Distribution Channel

Definition
 “ A channel of distribution or marketing channel is
the structure of intra company organisation units
and extra company agents & dealers, wholesale and
retail through which a commodity, product or
service is marketed”
American Marketing Association

 “A distribution channel is a set of independent

organizations (intermediaries) involved in the
process of making a product or service available to
the consumer or business user”
Philip Kotler
 Role of Intermediaries

 Greater efficiency in making goods available to

target markets.

 Intermediaries provide
◦ Contacts
◦ Experience
◦ Specialization
◦ Scale of operation
◦ Match supply and demand
 Facilitate the search process of buyers &
sellers
 Sorting
 Making transactions routine
 Middlemen- Why do we need them?
Economy of efforts

C1 M1 C1 M1

C2 M2 C2 R M2

C3 M3 C3 M3

Total no. of contacts = 9 Total no. of contacts = 6

 Flows in channels
Possession Possession
M
A Title Title
M
N C
I
U U
Promotion D Promotion
F S
D
A T
Order L Order
C O
E
T M
Payment M Payment
U E
A
R R
Finance N Finance
E
R
Negotiation Negotiation
Types of Channel Levels
 Channel levels
(in case of consumer marketing)
Manufacturer

Wholesaler Wholesaler

Zero One Two Three

tier/level tier/level tier/level Jobber tier/level

Retailer Retailer Retailer

Customer
 Channel levels
(in case of industrial marketing)
Manufacturer

Manufacturer’s Manufacturer’s
rep Sales branch

Industrial
distributor

Customer
Functions

 Facilitating the strategic aim

 Market coverage & product availability
 Market development
 Technical support
 Market information
 Inventory management
Channel Participants
 All Participants

Yes Do No
they negotiate

Non Member Participants

Member participants (Facilitating Agencies)
(Contactual Org.)

Transportation Storage Advertising

Firms Firms Agency
Producers and Intermediaries
Manufacturer
Financial Insurance Research
Final Users Firms Firms Agency

Consumer Industries Wholesale Retail

Intermediaries Intermediaries
 All Wholesalers

Independent Manufacturer
Middlemen Owned

Agents, Brokers Manufacturer’s

Merchant
& Sales Branches
wholesaler
Commission Merchants and offices
Merchant wholesaler

 Buy large quantities

 Take title
 Store
 Resell to retailers, industries or other
wholesalers
Agents, Brokers &
Commission Merchants

 Do not take title

 Negotiate on the behalf of their client
 Take commission
Manufacturer’s Sales Branches and
offices

 Owned and operated by the

manufacturer

 physically separated from manufacturing

plants
Agent Versus Distributor/Wholesaler

Broker/Agent Distributor

•A representative of •A customer of the

the manufacturer manufacturer
•Not financially •Buys for own account
involved
•The agent works for •Marks up supply price
you and is paid by you
in an agreed way
 Broker/Agent Distributor/ Wholesaler

Not normally responsible for after Responsible for after sales

sales service service and in some cases
warranty and guarantee issues

No control of resale price Controls selling price

Does not accept credit risk for Accepts credit risk of buyers
principal
Channel Intensity

It refers to the number of intermediaries

present in a distribution or marketing
channel.
Types:
 Intensive distribution
 Exclusive distribution
 Selective distribution
Factors influencing channel design
Product Considerations

 Price of Product
 Weight
 Standardization
 Product Nature
 After Sale Services
 Technical aspects
Market Considerations

 Market Size

 Nature of Customers

 Location of Buyers
Consumer Considerations

 Number of Customers

 Quantity to be Purchased
Middlemen Considerations

 Availability

 Cost

 Effect on Sales

 Attitudes of Middlemen
Manufacturer’s Consideration

 Financial Position

 Volume of Production

 Control over Distribution

Factors Related to Competition

 Intensity of Competition

 Company’s Competitive Position in

Market
Recruiting channel members

 Recruiting as a continuous process

 Screening
 Tips for effective management of
channel partners

 Understand purchase behavior of end users

 Develop a clear vision
 Gain expertise on distributor’s business
 Gain better insight on distributor’s business
 Involve distributors in planning
 Develop distributor assistance program
Evaluating channel members

 Distributor’s experience
 His capability of covering market
 Ability to manage finances & inventory
 His share of market in assigned area
 Annual inventory turnover
 Financial condition
 Distributor’s warehousing
Channel Integration
Channel Integration involves streamlining
the distribution process in terms of
physical and information efficiency by
establishing channel partnerships and
strategic alliances with channel members
at all levels of the channel hierarchy.
Vertical Marketing Systems

 It is the degree to which a firm owns its

upstream suppliers and its downstream
buyers.

 Carnegie Steel Company owned mills

where the steel was manufactured, mines
where the iron ore was extracted, coal
mines that supplied the coal, ships and
railroads that transported the material,
etc.
 FORWARD BACKWARD
INTEGRATIO INTEGRATIO
N N
 Reduce transportation cost
 Improve supply chain coordination
 More opportunities to differentiate by
means of increased control of inputs
 Capture upstream and downstream
profits

 Making sure that inputs will match

outputs at all levels
 Developing new competencies may
compromise existing competencies
 Horizontal Marketing System

 Horizontal Integration is the addition of

other business activities at the same level of
the value chain.

 Examples: – The Standard Oil Company

buying 40 refineries – An automobile
manufacturer buying a sport utility vehicle
manufacturer – A radio station that also
owns a newspaper and magazine
 Economics of scale: Selling more of the
same product in different parts of the
world

 Economics of Scope: Sharing resources

common to different products. “Synergies”

 Increased Market Power

 Reduction in cost
Managing Channel Conflict
 A channel conflict may be defined as “A
situation in which one channel member
perceives another channel member(s) to
be engaged in behavior that prevents it
from achieving its goals”.
 Conflict is opposition, disagreement or
discard among the organizations.
 Stages of Conflict

Latent Conflict: Some amount of discord

exists but does not affect the working or
delivery of customer service objectives.
 Disagreement could be on roles,
expectations, perceptions, communication.
Perceived Conflict: Discords become
noticeable – channel partners are aware
of the opposition.
 Channel members take the situation in
their stride and go about their normal
business.
 No cause for worry but the opposition
has to be recognized.
Felt Conflict: Reaching the stage of worry,
concern and alarm.
 Also known as ‘affective’ conflict.
 Parties are trying to outsmart each other.
 Causes could be economical or personal.
 Needs to be managed effectively and not
allowed to escalate.
Manifest Conflict: Reflects open
antagonistic behavior of channel partners.
 Confrontation results.
 Initiatives taken are openly opposed
affecting the performance of the channel
system.
 May require outside intervention to
resolve.
 Pre Contractual Conflicts

 Post Contractual Conflicts

 Conflict management
techniques

Causes of Level of Outcomes

Conflict conflict of conflict

Competing roles
Vertical
Clashes over
domain Horizontal

Different Multi- channel

perception
 Sources of Conflict
 Competing goals
◦ Margins, unit sales, expense control, inventory,
incentives, promotions, allowances, volumes and
thresholds, market penetration objectives.
◦ Goal Incompatibility

 Perceptions of reality
◦ Role Ambiguity
◦ Lack of communication
◦ Expectation differences

 Domain of control
◦ Product Range
◦ Population & territory coverage
Levels of Conflict

Vertical channel Conflict : It occurs

between channel members operating at
different levels within the same channel
structure.
 Some common reasons for vertical
conflict are

 Dual distribution i.e. manufacturers may

bypass intermediaries and sell directly to
consumers and thus they compete with the
intermediaries.

 Over saturation, i.e. manufacturers

permit too many intermediaries in a
designated area that can restrict, reduce
sales opportunities for individual dealer and
ultimately shrink their profits.
 Partial treatment, i.e. manufacturers
offer different services and margins to the
different channels members even at same
level or favor some members.

 New channels, i.e. manufacturers develop

and use innovative channels that create
threat to establish channel participants.
 No or inadequate sales support and
training to intermediaries from the
manufacturers.

 Irregular
communication, non co-
operation and rude behavior with the
channel members.
 Stipulation of ordering in advance, high
stock holding and dumping the stock at
the intermediaries.

 Delays in delivering the products or

sometimes dispatching the products
without confirmed order.

 Refusal to replace or take back the goods

damaged in transit. Non co-operation in
replacement of faulty goods, repairing
services, and installations.
 No co-operative advertisements.
Manufacturers do not share any expenses
of advertisements.

 No or inadequate credit offered to the

intermediaries. Margins / commissions are
not sufficient and there is no periodic
revision of commission and other terms
 Intermediariespromote and sell
more private labels than promoting
the manufacturer’s brands.

 Intermediariesencourage customers
to switch to private labels /
competitive products.

 Intermediaries
carry competing lines
and give more showroom space.
 Nosupport in the manufacturer’s
promotional efforts.

 Intermediaries
fail to get the
expected / promised efforts.

 Intermediaries
fail to collect payment
from market in stipulated time.
Horizontal conflicts
 Horizontal conflicts are the conflicts
between the channel members at the
same level, i.e. two or more retailers, etc.

 These conflicts can offer some positive

benefits to the consumers. Competition
or a price war between two dealers or
retailers can be in favor of the consumers.
Reasons behind horizontal conflicts

 Price-off by one dealer / retailer can

attract more customers of other
retailers.

 Aggressiveadvertising and pricing by

one dealer can affect business of
other dealers.
 Extra service offered by one dealer /
retailer can attract customers of others.

 Crossing the assigned territory and selling

in other dealers / retailers / franchises
area.

 Unethical practices or malpractices of

one dealer or retailer can affect other and
spoil the brand image.
Multi-channel Conflict
 Manufacturers can bypass the wholesalers
and sell directly to the large retailers.
Conflict becomes more intense in this
case as the large retailers can enjoy more
customers and so the profit due to
offering more variety and still economical
prices, which is possible due to a volume
purchase.
Managing Conflict
 Negotiation
 Adoption of super-ordinate goals
 Persuasive Mechanism
 Political Strategies
Diplomacy
Mediation
Arbitration
 Co-optation
Role of Leadership in resolving conflicts

 Reward Power
 Coercive Power
 Expert Power
 Referent Power
 Legitimate power