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What are Channels of Distribution?

Channel of distribution is mainly concerned with the physical distribution of goods and services. It is the pipeline through which products move from producer to consumer. It consists of all the middlemen who participate in the distribution of goods and services.

Every small-scale entrepreneur requires a channel that can distribute his products to the right customers at the right place at the right time and at the right cost.

Types of Channels of Distribution

Depending on the number of middlemen involved, channels of distribution may be categorized. A channel symbolizes the path for the movement of title, possession, and payment for goods and services. These are the important types of channels of distribution:

1. Manufacturer – Customer – Channel (Direct Sale)
2. Manufacturer – Retailer – Customer
3. Producer – Wholesaler – Consumer
4. Producer – Wholesaler – Retailer – Consumer
5. Producer – Agent – Wholesaler – Retailer – Consumers

Manufacturer – Customer – Channel (Direct Sale)

This is the shortest and simplest channel a product can follow to the market. A producer may sell directly through his retail stores (e.g. Bata), through mail, or through door-to-door selling. However, a small-scale manufacturer rarely uses this channel as it requires investment and expertise for direct selling.

Hence this channel is not popular for a wider market. This is more common in the distribution of industrial goods like heavy machinery, industrial chemicals, etc.

Manufacturer – Retailer – Customer

This channel option is preferable when buyers are large retailers, e.g. a department store, discount house or cooperative stores. This channel is very popular in the distribution of consumer durables like, TV sets, Washing Machines, Mobiles etc.

The wholesaler can be bypassed in this trade route. It is also suitable when products are perishable and speed in distribution is essential. However, the manufacturer has to perform the functions of a wholesaler such as storage, insurance, and transport.

Producer – Wholesaler – Consumer

A wholesaler may bypass retailers when there are large and institutional buyers e.g., business buyers, government, consumer cooperatives, educational institutions, etc.

Producer – Wholesaler – Retailer – Consumer

This is a normal, regular, and popular channel option used in groceries, drugs, cosmetics, etc. It is quite suitable for small-scale producers under the given conditions:

1. He has a narrow product line.
   
2. He has limited finance.
   
3. Wholesalers are specialized and can provide strong promotional support.
   
4. Products are durable and not subject to physical deterioration or fashion change.

Producer – Agent – Wholesaler – Retailer – Consumers

In this channel, the producer uses the service of an agent middleman such as a sole selling agent, for the initial dispersion of goods. The agent may distribute to wholesalers, who in turn sell to retailers. Agent middlemen generally operate at the wholesale level. They are common in agricultural marketing.

Factors Affecting Choice of Channels of Distribution

The selection of a distribution channel is a difficult decision. Channels decisions also require special attention as these involve long-term commitments to other firms with whom the marketer enters into a contract, chosen channel cannot be terminated overnight.

While choosing a distribution channel, the producer should compare the costs, sales volume, and profit expected from alternative channels of distribution. A small-scale manufacturer has to consider a number of factors for the selection of the right channel for distribution. The following are the factors affecting choice of channels of distribution:

1. Product
2. Nature of Market
3. Middlemen
4. Competitors
5. Nature of Firm

Product

• If a commodity is perishable or fragile, a producer prefers few and controlled levels of distribution.
  
• For durable goods longer and diversified channels may be necessary.
  
• When a product is technically complex dependable installation and maintenance services are required. Therefore computers and other products are sold directly.
  
  
• Standardized and highly branded products like toothpaste soap, detergents, etc. can better be sold through a long channel.

Nature of Market

• For the consumer market, the retailer is essential, whereas in the business market, we can eliminate the retailer.
  
• If the market size is large, we have many channels, whereas in a small market, direct selling may be profitable. In the case of a mass market and geographically scattered customers, a longer channel becomes necessary. Customers’ requirements for credit, home delivery, etc. also influence the choice of channel of distribution.

Middlemen

• Middlemen who can provide wanted marketing services will be given first preference.
  
• The selected middlemen must offer maximum cooperation, particularly in promotional services.
  
• Legal restrictions are important. For example, liquor and drugs are to be marketed through licensed shops only.

Competitors

Marketers closely watch the channels used by rivals. Sometimes marketers deliberately avoid customary channels which are dominated by rivals and adopt different channel strategies.

Nature of Firm

Direct selling is possible only when the manufacturer is financially strong and possesses marketing expertise. For a single-product firm, direct selling is not economical. The distribution policy of the firm also influences the choice of distribution channel.

FAQs Section About Channels of Distribution