Channels of distribution
Physical distribution means the transfer of goods and making it available at the right place in the right quantity and to the right people. It has two main aspects. First is the physical movement of goods from one place to another. Second, deciding the channel of distribution for that physical movement.
Channel of distribution means all the people who come together in helping and assisting in transfer of the title of goods and services from the producer to the consumer. These people are the middlemen such as wholesalers, retailers, agents, merchants, institutions etc. There are various benefits of the channels of distribution such as economies of efforts. The efforts can be saved as the work will be distributed over a large number of people. It helps in reaching large geographical areas where it would have been difficult for the producer to reach single handedly. They also bring efficiency in distribution.
There are various types of channels of distribution. They are described as under:
Based on the factors such as costs, geographical area to be reached, product type, the channel of distribution from these different channels of distributions can be selected.
- Direct channel
- Indirect channel
This channel is also known as zero level as it does not involve any middlemen in between the producer and the consumer. It is the simplest and the quickest channel of distribution. This channel is helpful for those producers who want to maintain a direct connection with the consumers. For example: ‘Bata shoes’ has its own outlets and this means that the producer is selling his products directly to the consumers without appointing and wholesaler or retailer in between. This helps in lowering the cost involved. Online selling or internet selling is the new form of direct selling or zero level channel of distribution.
The indirect channel of distribution involves people in between the producer and consumers. Depending on the number of middlemen these indirect channels of distribution can be classified as under:
One level channel
Producer – retailer – consumer: this channel of distribution involves the least number of middlemen i.e. single middlemen, a retailer. In this channel, the goods will be transferred from the producer to the retailer and then finally to the consumer. This channel is helpful in quick sales. As the chain is small. It also helps in covering wider area than the zero level channels. For example: the electronic goods of Sony and Panasonic are sold to retailers and then to the consumers without involving other middlemen in between.
Two level channel
Producer – wholesaler – retailer – consumer: this channel of distribution is most common which includes two middlemen i.e. wholesaler and retailer. The wholesaler takes the bulk quantities of the product from the producer and then sells in smaller quantities to the retailers. This helps in larger coverage of area for the product. For example: cloth market runs on this structure.
Three level channels
Producer – agent – wholesaler – retailer – consumer: this channel involves one more middlemen i.e. an agent or a broker. The agents help in reaching larger geographical areas as they contact different wholesalers. Different agents are appointed for different areas to make a greater reach.
Factors determining choice of channel
The choice of channel depends upon these factors:
Product related factors
Depending on the product, the channel of distribution should be chosen. When the products are very technical and complex such as industrial products then the shorter channels such as direct channels or channels with fewer middlemen such as one level can be chosen, so that a direct conversation can be done and the technicality and complexity can be explained. While the consumer products are not so technical and are standardized, they are even less bulky and do not involve huge price then the longer channels can be chosen so that they can reach more wide spread consumers.
Another category that should be considered is the perishable and non perishable products. The perishable products are the ones that can be rotten, decayed or become useless after some days. So the channel which can help in sending these products from the production place to consumer place should be chosen. These products include the fruits, vegetables etc. Non perishable products are for longer use and they can be distributed through longer channels of distribution. These longer channels of distribution will help in making a wide reach of these products such as utensils, grocery items etc.
It depends on the financial strength, cost involved and degree of control that the company wants on the channels. If the company is not having sufficient funds to start its own retail stores then it must go for the existing channel of distribution. While, when the company has good amount of money to invest in the retail store and the sales force then they can go for direct channel such as Bata shoes.
When the company chooses indirect channel of distribution then the price of the product may rise because of the middlemen’s earning in between, this may not be good for the affordability and image of the product. So the proper analyses should be done before choosing the product.
When the company wants more control over the distribution channel and want them to work according company norms then going for the direct retail stores that are company owned should be chosen.
The competitor’s strategy also plays a major role. When a competitor chooses some kind of channel, the firm may decide to either go with the same strategy or choose completely different channel which they think might be more effective. For example: a competitor may choose to sell the product through company owned retail stores, while, the company may decide to do personal, door to door selling.
The geographical scope plays a major role. The location of potential and actual buyers will help in determining the channel of distribution. Order size is also an important factor. This depends upon the demand of the product. The demand for convenience products is higher, that are used in daily life. While speciality products have less demand in the market.
The economic conditions, government’s laws and legal constraints play a major role. When the economy is depressed then the company jumps to sales of the product through shorter and direct channels to make more sales along with cutting the cost and make the product economical.