Understanding Distribution Channels: Functions, Types, and Key Factors

Channels of Distribution

One of the important problems of marketing is the distribution of goods & services to the right place, person & the right time. Manufacturers often find it difficult to decide about the effective distribution system. The channel of distributions refers to the group of intermediaries, which perform the distribution functions.

Definition of Channels of Distribution

According to Philip Kotler, “The distribution is the set of all firms & individuals that assist in the transferring the little of goods & services as they move from producers to customers.”
It is also defined as “The root through which goods move from the place of production of the place of consumption.”

Functions of the Channels

Channels of distribution helps, the goods & services to move from the place of production to the place of consumption, hence they create place utility.
Goods are brought by the channels when they are needed. Hence, they create time utility.
A channel reduces complexity in the distribution system
Inclusion of channel reduces the financial burden of the producers
They provide various services such as standardization, grading, etc.
They supply the market information to the producers
They help producers in promoting their sales.

Types of Channels

Zero-level channel (producer to consumer): It is also called as direct marketing or direct selling. This channel consists of the producer who directly sells his products to the ultimate consumers. This is the shortest, simplest, & cheapest form of distribution. Producers are benefited by increased profit, whereas consumers are benefited by reduced price. This is possible because it eliminates the middleman completely. With the development of sophisticated & efficient retailing like supermarkets, chain-stores, automatic selling machine is financially sound follow this channel of distribution. For products like jewellery & industrial goods like machinery, this is the best channel.
One-Level Channel (Producers→ Retailers→ Consumers or producers →Wholesalers→ Consumers): This is a short channel where the manufacturer may himself perform some of the wholesaler. This is considered to be the best channel as it eliminates some of the marketing intermediaries & at the same time gets advantages of inclusion of retailers. In case of perishable goods, this is the best channel. When there is large scale promotion, inelastic demand & when manufactures are financially sound this channel is preferred.
Two-Level Channel (Manufactures →Wholesalers →Retailers →Consumers): This is the traditional channel. It is more useful in the case of buyers, sellers, & manufactures who operate in small scale. The manufacturer sells his products in large quantities to a wholesaler who in turn sells in small quantities to retailers & finally retailers sell to ultimate consumers. Products which have low unit value & which are purchased frequently may be distributed through this channel.
Three Level Channel (Manufactures→ Wholesalers →Agents Retailers →Consumers): In this method manufactures appoint agent such as consignees to sell their products. It is preferable for exporters or MNCs.

Factors Affecting the Selection of Channel

Selection of a particular channel depends on various factors.

Market Factors:

Nature of the market: When manufacturer produce consumer goods, the channel will be lengthy because the market will be large & spread throughout the country. Moreover, demand may be inelastic. In case of industrial goods, he can sell directly because buyers are concentrated in few places.
Number of Companies: In case if buyers are limited in number, the manufacturer can directly sell to them. If consumers are scattered the manufacturers should go for larger channel.

Product Factor:

Unit Value of the Product: Lower the value of the product longer will be the channel. Eg: Matchboxes, salt, etc.
Perish ability: In case of perishable products, the shortest channel should be used because they should be sold as quickly as possible. Eg: Fruits, Vegetables, Milk, etc.
Nature of Product: If the product is highly technical in nature, the manufacturer sells it to the buyers. Eg: Computers, because such products require before & after sales services, which wholesalers, & retailers cannot provide. In case of consumer goods, which are technical in nature he may appoint sales agent. Eg: Motor Vehicle, TV, etc.

Company Factors:

Finance: If the company is financially sound, it can sell its products directly to its consumers by maintaining its own warehouse, retail shops, etc.
Management Capability: If the management is capable of handling the distribution function efficiently, it can prefer a shorter channel.

Methods of Distribution

Intensive Distribution: It is a method of selling whereby a manufacturer distributes his products through a large number of retailers & in, as many places as possible. In this case, retailers control the distribution system. Usually, consumer’s necessities are sold through this system.
Selective Distribution: In this case, manufacturer sells their products through few retailers. Even though this method is suitable to sell all products, it is usually followed in case of industrial goods & consumer shopping & luxury goods. Ex: Motor vehicle.
Exclusive Method of Distribution: In this case, the manufacturer sells his products only through a particular wholesaler or retailer. In other words, the manufacturer gives him the exclusive rights to distribute the products such a distributor is usually prohibited in dealing to the competitor’s product.

Types of Channel Members

A channel includes many middlemen. The term middlemen mean those individuals or institutions, which assists a producer in the transfer of ownership of goods to consumers. Following are some of the various kinds of middlemen:

Agents: These are the middlemen assist the buyers & the sellers in buying & selling of the goods without taking the ownership.
Brokers: These are the agents whose main function is to bring into contact between buyers & sellers. Their powers are limited as they cannot fix price, terms of sale, etc.
Wholesalers: The wholesaler is a middleman who buys from the producer directly & sells it to the retailers on a small scale for the purpose of resale.

Note - Discount House: It is a kind of retail business dealing with consumer durables competing on the basis of price appeal with low margin & minimum consumer services.

Is Elimination of Middlemen or are middlemen necessary in the channels?

The channels of distribution are the means through which goods are passed on to consumers. In the process thy look on various marketing functions like financing, transportation, grading, standardization, risk-bearing, etc. to perform these functions they have to incur losses. Hence, the services of middlemen will have to be paid either by the manufacturer or the consumer. Many manufacturers are trying to eliminate middlemen and have opted for direct selling because of improvement in retail techniques like automatic selling machines, telemarketing etc. It should be noted that even though Manufacturers can eliminate middlemen, they can’t eliminate their functions. In other words, functions performed by them must be taken over by the producers if the goods are to be made available in the market. Manufacturers try to eliminate middlemen to perform the functions of middlemen at the lowest possible cost and to serve the consumer best.

Arguments in Favor of Middlemen

If there were no Middlemen, it would have been difficult for the producers and consumers to meet personally to buy and sell. Hence inclusion of middlemen reduces the complexities of the distribution function.
Many producers do not have the resources to sell their products directly to the consumers.
They perform some of the important marketing functions like standardization, grading, transportation, warehousing, etc this makes producers concentrate on their production activities.
It is the Middlemen who help in stabilizing the prices
It brings down the cost of production of some of the functions of the producers as they are taken over by the middlemen.
As they purchase on large scale, they also bring down the storage cost
They provide important marketing information to the producers.
They create place and time utilities.

Arguments in Against of Middlemen

They are considered as parasites that for one reason or another prevent the direct contact between producers and consumers. This mistakes producers ignorant of consumer’s grievances which result in customer dissatisfaction which may bring down the sale.
Middlemen also manipulate the economy. This misleads both the consumers and producers.
Middlemen are also referred to as cost escalators. In other words, they unnecessarily increase the price of the product.
They often dictate the terms of marketing. In fact, the term ‘Black Market’ was the creation of middle men.
They are also referred to as fair weather Friends. In other words, they only sell those products which give them maximum profits. They go on changing their Loyalties depending on the profitability.
In practice they do not perform any marketing function. They simply transfer ownership without shouldering any responsibility. To conclude, it can be said that many manufacturers regard middlemen as Evils. But, all of them can’t eliminate middlemen. Hence, they are considered as necessary Evil.

Practical Insight: A good distribution channel ensures products reach customers where and when they want them. Choosing the right channel (direct selling, retailers, online platforms, etc.) increases sales reach, reduces delivery costs, and improves customer satisfaction.

Sandeep Ghatuary

Finance & Accounting blogger simplifying complex topics.

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