Distribution Channels: Design, Selection, and Management

Posted on Nov 29, 2024 in Economy

Intermediaries

Product ownership transfer from developers to consumers is crucial. Distribution ensures product reach to the target market, involving sales arrangement, promotion, storage, and financial risk management. Brokers, non-profit entities, facilitate product purchase and flow. Intermediaries hold products or aid ownership transfer.

Classification of Intermediaries

1) Traders: Obtain product ownership.

  • Retailers: Buy in bulk, sell individually for personal use. Offer diverse products, competitive pricing, and shared promotions.
  • Wholesalers: Buy and sell large quantities to retailers, businesses, and institutions.

2) Non-Traders: Manage product transfer without ownership (e.g., realtors, travel agencies).

Importance of Intermediaries

Intermediaries enhance distribution efficiency and reduce costs. Direct manufacturer-consumer interaction is rare. They act as purchasing agents for customers and sales specialists for suppliers, offering storage and market knowledge.

Channels of Distribution

A structure of interdependent businesses and organizations moving products from origin to consumer. It involves individuals and companies transferring product ownership.

Design of Distribution Channels

Companies need channels that meet customer needs and provide a competitive advantage. The design involves:

  1. Specify the Role: Align with overall marketing strategy.
  2. Select Channel Type: Direct or indirect, using intermediaries.
  3. Determine Intensity: Number of intermediaries in a territory.
  4. Select Specific Members: Choose companies based on market, product, and compatibility.

Types of Channels

  • Direct: Producer to consumer.
  • Indirect: Producer to intermediaries to consumer.

Main Distribution Channels

1) Consumer Goods

  • Direct Channel (Producer – Consumer)
  • Retailer Channel (Producer – Retailer – Consumer)
  • Wholesale Channel (Producer – Wholesaler – Retailer – Consumer)
  • Producer – Agent – Retailer – Consumer
  • Agent/Broker Channel (Producer – Agent – Wholesaler – Retailer – Consumer)

2) Industrial Goods

  • Direct Channel (Producer – Industrial User)
  • Industrial Distributor (Producer – Distributor – Industrial User)
  • Agent/Broker Channel (Producer – Agent – Industrial User)
  • Agent/Broker – Dealer (Producer – Agent – Distributor – Industrial User)

3) Service Distribution

  • Producer – Consumer
  • Producer – Agent – Consumer

4) Multiple Channels: Using various channels for broader market coverage.

5) Non-Traditional Channels: Differentiate from competitors.

6) Reverse Channels: Consumer to manufacturer (e.g., repairs, recycling).

Vertical Marketing Systems

Coordinated channels to improve efficiency and effectiveness. Achieved through:

  1. Common ownership
  2. Contracts
  3. Market power

Types of Vertical Systems

  • Corporate
  • Contractual (Wholesaler-sponsored, retailer cooperatives, franchises)
  • Administered

Factors Affecting Channel Selection

  • Market factors (type, number of buyers, geographic concentration, order size)
  • Product factors (unit value, perishability, technical nature)
  • Intermediary factors (services, availability, attitudes)
  • Company factors (control desire, services offered, experience, financial resources)

Intensity of Distribution

  • Intensive: Maximum market coverage.
  • Selective: Limited number of dealers.
  • Exclusive: Few dealers in a given area.

Conflict and Control in Distribution Channels

Conflicts arise from differing goals and control struggles. Management involves mitigating conflict and increasing control.

Types of Conflict

  • Horizontal: Between firms at the same level.
  • Vertical: Between producer and wholesaler or retailer.

Managing Conflict

  • Improve internal operations.
  • Provide management assistance.
  • Form voluntary chains.
  • Create brands.

Channel Control

Ability to influence behavior. Sources include expertise, premises, and sanctions.

Legal Considerations

Control methods are subject to legal restrictions, including exclusive marketing, restrictive covenants, refusal to distribute, and exclusive territories.