Choice of Distribution Channel – SS2 Marketing Lesson Note (First Term)

The choice of distribution channel is the decision a company makes on how its product will reach buyers.

Behavioural objectives

1. State the factors that influence the choice of distribution channel.
2. Explain how the market and the product affect the choice of channel.
3. Describe the middlemen characteristics a company considers when choosing a channel.
4. Explain why a company may use middlemen and why it may want channel control.
5. List the competitive and environmental factors that affect channel design.

What is a distribution channel?

A distribution channel is the route a product follows from the producer to the final buyer.

• Middlemen: businesses or persons between the producer and the buyer that help to move and sell the product.
• Wholesaler: buys in large quantities from producers and sells in smaller quantities to retailers.
• Retailer: sells goods in small quantities to final consumers, as in a supermarket or a provision shop.
• Agent: sells on behalf of the producer for a commission and does not usually own the goods.

What are the common types of distribution channel?

There are four common channels for consumer goods: direct, through retailers, through wholesalers and retailers, and through agents.

• Producer to consumer (direct): the producer sells straight to the buyer, as a farmer does at the farm gate.
• Producer to retailer to consumer: the producer supplies retailers, as when a manufacturer supplies supermarkets.
• Producer to wholesaler to retailer to consumer: the longer route, common for provisions and toiletries.
• Producer to agent to wholesaler to retailer to consumer: an agent finds buyers and earns a commission.

What factors influence the choice of distribution channel?

Eight factors influence the choice: the company’s objective, the market, product characteristics, middlemen characteristics, managerial ability, desire for channel control, competition and the environment.

1. Company’s objective

• Meaning: the channel must help the company to reach its goals.
• Example: a company that wants wide market coverage needs more middlemen than one that wants a select image.

2. Market consideration

• Market: the actual or potential buyers of a given product.
• Main question: is the product for the consumer market or the industrial market?
• Other points: the number of buyers, how widely they are spread and the size of their orders.

3. Product characteristics

• Unit value: low-value goods such as sachet water use many middlemen. High-value goods such as cars use few.
• Perishability: goods that spoil quickly, such as fresh fish and bread, need short channels.
• Technicality: complex goods such as machinery need installation and servicing, so they are often sold directly.

4. Middlemen characteristics

• Services rendered: the channel depends on the services the middlemen offer, such as storage, credit and promotion.
• Availability and willingness: the desired middlemen must be available and willing to handle the product.
• Ability: the middlemen must be able to render the services required.
• Attitude to company policies: they must accept the company’s pricing and promotion policies.

5. Managerial ability

• Problem: management may lack the skill or capacity to handle distribution.
• Solution: the company turns to middlemen, who are professionals in distribution.

6. Desire for channel control

• Aggressive promotion: a company that controls its channel can push the product harder.
• Merchandise control: it can better manage how the goods are stocked and handled.
• Retail price control: it can keep the retail price of the product steady.

7. Competitive consideration

• Meaning: competitors are part of the task environment that affects how a company serves its target market.
• Methods used by competitors: the company studies the channels rivals use.
• Financial strength of competitors: strong rivals can afford wider and more costly channels.
• Competitors’ market share: a large share may show which channels work well in the market.

8. Environmental characteristics

• Prevailing economic situation: in a weak economy, firms may choose cheaper and shorter channels.
• Legal regulations and constraints: laws may restrict how some products are sold.
• Technological change: new technology, such as online selling, creates new ways to reach buyers.

Why does a company use middlemen?

A company uses middlemen because they can do distribution work more cheaply and more skilfully than the company can.

• Expertise: middlemen are professionals in selling and distribution.
• Wider coverage: they place the product in many areas the producer cannot reach alone.
• Storage: they keep stock close to buyers.
• Lower cost: the producer does not need its own shops, vehicles and sales staff everywhere.

Evaluation

1. List the factors that influence the choice of distribution channel.
2. Define a market. How does the type of market affect the choice of channel?
3. State three product characteristics that a company considers when choosing a channel.
4. Why might a company’s management turn to middlemen for distribution?
5. What competitive considerations must be taken into account when designing a channel?

Assignment

1. Explain any four factors that influence the choice of distribution channel. In your answer, include the middlemen characteristics and the environmental characteristics a company considers.