Distribution Channels: Functions

• Channels of distribution act as the path products take from production to consumption.
• This creates connections between producers and consumers.
• Utilities of time, place, and possession are created through distribution channels.
• They bridge the production to consumption gap.

Functions of Distribution Channels

• Sorting involves middlemen gathering goods from various sources that differ in quality, size, nature, color, etc.
• Intermediaries sort goods into homogeneous groups based on quality and nature.
• Accumulation involves gathering goods into larger homogeneous stocks to maintain a continuous flow.
• Allocation is breaking homogeneous stock into smaller marketable portions.
• Assorting is when middlemen procure a variety of goods from different sources and deliver customer-desired combinations.
• Retailers collect a variety of consumer goods and deliver them to households.
• Product promotion includes middlemen advertising products and conducting sales, by way of demonstrations and special displays.
• Negotiation involves middlemen negotiating and reaching agreements on price and other terms of sale.
• Risk-taking is when middlemen bear the risk of changes and damage during transit, theft, spoilage, and destruction.

Types and Levels of Channels

• A distribution channel links producers and consumers with intermediaries functioning between them.
• The number of intermediaries determines the length or levels of a channel.

Direct Channel/Zero Level

• A direct channel of distribution makes goods available to consumers directly from the manufacturer, without intermediaries.
• Examples include mail order selling, Internet selling, selling through own sales force, and own retail outlets like Bata, McDonald's, and Eureka Forbes.

Indirect Channels

• Indirect channels use one or more intermediaries to make goods available to consumers.
• Indirect channels include one-level, two-level, and three-level channels.

One Level Channel

• The intermediary is the retailer, where the firm supplies products directly and the retailer sells to customers.
• Maruti Udyog which sells its cars through approved retailers is an example.

Two Level Channels

• Manufacturers sell to one or more retailers who then sell to consumers.
• This is a commonly adopted distribution network for most consumer goods like soaps, oils, clothes, rice, and sugar.

Three Level Channels

• The longest distribution channel adds another middleman for a total of three intermediaries: agents, wholesalers, and retailers.
• Manufacturers use selling agents or brokers who connect them with wholesalers and then retailers.

Factors Determining Channel Choice

• Choosing the right distribution channel is essential and depends on various factors.
• These factors include product-related, market-related, company-related, competitive, and environmental factors.

Product Related Factors

• Industrial products are technical, expensive, and purchased by few customers, requiring a direct channel.
• Consumer products are standard and easily sold through intermediaries.
• Perishable products like fruits, vegetables, and dairy are best sold through shorter channels.
• Non-perishable products like soaps and toothpaste require longer channels.
• High unit value products utilize direct channels, while less costly products are sold through longer channels.

Market Related Factors

• In a consumer market, longer channels are used, whereas, in an industrial market, shorter channels are preferred.
• Shorter channels are used when the number of buyers is small
• Indirect channels are required for broad markets.
• Direct selling can be used when buyers are concentrated; middlemen are needed for scattered customers.
• With consumer products, a large number of intermediaries may be used.
• Direct channels may be used if order size is large.

Company Related Factors

• A company with a high amount of funds can create its own channels
• Financially weaker companies will need to depend on middlemen
• Companies that require a tight control will prefer direct channels
• Use indireect management if the company desires less control
• If the management has sufficient distribution knowledge, it may prefer direct selling.
• Firms lacking sufficient knowledge will have to depend on middlemen.

Competitive Factors

• Channel choice is affected by channels selected by competitors in the same industry.
• The other firm may select a similar channel.
• Channels used by competitors may be avoided.

Environmental Factors

• Environmental factors include economic conditions and legal constraints.
• Marketers tend to use shorter channels to distribute their goods in a depressed economy.