Designing Channels of Distribution

Introduction : Some Important Definitions

Distribution : Process of getting goods from the producer to the ultimate consumer

Vehicle of Distribution : Channels – Agents that facilitate and encourage consumer purchase, the
number and nature of which are determined by the producers

Go to Market : How to design a distribution system – is a key strategic marketing decision, with each
approach providing a unique set of benefits and costs

The article examines the extent to which producer/seller relations and incentives determine how
goods and services get to consumers and at what price. When choosing a particular distribution
strategy, a manufacturer must balance three primary considerations :

Efficiency – getting products and services to retailers and consumers at the lowest cost

Effectiveness – market coverage and quality of services produced

Control – ability to determine timing and focus of distribution efforts

Defining a channel of distribution

A channel of distribution is a set of interdependent firms that collaborate to make a product or service
available for end use consumption. It represents a process in which certain activities are performed
and certain flows (movement of goods, material, money and information) must occur as products or
services proceed from provider to end user.

Channel Types
Each channel type serves a specific function in the large distribution system. Some common channel
types are distributors (wholesale distribution), Master distributors, Value added resellers (VARS),
Manufacturer reps and Brokers.

What is the optimal distribution system?

Marketer’s struggle to balance coverage and control. To describe the extent to which a market is
covered, the extent to which a product is available to a selected set of customers, marketer’s speak
of the following types of distribution:

Intensive distribution – strategy whereby the product – often, frequently purchased goods of
relatively low price – is widely available to a very large set of customers.

Pros – Product is ubiquitous, purchasing and finding it is easy for the customer

Cons – Such a widespread distribution makes it very difficult for the manufacturer to maintain control
over how the product is sold. Therefore, he needs to address the trade-off between coverage and
control. High coverage for a product in a highly competitive market reduces the resellers efforts and
focus as competition in distribution lowers returns for the reseller.

Exclusive distribution – reduces the availability of the product and is associated with one outlet per
region or location. Often, certain rights are granted in change of exclusivity, whereby the
manufacturer influences a set of business decisions made by its channel partners.
Pros – Enables greater control over the reseller’s behaviour because of his dependence on the
supplier; elimination of competitors from these exclusive channels, lower transaction costs given the
skewed power equation, greater commitment from reseller

Cons – Tying contracts cab be subject to legal remedies

Selective Distribution – Limited form of distribution where the product is less widely distributed than
if an intensive strategy is employed but is more available than under an exclusive arrangement

Designing Channels of Distribution

Channel design consists of four steps:

Segmentation – addresses the question of how the customer wants to be met in the marketplace.
Focuses on the different segments served by the manufacturer, since different segments should
demand different outputs from the marketing channel. However, it is very difficult to isolate or bound
the channel since consumers tend to frequent multiple channels

Positioning – the channel that optimally serves each of the key segments is identified. It is a matching
process that comprises of channel flows and channel structure

Targeting – deciding which segments will be served and which will not be depending on “managerial
bandwidth”, resource allocations and competitive realities

Implementation – Here the manager must address the issues of power, conflict and channel
coordination

Changing Channel Designs

Factors that can force management to change channel designs:

1. Proliferation of customer needs, end user demanding unique solutions

2. Shift in power from one level in the channel to another
3. Change in strategic priorities

Recent Trends in Channels of Distribution

Customer self-service, strategic sourcing, fee-based services, logistics and fulfilment, technology
spending

Channel Incentives : The use of Margins

Determining net selling and buying prices for distributors can be surprisingly difficult because of the
various allowances earned from suppliers and granted to customers. Manufacturer’s frequently offer
distributors additional compensation in return for early payment of invoices (terms), meeting sales
goals (volume rebates or incentives), buying in minimum sized lots (e.g, truckload discounts), or
performing services (merchandizing or promotional allowances). Another way to compensate
resellers is to engage in functional discounting, in which the margin is based not on one’s position in
the channel but on performance.

Corporate Brands and Role of Channel Partners

The strength and nature of a manufacturer’s corporate reputation and brand image also affect the
design and implementation of a distribution strategy. Known primarily by the company it keeps, a
reseller must often rely on manufacturer’s to bolster its brand equity, since relying on a partner of
questionable reputation can immediately tarnish one’s own.