The choice of a suitable channel of distribution is one of the most important decisions in the marketing of products because channel affects the time and costs of distribution as well as the volume of sales.
It also influences pricing and promoting efforts and dealer relations. Choice of a channel of distribution involves the selection of the best possible combination of middlemen or intermediaries.
The objective is to secure the largest possible distribution at minimum cost. The channel must be flexible and efficient. It should be consistent with the declared marketing policies and programmes of the firm.
Such a channel can be selected by evaluating alternative channels in terms of their costs, sales potential and suitability. The factors affecting the choice of distribution channels may be classified as follows:
1. Product Considerations:
The nature and type of the product have an important bearing on the choice of distribution channels. The main characteristics of the product in this respect are given below:
(a) Unit Value:
Products of low unit value and common use are generally sold through middlemen as they cannot bear the cost of direct selling. Low-priced and high turnover articles like cosmetics, hosiery goods, stationery and small accessory equipment usually flow through a long channel.
On the other hand, expensive consumer goods and industrial products are sold directly by the producers.
(b) Perish ability:
Perishable products like vegetables, fruits, milk and eggs have relatively short channels as they cannot withstand repeated handling. Same is true about articles of seasonal nature.
Goods which are subject to frequent changes in fashion and style are generally distributed through short channels as the producer has to maintain close and continuous touch with the market. Durable and non-fashion articles are sold through agents and merchants.
(c) Bulk and weight:
Heavy and bulky products are distributed through shorter channels to minimise handling costs. Coal, bricks, stones, etc., are some examples.
Custom-made and non-standardised products usually pass through short channels due to the need for direct contact between the producer and the consumers. Standardised and mass-made goods can be distributed through middlemen.
(e) Technical nature:
Products requiring demonstration, installation and after sale services are often sold directly the producer appoints sales engineers to sell and service industrial equipment and other products of technical nature.
(f) Product line:
A firm producing a wide range of products may find it economical to set up its own retail outlets. On the other hand, firms with one or two products find it profitable to distribute through wholesalers and retailers.
(g) Age of the product:
A new product needs greater promotional effort and few middlemen may like to handle it. As the product gains acceptance in the market, more middlemen may be employed for its distribution. Channels used for competitive products may also influence the choice of distribution channels.
2. Market considerations:
The nature and type of customers is an important consideration in the choice of a channel of distribution. Following factors relating to the market are particularly significant.
(a) Consumer or industrial market:
The purpose of buying has an important influence on channel. Goods purchased for industrial or commercial use are usually sold directly or through agents.
This is because industrial users buy in a large quantity and the producer can easily establish a direct contact with them. To ultimate consumers, goods are sold normally through middlemen.
(b) Number and location of buyers:
When the number of potential customers is small or the market is geographically located in a limited area, direct selling is easy and economical. In case of large number of customers and widely scattered markets, use of wholesalers and retailers becomes necessary.
(c) Size and frequency of order:
Direct selling is convenient and economical in case of large and infrequent orders. When articles are purchased very frequently and each purchase order is small, middlemen may have to be used.
A manufacturer may use different channels for different types of buyers. He may sell directly to departmental and chain stores and may depend upon wholesalers to sell to small retail stores.
(d) Customer's buying habits:
The amount of time and effort which customers are willing to spend in shopping is an important consideration. Customer expectations like desire for one-stop shopping, need for personal attention, preference for self-service and desire for credit also influence the choice of trade channel.
3. Company considerations:
The nature, size and objectives of the firm play an important role in channel decisions.
(a) Market standing:
Well-established companies with good reputation in the market are in a better position to eliminate middlemen than new and less known firms.
(b) Financial resources:
A large firm with sufficient funds can establish its own retail shops to sell directly to consumers. But a small or weak enterprise which cannot invest money in distribution has to depend on middlemen for the marketing of its products.
The competence and experience of management exercises influence on channel decision. If the management of a firm has sufficient knowledge and experience of distribution it may prefer direct selling. Firms whose managements lack marketing know-how have to depend on middlemen.
(d) Volume of production:
A big firm with large, output may find it profitable to set up its own retail outlets throughout the country. But a manufacturer producing a small quantity can distribute his output more economically through middlemen.
(e) Desire for control of channel:
Firms that want to have close control over the distribution of their products use a short channel. Such firms can have more aggressive promotion and a thorough understanding of customers' requirements. A firm not desirous of control over channel can freely employ middlemen.
(f) Services provided by manufacturers:
A company that sells directly has itself to provide installation, credit, home delivery, after sale services and other facilities to customers. Firms which do not or cannot provide such services have to depend upon middlemen.
4. Middlemen considerations:
The cost and efficiency of distribution depend largely upon the nature and type of middlemen as reflected in the following factors:
When desired type of middlemen is not available, a manufacturer may have to establish his own distribution network. Non-availability of middlemen may arise when they are handling competitive products as they do not like to handle more brands.
Middlemen who do not like a firm's marketing policies may refuse to handle its products. For instance, some wholesalers and retailers demand sole selling rights or a guarantee against fall in prices.
Use of middlemen is profitable who provide financing, storage, promotion and after sale services.
(d) Sales potential:
A manufacturer generally prefers a dealer who offers the greatest potential volume of sales.
Choice of a channel should be made after comparing the costs of distribution through alternative channels.
(f) Customs and competition:
The channels traditionally used for a product are likely to influence the choice. For instance, locks are sold usually through hardware stores and their distribution through general stores may not be preferred. Channels used by competitors are also important.
(g) Legal constraints:
Government regulations regarding certain products may influence channel decision. For instance, liquor and drugs can be distributed only through licensed shops.
As stated above, a. channel of distribution consists of some middlemen in addition to the manufacturer and the consumer. Middlemen or intermediaries are persons and institutions which serve as connecting links between the producer and ultimate consumers.
They direct the flow of goods from producers to consumers and perform several marketing functions. They are known by different names. Middlemen may be classified into two broad categories.
1. Agent Middlemen 2. Merchant middlemen
Agent middlemen or functional middlemen or merchantable agents do not take ownership and delivery of goods. They simply assist in buying and selling of goods. They help in the transfer of ownership and delivery of goods and charge commission for their services. Agent middlemen are of the following kinds.
A factor is an agent employed to sell goods consigned or delivered to him by his principal. He keeps the goods of others in his possession and exercises general lien on them for his charges. A factor enjoys wide powers.
He can sell goods in his own name, receive payment and give valid receipts of discharge. He can pledge the goods and can sell goods on credit. He receives commission at fixed percentage on sales from his principal.
A broker is an agent who makes bargains for others and receives brokerage for his services. He makes transactions on behalf of and in the name of his principal. He obtains neither the possession nor the ownership of goods.
He brings buyers and sellers together and negotiates terms and conditions of sales. He receives brokerage at a fixed percentage of the volume of transaction.
3. Commission Agent:
He is an agent employed to sell goods on behalf of and at the risk of his principal. He not only negotiates the transaction but also makes arrangement for transfer of ownership. He gets commission on sales at a fixed rate.
4. Del credere agent:
He is an agent employed to sell goods on credit on behalf of his principal. But he undertakes to bear the risk of loss on account of bad debts. He is paid extra commission called Del credere commission for bearing this risk.
He is an agent employed to sell goods on behalf of the principal and at a public auction. He makes publicity, displays goods to the intending buyers, invites bids and sells goods to the highest bidder.
He is usually paid a commission on the sale proceeds. Sometimes a minimum price (Known as reserve price) is fixed and bids below this price are not accepted.
6. Common carrier:
He is an agent employed to carry goods, on behalf of the owner, from one place to another. He provides public transport in the form of trucks, railways, airways or shipping. He is paid freight for his service.
7. Public warehouse:
He is an agent employed to keep the goods of his principal in his godowns in return for storage charges. He is expected to deliver the goods as per the instruction of the principal.
Difference between Factor and Broker
A factor is a general merchantile agent, whereas a broker is a special merchantable agent.
A factor deals in his own name, whereas a broker deals in the name of his principal. A factor can also sue and enforce contracts in his own name. A broker cannot do so.
A factor is in possession of the goods to be sold. But a broker is not given possession of the goods to be sold.
A factor carries on the business of his principal regularly. But a broker is employed for a particular transaction or special deal only.
A factor is personally liable for his contracts. On the other hand, a broker is not personally liable for the contracts made on behalf of the principal.
A factor has the authority to receive payments and to issue receipts for them. A broker has no such authority to receive payments and issue receipts.
Remuneration of a factor is called commission whereas a broker's remuneration is known as brokerage.
A factor enjoys a general lien on the goods in his possession for his unpaid charges. But a broker has no such lien on goods.
A factor has discretion as to the terms of sale negotiated by him. A broker has no such discretion.
x. Insurable interest:
A factor has invaluable interest in the goods in which he deals. A broker has no insurable interest in goods he deals in.