Distribution channels are networks of people and companies that work together to meet their goals. Each member has a specific role, and the channel works best when they work well together. But conflicts can happen, and it’s important to manage them to keep the channel working smoothly.
To create a good marketing channel, companies need to understand what their customers want and balance that with costs and preferences. Once the channel is designed, the company must choose the right members and ensure they are doing a good job.
Managing the channel involves agreeing on responsibilities and evaluating performance. Understanding how distribution channels work is important for successful marketing strategies.
Channel Design & Management Decisions In Marketing
Channel Behavior and Organization
Distribution channels are not merely groups of firms. Rather they can be described as complex behavioral systems in which people and companies interact to accomplish individual, company, and channel goals.
In some channel systems, firms interact informally, while formal interactions guided by strong organizational structures prevail in some channel systems.
Moreover, channel systems are not rigid. New types of intermediaries appear, and whole new channel systems emerge. Here we shall discuss channel behavior and how the members organize to perform the channel’s work.
Channel Behavior
A distribution channel is a group of firms joined for their common benefit. The channel members are interdependent.
For example, a Toyota dealer depends on the Motor Company to design cars that meet consumer needs. In turn, Toyota depends on the dealer to attract consumers, persuade them to buy Toyota cars, and service cars after the sale.
The Toyota dealer also depends on other dealers to provide good sales and service that will uphold the reputation of Toyota and its dealer body. The success of individual Toyota dealers depends on how well the entire Toyota distribution channel competes with the channels of other automobile manufacturers.
Each channel member has a role in the channel and specializes in performing one or more functions. The channel will be most successful when each member is assigned the jobs it can do best.
Because of the interdependence of channel members, all channel firms should work together smoothly. Channel members should understand and accept their roles, coordinate their goals and activities, and cooperate to attain overall channel goals.
However, individual channel members very often ignore such a broad spirit. Although channel members depend on one another, they often act in their short-run interests. They often disagree over the individual channel members’ goals and roles, generating channel conflict.
Channel conflict may occur on two lines-horizontal and vertical. Horizontal conflict occurs among firms at the same level of the channel.
For example, some Ford dealers in Chicago complained about other dealers in the city who stole sales from them by being too aggressive in their pricing and advertising or by selling outside their assigned territories.
Vertical conflict refers to conflicts between different levels of the same channel.
For example, General Motors came into conflict with its dealer some years ago by trying to enforce service, pricing, and advertising policies.
However, some conflicts in the channel may generate healthy competition, making the channel active and innovative. But sometimes, conflict may cause harm to the channels.
To ensure good performance of the channel, each channel member’s role must be specified, and channel conflict must be managed. Conflict management is attained through strong channel leadership, cooperation, and role assignment.
Channel performance will be better if it includes a firm, agency, or mechanism that has the power to assign roles and manage conflict.
Unlike large companies, the formal organization structure in distribution channels comprises independent firms. Traditionally, distribution channels did not have the leadership needed to assign roles and manage conflict. Of late, however, new types of channel organizations have emerged that provide stronger leadership and improved performance.
- Vertical Marketing Systems
- Horizontal Marketing Systems
- Hybrid Marketing Systems
Having reviewed its channel alternatives and decided on the best channel design, the company must implement and manage the chosen channel. Channel management warrants: selecting, motivating individual channel members, and evaluating their performance over time.
Selecting Channel Members
Attracting suitable intermediaries is very important to producers for successfully designing and maintaining channels of distribution.
But the task is not easy for all producers. Old producers with reputed brands find it easier to attract intermediaries, while new producers with relatively unknown brands may struggle to pull suitable intermediaries.
In selecting intermediaries, the company should be very clear about the characteristics of intermediaries.
Issues to be considered are channel members’ length of business, other lines carried, growth and profit record, cooperativeness, and reputation.
When intermediaries are sales agents, the company should evaluate the number and nature of other lines carried and the size and quality of the sales force.
When a retail store is to be selected as an intermediary seeking exclusive or selective distribution, the company should evaluate the store’s customers, location, and future growth potential.
Motivating Channel Members
Once selected, channel members must be continuously motivated to help to achieve the company’s goals.
Producers endeavor to find ways to gain intermediary cooperation. They often resort to positive motivators such as higher margins, special deals, premiums, cooperative advertising allowances, display allowances, and sales contests.
At other times they offer negative motivators, such as threatening to reduce margins, to slow down delivery, or end the relationship altogether. This approach should be discouraged as it ignores its distributors’ needs, problems, strengths, and weaknesses.
Farsighted companies try to build a long-term relationships with their distributors. It requires creating a planned, professionally managed, vertical marketing system that fulfills the needs of both the manufacturer and the distributors.
General Electric works closely with its smaller independent dealers to successfully sell the company’s products.
In managing its channel, a company must convince distributors that it will make a fortune by being part of an advanced vertical marketing system.
Evaluating Channel Members
The producer must continuously evaluate each channel member’s performance against standards such as sales quotas, average inventory levels, customer delivery time, treatment of damaged and lost goods, cooperation in company promotion and training programs, and service to the customer.
Intermediaries having excellent performance should be recognized and rewarded by the company. Intermediaries having unsatisfactory performance should be helped, if not possible, replaced.
A company may, from time to time, set new qualifications for its intermediaries and trim the weaker ones.
For example, when IBM introduced its PS/2 personal computers, it re-evaluated its dealers and allowed only the best ones to carry the new models.
Each IBM dealer had to submit a business plan, send a sales and service employee to IBM training classes, and meet new sales quotas.
Only about two-thirds of IBM’s 2,200 dealers qualified to carry the PS/2 models.4 Finally, manufacturers need to be attentive to their channel members. Treating channel members lightly may result in losing their cooperation or may even invite legal problems.
Channel Design Decisions
Designing a channel system requires analyzing consumer service needs, setting the channel objectives and constraints, identifying the major channel alternatives, and evaluating them.
Analyzing Consumer Service Needs
Decisions regarding designing a channel begin with the customer. Marketing channels can be conceived of as customer value delivery systems in which each channel member adds value to the customer.
It is well recognized that one company’s success depends not just on its performance but on how tactfully its entire channel competes with competitors’ channels. For example, Seiko is just one like in a customer value delivery system that includes dealers.
Even if Seiko makes the best watches globally, it will lose out to Rado or Tisso if these competitors have superior dealer networks.
Similarly, the best Seiko dealer worldwide cannot do well if Seiko supplies inferior watches. The company aims to design an integrated marketing channel system to deliver superior customer value.
Thus, the first step in designing the distribution channel is to identify the values consumers in various target segments want from the channel (such as location, means of communication, mode of delivery, and assortment.
It is accepted that the more decentralized the channel, the faster the delivery, the greater the assortment provided, and the more add-on services supplied, the greater the channel’s service level.
But providing the services the customers’ desires may not always be possible or feasible. The company and its channel members may lack the necessary resources and skills, and higher levels of service increase costs and prices, which the customers may not find agreeable.
The company must balance consumer service needs against costs and customer price preferences. Experience tells us consumers are often interested in lower service levels than higher prices.
Setting the Channel Objectives and Constraints
Channel objectives should be determined considering the desired service level of target consumers. A company can identify various segments desiring different levels of channel service and can then decide which segments to serve with what kind of channel.
Here, the company aims to minimize channel costs.
The company’s channel objectives are also influenced by product characteristics, company characteristics, marketing intermediaries, competitors’ channels, and environmental factors. Product characteristics significantly affect channel design.
For example, perishable products need more direct marketing to minimize delays and too much handling.
Company characteristics also influence channel design as the company’s size and financial condition determine which marketing functions it can handle itself and give to intermediaries.
The characteristics of intermediaries also influence channel design as they differ in their abilities to handle promotion, customer contact, storage, and credit.
In designing channels, a company must take into account its competitors’ channels. A company can intend either to compete with or avoid outlets used by its competitors.
Finally, environmental factors, such as economic conditions and legal constraints, affect channel design decisions.
For example, during a recession, marketers use shorter channels and cut down channel costs to keep the ultimate price as low as possible. Channel design decisions must be made within the provisions of the law.
Identifying Major Alternatives
After defining its channel objectives, a company should identify major channel alternatives in terms of types of intermediaries, several intermediaries, and the responsibilities of each channel member.
Types of Middlemen
A company has to locate the types of channel members available to maintain and operate its channel. For example, suppose a test equipment manufacturer has developed an audio device that detects poor mechanical connections in any machine with moving parts.
Company executives think this product would have a market in all industries where electric, combustion, or steam engines are made or used. This market includes aviation, automobile, railroad, food canning, construction, and oil.
The company’s current sales force is small, and the problem is reaching these different industries. The following channel alternatives might emerge from management discussion.
- Company sales force: Expand the company’s direct sales force. Assign salespeople to territories and contact all prospects in the area or develop separate company salesforces for different industries.
- Manufacturer’s agency: Hire manufacturer’s agents-independent firms whose sales forces handle related products from many companies in different regions or industries to sell the new test equipment.
- Industrial distributors: Find distributors in different regions or industries who will buy and carry the new line. Give them exclusive distribution, good margins, product training, and promotional support.
Sometimes a company may not be able to use a channel it prefers because of the cost involved and other difficulties. Instead, it develops another channel. However, this decision may prove to be wise subsequently.
Channel Management Decisions
Having reviewed its channel alternatives and decided on the best channel design, the company must implement and manage the chosen channel.
Channel management warrants: selecting, motivating individual channel members, and evaluating their performance over time.
Selecting Channel Members
Attracting suitable intermediaries is very important to producers for successfully designing and maintaining distribution channels.
But the task is not easy for all producers. Old producers with reputed brands find it easier to attract intermediaries, while new producers with relatively unknown brands may struggle to pull suitable intermediaries.
In selecting intermediaries, the company should be very clear about the characteristics of intermediaries.
Issues to be considered are channel members’ length of business, other lines carried, growth and profit record, cooperativeness, and reputation.
When intermediaries are sales agents, the company should evaluate the number and nature of other lines carried and the size and quality of the sales force.
When a retail store is selected as an intermediary seeking exclusive or selective distribution, the company should evaluate the store’s customers, location, and future growth potential.
Motivating Channel Members
Once selected, channel members must be continuously motivated to help to achieve the company’s goals. Producers endeavor to find ways to gain intermediary cooperation.
They often resort to positive motivators such as higher margins, special deals, premiums, cooperative advertising allowances, display allowances, and sales contests.
At other times they offer negative motivators, such as threatening to reduce margins, to slow down delivery, or end the relationship altogether. This approach should be discouraged as it ignores its distributors’ needs, problems, strengths, and weaknesses.
Farsighted companies try to build long-term relationships with their distributors. It requires creating a planned, professionally managed, vertical marketing system that fulfills the needs of both the manufacturer and the distributors.
General Electric works closely with its smaller independent dealers to successfully sell the company’s products. In managing its channel, a company must convince distributors that it will make a fortune by being part of an advanced vertical marketing system.
Evaluating Channel Members
The producer must continuously evaluate each channel member’s performance against standards such as sales quotas, average inventory levels, customer delivery time, treatment of damaged and lost goods, cooperation in company promotion and training programs, and service to the customer.
Intermediaries having excellent performance should be recognized and rewarded by the company. Intermediaries having unsatisfactory performance should be helped, if not possible, replaced.
A company may, from time to time, set new qualifications for its intermediaries and trim the weaker ones.
For example, when IBM introduced its PS/2 personal computers, it re-evaluated its dealers and allowed only the best ones to carry the new models.
Each IBM dealer had to submit a business plan, send a sales and service employee to IBM training classes, and meet new sales quotas.
Only about two-thirds of IBM’s 2,200 dealers qualified to carry the PS/2 models.4 Finally, manufacturers need to be attentive to their channel members. Treating channel members lightly may result in the loss of their cooperation or may even invite legal problems.
Responsibilities of Channel Members
The producer and the intermediaries must agree on each channel member’s terms and responsibilities. The agreement should be reached on price policies, conditions of sale, territorial rights, and specific services to be performed by each party.
Evaluating the Major Alternatives
Having identified alternative channels, a company must evaluate them before selecting the one that best satisfies its long-term goals. Such evaluation is made against economic, control, and adaptive criteria.
Economic Criteria
Each channel alternative will generate different sales and costs. The first step is determining what sales would be produced by a company-owned channel (company salesforce) compared to a middlemen-owned channel (sales agency).
It is generally believed that a company sales force will sell more because they sell only the company’s products, are better trained, have career objectives, and come into direct contact with the customers.
On the other hand, the sales agent might sell more than a company sales force.
Because the sales agent may have a larger sales force than the company, it has many existing contacts, and the lucrative commission may induce its sales force. The sales agency also has the advantage of representing several manufacturers.
The next step is determining the costs of selling different volumes through each channel. The fixed costs of using a sales agency are lower than establishing a company sales office.
But costs increase faster through a sales agency because sales agents get a larger commission than company salespeople.
At one sales level, selling costs are the same for the two channels (company sales force and manufacturer’s sales agency).
The company would prefer to use the sales agent at any sales volume below this sales level and the company sales branch at any volume higher than this sales level.
Generally, sales agents are used by smaller firms or by larger firms in smaller territories where the sales volume is too low to build a company sales force.
Control Criteria
The company must consider the degree of control it wants to exert on its channel. Controlling problems are greater in using a sales agent as it is an independent business firm having its own goals and may concentrate on other companies who give more business.
Adaptive Criteria
Each channel involves some long-term commitment and loss of flexibility. A sales agency is used for a period decided through a contract between a company and the sales agency.
During this period, the company can not drop the sales agency even if its performance is unsatisfactory. Long commitments should be made only when justified on economic and/ or control grounds.
Designing International Distribution Channels
Designing international marketing channels involves additional complexities. Each country has its unique distribution system.
So, global marketers need to adapt their channel strategy to the existing structures within each country.
In some markets, the distribution system consists of many layers and large numbers of intermediaries, making it complex and difficult to penetrate. Distribution systems in developing countries may be scattered and inefficient or altogether lacking.
A country with a big population may, in reality, be a small market because the intermediaries and other institutions to reach the whole population may be non-existent.
Thus, the task of designing efficient and effective channel systems between and within various country effective channel system between and within various country’s markets is a challenging one for an international marketer.
Nature of Distribution Channels
In most cases, the producers and the consumers are separated by space and time, so they must use intermediaries to place their products on the market. With this end in view, they try to build and maintain a distribution channel that will best suit their needs.
A distribution channel is a set of interdependent organizations involved in making a product or service available for use or consumption by the consumer or business user.
Reasons for Using Marketing Intermediaries
Producers involve intermediaries in selling, although doing so means relinquishing some control over marketing programs and consumers. Intermediaries are justified because they excel in making goods available to target markets.
A firm’s achievement is augmented by utilizing the con experience, specialization, and scale of operation of the interiors.
Marketing intermediaries play the important role of transforming the products made by producers into the assortments desired by consumers.
Producers make narrow assortments of products in large quantities, while consumers want broad assortments in small quantities. Intermediaries procure large quantities of many producers and split them into smaller quantities and broader assortment by consumers.
Thus, functions performed by the intermediaries lead to better matching of supply with demand.
Distribution Channel Functions
A distribution channel transports goods from producers to consumers overcoming the major time, place, and possession gaps that exist between these two parties. Members of the marketing channel perform many important functions.
Some of these functions, such as information, promotion, contact, matching, and negotiation, help complete transactions. Channel members gather and distribute marketing research and intelligence information about players and forces in the marketing environment. They develop and spread persuasive communications about an offer.
Locating and communicating with prospective buyers are often done by channel members. They also perform the task of shaping and fitting the offer to the buyer’s needs, including such activities as manufacturing, grading, assembling, and packaging.
Channel members also play an important role in reaching an agreement on price and other terms of offer so that ownership or possession can be transferred.
Other functions help to fulfill the completed transactions, such as physical distribution ( transporting and storing goods), financing (acquiring and using funds to cover the cost of the channel work), and risk-taking (assuming the risks of carrying out the channel work).
The functions stated in the foregoing discussion are shifted to the channel members for certain reasons. If the manufacturer performs these functions, it is quite likely that its costs will go up, and its prices will have to be higher.
Rather, when some of these functions are shifted to intermediaries, the manufacturer’s costs and prices may be lower, in which case the intermediaries must charge more to cover the costs of their work.
In managing the channel’s work, the various functions should be assigned to the channel members who can perform them most efficiently and effectively to ensure satisfactory assortments of goods to target consumers.
Number of Channel Levels
A distribution channel can be described by its number of channel levels. Each layer of marketing intermediaries that performs some function in bringing the product and its title closer to the ultimate buyer is a channel level.
Both the producer and consumer are part of every channel. The number of intermediary levels indicates the length of a channel.
The chart below shows several consumer distribution channels of different lengths.
Channel 1 is a direct marketing channel with no intermediary level. Companies selling directly to consumers use this type of channel.
Selling through direct channels includes door-to-door selling, through home and office sales parties, mail orders by telephone, and through the manufacturer’s stores. The rest of the channels are in chart above.
A are indirect marketing channels.
Channel 2 consists of one intermediary level, which is typically a retailer. The manufacturers of televisions, cameras, and many other products sell their goods directly to large retailers who then sell the goods to ultimate consumers.
Channel 3 consists of two intermediary levels-a wholesalers and a retailer. Small manufacturers of food, medicines, hardware, and other products often employ this channel.
Channel 4 consists of three intermediary levels. For example, jobbers usually operate between wholesalers and retailers in the fruit packing industry. The jobbers buy from a wholesaler and sell to smaller retailers. Distribution channels with even more levels are
sometimes found but very rarely. For a producer, a greater number of levels means less control and greater channel complexity.
It shows some familiar business distribution channels. The business marketer can employ its sales force to sell directly to customers. It can also sell to industrial distributors who again sell to business customers.
It can sell through manufacturer’s agents or its own sales branches to business customers or utilize these agents and branches to sell through industrial distributors. Thus, business markets commonly consist of multi-level distribution channels.
Several types of flows link institutions in the marketing channel. These are the physical flow of products, the flow of ownership, the payment flow, the information flow, and the promotion flow. These flows can often introduce complexity in distribution channels.
Channels in the Service Sector
Like the producers of physical goods, service producers also use distribution channels to make their output available to target populations. In the private sector, hotels, banks, and other service providers try to set up their outlets in locations convenient to target customers.
Service organizations and agencies develop educational and healthcare systems in the public sector to reach widespread populations.
Hospitals must be located geographically to serve a maximum number of patients with comprehensive medical care. Similarly, schools must be located close to the children who are to be given education.
The Procedure of Exporting Goods
The following are the important steps in the procedure of exporting:
Receipt of Indent
It is the first step that the exporter receives the order of export or indent. Various information is provided in the indent.
Acceptance of Indent
When the exporter receives the indent, he studies its conditions. If these conditions are acceptable, then he informs the importer.
Export License
After the acceptance of the indent, the exporter obtains permission from the controller of import and export. It is called an export license.
Receipt of Inquiry
The exporter may receive an inquiry from overseas buyers about the price and other terms and conditions. The exporter should also send quotations giving full details about price, insurance, and packing.
Packing and Forwarding
The goods should be carefully packed and supplied according to the advice of the importer.
Preparation of Invoice
The exporter prepares the invoice according to the agreed price with the buyers after meeting all the formalities.
Customs Formalities
The next step is that the exporter fills in the shipping bill and presents it to the port Traffic Manager.
Mate’s Receipt
An exporter obtains a dock’s receipt after delivering the goods to the dock. The goods can also be handed over to the ship’s mate. If the mate is satisfied, then he issues a clean Mate’s Receipt.
Bill of Lading
The exporter also receives it upon the receipt of the goods; the master of the ship signs the bill of lading. It is an official receipt of goods. It is also called a document or title of goods.
Securing of Payment
The exporter usually receives the payment by the following methods:
- Drawing a bill of exchange.
- By means of a letter of credit.
Check & Release
If the importer is satisfied with the imported goods’ quality and quantity, then he informs the exporter, and the procedure ends.
The Procedure of Importing Goods or How the Goods are Imported
The following are the important steps in the procedure of importing:
Import License
Whenever any firm wants to import goods, it takes permission from the Government, which is called an import license. Without an import license, nobody can import goods.
Sends Indent or Order
The trader sends an order or indent to the exporter, in which all the important information about the goods he wants is written.
Opening Letter of Credit
When the exporter accepts the indent, then the importer will open a letter of credit in his bank in favor of the exporter.
Exchange Rate Fixation
The importer has to make the payment in terms of foreign currency. So, the foreign exchange rate is also determined through brokers.
Advice of Shipment
After dispatching the goods, the exporter informs the importer through a letter. All the information about the shipment is provided in the letter.
Payment of Bill
After the departure of the goods, the exporter advises presenting the bill of exchange along with relative shipping documents to the importer. The importer makes the payment and receives the documents.
Delivery of Goods
Imported goods must be cleared through customs departments. If they are duty-free, then there is no problem for the importer. After the examination of imported goods and payment of duty, the importer will take the articles to his own store. Generally, the imported goods are cleared by the clearing agent of the importer at the port.
Check & Release
The importer checks the imported goods according to the indent. If they are checked and found correct, then he informs the exporter, and this procedure of importing goods ends.