Distribution strategy in influenced by the market structure, the firm’s objectives. Its resources and of course it’s overall marketing strategy. All these factors are addressed in the section on selecting Distribution Channels.

According to W.J. Stanton, “Channel of distribution or trade channel for a product is the route taken by the title of the goods as they move from the producer to the ultimate consumers or industrial user.”

A channel of distribution or trade channel is the path or route along which goods move from producers to ultimate consumers or industrial users. It is the distribution network through which a producer puts his products in the hands of actual users.

Learn about:-


1. Introduction to Distribution Channel 2. Meaning and Definitions of Distribution Channel 3. Characteristics and Role 4. Functions 5. Selecting Distribution Channel

6.  Selecting, Motivating and Evaluating the Channel Members 7. Intensity. 8. Steps Involved in Designing a Channel System 9. Activities Involved 10. Strategies

11. Criteria for Selecting Members within a Channel  12. Guidelines  13. Factors Needed 14. Types 15. Factors Affecting 16. Managing Distribution Channels.

Distribution Channel: Meaning, Definitions, Characteristics, Role, Functions, Steps, Strategies, Types and Guidelines

Distribution Channel – Introduction

Also referred to as distribution channels, they are indeed like the great feats achieved by the Kings of yore who built unimaginable irrigation systems to carry out the management of the scarce resource — water for cultivation.


The large tanks (reservoirs) collect and store water during rain and it is then distributed through canals to the paddy fields and other agricultural land where irrigation is required, when there is no rain. The distributor or wholesaler is like the tank whilst the canals are the retail trade, through which goods flow to customers.

The vital links between the manufacturers, marketing intermediaries and customers are the channels of distribution through which goods will flow. The individual product may need a specific distribution system and it may be similar to another group of products. For example frozen foods require reefer trucks and a slightly different system of distribution, as they need to be transported to the trade outlets as quickly as possible avoiding double handling.

Pasteurised milk and Soybean curd will also need similar attention, as their shelf life is only a few days. The distribution channel for frozen food is the retail shop networks that has deep freezers and is willing to stock and sell frozen food. All outlets that have refrigeration are suitable for pasteurised milk and Soybean curd.

How would a manufacturer of biscuits and similar confectionery items choose their channels? The manufacturer will have its own distribution or out-source a distributor who will cover wholesalers and the retail trade whilst retail trade will also purchase from the wholesalers depending on their needs. This is known as the distribution pipeline. Manufacturer > Distributor > Wholesalers & Retailers and or Wholesalers > Retailers. Supermarkets are often served direct by manufactures due to bigger margins required by them and their strategic importance to most FMCG.


The manufacturer invoices their products direct to the Distributor and transfers ownership to them. The Sales Tax is paid on the invoice/selling/transfer price quarterly after deducting previous market returns.

The manufacturer provides a margin of around 5% to 7% to the Distributor to distribute their products to the retail network, which is generally referred to as re-distribution. Manufacturer also pays an allowance to transport goods from the factory to their warehouse or transports themselves and a further allowance per day is granted for transport to carry out re-distribution. The distributor has to provide his staff to carry out re-distribution.

In addition to all the allowances paid the company also provides a company Sales Representative to carry out re-distribution. The distributor would have to provide a suitable vehicle to carry the product portfolio, a driver, a cash collector and a porter to deliver the goods. The company Sales Representative will do the actual selling and some merchandising. The Sales Representative, who has a pre-determined itinerary approved by his superior the Area Sales Manager, will work the outlets within the area mix given in the plan each day.

He covers the following outlets:

i. Wholesalers

ii. Semi-wholesalers

iii. Large, medium and small Grocery retailers

iv. Supermarkets

v. Partial Chemists


vi. Bus stand outlets

vii. Eating Houses.

Other confectionary manufacturers such as – the snack food manufacturers and cake manufacturers use similar channels. However, when it comes to cosmetics two other types of outlets will be prominent – the textile and fancy goods shops, particularly for ladies.

Manufacturers and suppliers of pharmaceuticals have the Chemists and Partial Chemists network to focus. Similarly the hardware importers and manufacturers have the Hardware outlets network in every town. Some small grocers also sell Vegetables and Fruits even though Vegetable & Fruit sellers are usually in the market place, where either only vegetables or fruits are sold.


There are the small groceries in housing schemes and densely populated residential areas often located in dwelling houses that are outside the shopping complexes, which are a very important network to place products. Many who live around the vicinity go for their low value day to day items to them. Therefore adding them to the call list and visiting them will be beneficial. They may not depend on the pipeline and may not visit the wholesaler for goods and may only serve the goods that are brought to their doorstep. In the circumstances, the entrepreneur who ignores such outlets will lose an opportunity.

The channel for ready-made garments is essentially the drapery and textile shop and manufacturer’s own shops and franchise shops. The latter is becoming very popular among the big names. In the case of TVs, VCD Players, Irons, Washing Machines and the like, some manufacturers & importers go for their own shops as well as franchise shops. Just like the Hardware shops there are shops selling Electronic goods, they too carry a large product portfolio Liquor shops are also specialised outlets that only sell liquor and often tobacco products under licence.

When it comes to industrial products the approach is direct marketing and personal selling – there is nothing better than this. If possible demonstrations, direct mail, gift and meal vouchers, concert tickets, emails are ideal to provide support, some may choose media.

The service sector can achieve place utility by the right ‘location of industry’. A food court in a large shopping complex to suit the shoppers’ mood and style is an opportunity. A little pub, which serves the pints, soft drinks, sweets and snacks in a cinema complex, is a winner. A courier service located in the heart of the business city, a freight forwarder located besides import and export offices, a floor shine service in a busy business area, will provide them place utility, which is the ultimate goal of distribution.

Distribution Channel – Meaning and Definitions


According to W.J. Stanton, “Channel of distribution or trade channel for a product is the route taken by the title of the goods as they move from the producer to the ultimate consumers or industrial user.” A channel of distribution or trade channel is the path or route along which goods move from producers to ultimate consumers or industrial users. It is the distribution network through which a producer puts his products in the hands of actual users.

It is the pipeline through which products flow during their journey to the market. A trade or marketing channel consists of the producer, consumers or users and the various middlemen who intervene between the two. The channel serves as a connecting link between the producer and consumers. By bridging the gap between the point of production and the point of consumption, a channel creates time, place and possession utilities.

A channel of distribution represents three types of flows:

(a) Goods flow downwards from producer to consumers;

(b) Cash flows upwards from consumers to producer as payment for goods; and

(c) Marketing information flows in both directions.


The downward flow includes information on new products, new uses of existing products, etc. The upward flow of information is the feedback on the wants, suggestions, complaints, etc. of ultimate consumers or users.

The objective of manufacture is to deliver the product so manufactured to the consumer. In this age of technology in which production is made on large scale, a manufacturer cannot complete such work himself. The manufacturer receives services of several middlemen and then only the product is reached to the ultimate consumer.

Hence, different means of distribution and distribution channels are required between the manufacturer and the final consumer for transfer of the title of product / item so that the distribution function can be completed effectively.

Some main definitions of distribution channels are as under:

According to Richard M. CIewett – “The channel has been defined as the pipeline through which a product flows on its way to consumers. The manufacturer puts his product into pipeline or marketing channel and various marketing people move it along to the consumer as the other end of the channel.”

According to John A. Haward – “Marketing channels are the combinations of agencies through which the seller, who is often, though not necessarily, the manufacturer, markets his product ultimate user.”


According to William J. Stanton – “A channel of distribution for a products is the’ route taken by the title to the goods as they move from the producer to the ultimate consumer or industrial user.”

According to Richard Buskrik – “Distribution channels are system of economic institutions through which a producer of goods delivers them into the hands of their users”.

According to McCarthy – “Any sequence of institutions from the producer to the consumer, including one or any number of middlemen, is called a channel of distribution”.

It is concluded as a result of analysis of the definitions that:

(i) The distribution channels proceeds the way from manufacturer to the ultimate users.

(ii) It includes all middlemen assisting in transfer of product’s title.


(iii) It also include institutions (Banks, Railways, Insurance Companies and other organizations) that do not play any part in sells-purchase jobs and merely provide marketing services.

Thus, distribution channel is a route for transfer of products title in which those institutions only are included that assist in the act of title transfer and these deliver the products to ultimate user or industrial users without making any charge there upon.

Producers normally use a number of marketing intermediaries for taking their products to users. Marketing intermediaries bear a variety of names such as – sole selling agents, marketers, wholesalers, distributors, stockist, retailers, franchised dealers, authorized representatives, brokers / commission agents and jobbers. All such intermediaries constitute the distribution channel. The depots / showrooms and other direct outlets of producers also form part of distribution channel.

Distribution Channel Characteristics and Role

The channels of distribution, thus, add the following characteristics in marketing:

1. Place Utility – As they help in moving the goods from one place to another;


2. Time Utility – As they bring goods to the consumers when needed;

3. Convenience Value – As they bring goods to the consumers in convenient shape, unit, size, style and package;

4. Possession Value – As they make it possible for the consumers to obtain goods with ownership title;

5. Marketing Tools – As they serve as vehicles for viewing the marketing organization in its external aspects and for bridging the physical and non-physical gaps which exist in moving goods from the producers to the consumers; and

6. Supply-Demand Linkage – As they bridge the gap between the producers and consumers by resolving spatial (geographical distance) and temporal (relating to time) discrepancies in supply and demand.

Role of Distribution Channels:

1. Confers distribution efficiency to the manufactures.

2. Channels supply products in required assortments, (combination of products of different manufactures) and help in assembling also.

3. Channels provide salesmanship (word of mouth) by being physically close to customers

4. Helps merchandising the products at retail shop by display, selling effort, awareness etc.

5. Helps in implementing price mechanism (setting price level from both sides) making a bridge between user and manufacturer

6. Physical distribution and financial functions

7. After sale and presale services

8. Help in sub distribution

9. Selling to sub distributors etc.

10. Helps in stock holding

11. Financing the stock, risk bearing, warehousing, storage of products etc.

Distribution Channel Top 2 Functions

(A) Functions that Help to Complete Transactions:

1. Information – Gathering and distributing Marketing Research and intelligence information about factors and forces in the marketing environments needed for planning and aiding exchange.

2. Promotion – Developing and spreading persuasive communications about an offer.

3. Contact – Finding and communicating with prospective buyers.

4. Matching – Shaping and fitting the offer to the buyers needs including activities such as manufacturing, grading, assembling and packaging.

5. Negotiation – Reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred.

(B) Functions that Help to Fulfill the Completed Transactions:

1. Physical distribution – Transporting and storing goods.

2. Financing – Acquiring and using funds to cover the costs of the channel work.

3. Risk bearing – Assuming the risks of carrying out the channel work.

All the function has three things in common:

(a) They use up scarce resources.

(b) They can often be performed better through specialization.

(c) They can often be shifted among channel members.

Distribution Channel Selecting Distribution Channels 

A manufacturer will seek to select that channel or restricted combination of channels open to him which provides the maxi­mum sales volume at minimum cost in the long-term. In making his selection he will be guided by the size and accessibility of his consumer or user market, the periodicity of customer purchase and of stock-replacement by the distribution channel, the cost of transport, storage and stock maintenance, the traditional or pre­vailing level of distributors’ margins, competitors’ distribution policies, and the degree of technical knowledge needed to sell the product to the final user.

Thus, products which have a larger consumer market, which are purchased with a relatively high degree of frequency and involve a minimum of technical knowledge in selling to the final user, can be sold through retailers dealing in the particular class of goods concerned, or from automatic vending machines, or direct to the customer door-to-door or through mail order.

Manufactur­ers of such products, as a general rule, will choose the shortest available route between factory and user, since the purpose of distribution is to place the product with a minimum of delay where it stands the greatest chance of being bought. Hence cos­metics and toiletries are sold not only through grocers and chem­ists but also door-to-door.

Cigarettes, books and magazines and sugar and chocolate confectionery are sold through a multiplicity of different types of retail outlets to meet the convenience of the customer. Consumer durables such as washing machines, refrig­erators and other appliances are sold door-to-door as well as through specialist retail outlets and department stores.

The pressure on firms to shorten the distribution route between factory and user, which reaches its ultimate form when a manufacturer’s salesman confronts the prospective user face to face on his or her doorstep or in the home, usually stems from the need to reduce the costs of distribution through the elimination of wasteful movements and transfers of goods at intermediate points between the factory and the customer, and the desire to exert greater direct control over the market for the product.

Such efforts are easier when large conglomerations of consumers are readily accessible in terms of their physical location, and the degree to which they can be influenced directly by the manufacturer to buy his product. Other things being equal, it will be easier for a manu­facturer to reduce the distribution gap between himself and his potential market if he can readily identify that market and reach it economically with his sales and advertising messages.

It is then up to the manufacturer through personal selling and advertising to persuade potential customers that it is more convenient, less time-consuming, cheaper or, what amounts to the same thing, better value to buy his product in this way rather than an alterna­tive product in some other way.

Direct contact between a consumer goods manufacturer and his retail customers enables the former to gauge his distribution levels more accurately, to keep stock levels at a maximum and to apply additional stock pressure when necessary. It enables him to obtain more effective and more continuous point-of-sale display for his product and quicker distribution of new or improved prod­ucts.

Distribution Channel – Selecting, Motivating and Evaluating the Channel Members 

While selecting intermediaries, the company should determine what characteristics distinguish the better ones.

The selection of intermediaries is essentially a matching process. The producer must identify the specific channel members who can perform the functions needed and convince them of the mutual benefit that will accrue of the relation.

The selection decision should examine the following characteristics in the intermediary:

(i) Number of years in the business

(ii) Other product lines carried

(iii) Growth record

(iv) Profit record

(v) Cooperativeness

(vi) Reputation

(vii) Size and quality of sales force

(viii) Quality of other lines carried

(ix) Stores’ customers

(x) Location

(xi) Future growth potential

(xii) Contacts and relationship with customers

(xiii) Estimated cost and financial capability

(xiv) Profit contribution

(xv) Management ability.

Commitment and ability to deliver sales results from the essential characteristics required from a channel member.

In a multilevel channel, the producer must look beyond the first level of contact. A careful appraisal of the entire network is important. Changes required in the network must be anticipated and properly implemented.

Motivating Channel Members:

Motivation of channel members is essential to achieving the producers channel objectives. Once selected, channel members must be continuously motivated to do their best. The company must sell not only through the intermediaries but to them.

At times companies offer positive motivators like higher margins, special deals, premiums, cooperative advertising allowances, display allowances, sales contest etc.

At other times negative motivators are used such as threatening to reduce margins, to slow down deliveries, or to end relationship.

Effective communication and information flow in both directions are necessary if the channel is to function properly.

Most companies try to forge long term partnership with their distributors to create a marketing system that meets the need of both the manufacturer and the distributor. They jointly plan merchandising goals and strategies, inventory levels, advertising and promotion plans etc.

The company must ensure a participative relationship for a mutually beneficial relationship to exist.

Evaluating Channel Members:

The producer must regularly check the channel member’s performance against standards like:

(i) Sales quotas

(ii) Average inventory levels

(iii) Customer delivery time

(iv) Treatment of damaged and lost goods

(v) Cooperation in company promotion and training program

(vi) Services to customers.

Intermediaries who are performing well must be recognized and rewarded suitably. Those performing poorly must be assisted or as a last resort replaced.

The manufacturer must however, be sensitive to the dealers. Those who treat dealers lightly risk not only losing their support but also causing some legal problems.

The distribution channels must be responsive to the changing needs and wants of customers and to the development of new channel systems by competitors.

The marketing management must continuously monitor channel effectiveness and improve the distribution network to match changing conditions and potential market opportunities.

Distribution Channel Intensity of Distribution 

The number of intermediaries relative to a saturation level that are marketing a manufacturer’s brand in a trading area is designated as the distribution intensity being used for the brand. Complete saturation occurs when all middlemen that normally market a particular product type carry a specific brand.

The determination of number of middlemen to be employed or the intensity of distribution is an important problem after the choice of channels of distribution.

The producers decide the general channel of distribution, which is based on the number of middlemen to be engaged at each level. The nature of products, buying habits of customers, competition, etc., is considered. The number of intermediaries and the situations are not static.

Intensity Alternatives:

1. Exclusive Distribution (Franchised Distribution):

Exclusive distribution arrangement refers to an agreement between the manufacturer and middleman under which the manufacturer grants exclusive right to sell his product in the territory specified in the agreement to the particular middleman. In such an agreement the wholesaler, distributor or retailer does not market competing brands. Instead, only one firm in a trading area carries the brand.

Exclusive distribution policy leads to a restriction on the number of middlemen to a greater degree and is used in case of marketing of products which are speciality products, require installation or considerable investment in stock or show room. Exclusive distribution is preferred when the amount of product service expected by the customer is considerable.

The manufacturer hopes aggressive selling through the exclusive distribution. He hopes that it will give more control over the price, promotion, credit policies etc. It increases product image and allows higher mark ups. Exclusive distribution is used for products like automobiles, designer garments, etc.

2. Selective Distribution (Limited Distribution):

Selective distribution may be carried at both the wholesaler and retailer level. A manufacturer following selective distribution policy will choose only a few middlemen to handle his product. Only those middlemen will be selected who can sell greater volumes.

In addition to type of product a strong brand image that attracts customers, adequate margins to support the necessary services, and availability of qualified intermediaries are factors that suggest the choice of selective approaches.

As a policy, selective distribution may not be appropriate for products like convenience products. It is more suitable for speciality products and accessories for which customer has strong brand preference. Selective selling increases the prestige of the product. It lowers the distribution cost and reduces credit risks.

3. Intensive Distribution (Mass Distribution):

A manufacturer following the policy of intensive distribution tries to get maximum exposure for his product by having it sold in every outlet where final customer are likely to look for it. This policy is normally adopted for marketing of convenience goods like tooth paste, soap, etc. where purchase price per unit is low and purchase units are very small. In the field of industrial products, intensive distribution is limited to spares and other supply items like small tools, lubricants, etc.

Intensive distribution is more successful if it is supported with large scale advertising by the manufacturer.

Intensity of Distribution and Suitability:

Distribution Channel – Steps Involved in Designing a Channel System

In designing marketing channels, manufacturers struggle between what is ideal and what is practical. Channel systems often evolve to meet market opportunities and conditions. However for maximum effectiveness, channel analysis and decision making should be more purposeful.

Steps involved in designing a channel system are:

(i) Analysing Consumer Service Needs:

A marketing channel acts as a value – delivery system for customers. Each channel member adds some value for the customer. The marketer must first analyse and understand customer needs from the distribution channel. Sometime the customer is willing to travel long distances to buy a product, sometimes they prefer local shopping, some products are bought in person and others may be ordered on phone.

Such needs of customers must be understood while designing the distribution system. The company must balance customer service needs with the feasibility, cost of meeting these needs and customer price preference.

(ii) Formulating Channel Objectives:

Company’s objectives should be stated in terms of the desired service level of target consumers.

Objectives firms commonly seek from channels would include:

(a) Effective coverage of the target market

(b) Efficient and cost effective distribution

(c) Ensuring that customers incur minimum exertion in procuring the product.

(d) Helping the firm to carry on marketing activities uninterrupted, confident that the channels will take care of sales

(e) Partnering the firm in financing and sub distribution of tasks.

Objectives differ from firm to firm and hence their channel design will also differ.

(iii) Analysing the Product and Linking the Channel Design to the Product Characteristics:

The firm must analyse the kind of product being offered and accordingly choose an appropriate channel. Different products must be sold through different channels, e.g. industrial products should have a channel different from that for consumer goods.

Product type would also influence the choice of channel e.g. for garments etc. franchise type of intermediary may be most appropriate but for soap etc. wholesaler retailer system works best.

(iv) Evaluation of the Distribution Environment:

Vital features of distribution environment must be analyzed and ensured that the proposed channel is compatible with them. Distribution environment includes the trade related legal environment as well.

(v) Evaluation of Competitors Channel Designs:

The positive and negative aspects of competitors channel design must be analyzed.

(vi) Matching the Channel Design to Company Resources:

Companies with limited resources may have to settle for a more conventional channel, firms with small volume of business may find an own channel uneconomical. They are better off by depending on conventional hired channels. Firms with larger resources have more options and can go for varied channels.

(vii) Identifying Major Channel Alternatives:

The firm must identify its major alternatives in terms of:

a. Types of intermediaries

b. Number of intermediaries

c. Responsibilities of each channel member.

(viii) Evaluating the Major Alternatives:

All the alternatives must be evaluated on the following criteria:

a. Economic criteria

b. Adaptability criteria

c. Control to be given to members.

Pattern of Distribution Channel and Type of Intermediaries:

i. Manufacturer – user

ii. Manufacturer – mail order – user

iii. Manufacturer – door to door salesman – user

iv. Manufacturer – manufacturer’s showroom – user

v. Manufacturer – retailer – user

vi. Manufacturer – wholesaler – retailer – user

vii. Manufacturer – stockist / distributor – semi wholesaler – retailer – user

viii. Manufacturer – marketer – distributor – semi wholesaler – retailer – user

ix. Manufacturer – sole selling agent – distributor – semi wholesaler – retailer – user

Marketer or Sole Selling Agent:

A big marketing intermediary with large resources and extensive territories of operations. They have major responsibility of the operations of the main organisation for a particular region. They decide and set their own channels of distribution.

Levels of Marketing Channels:

Consumer Marketing Channels:

Distribution Systems:

Vertical Marketing System (VMS):

1. Vertical marketing system – A distribution channel structure in which producers, wholesalers, and retailers act as a unified system.

i. Corporate vertical marketing system – A vertical marketing system that combines successive stages of production and distribution under single ownership – channel leadership is established through common ownership.

ii. Contractual vertical marketing system – A vertical marketing system in which independent firms at different levels of production and distribution join together through contracts to obtain more economies or sales impact then they could achieve alone.

iii. Wholesaler sponsored voluntary chain – Contractual vertical marketing system in which wholesaler organise a voluntary chain of independent retailers to help them compete with large corporate chain organisations.

iv. Retailers cooperative – Contractual vertical marketing system in which retailers organise a new, jointly owned business to carry on wholesaling, and possible production.

v. Franchise organisation – Contractual vertical marketing system in which a channel member called a franchiser, links several stages in the production – distribution process.

vi. Administered vertical marketing system – A vertical marketing system that coordinates successive stages of production and distribution not through common ownership or contractual ties but through the size and power of one of the parties.

2. Horizontal Marketing System – A channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity.

3. Hybrid Marketing System – Multichannel distribution system in which a single firm sets up two or more marketing channels to reach one or more customer segments.

Distribution Channel – Activities Involved in the Distribution Channel

For marketers, the distribution decision is primarily concerned with the supply chains front-end or channels of distribution that are designed to move the product (good or services) from the hands of the company to the hands of the customer.

Obviously, when we talk about intangible services the use of the word “hands” is a figurative way to describe the exchange that takes place. But the idea is the same as with tangible goods. All activities and organizations helping with the exchange are part of the marketer’s channels of distribution.

Activities involved in the channel are wide and varied though the basic activities revolve around these general tasks:

i. Ordering

ii. Handling and shipping

iii. Storage

iv. Display

v. Promotion Selling

vi. Information feedback.

Buying a computer in the post, petrol at a supermarket, mortgages over the phone and phones themselves from vending machines are just some innovations in distribution which create competitive advantage as customers are offered newer, faster, cheaper, safer and easier ways of buying products and services.

Without distribution even the best product or service fails.

Author Jean-Jacques Lambin believes a marketer has two roles:

(1) To organize exchange through distribution, and

(2) To organize communication.

Physical distribution, or place, must integrate with the other ‘P’s in the marketing mix. For example, the design of product packaging must fit onto a pallet, into a truck and onto a shelf, prices are often determined by distribution channels; and the image of the channel must fit in with the supplier’s required ‘positioning’. You can see how Coca Cola further integrate the timing of distribution and promotion in the Hall Of Fame later. In fact, they see distribution as one of their “core competencies”.

Distribution is important because:

Firstly, it affects sales – if it’s not available it can’t be sold. Most customers won’t wait.

Secondly, distribution affects profits and competitiveness since it can contribute up to 50 percent of the final selling price of some goods. This affects cost competitiveness as well as profits since margins are squeezed by distribution costs.

Thirdly, delivery is seen as part of the product influencing customer satisfaction. Distribution and its associated customer service play a big part in relationship marketing.

Decisions about physical distribution are key strategic decisions. They are not short term. Increasingly it involves strategic alliances and partnerships which are founded on trust and mutual benefits. We are seeing the birth of strategic distribution alliances. You can see Southwestern Bell in the Hall Of Fame explain how marketing marriages provide new ways of getting products and services in front of customers.

Channels change throughout a product’s life cycle. Changing lifestyles, aspirations and expectations along with the IT explosion offer new opportunities of using distribution to create a competitive edge.

Controlling the flow of products and services from producer to customer requires careful consideration. It can determine success or failure in the market place.

The choice of channel includes choosing among and between distributors, agents, retailers, franchisees, direct marketing and a sales force.

Deciding between blanket coverage or selecting distribution, vertical systems or multi­channel networks, strategic, alliances or solo sales forces, requires strong strategic thinking.

Decisions about levels of stock, minimum order quantities, delivery methods, delivery frequency and warehouse locations have major cash flow implications as well as customer satisfaction implications. Meanwhile, remember Lambin – “distribution is one of the two main roles of marketing.”

Distribution Channel – 2 Common Strategies

Distribution strategy in influenced by the market structure, the firm’s objectives. Its resources and of course it’s overall marketing strategy. All these factors are addressed in the section on selecting Distribution Channels.

The first strategic decision is whether the distribution is to be:

i. Intensive (with mass distribution into all outlets as in the case of confectionery).

ii. Selecting (with carefully chosen distributors e.g., specialty goods such as – car repair kits);

iii. Exclusive (with distribution restricted to up market outlets, as in the case of Gucci clothes).

The next strategic decision clarifies the number of levels within a channel such as – agents, distributors, wholesalers, retailers. In some Japanese markets there are many, many intermediaries involved.

Next comes, a sensitive strategic decision whether to go single channel or multi-channel. Some producers, like Manchester United FC, use multi-channels – they use many different routes, direct and indirect, to bring their products to their customers. Multi-channel Systems like this are common where intensive distribution is required. So direct marketing is combined with indirect marketing through intermediaries.

Then, comes the next level of strategic decisions concerning strategic relationships and partnerships.

Two common strategies are Vertical Marketing Systems and Horizontal Marketing Systems:

1. Vertical Marketing Systems:

Vertical Marketing Systems involve suppliers and intermediaries working closely together instead of against each other. They plan production and delivery schedules quality levels, promotions and sometimes prices. Resources, like information, equipment and expertise, are shared. The system is usually managed by a dominant member, or ‘channel captain’. VMS is more flexible than vertical integration where the manufacturer actually owns the distribution channel, for example, Doctor Martens boot manufacturers own their own retail store.

2. Horizontal Marketing Systems:

Horizontal Marketing Systems occur where organizations operating on the same channel level (e.g., two suppliers or two retailers) cooperate. They then share their distribution expertise and distribution channels. This can speed up the time taken to penetrate the market. There is room for creative alliances here.

Resources available affect distribution strategy. Who can handle outbound logistics marketing and sales, and servicing? Can the supplier afford to deliver small quantities? Can it provide more trucks, can its sales force ‘push’ products into national retail chains? Can the organization deal with thousands, may be even millions of customers can cope? Does it want to devote huge resources here or would it prefer to utilize someone else’s resources in return for a slice of the profits?

Difficult marketing dilemmas which make distribution strategy both critical and interesting.

Distribution Channel – Criteria for Selecting Members within a Channel

Having decided to go through intermediaries the next question is whether to use agents or distributors and also how many. Unlike distributors, agents don’t hold stocks – they only act as sales agents finding customers, collecting orders and passing them on to the supplier in return for a percentage commission.

How would you select a distributor or an agent?

Here are some criteria:

1. Market Coverage – Does the profile existing customers match your target market profile? – is the number of customers big enough to meet the required distribution penetration? – is the existing sales force big enough to cover the territory? – are they dependent on a single individual? – are the existing delivery fleet and warehouse facilities adequate?

2. Sales Forecast – How many can they sell? What are their forecasts based upon? Do they give a ‘best, worst and average’ forecast? Will they invest in large stock commitment? Do they have budgets to run promotions? Some suppliers even ask their distributors for a marketing plan showing how they intend to market the supplier’s products.

3. Cost – What will it cost in terms of discounts, commissions, stock investment and marketing support?

4. Other Resources – Does the target market require anything special such as technical advice, installation, quick deliveries, and instant availability? If so can the distributor provide it?

5. Profitability – How much profit will the distributor generate for the supplier?

6. Control – Do they have a reporting system in place? How do they deal with problems? How often is review meeting scheduled? Can you influence the way they present your products?

7. Motivation – Does the agent or distributor convey a sense of excitement and enthusiasm about the product? What about its sales force – what’s their reaction?

8. Reputation – Has it got a good track record? This includes the number of years in business, growth and profit record, solvency, general stability and overall reliability. Is it dependent on one key player?

9. Competition – Do they distribute any competitor’s products?

10. Contracts – Some distributors demand exclusivity. Some agreements tie the supplier in for certain periods of time. Check for flexibility in case things go wrong.

The bottom line is – Can the agent or distributor be motivated, controlled and trusted? Motivated to sell your product among a range of others? Controlled to feedback results or change strategy if requested. And trusted to act as a reliable ambassador of your product?

In reality, maintaining continually high levels of motivation among intermediaries presents a challenge. It requires a reasonable quality product, creative promotions, product training joint visits between producer and distributor, co-operative advertising, merchandising and display.

Most of these apply to agents as much as distributors and retailers.

Keeping the intermediary stimulated is important. Positive motivators, like sales contests are preferred to negative motivators like sanctions such as reduced discounts and the threat of terminating the relationship.

A positive reward works better than a negative punishment. Ideally there should be a shared sense of responsibility – a partnership – a strategic partnership. The supplier and intermediary are there to help each other. Vertical Marketing Systems are a good example.

Clear communications, covering sales goals, review meetings, reporting procedures marketing strategy, training, and market information required, suggestions for improvements all help. Regular contact through visits, review meetings, dinners, competitions newsletters thank you letters, congratulatory awards all help to keep everyone working closely together.

These are all non-financial incentives which provide a form of psychic income as opposed to financial income. That’s not to say that financial incentives aren’t useful motivators. It just means that there are other motivations there too.

In fact, the money spent on financial incentives is often spent more effectively when the sales person is rewarded with a plague a gold pen or a holiday in the Bahamas rather than just the cash which tends to get soaked up and lost in a sea of ordinary household daily expenditure.

Non cash rewards appeal to the higher levels of Maslow’s Hierarchy of Needs-belonging esteem and self-actualization.

Despite this, conflict can occur when too many distributors are appointed within close proximity of each other, or the producer engages in a multiple channel strategy of direct marketing as well as marketing through intermediaries.

Carefully motivating distributors is vital if goods are to flow smoothly through the channel and reach satisfied customers.

Distribution Channel – Guidelines for Distribution Channel Management

Role of intermediaries is very significant in modern marketing. Therefore, it is essential that the companies must think strategically about relationships with intermediaries.

Guidelines for channel management are outlined in the following points:

1. Interdependence:

Each channel member depends to some degree on other channel members to achieve desired goals. High interdependence means that each has the potential to influence the decisions of another. Therefore, it is very essential that these channel members should be properly co-coordinated.

If channel relationship is unbalanced, the firm will have to suffer considerable loss. Hence, the producers need to establish channel system and responsibilities in a systematic way so that proper co-ordination and relation exists among the channel members.

2. Trust:

Another important aspect of channel management is trust or confidence in the reliability and integrity of channel members. High trust is the belief that words and promises can be relied upon. It makes coordination of channel relationships much easier. Lack of trust creates serious problems. Intentions and basic honesty are likely to be questioned.

3. Support:

Producers should support the channel members in all possible ways. Funds may be provided to intermediaries for general promotion purposes such as brochures, mailings, and training related to a product. Support also may be extended through inventory management, sales training programs etc. Another form of support is to invite intermediaries to sales conferences to mingle and attend sessions devoted to new products or marketing techniques.

4. Goal Setting and Planning:

Cannel management is facilitated when members meet formally to set joint goals and develop plans for the coming year. This works best when interdependence and trust are high. This develops a feel of partnership in the minds of channel intermediaries. During their meet, they make a commitment to a set of goals.

Specific business plans are developed regarding the activities and investments intermediaries will make to help achieve goals. At the same time, the producer agrees to assist intermediaries through support programs and marketing efforts. Therefore, it is essential to involve the intermediaries in the goal seating process to facilitate smooth functioning of marketing activities.

5. Monitoring Intermediary Activities:

Once the business plan is in place, company sales personnel must keep track of the marketing and selling efforts of each intermediary. Deviations from the plan must be noted. How well the intermediary is doing in reaching the goals established must be constantly evaluated.

6. Motivating Intermediary:

Another major component of channel management is to keep channel members motivated in such a way that they give their best performance. Motivation of channel members is often achieved through financial and non-financial rewards. Financial rewards include higher margins, extended credit time, bonuses and reimbursement of expenses. The non-financial rewards are contests, public recognition higher performance etc.

7. Conflict Resolution:

Channel conflict occurs when members disagree about the course of their relationship. It often arises due to business pressures, policy changes, and the use of coercion. For the effective functioning of the organization it is very essential that the conflict should be resolved without hearting the intermediaries.

8. Evaluating Performance:

Distribution strategy of any manufacturing firm should respond to changes. Intermediaries are believed to attract innovators and early adopters. Therefore it is essential to see whether the intermediaries are adopting to the changing environment. Also it is necessary to know how well the intermediary is doing in reaching the goals.

Distribution Channel Important Factors Needed during Selection of Channel

Selection of appropriate distribution/ marketing channel is an important consideration in the marketing management. It is rather a knotty and ticklish problem in the marketing mix. It may be pointed out that there is not hard and fast rule for deciding which channel of distribution is to be selected for successful marketing.

A manufacturer has to study all available channels and select one channel which would give the best results under the given circumstances. While selecting one or two channels, certain considerations like product considerations, market considerations, consumer considerations, enterprises considerations, etc., should be given adequate attention.

Important factors which need careful consideration while selecting the channel of distribution is as noted below:

Factor # 1. Nature of Product:

The nature of product is one significant factor influencing the selection of the distribution channel. The nature of product means the characteristics of the product. The product for marketing may be a new product or an established one. It may be a cheap or costly and finally it may be perishable or durable. If it is perishable like fruits or vegetables, it will be better to sell it directly to consumers.

Similarly, costly products requiring after sale service should pass on through few hands. Thus consumer durables like sewing machines, automobiles, television sets and scooters are sold either directly by the manufacturer or through one area distributor. An industrial product is usually sold directly to the industrial user.

If a product is new, active support of middlemen is necessary. Once it is established in the market, some middlemen can be eliminated. Standardized products like machine tools are commonly handled by wholesale distributors. In the case of local market, direct sale is possible and also preferred.

Factor # 2. Nature of the Market:

The size and location of the market also influence the choice, regarding the distribution channel. In the case of national markets, the producer may be compelled to avail the services of intermediaries for effective marketing of goods. Similarly, if the number of customers is very large end if they are widely scattered, the services of middlemen are essential.

On the contrary, in the case of local market and a small number of customers, the manufacturer may resort to direct channel. For example, in the marketing of consumer items, wholesalers and retailers are inevitable but they are not essential for marketing industrial goods. Finally, for mass distribution of goods, the services of middlemen are required but for selective or exclusive distribution one or two dealers are adequate.

Factor # 3. Nature of Market Competition and Marketing Environment:

The nature and intensity of market competition is another factor connected with the selection of distribution channel. In the case of keen competition, the manufacturer has to seek active support of middlemen. Similarly, in the case of certain products like medicines, a manufacturer has to follow the same channel as used by his competitors. A manufacturer can use a shorter channel if the market competition is limited.

Similarly, shorter channel can be used during the recession when the demand is less. Longer channel will be more useful during the period of prosperity when demand is more and also increasing. Along with market competition, marketing environment needs careful consideration while selecting the marketing/distribution channel.

Such environment is the net result of various factors such as – market competition, entry of new products in the market policies of competitors, government policies and so on. The channel should be selected after due consideration of market environment -present and future.

Factor # 4. Nature and Features of Customers:

While selecting distribution channel, the convenience of the prospective customers should be taken into consideration. Selecting channel from the view point of customers requires information of regarding prospective customer’s age, income group, sex, etc. The buying habits of customers should also be taken into consideration while selecting a marketing/distribution channel.

Factor # 5. Financial Resources and Cost of Distribution:

Another significant factor influencing selection of marketing/distribution channel is a financial resources at the disposal of the manufacturer and the cost of distribution in relation to the product. A manufacturer with limited financial support has to use a longer channel as he needs the services of middlemen for the distribution of goods.

He can use shorter channel or can sell his goods directly to consumers if he is-financially strong and capable to establish his own sales organization. Similarly, if the market is local, direct sale to consumers is possible However, a longer channel is required if the market is too wide. This is natural as a manufacturer finds it difficult (financially) to establish his own sales organization.

New companies depend heavily on the middlemen for distribution due to lack of finance but established companies try to sell their products with minimum number of middlemen. The company’s product mix influences the selection of marketing channel. Here, the broader the product line, shorter will be the dealerships. Finally, a company interested in keeping greater control over the marketing channels prefers a shorter marketing channel.

Factor # 6. Availability of Middlemen:

The manufacturer of a particular product may need a large number of middlemen for efficient distribution of his product. He may also be willing to pay them attractive commission. However, he may not get the services of middlemen on fair terms and conditions.

Under such circumstances, he has no alternative but to establish his own sales organization for marketing. This is because of non-availability of suitable middlemen. In brief, availability of middlemen, willingness of middlemen and the services which the middlemen are willing to provide are three broad factors connected with the middlemen in the distribution channels.

Factor # 7. Miscellaneous Factors:

In addition to the factors, there are other miscellaneous factors which influence the selection of distribution channel. Such factors are – proportion of credit sales, risk-bearing in business, additional services offered by the middlemen, size of sales organization, desire for control over distribution channel and number of potential consumers.

Distribution Channel in Marketing 4 Major Types

Generally we do not buy goods directly from the producers. The producers/manufacturers usually use services of one or more middlemen to supply their goods to the consumers. But sometimes, they do have direct contact with the customers with no middlemen in between them.

The various channels used for distribution of consumer goods can be described as follows:

(i) Zero Stage Channel of Distribution:

Zero stage distribution channel exists where there is direct sale of goods by the producer to the consumer. This direct contact with the consumer can be made through door-to-door salesman, own retail outlets or even through direct mail. For example, Eureka Forbes, sells its water purifiers directly through their own sales staff.

(ii) One Stage Channel of Distribution:

In this case, there is one middleman i.e., the retailer. The manufacturers sell their good to retailers who in turn sell it to the consumers. This type of distribution channel is preferred by manufacturers of consumer durables like refrigerator, air conditioner, washing machine, etc., where individual purchase involves large amount.

(iii) Two Stage Channel of Distribution:

This is the most commonly used channel of distribution for the sale of consumer goods. In this case, there are two middlemen used, namely, wholesaler and retailer. This is applicable to products where markets are spread over a large area, value of individual purchase is small and the frequency of purchase is high.

(iv) Three Stage Channel of Distribution:

When the number of wholesalers used is large and they are scattered throughout the country, the manufacturers often use the services of mercantile agents who act as a link between the producer and the wholesaler. They are also known as distributors.

Distribution Channel Factors Affecting the Choice of Channel of Distribution

Choice of an appropriate distribution channel is very important as the pricing as well as promotion strategy are dependent upon the distribution channel selected. Not only that, the route which the product follows in its journey from the manufacturer to the consumer also involves certain costs.

This in turn, affects not only the price of the product but also the profits. Choice of inappropriate channels of distribution may result in lessor profits for the manufacturer and higher price from the consumer.

Choice of channel of distribution depends upon following factors:

(i) Nature of Market:

There are many aspects of market which determine the choice of channel of distribution. Say for example, where the number of buyer’s is limited, they are concentrated at few locations and their individual purchases are large as is the case with industrial buyers, direct sale may be the most preferred choice. But in case where number of buyers is large with small individual purchase and they are scattered, then need may arise for use of middlemen.

(ii) Nature of Product:

Nature of the product considerably affects the choice of channel of distribution. In case the product is of technical nature involving a good amount of pre-sale and after sale services, the sale is generally done through retailers without involving the wholesalers. But in most of the consumer goods having small value, bought frequently in small quantities, a long channel involving agents, wholesalers and retailers is used as the goods need to be stored at convenient locations. Items like toiletries, groceries, etc., fall in this category.

(iii) Nature of the Company:

A firm having enough financial resources can afford to its own a distribution force and retail outlet, both. But most business firms prefer not to create their own distribution channel and concentrate on manufacturing. The firms who wish to control the distribution network prefer a shorter channel.

(iv) Middlemen Consideration:

If right kind of middlemen having the necessary experience, contacts, financial strength and integrity are available, their use is preferred as they can ensure success of newly introduced products. Cost factors also have to be kept in view as all middlemen add their own margin of profit to the price of the products. But from experience it is learnt that where the volume of Sales are adequate, the use of middlemen is often found economical and less cumbersome as against direct sale.

Distribution Channel Managing Distribution Channels 

Ensuring top performance from distributors day by day can be a significant challenge.


I. Intermediary Compliance:

The firm must ensure channel intermediaries stick to their agreements, implement its market strate­gies. When suppliers compensate intermediaries with standard commissions for all products to all customers, they may encounter compliance problems.

The supplier can better direct distributors by varying commissions by product/customer type. The supplier can also tie evaluation/compensation directly to contract requirements — maintain inven­tory levels, achieve sales levels, provide customer service, secure customer satisfaction.

II. Power in Distribution Systems:

Power, conflict are endemic in distribution systems. Power — one channel member’s ability to get another member to act as it wants. Typically, some channel members have more power than others; they also have different objectives. When a supplier is more powerful, it can impose demands.

Example- Micro­soft sets many conditions for PC manufacturers. Similarly, powerful intermediaries may exert power when they enjoy strong market positions.

III. Conflict in Distribution Systems:

Distribution channel members often have multiple organizational relationships; hence, the potential for conflict is high. Operational conflict occurs daily — shipments, invoice errors, unfulfilled promises, unacceptable product quality. Operational conflicts are annoying, frustrating, channel disrupting, so most members try to minimize them. Real-time systems for tracking/viewing distribution data can alleviate some conflicts.

Sometimes firms take actions to generate strategic conflict, gain advantage — upstream with suppliers, downstream with customers. Strategic con­flict changes the dynamics between suppliers, distributors/wholesalers, retailers.

Downstream Conflict:

i. End users/retailers go direct to suppliers — seek better prices, eliminate distributors.

ii. New megadealers/high-revenue retailers shift power from distributors/manufacturers.

iii. Distributors/buying groups disrupt channel relationships by offering private-label products.

iv. Independent buying groups increase buying power for member retailers.

Upstream Conflict:

i. Suppliers go direct to end users, eliminate distributor.

ii. Internet circumvents need for distributors; but may cause conflict/confusion for end users.

iii. Supplier adds new distributors to achieve better market penetration.

IV. Planning for Power Changes:

All things equal, the firm is better off having a stronger (versus weaker) power position relative to channel intermediaries. If the firm initiates strategic conflict, it must assess the likely impact on other channel members, anticipate potential responses. A strong negative response may hurt the supplier.

V. The Partnership Model:

When firms exercise power, generate strategic conflict, the underlying assumption is a zero-sum game. If the firm wins, another channel member loses, and vice versa. The partnership model assumes the possibility of a positive-sum game. By developing trust, working together, several channel members win; there are no losers.

By developing partnerships, channel members can establish joint strategic goals — cutting costs, reducing supply-chain inventory, while limiting stock-outs. Better forecasting allows retailers to offer more efficient product sets, conduct more effective promotions, eliminate heavy discounts on unsold merchandise. By working with retailers, suppliers can achieve lower production/distribution costs, better use promotional funds.