Distribution is the process of making a product or service available for use or consumption by a producer or business provider. It is the movement of goods and services from the source through a distribution channel, right up to the final customer.
TYPES OF DISTRIBUTION
Three types of distribution can be used to make product available to consumers: (1) intensive distribution, (2) selective distribution and (3) exclusive distribution.
- Intensive distribution: In intensive distribution, the product is sold to as many appropriate retailers or wholesalers as possible. Intensive distribution is appropriate for products such as chewing gum, candy bars, soft drinks, bread, film, and cigarettes where the primary factor influencing the purchase decision is convenience. Industrial products that may require intensive distribution include pencils, paperclips, transparent tape, file folders, typing paper, transparency masters, screws, and nails.
- Selective distribution: In selective distribution, the number of outlets that may carry a product is limited, but not to the extent of exclusive dealing. By carefully selecting wholesalers or retailers, the manufacturer can concentrate on potentially profitable accounts and develop solid working relationships to ensure that the product is properly merchandised. The producer also may restrict the number of retail outlets if the product requires specialized servicing or sales support. Selective distribution maybe used for product categories such as clothing, appliances, televisions, stereo equipment, home furnishings, and sports equipment.
- Exclusive distribution: When a single outlet is given an exclusive franchise to sell the product in a geographic area, the arrangement Is referred to as exclusive distribution. Products such as special automobiles, some major appliances, certain brands of furniture, and lines of clothing that enjoy a high degree of brand loyalty are likely to be distributed on an exclusive basis. This is particularly true if the consumer is willing to overcome the inconvenience of travelling some distance to obtain the product. Usually, exclusive distribution is undertaken when the manufacturer desires more aggressive selling on the part of the wholesaler or retailer, or when channel control is important, exclusive distribution may enhance the product’s image and enable the firm to charge higher retail prices.
Sometimes manufacturers use multiple brands in order to offer exclusive distribution to more than one retailer or distributor. Exclusive distribution occurs more frequently at the wholesale level than at the retail level. In general, exclusive distribution lends itself to direct channels (manufacturer to retailer). Intensive distribution is more likely to involve indirect channels with two or more intermediaries.
CHANNELS OF DISTRIBUTION
A distribution channel is the method a channel is defined as the path or route along which goods move from producers or manufacturers to ultimate consumers or industrial users. In other words, it is a distribution network through which producer puts his products in the market and passes it to the actual users.
An entrepreneur has a number of alternative channels available to him for distributing his products. These channels vary in the number and types of middlemen involved. Some channels are short and directly link producers with customers. Whereas other channels are long and indirectly link the two through one or more middlemen.
These channels of distribution are broadly divided into four types:
- Producer to Customer: This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is a fast and economical channel of distribution. Under it, the producer or entrepreneur performs all the marketing activities by himself and has full control over distribution. A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial products of high value. Small producers and producers of perishable commodities also sell directly to local consumers.
- Producer to Retailer to Customer: This channel of distribution involves only one middlemen called ‘retailer’. Under it, the producer sells his product to big retailers (or retailers who buy goods in large quantities) who in turn sell to the ultimate consumers. This channel relieves the manufacturer from the burden of selling the goods himself and at the same time gives him control over the process of distribution. This is often suited for distribution of consumer durables and products of high value.
- Producer to Wholesaler to Retailer to Customer: This is the most common and traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers, and retailers finally sell the product to the ultimate consumers. This channel is suitable for the producers having limited finance, narrow product line and who needed expert services and promotional support of wholesalers. This is mostly used for products with widely scattered market.
- Producer to Agent to Wholesaler to Retailer to Customer: This is the longest channel of distribution in which three middlemen are involved. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents. The agents distribute the product among a few wholesalers. Each wholesaler distribute the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products.
FACTORS THAT INFLUENCE THE CHOICE OF DISTRIBUTION CHANNELS
The following factors must be considered before selecting the distribution channels.
- Nature of product: Nature of product has influence on the selection of a channel of distribution. In the case of industrial goods like machinery and equipment, the manufacturer sells directly to industrial user, but in the case of tools, sales take place through middlemen.
- Nature of market: Choice of suitable channel of distribution also depends on the nature of market. Location of the market and the buying habits of buyers are also analysed.
- Distribution expenses: If the producer makes direct selling, he will have to spend on distribution. But, if the product gets good response from the dealers, a producer will prefer to sell through them to reduce his distribution expenses.
- Mutual cooperation: Choice of channel of distribution depends on the mutual cooperation between the manufacturer and the dealers.
- Company considerations: The character of the company also influences the selection of channel. If the management lacks marketing know how, it may prefer to depend on middleman.
- Prompt payment: A producer may not like to sell to retailers or big consumers because they insist to make purchase on credit. He, therefore, prefers to sell to a wholesaler who purchases usually on ready cash.
- Popularity of goods: If the goods are popular among the consumers, the dealers themselves come forward to buy. Then the producer may not like to open his own shops to sell the goods.
- Price and profit: Where the price of the goods is low and the profit margin is small, the producer sells through a middle man. It is profitable for the producer to sell through the dealers. Here, the producer can maximize his profit by depending on quality production.
- Structure of retailing: Selection of channel also depends on the structure of retail trade in a product. The manufacturer will consider the number of stores selling the product, convenience of shopping to the buyers, service provided by the retailers, availability of retailers and sale volume before selecting a channel of distribution.
- Financial resources: A firm’s reputation can affect its channels. A financially strong company needs middlemen more than one, who is financially buoyant. A business with adequate finances can establish its own sales force and even branch organization.
FUNCTIONS OF A DISTRIBUTION CHANNEL
- The primary function of a distribution channel is to bridge the gap between production and consumption.
- A close study of the market is extremely essential. A sound marketing plan depends upon thorough market study.
- The distribution channel is also responsible for promoting the product. Awareness regarding products and other offers should be created among the consumers.
- Creating contacts for prospective buyers and maintaining liaison with existing ones.
- Understanding the customer’s needs and adjusting the offer accordingly.
- Negotiate price and other offers related to the product as per the customer demand.
- Storage and distribution of goods.
- Catering to the financial requirements for the smooth working of the distribution chain.
- Risk taking, for example, by stock holding.
BENEFITS OF INTERMEDIARIES
If selling directly from the manufacturer to the consumer were always the most efficient methodology for doing business, the need for channels of distribution would be obviated. Intermediaries, however, provide several benefits to both manufacturers and consumers: improved efficiency, a better assortment of products, routinization of transactions, and easier searching for goods as well as customers.
The improved efficiency that results from adding intermediaries in the channels of distribution can easily be grasped with the help of a few examples. Take five manufacturers and twenty retailers, for instance. If each manufacturer sells directly to each retailer, there are one hundred contact lines from each manufacturer to each retailer. The complexity of this distribution arrangement can be reduced by adding wholesalers as intermediaries between manufacturers and retailers. If a single wholesaler serves as the intermediary, the number of contacts is reduced from one hundred to twenty-five: five contact lines between the manufacturers and the wholesaler, and twenty contact lines between the wholesaler and the retailers. Reducing the number of necessary contacts brings more efficiency into the distribution system by eliminating duplicate efforts in ordering, processing, transporting, etc.
In terms of efficiency, there is an effect of diminishing returns as more intermediaries are added to the channels of distribution. If in the example above, there were three wholesalers instead of only one, the number of essential contacts increases to seventy-five : fifteen contacts between five manufacturers and three wholesalers, plus sixty contacts between three wholesalers and twenty retailers. Of course this example assumes that each retailer would order from each wholesaler and that each manufacturer would supply each wholesaler. In fact geographic and other constraints typically eliminate some lines of contact, making the channels of distribution more efficient.
Intermediaries provide a second benefit by bridging the gap between the assortment of goods and services generated by producers and those in demand from consumers. Manufacturers typically produce large quantities of a few similar products, while consumers want small quantities of many different products. In order to smooth the flow of goods and services, intermediaries perform such functions as sorting, accumulation, allocation, and creating assortments. In sorting, intermediaries take a supply of different items and sort them into similar groupings, as exemplified by graded agricultural products. Accumulation means that intermediaries bring together items from a number of different sources to create a larger supply for their customers. Intermediaries allocate products by breaking down a homogeneous supply into smaller units for resale. Finally, they build up an assortment of products to give their customers a wider selection.
A third benefit provided by intermediaries is that they help reduce the cost of distribution by making transactions routine. Exchange relationships can be standardized in terms of lot size, frequency of delivery and payment, and communications. Seller and buyer no longer have to bargain over every transaction. As transactions become more routine, the costs associated with those transactions are reduced.
The use of intermediaries also aid the search processes of both buyers and sellers. Producers are searching to determine their customers’ needs, while customers are searching for certain products and services. A degree of uncertainty in both search processes can be reduced by using channels of distribution. For example, consumers are more likely to find what they are looking for when they shop at wholesale or retail institutions organized by separate lines of trade, such as grocery, hardware, and clothing stores. In addition, producers can make some of their commonly used products more widely available by placing them in many different retail outlets, so that consumers are more likely to find them at the right time.