Channels of Distribution – SS2 Marketing Lesson Note (First Term)

A channel of distribution is the route through which goods and services move from the producer to the consumer.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define a channel of distribution.
2. Name the channel members.
3. Describe the channels used for consumer and industrial goods.
4. State the functions of a distribution channel.
5. List the requirements for a good channel of distribution.

What is a distribution channel?

A distribution channel is the route, avenue or pathway through which goods and services flow from the producer to the consumer.

• Set of agencies: a channel is the group of agencies through which a seller markets a product to the ultimate consumer.
• The seller: the seller may or may not be the manufacturer.
• Choice of channel: channels are mainly determined by where purchasers want to buy the product.
• Direct channel: goods pass with no intermediaries.
• Indirect channel: goods pass through one or more intermediaries.

Who are the channel members?

The main channel members are the producer, the wholesaler and the retailer.

1. Producer: makes or grows the goods, such as a farmer, a baker or a factory owner.
2. Wholesaler: buys in large quantities from producers and sells in smaller lots to retailers.
3. Retailer: buys from the wholesaler or producer and sells in small quantities to consumers, as in a provision shop.

• Agent: an intermediary who links buyers and sellers without owning the goods, and earns a commission.
• Consumer: the final user of the product, who ends the channel.

What is the difference between a direct and an indirect channel?

A direct channel moves goods from producer to consumer with no intermediary, while an indirect channel uses one or more intermediaries.

• Direct channel: a baker sells bread straight to buyers at the bakery.
• Indirect channel: a producer sells to a wholesaler, who sells to a retailer, who sells to the consumer.

What are the distribution channels for consumer and industrial goods?

There are seven common channels: four for consumer goods and three for industrial goods.

Channels for consumer goods

Consumer goods are goods bought by individuals and households for personal use.

1. Producer ➡ consumer: the shortest channel, as when a farmer sells at the farm gate.
2. Producer ➡ retailer ➡ consumer: the producer sells to a retailer, who sells to the consumer.
3. Producer ➡ wholesaler ➡ retailer ➡ consumer: the traditional and longest common channel.
4. Producer ➡ agent ➡ retailer ➡ consumer: an agent finds retailers for the producer and earns a commission.

Channels for industrial goods

Industrial goods are goods bought by businesses for use in production or in running the business.

1. Producer ➡ business customer: the producer sells directly to a firm, as with large machines.
2. Producer ➡ business industrial distributor ➡ business consumer: a distributor stocks the goods and supplies firms.
3. Producer ➡ manufacturer’s representative ➡ business distributor ➡ business customer or industrial user: the longest industrial channel, with a representative who sells for the producer.

What are the functions of a distribution channel?

The functions of a distribution channel are the tasks channel members perform to move goods from producer to consumer.

1. Promoting products: it helps to spread information about a firm’s product.
2. Assisting in merchandising: members help to display and present goods so that they attract buyers.
3. Physical distribution: members transport and store goods until buyers need them.
4. Financing: the financial burden is often shared by channel members through the financing of the flow of goods.
5. Facilitating information gathering: members pass market information, such as customers’ needs, back to the producer.
6. Promoting negotiation: members agree on price and other terms of sale.
7. Sorting: channel members are charged with sorting out, accumulating, allocating and assorting products and services.
8. Providing salesmanship: members persuade customers to buy.
9. Encouraging risk-taking: members share risks such as damage, theft and unsold stock.
10. Encouraging contact: members find and keep in touch with buyers and sellers.

What are the requirements for a good channel of distribution?

A good channel is flexible, cost-effective and well coordinated among its members.

1. Flexibility: the channel chosen must be able to change as the market changes.
2. Interdependence: there must be a high degree of interdependence among all parties in the channel for any given product.
3. Cost-effectiveness: the channel should be worth the expected returns or objective of the company.
4. Consumer-first design: channel design should begin with the final consumer and work backwards to the producer.
5. Market share: the channel should give the company access to a predetermined share of the market.

What factors affect the choice of a channel?

A firm chooses a channel by looking at its product, its market and its own resources.

• Nature of the product: perishable goods such as fresh fish need short channels.
• Size of the market: a large and scattered market needs intermediaries.
• Cost: the firm compares the cost of each possible channel.
• Producer’s resources: a firm with little capital may depend on wholesalers and agents.
• Buyers’ habits: the channel should be where customers want to buy.

Evaluation

1. Define a channel of distribution.
2. Name the three channel members.
3. Write out the channel that includes an agent.
4. State four functions of a distribution channel.
5. List three requirements for a good channel of distribution.

Assignment

1. Explain the difference between a direct and an indirect channel of distribution, giving one example of each.