A channel of distribution
or trade channel is defined as the path or route along which goods
move from producers or manufacturers to ultimate consumers or
industrial users. In other words, it is a distribution network through
which producer puts his products in the market and passes it to the
actual users. This channel consists of :- producers, consumers or
users and the various middlemen like wholesalers,selling agents and
retailers(dealers) who intervene between the producers and consumers.
Therefore,the channel serves to bridge the gap between the point of
production and the point of consumption thereby creating time, place
and possession utilities.
A channel of distribution consists of three types of flows:-
- Downward flow of goods from producers to consumers
- Upward flow of cash payments for goods from consumers to producers
- Flow
of marketing information in both downward and upward direction i.e.
Flow of information on new products, new uses of existing products,etc
from producers to consumers. And flow of information in the form of
feedback on the wants,suggestions,complaints,etc from consumers/users
to producers.
An
entrepreneur has a number of alternative channels available to him for
distributing his products. These channels vary in the number and types
of middlemen involved. Some channels are short and directly link
producers with customers. Whereas other channels are long and
indirectly link the two through one or more middlemen.
These channels of distribution are broadly divided into four types:-
- Producer-Customer:-
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.
- Producer-Retailer-Customer:-
This channel of distribution involves only one middlemen called
'retailer'. Under it, the producer sells his product to big retailers
(or retailers who buy goods in large quantities) 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.
- Producer-Wholesaler-Retailer-Customer:-
This is the most common and traditional channel of distribution.
Under it, two middlemen i.e. 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 of wholesalers. This is mostly used for the
products with widely scattered market.
- Producer-Agent-Wholesaler-Retailer-Customer:-
This is the longest channel of distribution in which three middlemen
are involved. 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 distribute 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.
An entrepreneur has to
choose a suitable channel of distribution for his product such that
the channel chosen is flexible,effective and consistent with the
declared marketing policies and programmes of the firm. While
selecting a distribution channel, the entrepreneur should compare the
costs,sales volume and profits expected from alternative channels of
distribution and take into account the following factors:-
- Product Consideration:-
The type and the nature of products manufactured is one of the
important elements in choosing the distribution channel. The major
product related factors are:-
- Products of low
unit value and of common use are generally sold through middlemen.
Whereas,expensive consumer goods and industrial products are sold
directly by the producer himself.
- Perishable
products; products subjected to frequent changes in fashion or style
as well as heavy and bulky products follow relatively shorter routes
and are generally distributed directly to minimise costs.
- Industrial
products requiring demonstration, installation and aftersale service
are often sold directly to the consumers. While the consumer products
of technical nature are generally sold through retailers.
- An
entrepreneur producing a wide range of products may find it economical
to set up his own retail outlets and sell directly to the consumers.
On the other hand, firms producing a narrow range of products may
their products distribute through wholesalers and retailers.
- A new product needs greater promotional efforts in the initial stages and hence few middlemen may be required.
- Market Consideration:-
Another important factor influencing the choice of distribution
channel is the nature of the target market. Some of the important
features in this respect are:-
- If the market for
the product is meant for industrial users, the channel of distribution
will not need any middlemen because they buy the product in large
quantities. short one and may as they buy in a large quantity. While
in the case of the goods meant for domestic consumers, middlemen may
have to be involved.
- If the number
of prospective customers is small or the market for the product is
geographically located in a limited area, direct selling is more
suitable. While in case of a large number of potential customers, use
of middlemen becomes necessary.
- If the
customers place order for the product in big lots, direct selling is
preferred. But,if the product is sold in small quantities, middlemen
are used to distribute such products.
- Other Considerations:-
There are several other factors that an entrepreneur must take into
account while choosing a distribution channel. Some of these are as
follows:-
- A new business firm
may need to involve one or more middlemen in order to promote its
product, while a well established firm with a good market standing may
sell its product directly to the consumers.
- A small firm
which cannot invest in setting up its own distribution network has to
depend on middlemen for selling its product. On the other hand, a
large firm can establish its own retail outlets.
- The
distribution costs of each channel is also an important factor because
it affects the price of the final product. Generally,a less expensive
channel is preferred. But sometimes, a channel which is more
convenient to the customers is preferred even if it is more expensive.
- If the demand
for the product is high,more number of channels may be used to
profitably distribute the product to maximum number of customers. But,
if the demand is low only a few channels would be sufficient.
- The nature and
the type of the middlemen required by the firm and its availability
also affects the choice of the distribution channel. A company prefers
a middlemen who can maximise the volume of sales of their product and
also offers other services like storage, promotion as well as
aftersale services. When the desired type of middlemen are not
available, the manufacturer will have to establish his own distribution
network.
All
these factors or considerations affecting the choice of a distribution
channel are inter-related and interdependent. Hence, an entrepreneur
must choose the most efficient and cost effective channel of
distribution by taking into account all these factors as a whole in the
light of the prevailing economic conditions. Such a decision is very
important for a business to sustain long term profitability.
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