Everything you need to know about marketing channels. Marketing channels have a wide variety. They perform number of functions. Their scope of work or functions may vary in different nations. They act as an interface between the manufacturers and their customers. There is two-way transaction flow and there has to be a two-way communication.
The key role of the marketing channel is to perform the work of moving goods from producers to consumers.
The intermediaries with their contacts, experience, specialization, and scale of operation makes possible the wide availability and accessibility of the merchandise to the target markets.
Learn about:- 1. Definition of Marketing Channel 2. Need 3. Functions 4. Types 5. Role 6. Steps 7. Channel Structure 8. Non-Conventional Channels 9. Channel Development 10. Levels 11. Channel Design Decision 12. Managing Conflicts.
Marketing Channels: Definition, Need, Function, Types, Role, Channel Structure, Channel Design Decision and Conflicts
Marketing Channel – Definitions: Provided by Eminent Authors and Institutions
‘Marketing channels refer to an organized network of interconnected organizations and agencies involved in the process of making a product or service available to consumers.’
The marketing channels are the independent business organizations. They are also known as the middlemen, intermediaries. There are various forms of these intermediaries. They bear variety of names. They act as an interface between the firm and its customers. They facilitate the producers and ensure a smooth flow of products/services to the customers.
Philip Kotler opines Channel of Distribution as that “It is a set of independent organizations involved in the process of making a product or service available for use or consumption”.
American Marketing Association defines it as – “the structure of intra company organisation units and extra company agents and dealers, wholesale and retail, through which a commodity, product or service is marketed”.
Cundiff and still are of the view that “it is a path traced in the direct and indirect transfer of title to a product, as it moves from producer to ultimate consumers or industrial users”.
Richard M. Clewett views as – “it is the pipeline through which a product flows on its way to the consumers. The manufacturer puts his product into the pipeline or marketing channel and various marketing people move it along to the consumers at the other end of the channel”.
Bowersox and cooper define channel, “as a system of relationship among businesses that participate in the process of buying and selling products and services. It means that channels comprise a number of members each responsible for specific tasks.”
Marketing Channel – Why Channels are Needed? Top 10 Reasons
When the producers want to reach to customers in the market, two options are available to them. Option I is Direct Marketing, i.e., they interact with their customers directly without any interface. Option II is Indirect Marketing, i.e., they take help of some intermediaries to reach to the market. Both options have some merits and demerits and no one system is perfect.
When the producers use the intermediaries and delegate them some of the selling responsibility, they actually lose the opportunity to interact with their customers and understand them and lose their hold and control, too. Occasionally one hears the cry “Get rid of the intermediaries; all they do is raise the price.” Still they use intermediaries, why?
Reasons why channels are needed are explained below:
1. Intermediaries bring the buyers and sellers together, simplify and facilitate the transactions.
2. Intermediaries are the independent business organizations. These are the private and professional institutions with the objective of profit making. Hence, it is easier and economical to work through their extensive and established network.
3. Intermediaries create time, place, form and possession utilities for the customers by making the products/services available at the convenient place, time and in convenient form.
4. Every time producers cannot deal directly with the ultimate consumers especially when the consumers are scattered over a wide geographical area.
5. Many producers tack the financial resources and expertise to carry out direct marketing. Hence they prefer marketing channels.
6. For the small producers having very limited budget for the promotion, it is quite difficult to create the awareness, interest and desire to buy the products among the customers. In this case, intermediaries being closer to the customers and having direct and regular interaction with them, can effectively promote and sell the products. They can sell unpackaged commodities more effectively and economically compared to the producers.
7. Intermediaries through their contacts in the market, experience, specialization, infrastructure, relations and rapport with the customers can do selling activities more profitably compared to that of done by the producers on their own.
8. If the producers delegate distribution to the intermediaries, they can increase their investment and can focus more on their main business activities.
9. Intermediaries play important role in bridging the gap between the customers’ quality, quantity and variety expectations and producers’ offerings.
10. Intermediaries reduce the number of transactions thereby reducing the efforts and cost.
Marketing Channel – Top 11 Functions: Facilitation, Information, Promotion, Negotiation, Transfer of the File and Ownership and a Few Other Functions
Marketing channels have a wide variety. They perform number of functions. Their scope of work or functions may vary in different nations. They act as an interface between the manufacturers and their customers. There is two-way transaction flow and there has to be a two-way communication.
Important functions of the channels are as follows:
1. Facilitation – Bringing the buyers and sellers together and facilitating both the parties in closing the deal.
2. Information – Giving the information about the products/services to the customers.
3. Promotion – Promoting the products/services, i.e., building and promoting the producers’ brands.
4. Negotiation – Negotiations on behalf of the manufacturer with the customers on the prices, terms of delivery, etc.
5. Transfer of the title and ownership – They help in transfer of the title or ownership from one party, i.e. sellers to other party, i.e. buyers.
6. Holding inventory and sharing risk – Channels hold the stock of ready products with them, thus they share the risk and cost associated with holding the inventory.
7. Finance – Channels keep deposit with the manufacturers, book the orders in advance, and keep the stock of ready products. Thus they reduce the manufacturers’ financial burden.
8. Providing pre-sale and post-sale services – Channels provide pre-sale and post-sale services, maintenance services, etc. to the customers on behalf of the producers as they cannot personally reach to the individual customer.
9. Change agents – Channels inform the customers about the changes in product and price. They tell the customers about the new or additional features introduced. They can create a positive, favourable opinion about these changes among the customers, as they are closer to customers and they directly and regularly interact with their customers. Thus, they act as ‘Change Agents’.
10. Warehousing and transportation – Channels provide the warehousing facility and arrange transport facility from the warehouses to the markets/retailers/end users.
11. Market feedback and intelligence – Channels provide valuable and authentic information about the customers, competitors, market changes and trends and market conditions to the manufacturers. They also maintain the sales records and database of the customers, which can be useful to the manufacturers in future decision-making.
Marketing Channel – Top 3 Types of Intermediaries /Channels: Merchants, Agents and Facilitator
Intermediaries can be broadly categorized in three categories as follows, on the basis of the criteria like ownership rights and the possession of the goods.
1. Merchants:
These are the intermediaries who take title to the merchandise and resell the merchandise, generally having the physical possession of the goods. Some of these types of intermediaries are wholesalers and retailers. They sell the merchandise and earn profit.
2. Agents:
These are the intermediaries, sales agents, brokers, auctioneers, etc., who may have the possession of the goods or may not have the possession of the goods, but in no case will have the title to the merchandise. They are the intermediaries who search for buyer and seller together, bring buyer and seller together or may negotiate the sale transaction on behalf of the seller.
3. Facilitators:
These are the intermediaries who assist in the distribution process of the merchandise. In this process, they may have physical possession of the merchandise in certain cases or may not have physical possession of the merchandise, but in no case will have title to the merchandise or negotiate purchase or sales transaction. Transportation companies, independent warehouses, banks, advertising agencies, insurance companies, etc., are some of the intermediaries in the category of the facilitators.
Marketing Channel – 3 Major Roles: Functions of Intermediaries, Channel Flow and Channel Levels
The key role of the marketing channel is to perform the work of moving goods from producers to consumers. The intermediaries with their contacts, experience, specialization, and scale of operation makes possible the wide availability and accessibility of the merchandise to the target markets.
Moreover, it also overcomes the time, place, and possession gaps that separate goods and services from those who need or want them. Thus, the various functions performed by the intermediaries offer the firm the synergistic effect, i.e., actually more than the manufacturers and producers can achieve independently.
Role # 1. Functions of Intermediaries:
i. Information:
Intermediaries like merchants and agents gather various information about potential and current customers, competitors, and other actors and forces in the marketing environment that are of crucial importance to the producers and suppliers of the various products.
This information is also of equal importance and sought by the potential consumers of the target markets, which in the absence of the intermediaries would become hectic session of the information surfing for the particular product and product-related information.
ii. Disseminating:
The intermediaries not only gather the information but also develop and disseminate such persuasive communications to stimulate purchasing to the other interested groups, ultimately serving the purpose of being the intermediaries and collecting the information.
Ultimately, gathering of the information accomplishes its purpose of meeting the sales target of the merchandise, if and when the related information is disseminated as and when sought for by the sources authorized for such information flow.
iii. Negotiating:
The role of the intermediaries like agents and auctioneers is to finalize the sale transaction by negotiating, on the price and other related terms obstructing the finalization of the sale transaction, thus, assist the actual transfer of ownership or possession as the case may be.
iv. Ordering:
Intermediaries, wholesalers and retailers do purchase the merchandise from the manufacturers in bulk and small quantity respectively, and resell the produces to the potential consumers of the target markets. With this service provided by the intermediaries, it also assists the potential consumers to avail and access the product required, without placing the purchase orders directly with the manufacturers.
v. Financing:
Intermediaries, like wholesalers also acquire the funds required to finance inventories at different levels in the marketing channel, through the banks and other financial institutions, for the purchasing of the produces.
vi. Risk:
The intermediaries like, insurance companies, banks, del credere agents and others do assume the risks involved in the distribution of the products from the particular destination or party to the another destination or party in the flow of the movement of the produces ultimately. Thus, intermediaries smooth the flow of the merchandise by controlling the degree of the uncertainty involved in the distribution.
vii. Storing:
The intermediaries desiring to stock the produces in bulk necessarily have to be equipped by well-structured warehouses. The intermediaries should assure the successive storage and movement of the physical products, for which various wholesalers as well as the independent warehouses perform an active function for the same.
viii. Payment:
Various banks and financial institutions enable making the payment of the bills and movement of the currencies from one party to the other. Not only the aforementioned intermediaries, but also some of the wholesalers, assist the purchase/sale transaction, by providing the credit facilities and the instalment mode of the making the payments to the buyers by the manufacturers, or wholesalers or the retailers or the end-users.
ix. Title:
The final stage of movement of the goods is from the manufacturer to the end-user, i.e., through the transfer of the ownership rights from the purchaser to the buyer, the end- user. The final destination of the transfer of the title to the goods and the obstacles in the movement of the goods are thereby are streamlined to oversee actual transfer of ownership from one organization or person to another.
Role # 2. Channel Flows:
The various key functions performed by the different intermediaries, constitute the different flow of the constituents of the sale transaction as well as the produces. In all, it results into forward flow, backward flow as well as the two-way flow.
Backward flow refers to flow of activity from customers to the company while forward flow refer to the flow of the activity from company to the customer and, the two-way flow refer to the flow of activity from both the directions, i.e., from company to customer as well as from customer to company.
The functions, namely, physical, title and promotion constitutes a forward flow of activity from the company to the customer, while some other functions, namely, ordering and payment, constitute a backward flow from customers to the company, and the functions, information, negotiation, finance, and risk taking, occurs in both the directions. These flows can be understood individually and not from just one diagram as it increases complexity.
These five flows are discussed below:
A manufacturer selling the physical goods will require at least the above mentioned three to four intermediaries. As it is not possible to move the physical goods from one place to another without the support of any transportation services, the role of this intermediary is mentioned in the physical flow of the goods at all the points wherever the movement of the physical possession of the goods is involved.
Also, generally, the goods physically from the suppliers, through transportation to the manufacturers, get it processed, move from the manufacturers as the finished products through transportation and warehouses services to the dealers, who further moves the same to the customer, again through the transportation services.
When the goods move physically from one party to another, it is not necessarily that this physical movement of the goods is accompanied by the movement of the title of the goods. The title of the goods is moved when the goods are purchased by one party to another party that is from suppliers to the manufacturer, from manufacturer to dealers and dealers to the customers.
The other intermediaries like transporters and warehouses as mentioned in the physical flow, may possess the goods physically but in no case will have the ownership rights on those goods.
The movement of the goods physically involves various parties, intermediaries in the activity, but the ‘payment flow’ moves among the parties involved in the movement of the title to the goods, connecting each party with the other through the flow of the payment with the help of the banking services.
Here, the payment flow refers only to the movement of the payment among the parties having the right to the ownership to the distribution of the goods.
The movement of the information among the intermediaries flows two ways, i.e., in forward as well as in backward direction. The information related to various aspects of the intermediaries flows from various parties to the other parties, each party has some important information to share with the other party involved in the sale transaction.
The manufacturer often undertakes various promotional efforts to promote the produces in the market, attracting a large number of the potential consumers by attracting large number of the middlemen to make product available to the end-users. The manufacturer may adopt the ‘Push Strategy’ or the ‘Pull Strategy’.
Push strategy of the promotion refers to the influencing and persuading the middlemen to carry the company’s product, to carry more of the company’s product, thus safeguarding the shelf-space for the company’s products.
While, ‘Pull Strategy’ focuses on the first level communication about the product-related information and promotional campaigns directly to the customer, and the customers themselves inquire about the product with the dealers for its purchase.
Channels normally describe a forward movement of products from source to user, but there are also reverse-flow channels.
These are important in the following cases- (1) to reuse products or containers (such as refillable chemical – carrying drums); (2) to refurbish products (such as circuit boards or computers) for resale; (3) to recycle products (such as paper); and (4) to dispose of products and packaging (waste products), Several intermediaries play a role in reverse-flow channels, including manufacturers’ redemption centres, community groups, and traditional intermediaries such as softdrink intermediaries, trash-collection specialists, recycling centers, trash-recycling brokers, and central processing warehouse.
A manufacturer selling a physical product and services might require three channels- a sales channel, a delivery channel, and a service channel. Some of the common features in various functions of the channels are that, they use up scarce resources, their performance can be enhanced by specialization and they can be shifted among the other channel members.
Moreover, the producer’s cost and prices are lower when some functions of the intermediaries are shifted by the manufacturers, but the intermediary does adds a charge to cover its work, as applicable. When, in case, the intermediaries are more efficient than the manufacturer, prices to the consumers are lower, generally.
Also, in case, where consumers perform some functions themselves, they should be provided an opportunity to enjoy even lower prices. Thus, changes in channel institutions largely reflect the discovery of more efficient ways to combine or separate the economic functions providing assortments of goods to target customers.
Role # 3. Channel Levels:
The producer and the final customer are part of every channel. We will use the number of intermediary levels to designate the length of a channel.
A zero-level channel (also called a direct marketing channel) consists of a manufacturer selling directly to the final customer. The major examples are door-to-door sales, home parties, mail order, telemarketing, TV selling, internet selling, and manufacturer-owned stores, Eureka Forbes sales representatives sell their products door-to-door; Tupperware representatives sell kitchen goods through home parties; Otto Burlington sells its products through mail order; ICICI Bank uses the telephone to prospect for new customers or sell enhanced services to its existing customers; Asian Sky Shop sells products through TV commercials or longer “infomercials”; Amazon and India Times sell their products online; and Bata and Indian Oil/Bharat Petroleum sell products through the manufacturer-owned stores and petrol pumps, respectively.
A one-level channel contains one selling intermediary, such as a retailer. A two-level channel contains two intermediaries. In consumer markets, these are typically a wholesaler and a retailer. A three-level channel contains three intermediaries.
An industrial-goods remanufacturer can use its sales force to sell directly to industrial customers; or it can sell to industrial distributors, who sell to the industrial customers; or it can sell through manufacturer’s representatives or its own sales branches directly to industrial customers, or indirectly to industrial customers through industrial distributors. Zero-, one-, and two-level marketing channels are quite common.
Marketing channels are not limited to the distribution of physical goods. Producers of services and ideas also face the problem of making their output available and accessible to target populations. For example, schools develop “educational-dissemination systems” and hospitals develop “health-delivery systems”, thus, figuring out agencies and locations for reaching the population, spread out over an area.
Marketing channels also keep changing in personal marketing. Besides live and programmed entertainment, entertainers, musicians, and other artists can reach prospective and existing fans online in many ways, by creating their own websites, social community sites such as MySpace, and third-party websites.
Service industries such as banking, insurance, travel, and stock buying and selling are enriched and operating with the new channels, and the development of internet and other advance technologies.
Marketing Channel – 4 Important Steps: Analysing the Customers’ Desired Service Output Levels, Establishing the Channel Objectives and Constraints and a Few Other Steps
The process of designing the marketing channels comprises four major steps.
These are:
1. Analysing the customers’ desired service output levels;
2. Establishing the channel objectives and constraints;
3. Identifying the major channel alternatives;
4. Evaluating the major channel alternatives.
Let us take a look at all these steps in detail:
Step # 1. Analysing the Customers’ Desired Service Output Levels:
Marketing begins with identifying the needs of the customers. The same holds true for marketing channels. Understanding how customers buy, why they buy a particular product, and what are their expectations when they buy, is the first step in designing a marketing channel.
The service outputs given by marketing channels are generally categorised into five types:
i. Lot Size – The number of units that a marketing channel permits a typical customer to purchase on every occasion of purchase is referred to as the lot size. Basically, consumers prefer that the intermediaries permit them to buy the quantities that they desire. It may be a lot size of one for a household consumer purchasing a car, or a lot size of 20 for a corporate entity purchasing cars for its executives. The smaller the lot size, the greater is the expected level of service output.
ii. Waiting Time – This is the time for which the customers would generally have to wait to get the delivery of goods. Customers expect and prefer faster delivery channels.
iii. Spatial Convenience – One of the major functions of the marketing channel is to provide time and space convenience. Customers will prefer those channels that make it easy for them to purchase the products.
iv. Product Variety – The breadth of the assortment offered by the channel member represents the variety of the products that the channel member offers to the customers. Most customers prefer a situation where more variety is available as it facilitates better choice.
v. Service Backup – Service backup typically deals with added services like installation, repairs, credit card payment, and free delivery and so on. More the service backup more is the preference for the channel.
Although higher service output levels are desirable by customers, one has to take into consideration the fact that higher service output levels translate into higher pricing for consumers. At times, consumers may be willing to accept lower service levels when it translates into lower prices.
Step # 2. Establishing the Channel Objectives and Constraints:
As mentioned in point (i) above, some customer segments are, at times, willing to accept lower service output levels with regards to the channel if it translates into lower prices. Different customer segments would desire different levels of service output. Effective channel planning would require the organisation to determine which market segments to serve, and based on that, decide the most suitable channel.
Channel objectives will also vary in line with the product characteristics. Perishable products would require more of the direct marketing channels because of the risks associated with delays. Bulky products would require the channels that minimise the number of the handlings and also the shipping distance.
Channel design also needs to take into consideration the strengths and weaknesses of the different types of channel members. For example, a manufacturer’s representatives are able to have a better rapport with the customers. However, the cost of visits to every individual customer is high, and the exercise of covering all customers is time-consuming too.
While designing the channel, the organisation must also take into consideration the competitors’ channels. The channel design must also adapt to the larger environment in terms of economic conditions, legal regulations and restrictions.
Step # 3. Identifying Major Channel Alternatives:
After having taken the decision on the target market and establishing the objectives, it is time for the organisation to decide on the channel alternatives.
While selecting the channel alternatives, three elements must be taken into consideration:
i. Types of available business intermediaries,
ii. The number of intermediaries needed, and
iii. The terms and responsibilities of each channel member.
Let us take a detailed look at these elements:
i. Types of Intermediaries:
The organisation must identify the types of intermediaries available to carry on its channel work.
Some examples of channel alternatives can be:
a. The organisation’s own sales force.
b. Manufacturer’s agency Industrial distributors – Finding and appointing distributors in different regions who, in addition to selling the products, will also keep stocks to facilitate faster deliveries.
c. OEM markets – Original Equipment Manufacturers (OEMs) are those organisations that buy products from other organisations, incorporate the same in their own products, and sell them further.
d. Dealers and distributors – The organisation can also consider dealers and distributors as channel alternatives.
ii. Number of Intermediaries:
The organisation has to decide the number of intermediaries to be used at each channel level.
There are three strategies an organisation can use to decide the number of intermediaries:
a. Exclusive Distribution:
Exclusive distribution involves limiting the number of intermediaries handling the organisation’s goods and services to just one. This involves a contract in which the intermediary agrees not to carry competing brands.
This is normally done when the organisation wants to exercise a greater control on the service level and the inputs offered by the channel members.
b. Selective Distribution:
This type of a channel structure deals with more intermediaries; however, the number is lesser than the maximum number of intermediaries willing to carry a particular product.
The rationale is that the organisation can develop good working relations with a few select intermediaries and expect better results. It is a structure which enables the organisation to gain more coverage and control with lesser costs than in case of intensive distribution.
c. Intensive Distribution:
Here, the manufacturing organisation places its goods in as many outlets as possible. This is specially done for products where the consumer looks for a greater deal of convenience while buying, like in case of daily use items, snacks, toiletries, bakery items, etc.
iii. Terms and Responsibilities of Channel Members:
The channel member is an important constituent of the entire marketing mix, and hence, it is necessary that the organisation establish a long term relationship with channel members. While developing a relationship, it is imperative for the organisation to define the rights and responsibilities of each channel member, and ensure that they are given opportunities to have a profitable business. This is the trade-relations mix.
The major elements of the trade-relations mix are:
a. Price policy – Here, the organisation has to establish a price list as well as an indicative list of discounts that are considered as fair and equitable by the channel member.
b. Distributor’s territorial rights – Demarcating the territory is the task that is of utmost importance in the trade-relations mix. It is only fair that organisations inform the intermediaries of the terms and conditions under which they would enfranchise other intermediaries, and allocate to them commissions or profits on sales in their territory, even if it is not done by them directly.
c. Mutual services and responsibilities -These must be clearly and explicitly mentioned so as to avoid any ambiguity and conflicts at a later stage. The organisation’s policy with regards to building, promotional support, training and recruitment of staff and other such areas of mutual co-operation must be mentioned.
Step # 4. Evaluating Major Channel Alternatives:
Having identified the major channel alternatives, it is now essential that the organisation evaluate these alternatives.
There are three major criteria which are used to evaluate the available alternatives:
i. Economic Criterion:
The economic criterion involves the comparison and evaluation of expected costs and expected sales under various alternatives. Suppose there are two alternatives, which are, selling through the organisation’s own sales force as against selling through an external sales agency. At first, the organisation should determine whether the organisation’s own sales force will be able to achieve better sales vis-a-vis an outside sales agency.
The next step is to establish the cost of having the internal sales force carry out the entire selling job as against the same being done by the sales agency, and the final step involves the comparison of the sales and the costs under both alternatives in order to decide which one is more profitable.
ii. Control Criterion:
Another important criterion that must be considered is that of control over the channel members. There is certainly a risk of loss of control when dealing with external agencies as against dealing with the organisation’s own sales force.
iii. Adaptive Criterion:
In a rapid and dynamic market scenario, the willingness of a channel member to adapt to changing policies and increased demands must be considered.
Marketing Channel – Structure: Zero-Level Channel , One-Level Channel, Two-Level Channel and Three or More Level Channel
1. Zero-Level Channel:
Manufacturers sell the products directly to the consumers eliminating the middlemen. This structure is suitable for the luxurious and exclusive products. Companies with the sound financial position can afford to sell their products directly through their own outlets or exclusive showrooms. On the other hand, even the small producers who cannot afford to use channels and targeting only local market can also use Direct Marketing. Farm products that are highly perishable in nature also use the direct channel.
2. One-Level Channel:
There is only one middleman between the manufacturers and their customers.
Examples:
(a) Manufacturer – Dealer – Consumers – e.g., Automobiles
(b) Manufacturer – Large retailers – Consumers – e.g., Supermarkets
(c) Manufacturer (Franchiser) – Franchisee – Consumers – e.g., Food products, designer jewelry, garments, etc.
(d) Service Provider – Agents – Consumers – e.g., Life Insurance
(e) Manufacturer – Manufacturers’ Agents – Consumers – e.g., Personal Computers
There are two layers.
Examples:
(a) Manufacturer – Wholesaler – Retailer – Consumers – e.g., All FMCGs
(b) Manufacturer – Brokers – Retailers – Consumers – e.g., Farm Products, Food grains
4. Three or More Level Channel:
(a) Manufacturer – C &F Agent – Stockist – Retailer – Consumers- e.g., Drugs, Medicines
(b) Manufacturer – C &F Agent – Redistribution Stockist – Retailer – Consumers – e.g., HLL products
In Japan, food distribution may involve as many as six levels.
Marketing Channel – Non-Conventional Channel or Supplementary Channel Format: Door-to Door, Consumer Co-Operatives, Automatic Vending Machines and a Few Others
Some supplementary channel formats are discussed below:
1. Door-to-Door:
Today, the term multilevel marketing (MLM) is known to everyone, which is the changed version of the conventional door-to-door selling. Even though it is not a new format, several changes took place in this format. Initially a limited variety of small products of low price used to distribute through this format.
However, today, even high priced and unique products are distributed. Large variations are observed in the products distributed through this format, e.g., Milk, Newspapers, Encyclopaedia, Vacuum Cleaner, Cleaning Material, Cosmetics, Tupperware, General Merchandise, etc.
2. Consumer Co-Operatives:
A group of consumers can buy directly from the manufacturers or the wholesalers in bulk and undertakes retailing for its members. As they are bypassing one or more channels, they can save the cost and products can be made available at the reasonable prices.
Generally, they work on no profit no loss basis. These buying groups can bypass retailers if they are not giving good services to the customers or following unethical practices. It is expected to increase the number and importance of the Consumer Co-operatives in days to come due to the increasing awareness of consumers.
3. Automatic Vending Machines:
Automatic vending machine is an impersonal form of retailing in which money or credit card operated machine provides products or services. It is operated by inserting a coin and then the buyer can get the items automatically. In India, Automatic Tailoring Machine (ATM) and PCO are the common examples of vending machine.
4. Vending Kiosk:
It is different from the Vending Machine. Customers can purchase the items through the Vending Machine, whereas through Vending Kiosk they only get the information and can place the order. In India, this form is yet not established. It is used just to get necessary information about the company and products/services. However, in the developed countries, through interactive video, on-line ordering technology, customers can get information about the products and services as well as they can book the orders.
5. Catalogue Marketing:
Special, exclusive and ethnic products can be sold through catalogue marketing. Catalogues are sent to the potential and repeat customers and orders are booked over the mail, phone or online. In India a few cosmetics companies, boutiques and jewelers use this form.
6. Company Sponsored Selling:
Employers contract with companies for buying the products and services for their employees. The seller gets access to the employee database. This form is used when the employer partly or fully sponsors his employees or wants to give these goods as a special occasion gift.
Employer wants these goods in large quantity hence he expects the good (economical) package from the seller. Generally, the seller also does not mind offering the discount as he is getting bulk order. For example, Car or Two-Wheelers, Insurance Policies, Health Care Services, Loans, Financial Services, Electronic Goods, etc. In India, employers use this form while giving the gifts to their employees in Diwali or on some special occasions.
Marketing Channel – Channel Development
Any new firm generally starts the local operation of selling the merchandise in a fairly limited market, using existing intermediaries. The number of such intermediaries is usually limited to the few manufacturers’ sales agents, a few wholesalers, several established retailers, a few trucking companies, and a few warehouses.
For such firms, deciding the best channels might not be a problem but the problem is faced in convincing the available intermediaries to carry and handle the firm’s merchandise line. Thus, the success of the firms on this front would assist the firm to determine whether the firm might branch into new markets and use different channels in different markets.
The variety of the channels to be adopted by the firm may gradually change from one market to the other, from one locality to the other, from one product category to the other product category, from one country to the other country. The firm might sell directly to retailers in smaller markets and through distributors in larger markets.
The firm in rural areas, might work with general goods merchants while deal with limited-line merchants in urban areas. In one part of the country, it might grant exclusive franchises; in another, it might sell through all outlets willing to handle the merchandise. In one country, it might use international sales agents; in another, it might partner with a local firm.
For the international players, the criticality of the decision increases as the shopping habits of the customers’ vary by countries. Many retailers channel design illustrated that exemplifies the same. Retailers, namely, Germany’s Aldi, the United Kingdom’s Tesco, and Spain’s Zara, while entering in the new market have redefined their channel distribution strategy to certain extent, enabling better tailoring of their image to local needs and wants.
While, there are also the retailers in the global market who have largely stuck to the same selling formula irrespective of the geographical differences, although have sometimes encountered trouble in entering new markets such as Eddie Bauer, Marks & Spencer, and Wal-Mart.
Thus, the channel system of any firm evolves as a function of local opportunities and conditions, emerging threats and opportunities, company resources and capabilities, and other factors.
Many companies in the present scenario have started using such hybrid channels, with many successful companies multiplying the number of “go-to-market” or hybrid channels in any one market area. The company, while adopting hybrid channels must assure its effective working all together and whether it matches with each target customer’s preferred ways of doing business.
The features of the channel system sufficing the channel integration expectation of the customers are as mentioned below:
i. The ability to order a product online and pick it up at a convenient retail location;
ii. The ability to return an online-ordered product to a nearby store of the retailer;
iii. The right to receive discounts and promotional offers based on total online and offline purchases, etc.
To illustrate, ICICI Bank targets four different kinds of market segments in rural markets, namely, rich, small and medium enterprises, the middle-class, and the low-income group, for which the ICICI Bank uses a combination of hybrid channels such as branches, franchisees, kiosks, and microfinance institutions.
Also, the channel design system of HP Company exemplifies the same. It has used its sales force to sell to the large accounts, outbound telemarketing to sell to medium-sized accounts, direct mail with an inbound number to sell to small accounts, retailers to sell to still smaller accounts, and the internet to sell specialty items.
Also in order to tap its staples markets it has used its traditional retail channel as well as other mediums like direct-response internet site, virtual malls, and thousands of links on affiliated sites are also used by this company.
Marketing Channel – Levels
For any company, successful value creation needs successful value delivery. A company needs to design the distribution network and then it needs to manage this network.
A company can decide its way to reach the customers. In some cases, the company has a choice to decide; but in some cases there are no choices. When a company reaches its customers directly, then it can be called a Zero Level Channel. It is also called a direct marketing channel. Companies like Eureka Forbes, Amway, Dell, Tupperware, Avon, Bata does their business directly.
It also includes door to door sales, telemarketing, TV marketing, internet selling and manufactured owned stores. Home Shop 18 sells its products on Television and also sells it online. Similarly, Eureka Forbes sells its products directly to the customer through its sales force. Bose sells its sound systems through its 15 showrooms across India. Many products are also sold through infomercials on various television channels in India in the late night. Customers can order the products through phone and get the home delivery.
One level channel includes one intermediary between the company and the customers. For example, all the two wheeler and four wheeler companies like Hero Honda, Bajaj Auto, Maruti Suzuki, Hyundai, and Chevrolet etc. have dealers in between the company and the customers. In two level channel, a wholesaler and a retailer deals with the company on the one side and customers on the other. In three level channel, there are three intermediaries – Distributor, Wholesalers and Retailer.
In certain products, there is the existence of multi-level channel. In case of HUL also, there are three and more intermediaries depending upon the point of sales to the customers, like C&F Agents, Stockist and then to retail outlet. Sometimes, there is a wholesaler in between the stockist and retail outlet. In the case of food grains and vegetables also, sometimes there are three to six level channel involved.
In the case of industrial marketing also, a similar structure exists in the market. Either the manufacturer sells its products directly or it can sell through a distributor. As the products are technical in nature, sometimes, the distributor is assisted with the manufacturer’s representative or manufacturer’s sales branch.
Marketing Channel – Channel Design Decision (With Distribution Strategies)
Channel design decisions are crucial for any company, whether it’s new or it’s old. In the case of a new company, it becomes even tougher to get the products on the shelves of the retailers. The problem does not lie in deciding the channel design, but the problem lies in convincing the wholesalers, dealers and retailers to carry your product. In case of an old and established company like Maruti Suzuki, the company might be spoilt with choices for the dealers.
A company needs to understand as to what kind of marketing strategy it wants to implement, whether it will be a Push strategy or a pull strategy. In the case of low cost, low involvement, impulse products; push strategy works better. The company just needs to push its products through the marketing channel by its sales staff. Sales staff is supported by the trade promotion schemes.
On the other hand, pull strategy works better in high involvement products like consumer durables and automobile. In this strategy, manufacturer advertises the products heavily to induce customers to ask for the products. It may also happen that in similar kind of product, two different companies are following opposite strategies. For example, lays potato chips sells through a pull strategy, while Balaji or Yellow Diamond potato chips are sold on the basis of a push strategy in western India.
The length of the channel can be decided on the basis of the following:
(A) Analysing customers’ desired service output levels:
(1) Size of the Market- Larger market requires longer channel to serve the customers, while shorter channel is required for small market.
(2) Service Requirement- If the product requires a service back up like a car or a bike, the channel should be zero or one level.
(3) Lot Size- A customer may require the product in lot size of one, while a business customer may require the same product in bulk quantity. Depending upon the requirement, the channel length is decided.
(4) Product Variety- Most of the companies deal in wide assortment of products. Then, the availability of all the products becomes essential at the retail outlet.
(B) Establishing Objectives and Constraints:
Channel objectives are also taken into consideration, while deciding the role of intermediary. FMCG product does not require any support, that’s why the length can be longer. While products needing service support like construction equipment, machineries require to be sold directly by the company or by the agent.
Perishable products like vegetables are sold directly to the customers in the rural areas, but gets into a one to two level channel in the urban areas.
(C) Identifying Major Channel Alternatives:
There are several channels options available with any company to market its products like Distributor, Dealer, Wholesaler, Retailer, Sales Force, Agents, Direct Mail, Telemarketing and Internet. It depends upon the company as to which channel it wants to sell its products through.
Eureka Forbes sell it’s Water Purifiers through direct selling and Kent RO Water purifier sells the product through distributor, direct marketing dealers and showrooms. In the same way, Avon sells its cosmetic range through direct selling network, while Revlon, Lakme, Pond’s sell its cosmetics through a regular channel involving stockist, wholesalers and retailers.
At each channel level, a company also needs to decide the number of intermediaries.
There are four distribution Strategies available to the company:
(I) Exclusive Distribution:
Exclusive distribution strategy is generally followed in the case of two wheelers, four wheelers, consumer electronics, men’s and women’s apparels besides other products. A company can provide the best customer experience through its exclusive distribution network.
BMW, Mercedes, Porsche, Maruti Suzuki, Hero Honda, Gucci and Bose try to give the best of sales and service support to the customers. Fast food companies like McDonalds, Pizza Hut and Domino’s Pizza also go for exclusive distribution through their franchisees.
(II) Intensive Distribution:
Intensive distribution is just the opposite of Exclusive distribution. A company tries to sell its products through many channels to get more market share. It works well in the low cost and low involvement products. Most of the convenience goods are sold through a wide variety of different retail outlets.
The distribution setup of HUL is based on intensive distribution. Mobile service providers like Airtel, Aircel, Vodafone, Reliance, Tata etc. are also following the strategy of intensive distribution.
(III) Selective Distribution:
Selective distribution is about choosing the middle path to sell your goods. Selective distribution is about selling the products in few places, rather than all the places. In the consumer electronics category, apparels category, PCs, Laptops Netbooks and Mobile category, companies prefer to go for selective distribution.
Companies like Sony, LG, Levi’s, Wrangler, HP and Acer generally go for selective distribution by having their own brand shops like Sony World or LG Best Shop or Samsung Plaza; or selling through big retailers like Big Bazaar, Croma, e-Zone, Reliance Digital or selling through retailers or resellers.
Besides the types and number of intermediaries, a company should also decide the role and responsibilities of its channel partners with respect to price policy, conditions of sale and distributors’ territorial rights. It helps to build a long term relationship with its channel partners. In the case of exclusive dealerships and franchisee, these rights and responsibilities in black and white becomes more important.
(IV) Evaluating Major Channel Alternatives:
Channels of distribution may be evaluated on such primary criteria as cost of distribution, coverage of market (penetration), customer service, and communication with the market and control of distribution networks. A detailed cost analysis of distribution is the first step in evaluating various channel alternatives on a sales-cost basis.
The decision that a company should go with wholesalers or it should have its own branch office depends upon the costs involved into that. Generally costs can be calculated from the published sources and through market information network.
Companies generally try to move towards lower cost channels. Among all the channel alternatives, Internet is the lowest cost channel, while Direct Sales Force is the highest. In between channel like Telemarketing, Retail Stores, Distributors, Value Added Partners exists.
Coverage of the market is also important to help you out in decision making. Coverage can be decided on the basis of number of customers or on the basis of a geographical area. In both the cases, the cost is taken into consideration for channel decision making.
In managing the channels, control is also very important. Mostly in the cases of industrial equipment and technical products, the sales agents need to be intelligent enough to solve the technical queries. These agents should also handle the promotions carefully. In the changing market situation, a company needs to be adaptive responding to a changed business environment.
Marketing Channel – Methods to Manage Channel Conflicts
Some amount of healthy competition is necessary to foster growth. However, when competition moves towards conflicts, it can be highly dysfunctional.
Some of the important methods to manage channel conflicts are explained here:
i. Adoption of Super-ordinate goals – The channel members somehow agree to work towards a fundamental goal that they jointly seek, and in doing so, resolve their conflicts.
ii. Exchange of Persons – Here, persons from the channel member’s organisation work in the manufacturing organisation, while those from the manufacturing organisation work in the channel member’s offices. This results in them appreciating each other’s roles and constraints, and helps resolve conflicts.
iii. Co-optation – Here, one organisation gets the support of the other organisation by involving leaders of the other organisation on their advisory boards, councils, etc.
iv. Joint Membership in and between Trade Associations – Co-operation or joint membership of trade associations can help in arriving at common practices and codes that can help in resolving conflicts.
v. Diplomacy – This happens when a conflicting side sends a representative to meet with a counterpart from the other organisation to resolve the conflict.
vi. Mediation – This involves referring the conflict to a neutral third party that helps reconcile the conflict between the two parties.
vii. Arbitration – This occurs when the two conflicting parties agree to present their arguments to an arbitrator (a third party) and abide by his decision.