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DISTRIBUTION CHANNEL

A distribution channel is a chain of businesses or intermediaries through which a good or service


passes until it reaches the final buyer or the end consumer. Distribution channels can
include wholesalers, retailers, distributors, and even the Internet.

Distribution channels are part of the downstream process, answering the question "How do we
get our product to the consumer?" This is in contrast to the upstream process, also known as the
supply chain, which answers the question "Who are our suppliers?"

A distribution channel is a chain of businesses or intermediaries through which a good or service


passes until it reaches the final buyer or the end consumer. Distribution channels can
include wholesalers, retailers, distributors, and even the Internet.

Distribution channels are part of the downstream process, answering the question "How do we
get our product to the consumer?" This is in contrast to the upstream process, also known as the
supply chain, which answers the question "Who are our suppliers?"

[Important: A distribution channel, also known as placement, is part of a company's


marketing strategy, which includes product, promotion, and price.]

TYPES OF DISTRIBUTION CHANNELS

While a distribution channel may seem endless at times, there are three main types of channels,
all of which include the combination of a producer, wholesaler, retailer, and end consumer.

The first channel is the longest because it includes all four: producer, wholesaler, retailer, and
consumer. The wine and adult beverage industry is a perfect example of this long distribution
channel. In this industry—thanks to laws born out of prohibition—a winery cannot sell directly
to a retailer. It operates in the three-tier system, meaning the law requires the winery to first sell
its product to a wholesaler who then sells to a retailer. The retailer then sells the product to the
end consumer.

The second channel cuts out the wholesaler—where the producer sells directly to a retailer
who sells the product to the end consumer. This means the second channel contains only one
intermediary. Dell, for example, is large enough to sell its products directly to reputable retailers
such as Best Buy.

The third and final channel is a direct-to-consumer model where the producer sells its product
directly to the end consumer. Amazon, which uses its own platform to sell Kindles to its
customers, is an example of a direct model. This is the shortest distribution channel possible,
cutting out both the wholesaler and the retailer.
Key Takeaways

 A distribution channel represents a chain of businesses or intermediaries through which


the final buyer purchases a good or service.
 Distribution channels include wholesalers, retailers, distributors, and the Internet.
 In a direct distribution channel, the manufacturer sells directly to the consumer. Indirect
channels involve multiple intermediaries before the product ends up in the hands of the
consumer.

CHOOSING THE RIGHT DISTRIBUTION CHANNEL

Not all distribution channels work for all products, so it's important for companies to choose the
right one. The channel should align with the firm's overall mission and strategic vision including
its sales goals.

The method of distribution should add value to the consumer. Do consumers want to speak to a
salesperson? Will they want to handle the product before they make a purchase? Or do they want
to purchase it online with no hassles? Answering these questions can help companies determine
which channel they choose.

Secondly, the company should consider how quickly it wants its product(s) to reach the buyer.
Certain products are best served by a direct distribution channel such as meat or produce, while
others may benefit from an indirect channel.

If a company chooses multiple distribution channels, such as selling products online and through
a retailer, the channels should not conflict with one another. Companies should strategize so one
channel doesn't overpower the other.
EVALUATING THE MAJOR ALTERNATIVES
Once the company has identified its major channel alternatives, it must evaluate each Alternative
against appropriate economic, control, and adaptive criteria.

➤ Economic criteria. Each channel alternative will produce a different level of sales
and Costs, so producers must estimate the fixed and variable costs of selling different volumes
through each channel. For example, in comparing a company sales force to a manufacturer’s
sales agency, the producer would estimate the variable cost of commissions paid to
representatives and the fixed cost of rent payments for a sales office. By comparing its costs at
different sales levels, the company can determine which alternative appears to be the most
profitable.

➤ Control criteria. Producers must consider how much channel control they require,
since they will have less control over members they do not own, such as outside sales Agencies.
In seeking to maximize profits, outside agents may concentrate on customers who buy the most,
but not necessarily of the producer’s goods. Furthermore, agents might not master the details of
every product they carry.

➤ Adaptive criteria. To develop a channel, the members must make some mutual
commitments for a specified period of time. Yet these commitments invariably lead to a decrease
in the producer’s ability to respond to a changing marketplace. In a volatile or uncertain
environment, smart producers seek out channel structures and policies that provide high
adaptability.

CHANNEL-MANAGEMENT DECISIONS
After a company has chosen a channel alternative, it must select, train, motivate, and evaluate the
individual intermediaries. Then, because neither the marketing environment nor the product life
cycle remains static, the company must be ready to modify these channel arrangements over
time.

Selecting Channel Members


During the selection process, producers should determine what characteristics distinguish the
better intermediaries. They will want to evaluate number of years in business, other lines carried,
growth and profit record, solvency, cooperativeness, and reputation. If the intermediaries are
sales agents, producers will want to evaluate the number and character of other lines carried and
the size and quality of the sales force. If the intermediaries are store or Internet retailers that want
exclusive distribution, the producer will want to evaluate locations, brand strength, future growth
potential, and
Type of clientele.
Training Channel Members
Companies need to plan and implement careful training programs for their distributors and
dealers because the intermediaries will be viewed as the company by end users. Microsoft, for
example, requires third-party service engineers who work with its software applications to
complete a number of courses and take certification exams. Those who pass are formally
recognized as Microsoft Certified Professionals, and they can use this designation to promote
business.

Motivating Channel Members

The most successful firms view their channel members in the same way they view their
End users. This means determining their intermediaries’ needs and then tailoring the channel
positioning to provide superior value to these intermediaries. To improve intermediaries’
performance, the company should provide training, market research, and other capability-
building programs. And the company must constantly reinforce that its intermediaries are
partners in the joint effort to satisfy customers

Evaluating Channel Members


Producers must periodically evaluate intermediaries’ performance against such standards as
sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged
and lost goods, and cooperation in promotional and training programs. A producer will
occasionally discover that it is paying too much to particular intermediaries for what they are
actually doing. As one example, a manufacturer that was compensating a distributor for holding
inventories found that the inventories were actually held in a public warehouse at the
manufacturer’s expense. Producers should therefore set up functional discounts in which they
pay specified amounts for the trade channel’s performance of each agreed-upon service.
Underperformers need to be counseled, retrained, remotivated, or terminated.
EVALUATING CHANNEL PERFORMANCE
The performance of a channel can be measured across multiple dimensions. The parameters that
are measured usually are effectiveness, efficiency, productivity, equity and profitability of the
channel While channel efficiency emphasizes controlling costs incurred by intermediaries while
performing channel functions, channel productivity is concerned with maximizing outputs for a
given level of inputs. Channel effectiveness deals with the intermediary's proficiency in
satisfying customer needs and channel equity measures the distribution of accessibility of the
channel among customers. While performance at a macro- level is evaluated through societal
contributions of intermediaries, a micro- level evaluation involves assessing the performance of
individual intermediaries in terms of achieving the manufacturer's objectives of goal attainment,
integration, adaptation and pattern maintenance. The performance of intermediaries is measured
on three scales, namely facet, global and composite scales. In addition to an intermediary's
performance in meeting supplier aims, his or her channel profitability that is concerned with his
or her financial performance is also evaluated. While the channel profitability is assessed using
the Strategic Profit Model from a broader perspective, Activity Based Costing and Direct
Product Profit are used for detailed analysis of channel performance. Another pivotal factor for
channel performance is the quality of services offered through the channel. Thus, the success of a
channel and its efficiency are determined by the efficiency of channel intermediaries in
delivering goods and services to customers and the quality of services offered in the process. An
effective distribution channel can provide channel services demanded by customers and extend
its capacity within the constraints of the market environment.

HOW TO EVALUTED CHANNEL PERFORMANCE


Evaluation is an important part of marketing: it helps your company eliminate ineffective
strategies and develop an overall plan that helps build your business. By scheduling regular
evaluations of your marketing plan, you can save wasted money by modifying or eliminating
campaigns that are not reaching your target market or garnering the response you need. As
you plan, build in mechanisms to monitor the success of each marketing effort to make
evaluation cheaper and easier.

Check for Changes in Sales

Because the end goal of most marketing efforts is to raise sales and profits, use the numbers to
measure how your campaigns are affecting customer behavior. Look at the sales before a
marketing campaign, during its rollout and for six months afterward; keep track of the long-
term response to monitor delayed effects.
Use a Questionnaire

An easy and inexpensive way to evaluate the effectiveness of a marketing technique is to talk
directly to consumers using a questionnaire. If you want to check on how well you are
promoting new features or services to existing clients, talk to customers who have been with
your company for some time. To gauge how a marketing campaign has impacted customer
perception, send out surveys to a random sampling of your target audience to see how familiar
they are with your company. Ask new customers where they heard about you to see which of
your marketing strategies is the most persuasive.

Monitor Your Progress

Marketing can be used to support your overall business objectives, so it's helpful to monitor
your progress towards strategic business goals. At regular intervals, conduct an evaluation of
each goal. If you find that the progress toward one is slower than the others, your marketing
strategies for that goal may be ineffective or need to be ramped up.

Compare Your Strategy to Competitors

If you are employing similar strategies to competitors, you can compare them to find
differences in frequency, quality, content and response. Note the number of places competitors'
advertisements show up, how many social media followers they have, how their profits
changed after a campaign or how they have altered their other marketing strategies.

Evaluate the Return on Investment

Even if your marketing strategies are helping to achieve your company goals, they can be
unsustainable if they cost more than they make. Calculate the cost of each campaign and the
man-hours that go into each project, then measure that cost against the campaign's profits to
determine the return on investment. If there is no change in profit, the campaign may not be
worth keeping.
CHANNEL PERFORMANCE MEASUREMENT PROCESS.

The channel performance measurement is primarily a four-step process.

1. Define Sales Objectives

The first step in channel performance measurement is to define the sales objectives for the
company. These objectives are outlined and discussed in sales meetings to ensure a shared
understanding between members of the marketing and sales teams.

2. Determine Channel Performance Metrics

Evaluating the performance of a distribution channel depends largely on the agreed upon
performance metrics. Choosing the right number and type of performance metrics can help to
monitor and improve the performance of channel partners. These metrics provide an
understanding of how well the channel partner is doing in reaching its performance targets.

Though it is possible to evaluate a channel on hundreds of performance metrics, this would make
reporting and analysis of the performance a cumbersome job. When determining channel
performance metrics, a key performance driver, such as sales or units sold, should be chosen to
identify and measure the most important tasks. A series of performance metrics are then decided
based on the key performance driver.

3. Set Channel Partner Targets

After overall sales objectives are defined, it is important to assign specific targets to each of the
channel partners to ensure they are in alignment with the overall objectives. Properly set targets
provide a benchmark to measure channel success, monitor performance, and take corrective
action to meet expectations. Each channel partner has a specific role towards fulfilling the
overall sales objectives. Performance targets should be set to reflect the channel partner’s
contribution to the overall objectives

4. Manage Channel Performance

This is the final step in channel performance measurement. It uses the agreed upon goals,
assigned performance targets, and identified performance metrics to manage channel
performance on an on-going basis and to identify the performance shortfalls of the channel
partners. During this step, management gains an understanding of the strengths and weaknesses
of each channel. Management can then take corrective action to ensure efficient performance of
the channel.

The success of a channel and its efficiency are determined by the efficiency of channel
intermediaries in delivering goods and services to customers and the quality of services offered
in the process. Developing a comprehensive marketing plan that provides clear and concise
direction about marketing activities and strategy is critical to the organization's success.
CONCLUSION
The performance of a channel can be measured across multiple
dimensions. The parameters that are measured usually are effectiveness,
efficiency, productivity, equity and profitability of the channel While
channel efficiency emphasizes controlling costs incurred by
intermediaries while performing channel functions, channel productivity
is concerned with maximizing outputs for a given level of inputs.

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