Lecture1-Distribution Channel Management- An Introduction

Dr. Neeraj DixitAssociate Professor

IES Management CollegeMumbai

Distribution Channel Management- An Introduction

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ContentsDefinition of Distribution ManagementTime, Place & Possession UtilityWhat are Distribution/Marketing channels &

their importanceFunctions of distribution channel membersRole of Marketing Channels Channel functions & FlowsChannel levels Patterns of distribution

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Distribution Management- DefinitionBroad range of activities concerned with

the efficient movement of finished products from the end of the production line to the consumer.

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Distribution Management-Time, Place & Possession UtilityPlace Utility-Whenever the consumer

desires for ex. a Colgate toothpaste the distribution management of Colgate ensures it is available in a shop near to the consumers.

Time Utility-If the consumer wants it to be available at a reasonable time then it is available

Possession Utility-The consumer gets title to the goods he is buying, he becomes the owner.

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MARKETING CHANNELS Marketing channels are sets of interdependent

organizations involved in the process of making a product or service available for use or consumption.

Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions.

These intermediaries constitute a marketing channel (also called a trade channel or distribution channel).

Some intermediaries buy, take title to, and resell the merchandise, they care called merchants.

Others search for customers and may negotiate on the producer’s behalf but do not take title to the goods, they are called agents.

Still others assist in the distribution process but neither takes title to goods nor negotiates purchases or sales, they are called facilitators.

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The Importance of Channels A marketing channel system is the

particular set of marketing channels employed by a firm.

Decisions about the marketing channel system are among the most critical facing management.

In the United States, channel members collectively earn margins that account for 30 to 50 percent of the ultimate selling price.

Marketing channels also represent a substantial opportunity cost.Converting potential buyers into profitable orders is

one of the chief roles of marketing channels. Marketing channels must not just serve markets,

they must also make markets

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The Importance of Channels

The channels chosen affect all other marketing decisions:

The company’s pricing depends on whether it uses mass-merchandisers or high-quality boutiques.

The firm’s sales force and advertising decisions depend on how much training and motivation dealers need.

In addition, channel decisions involve relatively long-term commitments to other firms as well as a set of policies and procedures.

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The Importance of Channels In managing its intermediaries, the firm must decide how

much effort to devote to push versus pull marketing. 1) A push strategy involves the manufacturer using its

sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end user.

a. Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the stores, the product is an impulse item, and product benefits are well understood.

2) A pull strategy involves the manufacturer using advertising and promotion to induce consumers to ask intermediaries for the product, thus inducing the intermediaries to order it.

a. Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between brands, and when people choose the brand before they go to the store.

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Intermediaries in distributionDistributor C&FA( Carrying & Forwarding Agent)

( Dabur has 47 C&FA) Dealer/StockistWholesalerRetailer

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Functions of Distribution Channel Members1. Collection of information about the customers,

competitors for the company’s Marketing & sales Departments.

2. Providing for storage & physical movement of goods.3. Placing orders to the producers for the goods for delivery

to customers/consumers.4. Canvassing the sales of the products they handle. In

many cases they do the actual “selling”.5. They are the link for transfer of ownership of the goods

from the producer to customer.6. Financing the inventories after the goods leave the

manufacturer till they reach the end user.7. Provide credit facilities to their buyers.8. Help the manufacturers to effectively run trade &

consumer promotions.

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THE ROLE OF MARKETING CHANNELS Why would a producer delegate some of the selling

job to intermediaries? Delegation means relinquishing some control over how and to whom the products are sold. Producers do gain several advantages by using intermediaries.

Many producers lack the financial resources to carry out direct marketing.

Producers who do establish their own channels can often earn a greater return by increasing investment in their main business.

In some cases direct marketing simply is not feasible. Intermediaries normally achieve superior efficiency in making

goods widely available and accessible to target markets. Through their contacts, experiences, specialization, and scale

of operations, intermediaries usually offer the firm more than it can achieve on its own.

The next Figure shows how a distributor increases efficiency.

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Channel Functions and Flows A marketing channel performs the work of

moving goods from producers to consumers. It overcomes the time, place, and possession gaps that separate goods and services from those who need and want them. Members of the marketing channel perform a

number of key functions. Some functions constitute a forward flow of

activity from the company to the customer.Other functions constitute a backward flow

from customers to the company.Still others occur in both directions.

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1. Physical Flow

Suppliers

2. Title Flow

Suppliers

3. Payment Flow

Suppliers

4. Information Flow

Suppliers

5. Promotion Flow

Suppliers Advertising agency Manufacturer Advertising

agency Dealers Customers

Transporters,Warehouses,

Banks Manufacturer Transporters,Warehouses,

BanksDealers Transporters,

Banks Customers

Banks Manufacturer Banks Dealers Banks Customers

Manufacturer Dealers Customers

Transporters,Warehouses Manufacturer Transporters,

Warehouses Dealers Transporters Customers

Channel Levels-Reverse Flow

Channels normally describe a forward movement of products from source to user.

One can also talk about reverse-flow channels. Reverse-flow channels are important in the

following cases:To reuse products or containers.To refurbish products for resale.To recycle products.To dispose of products and packaging.Several intermediaries play a role in reverse-

flow channels.

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Channel Levels The producer and the final consumer are

part of every channel. A zero-level channel (also called a direct-

selling channel) consists of—a manufacturer selling directly to the final consumer.

A one-level channel contains one selling intermediary—such as a retailer.

A two-level channel contains two intermediaries—Distributor and a retailer.

A three-level channel contains—Distributors, Dealers/Stockist and retailers.

Next Figure illustrates several consumer-goods marketing channels of different lengths.

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(a) Consumer Marketing Channels

0-level 1-level 2-level 3-level

Manufacturer Manufacturer Manufacturer Manufacturer

Consumer

Retailer

Consumer Consumer

Retailer

Distributor Distributor

Dealer/Stockist

Retailer

Consumer

Consumer and Industrial Marketing Channels

Zero Level ChannelIt is also called as direct marketing channelDoor-to-door selling- Eureka ForbesHome parties-TupperwareMail order- Otto BurlingtonTelemarketing- ICICI Bank cards TV Selling- Asian Sky ShopInternet Selling- Amazon, IndiatimesManufacturer-owned stores- Bata, IOC, BP

Petrol pumps

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(b) Industrial Marketing Channels

0-level 1-level 2-level 3-levelManufacturer Manufacturer Manufacturer Manufacturer

IndustrialCustomer

Industrialdistributors

IndustrialCustomer

IndustrialCustomer

Manufacturer’srepresentative

Manufacturer'ssales branch

IndustrialCustomer

Patterns of DistributionThis determines the intensity of desired

distribution after a firm has decided on the most appropriate channels of distribution.

In a way, the intensity denotes the service level that the organization provides to its customers.

There are three types of Distribution intensity1. Intensive Distribution.2. Selective Distribution3. Exclusive Distribution

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Intensive distributionThis strategy is to make sure that the product is

made available in as many outlets as possible so that anywhere the customer goes he/she should be able to get the products of his choice.

This system helps increase coverage & hence sales. This system is normally used for FMCG Goods.

Intensive distribution increases product & service availability but may lead to price wars among the retailers & may hurt the brand equity.

Ex. HUL reaches out to 63 lakh outlets.21

Selective DistributionOnly a few select outlets are permitted to

keep the company products.Selective distribution is the strategy in

which several but not all retail outlets in a given area distribute a product.The outlets are carefully selected by the company in line with the image it wants to project about itself & its exclusive products.

Ex. Tanishq Jewellery.

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Exclusive DistributionExclusive distribution means severely

limiting the number of intermediariesExclusive distribution has its own

advantages & disadvantages and is suitable for products having characteristics of high price, high margin and low volume.

Ex. Mercedes Benz outlets & Rolls Royce outlets

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Pharmaceutical distributionStockists in India operate on a margin of

8% on MRP of Price controlled drugs & 16% on decontrolled drugs.

Stockists normally operate on 2-2.5 % and pass on as much as 6% to chemists.

For retail chemists the margins offered are 16% in case of controlled formulations & 20% for decontrolled formulations.

Competition has increased in retail of medicines- subiksha, Medicine shoppe, Big bazaar etc.

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Indian Retail MarketThe Indian retail market, which is the fifth

largest retail destination globally, according to industry estimates is estimated to grow from the US$ 330 billion in 2007 to US$ 427 billion by 2010 and US$ 637 billion by 2015. Simultaneously, modern retail is likely to increase its share in the total retail market to 22 per cent by 2010.

India has one of the largest number of retail outlets in the world. Of the 12 million retail outlets present in the country, nearly 5 million sell food and related products. Thought the market has been dominated by unorganised players, the entry of domestic and international organised players is set to change the scenario.

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Application QuestionSharpedge is a company making razor

blades. They want to enter the market in Hyderabad & Andrapradesh. Harsh Malhotra, their Marketing Manager is of the opinion that razor blades need selective distribution by a direct company distribution network.

Discuss the merits of the suggestion & give the right direction to Harish.

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