transfer goods on time and without damage?
6. Materials Handling – How Will The Products Be Handled During Transportation?
Customer service is the percentage of orders that are filled in time. It is important to set standards of customer service. A customer service standard may be that 90% of the orders are delivered within 48 hours of receipt and 10% are delivered within 72 hours. Higher standards means higher costs as inventory levels need to be higher or faster means of transportation may have to be used.
The physical distribution management needs to be aware of the costs of fulfilling various customer service standards (80, 90, 100% of orders delivered within 48 hours), and extra customer satisfaction which results from raising standards.
i. Some customers’ value consistency in delivery time rather than speed (guaranteed delivery within 5 days each time.
ii. Customer service standards may be the differentiating factor between suppliers. They may be used as a key customer choice criterion.
Methods of Improving Customer Service:
1. Improve product availability – Higher stock levels, improvement in accuracy of deliveries in terms of delivery at the promised time and in terms of delivery of the right assortment of products.
2. Improve order cycle time – Shorter time between order and delivery, improve consistency between order time and delivery time.
3. Raise information levels – Improvement in salespersons’ information on inventory, improvement in information levels on order status, promptness in notifying customer of imminent delays.
4. Raise flexibility – Development of contingency plans for urgent orders, a structure to ensure fast reaction time to unforeseen problems like product return.
The idea is to reduce time between the consumer placing an order and receiving the goods. A computer link between order department and salesperson is effective. Computers can also check the customer’s credit rating and whether the goods are in stock, issuing an order to the warehousing, invoicing the customer and updating inventory records.
Some basic questions can reveal areas for improvement. What happens when a sales representative receives an order? What happens when it is received in the order department? How long does it take to check inventory? What are the methods for checking inventory? Delineating the steps that will be followed in the above situations will reveal gaps in the process to fulfill a customer order. Customer service levels can be improved by plugging these gaps.
Since inventory represents cost, finance managers seek stock minimization. But marketing wants large inventories to prevent stock out. Balance has to be found particularly as inventory costs rise at an increasing rate as customer service standard nears 100%. To always have in stock every conceivable item that a customer might order would normally be prohibitively expensive for companies marketing many items.
One solution is to separate items into those that arc in high demand and those that are slow moving. A high customer service standard is then set for high demand items but a much lower standard is used for those less in demand.
Two related inventory decisions are knowing when and how much to order so that stocks are replenished. Unless stock out is tolerated, the order point will be before the inventory reaches zero. This is because there is lead time between ordering and receiving inventory, and there should not be a stock out as the company is waiting for the ordered items to arrive.
The more variable the lead time, the greater the fluctuation in customer demand during the lead time and higher will be the safety or buffer stock that the company will be required to keep to prevent a stock out. The amount of safety inventory for a product should be related to variability in its demand. Higher the variability in demand from one time period to another, the higher should be the safety inventory for that item.
Small, frequent orders raise order processing costs because more orders have to be placed but reduce inventory carrying costs because lesser average inventory is held. (The average inventory held throughout the year is equal to half of the order amount. When the frequency of orders is increased, the order amount is reduced). Large infrequent costs raise inventory costs but lower processing expenditure. The tradeoff is the EOQ (Economic Order Quantity).
It involves all activities required in the storing of goods between the time they are produced and the time they are transported to the customer. These activities include breaking bulk, making product assortments for delivery to customers, storage and loading. Storage warehouses hold goods for moderate along periods.
Distribution centers operate as central locations for fast movement of goods to retail stores. Retailing organizations use regional distribution centers where suppliers bring products in bulk. These shipments are broken down into loads that are then quickly transported to retail outlets. Distribution centers usually are highly automated. A computer reads orders and controls fork lift trucks that gather goods and move them to loading bays.
Warehousing strategy involves the determination of the location and number of warehouses to be used. At one extreme is one large warehouse to serve the entire market, at the other extreme is a number of smaller warehouses that are based near the local markets. Latter option improves customer service, but the cost is higher. The optimum number and location of warehouses is a balance between customer service and cost considerations.
The selection of mode of transport will depend on the type of product, urgency of delivery and the volume being transferred.
A company can use anyone or a combination of following means for transporting their goods:
1. Rail – sure efficient at transporting large bulky freight over large distances, but there is lack of flexibility. There is additional transport by lorry to and from a rail depot. For small quantities the use of rail would be uneconomical.
2. Road – is flexible because of direct access to companies and warehouses. Lorries can transport goods from the supplier to receiver without unloading en route.
3. Air – Advantages are speed and long distance capabilities. It is used to transport perishable and emergency goods. It works to reduce inventory. Air freight is expected to grow. But it is costly and there is need to transport goods by road to and from the terminals.
4. Water transportation – is slow but inexpensive. It is used to transport bulky, low value, non-perishable goods. Road transportation of goods to and from docks is needed.
5. Pipeline – are dependable means for transporting liquids and gas. It requires low maintenance. Construction is expensive and time consuming.