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5 CHANNELS OF DISTRIBUTION
You are aware that while a manufacturer of a product is located at one place, its consumers
are located at innumerable places spread all over the country or the world. The manufacturer
has to ensure the availability of his goods to the consumers at convenient points for their
purchase. He may do so directly or, as stated earlier, through a chain of middlemen like
distributors, wholesalers and retailers. The path or route adopted by him for the purpose
is known as channel of distribution. A channel of distribution thus, refers to the pathway Notes
used by the manufacturer for transfer of the ownership of goods and its physical transfer to
the consumers and the user/buyers (industrial buyers).
Stanton has also defined it as “A distribution channel consists of the set of people and firms
involved in the transfer of title to a product as the product moves from producer to ultimate
consumer or business user”. Basically it refers to the vital links connecting the manufacturers
and producers and the ultimate consumers/users. It includes both the producer and the
end user and also the middlemen/agents engaged in the process of transfer of title of
goods.
Primarily a channel of distribution performs the following functions:
(a) It helps in establishing a regular contact with the customers and provides them the
necessary information relating to the goods.
(b) It provides the facility for inspection of goods by the consumers at convenient points
to make their choice.
(c) It facilitates the transfer of ownership as well as the delivery of goods.
(d) It helps in financing by giving credit facility.
(e) It assists the provision of after sales services, if necessary.
(f) It assumes all risks connected with the carrying out the distribution function.
M C
Manufacturer Consumers
M R C
Manufacturer Retailer Consumer
In this case, there is one middleman i.e., the retailer. The manufacturers sell their goods
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. It is also used
for distribution through large scale retailers such as departmental stores (Big Bazaar,
Spensors) and super markets.
(c) Two stage channel of distribution
M W R C
Manufacturer Wholesaler Retailer Consumer
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.
(d) Three stage channel of distribution
M A W R C
Manu-
facturers Agents Wholesalers Retailers Consumers
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.
MODULE-5
112 Senior Secondary
20.6 FACTORS AFFECTING THE CHOICE OF DISTRIBUTION CHANNEL
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
lesser profits for the manufacturer and higher price from the consumer. Hence, the manufacturer has to be
careful while finalising the channel of distribution to be used. He should pay attention to the following
factors while making his choice.
(b) Nature of Market: There are many aspects of market which determine the choice of channel of
distribution. Say for example, where the number of buyers 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.
(b) 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. As against this in case of items like industrial
machinery, having large value and involving specialised technical service and long negotiation period,
direct sale is preferred.
(c) 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.
(d) 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.
At its core, distribution strategy should be based on your ideal customer — how does the average
client buy goods? How could you, as a producer, make the purchasing process easier? Is it an extensive
Business Studies 113
purchase where buying the item directly from the manufacturer could be worth the potential hassle, or is it a
routine item where the customer would rather receive the product quickly and on-demand through a retailer?
The role that an item will play in a client’s life and the type of purchase decision associated with a product
are important aspects to consider when determining a strategy.
As mentioned above, the two main types of distribution strategies are direct and indirect. There are also more
nuanced types of distribution that fall into these categories — intensive, selective and exclusive distribution.
But what exactly do these methods entail? Let’s examine some of the factors that go into each of these
cutting edge distribution strategies so you can determine which practice is best for your primary customer
base.
Direct Distribution
Direct distribution is a strategy where manufacturers directly sell and send products to consumers. There are
a few different ways to implement this method. Some organizations may opt to take a more modern approach
and use an e-commerce website where users can make a purchase online. This is an effective option for
companies with a client base that’s moderately knowledgeable about technology, requests a specific solution
to meet needs or is devoted to a particular brand.
Another direct distribution method is through catalogs or phone orders. This option may target an older
customer base or users in specific industries that are attuned to placing orders this way.
One important factor to consider when implementing a direct distribution strategy is the amount of
investment required. For example, manufacturers will need to add warehouses, vehicles and delivery staff to
their portfolio to effectively distribute goods on their own.
Indirect Distribution
The term “middleman” often gets a bad reputation, but in the case of distribution, these organizations can be
helpful in getting goods to consumers. Indirect distribution strategies involve intermediaries that assist in the
logistics and placement of products so that they reach customers swiftly and in an optimal location based on
consumer habits and preferences.
We will discuss the different types of intermediaries and their specific benefits later in this article, but
business needs, targeted clients and type of product are typically behind the reasoning for using this strategy.
Low commitment or routine purchases are often something that customers grab absentmindedly in a
department store without any specific brand loyalty. A tube of toothpaste is a good example of a routine
purchase. For these types of products, an indirect distribution method that places a large number of items in
multiple retail locations may be a company’s best bet.
Intensive Distribution
Products are put into as many retail locations as possible with the intensive distribution strategy. For
example, gum is a product that typically uses this strategy. You can find gum at gas stations, grocery stores,
in vending machines and at retail locations like Target. This method hinges on making a large number of
goods available in multiple locations. These items don’t typically necessitate an involved purchase decision
where the customer does research before making a purchase. Rather, these items are routine purchases that
involve very minimal effort to sell.
Exclusive Distribution
When manufacturers opt for exclusive distribution, they make a deal with a retailer to sell a product through
that specific storefront only. Businesses may also sell goods directly through their own branded stores, which
is another example of exclusive distribution. For example, customers can’t buy a Lamborghini at any location
— they need to go to a Lamborghini dealership to purchase new luxury vehicles.
An example of an exclusive distribution deal where a manufacturer and a retailer teamed up is the previous
agreement that Apple had with AT&T in distributing iPhones. This agreement caused people to forgo their
phone plans with other companies so they could get their hands on this exclusive product. This distribution
strategy works especially well for highly coveted, exclusive items.
114 Senior Secondary
Selective Distribution
Selective distribution is a middle-ground option between intensive and exclusive distribution. With this
strategy, products are distributed in more than one location, but not as many as with an intensive distribution
strategy. For example, clothing from different brands may be offered selectively. A brand like Gucci may
choose to distribute its items to its own stores in addition to a few selected department stores rather than
placing its products in a range of locations such as Walmart or Target. This can help craft an implicit high-
end brand message while also increasing the opportunity for shoppers to purchase one of its products.
What Are Some Technologies that Aid in Distribution?
As technology becomes smarter, more and more solutions arise to streamline the distribution process. One of
the main ways to optimize the distribution workflow is to employ a distribution software. Whether you’re a
manufacturer conducting your own distribution or a distributor looking to improve operations, a software
solution can be a beneficial option. Here are some of the new technologies included in distribution software
that can positively influence your business.
Automation
Automation capabilities can increase the speed at which work is completed and free up employee time. This
ability is offered for various tasks, and specific functionality differs based on the distribution software vendor
that you go with. An example of how this might look in practice is through the automatic assignment of items
to a vehicle based on where the other materials in that vehicle are going and its planned route.
Internet of Things (IoT)
The internet of things is especially helpful in increasing productivity in the distribution process. Many
distribution systems include RFID tracking that enables users to scan items and track their locations
geographically and within the workflow. This helps users visualize the movement of inventory in real time.
Cloud-Based System
The proliferation of cloud-based distribution software enables users to access solutions anytime and
anywhere. This is especially helpful in the distribution industry where employees may need to look at data
not just when they’re seated at their desks, but also when they’re working hands-on in a distribution center.
This option enables flexibility and accessibility.