What is Channel marketing ?
Channel marketing focuses on the distribution of products from the manufacturer to the consumer. It is part of the distribution (“place”) component in the four P’s of the “marketing mix” – product, pricing, promotion, and place.
Most manufacturers do not sell directly to end user. There are a set of intermediaries performing a variety of functions called as Marketing Channel, also called Trade Channel or Distribution Channel.
Table of Content
- 1 What is Channel marketing ?
- 2 Kinds of Intermediaries
- 2.1 1.Merchant Middleme
- 2.2 Three categories of wholesalers
- 2.3 Small scale retailers
- 2.4 Large scale retailers
- 2.5 Agent middlemen
- 2.6 Classification of Agent Middlemen
- 3 Types of Channels
- 4 Channel Strategies
- 4.1 Exclusive Distribution
- 4.2 Intensive Distribution
- 4.3 Selective Distribution
- 4.4 Product
- 4.5 Customer
- 4.6 Type of market
- 4.7 Organisations objectives and resources
- 4.8 Marketing environment
- 4.9 Availability of intermediary
- 4.10 Channel partner capabilities
- 4.11 Cost
- 4.12 Competitors control and choice of intermediaries
- 5 Steps Involved In Designing A Marketing Channel
- 6 Managing Retailing, Wholesaling and Market logistics
- 6.1 Managing Major functions of retailers
- 6.1.1 Buying and Assembling
- 6.1.2 Warehousing and storing
- 6.1.3 Selling for final consumption
- 6.1.4 Promotion of brands
- 6.1.5 Credit facilities
- 6.1.6 Risk bearing
- 6.1.7 Grading and packaging
- 6.1.8 Source of market information
- 6.1.9 Customer education
- 6.1.10 Cater to the needs of all kinds of customers
- 6.1.11 Managing Major Functions of Wholesalers.
- 6.1.12 Buying and assembling
- 6.1.13 Warehousing
- 6.1.14 Breaking the bulk
- 6.1.15 Dispersing of products to retailers scattered in the target market
- 6.1.16 Source of market information
- 6.1.17 Financing
- 6.1.18 Grading and Packaging
- 6.1.19 Transportation
- 6.1.20 Risk bearing
- 6.1.21 Advertising
- 6.1 Managing Major functions of retailers
- 7 Market Logistics : Objectives and Decisions
- 8 FAQ
Channel marketing is usually applied to products, it can also be used to market ideas and services. Marketing channels help organisations expand their reach and their revenue. However, each marketing channel offers a different combination of coverage and performance, and so they are used in combination.
Kinds of Intermediaries
Intermediaries, also known as middlemen and re–sellers. These can be organisations as well as individual business men. There are two types of middlemen, one those who take title to the products (merchant middlemen), and others who just facilitate the sale and purchase of product without taking title of them (agent middlemen).
These are the organisations that buy and resell products to other resellers like retailers, other merchants or to industrial buyers, and not in significant amount to end users. They take title to the products, buy in large quantities and break down the bulk as required by retailers, etc.
Three categories of wholesalers
Full function wholesaler
after buying sell them to other resellers like retailers, traders, etc. below the marketing or distribution channel.
process them before selling them to the following channel members. (textile bleaching before selling).
They sell the products to manufacturers instead of retailers.
Drop shipper wholesaler
They take orders and coordinates with the manufacturer to deliver the goods directly to the retailer or other merchants in the channel (like coal).
Retailers sell products / goods to final consumers. Retailers buy the products from different sources like manufacturers, wholesalers, traders, etc. They are considered the final link with the consumer in the marketing/ distribution channel. Retailers can be broadly classified as small–scale retailers and large–scale retailers.
Small scale retailers
Unit stores – are general stores or single line stores (clothes, gift shops, grocery stores)
Street traders – sell products on streets, footpaths. (mobile accessories, gloves)
Market traders – have a fixed location and arrangement made for selling like a selling van, setting a kiosk, outlet, etc. on a fixed location (farmers market).
Hawkers and Peddlers – sell goods door to door on their cart, bicycle, etc. They carry items as per the demand of different products (woollen clothes in winter).
Cheap jacks – have a specific place in a locality but do change locations (unbranded items like clothes, plastic items, kitchen utensils).
Large scale retailers
Has wide variety of products being sold under one roof. They sell a particular specialised product or an entire product line.
Sells standard items at lower prices. The business is done on higher sales and lower profit margins (Wal–Mart).
These are stores near residential areas selling the same kind of products in different localities. These can be in the entire region, state or nation. (Nike stores, Raymond, Big Bazaar). These centrally owned and managed.
They mostly deal in same products across all chains like, fast food chains, Nike products, etc. The items for sale are bought centrally and sent across to all the chains. Since it operates under the same brand, the prices and quality are standardised. For E.g., a McDonald’s outlet will have same kind of price range and feel and appearance of the store in different locations.
Mail order houses
Shares information about the product via different means like advertising, press, post, catalogue, tele–calling, etc. The buyer doesn’t visit the seller but orders the product and receives it via post, courier, etc. The product is not inspected by the customer.
Sells a variety of consumer goods with self–service (food items and articles of daily needs like, cold cream, bakery, vegetables).
oversize department stores and also known as hypermarkets. They carry a wide range of general merchandise. A customer can get services like haircuts, restaurants.
These are small stores that deal in limited– line of high selling goods at a higher price. They are like mini– supermarkets.
It is an association of consumers who buy products in large bulk for members as well as non–members. The consumers or locality residents themselves manage all the activities from designating a manager to setting the policies of the store.
They facilitate the sale and purchase of product without taking title of them. They negotiate the sales between sellers and buyers, and generally receive commission for their service.
Classification of Agent Middlemen
Do not assume any risk of the products and receives a fixed rate of commission for his service. They are expert in dealing with the commodities they deal in and have knowledge about the market trends and the producers. They take orders and arrange the transport, delivery and payment transactions. He may or may not take possession of goods.
They are agents who do bargains and arrangements between parties and receives a compensation known as brokerage. They bring the buyers and sellers on one platform for discussion.
Forwarding and Clearing Agents
Fulfil the responsibility of collecting and delivering of products on behalf of others. They are mostly dominant in export and import business.
Types of Channels
- Conventional marketing channel
- Vertical marketing channel
- Multiple marketing channel
Conventional marketing channel
Conventional marketing channel Members work independently with each other and no member has control over other member. It comprises on autonomous / independent manufacturer, wholesaler and retailer. Each member is concerned about increasing the profits of its business and not the profit of the entire channel.
Manufacturer performs the function of product development, branding, pricing, promoting and selling. Wholesaler performs its function of buying, stocking, promoting, displaying, selling, delivering, finance, etc. The decision making resides in each firm and there is lack of proper planning to achieve the objectives of the entire channel.
Vertical marketing channel
Manufacturer, wholesaler and retailer working as one system. They formally agree to cooperate with each other, through contractual agreement. They work in cohesion, and generally without conflicts. Once the channel operates as a one system and managed by one member, there is much clarity and coordination among channel members to achieve the channel objectives.
Multiple marketing channel
Manufacturer utilises two or more marketing channels in the target market. This channel can be planned and implemented for more market coverage by targeting additional segments. For E.g., with ecommerce a segment of consumers that like home delivery, a manufacturer can open a company store in the target market.
Customers would prefer a company store rather than an intermediary because of reasons like brand image, etc. and the firm saves on the margins that it shares with the channel members. If the firm is a market leader, it will cut out the additional channel which also brings competition among the intermediaries.
This provides proper education, and service for complex products to the customer and a reliable feedback to the organisation.
Organisations, depending on their marketing strategy, decide on the number of channel members. There are three channel strategies that organisations choose from.
- Exclusive Distribution
- Intensive Distribution
- Selective Distribution
In exclusive distribution, a firm selects only one or few intermediaries for product distribution. This leads to a strong relationship and support between the manufacturer and the intermediary, becoming highly dependent on each other.
Manufacturer requires the knowledge and distribution expertise of the intermediary. The intermediary promotes the product as they get higher sales. If the manufacturer contracts with another intermediary, the relationship between intermediary and the manufacturer hits a low.
Intermediaries may block the sale of products at its outlet. TV series sign exclusive contracts with networks for exclusive premier on certain TV channels.
Here, a firm sells product through as many outlets as possible. The products which can be easily accessed by customers without much effort. For E.g., newspapers, milk, soaps, etc. These products do not require much additional services from intermediaries apart from handling and assigning shelf space.
The consumers can get these products when and where they are needed. These are mostly for FMCG products. This strategy provides great brand exposure and consumer convenience is given high priority.
In selective distribution, the manufacturer opts to distribute products at select outlets and in select regions. The product distribution is the main difference between Selective distribution and Intensive distribution. Selective distribution gives more market coverage than Exclusive distribution and better control on the marketing channel than Intensive distribution.
The intermediary may be required to add value in some way like outlet ambience, customer education before and after the sale of the product, etc. This channel is especially appealing to expensive products. For E.g., Cannon cameras can be found in many outlets but some models are sold at select outlets appealing to different customers in the target markets.
Factors that affect the Selection of A Marketing Channel
A detailed study needs to be done for selecting a marketing / distribution channel as it affects the marketing strategy, and the intermediaries in the channel.Therefore, it is essential that a right channel if chosen.
Factors that influence the choice of the channel
The first factor to be considered is the product category. A FMCG product will require different distribution than an automobile. Similarly, the channel of distribution for making a specialised industrial product will be shorter as compared to a consumer product like Shampoo.
Some consumer goods need immediate availability, like perishable bakery items for the risk of shorter life. Similarly, a fragile product will need careful handling by the intermediaries requiring shorter channel. A technical product will need selling from knowledgeable sellers providing demos, etc. Complexity of product and level of sales service also decide the selection of the intermediary.
There is a difference in buying behaviour of consumers and a business buyer. They have to be sold through different channels. A consumer may want to personally inspect vegetables and fruits bought for home consumption. A business buyer (hotel owner) will expect a dealer, company supplier, agent, or a reseller to contacting him for regular supply for a certain period. Similarly, the buying style for consumer and a business buyer will vary like buying on credit, demo by sales team, etc.
Type of market
A large market will require increase in channel members. If the number of buyers is large, it is better to have local presence to understand the pulse of the market. If the market is small, direct selling can be utilised. Number of buyers in the market and their frequency of buying the product affect the choice of channel member.
Organisations objectives and resources
To ensure complete control on the quality, price and after sales service, the organisation with huge resources may sell directly to consumers through its own exclusive outlets. An organisation with less financial resources are dependent on the intermediaries to sell their products. They rely on the experience and expertise of the channel members.
Economic environment affects the choice of marketing channels. For example, a fall in the dollar or euros value will result in increase of product imported from other countries. Similarly, at the time of high inflation, cheaper intermediaries are chosen.
The organisations try to shorten the channel to reduce costs. Technological advancements have given consumers options to buy products through internet. The organisations can control product prices as well as track the number of potential buyers who visited their sites for the product.
Availability of intermediary
The availability of the preferred intermediary influences the selection of the channel member. In their absence, the organisation may opt for an intermediary that is available or invest to open their own stores.
Channel partner capabilities
For a new gadget like mobile phone, a manufacturer can sell it through internet, but a consumer may want to physically inspect it, then the producer will need to make it available at stores with the salesman will be able to educate and influence the sale of the product. Sometimes, the customer is more inclined to buy from a store to ensure easy return and after sales service.
There is cost in distributing products in the market through intermediaries as they are given a share of the profit for their services. Organisations strive to make the channel network as efficient and effective as possible to reduce the costs. The organisations select a channel network that generates high sales with minimum costs.
Competitors control and choice of intermediaries
Sometimes the market leaders control the intermediaries, and threaten to withdraw their products for selling competitors’ products. To avoid conflicts, a firm can sell products directly to consumers if the competitor sells through retailers.
If the rival firms sell through the same retailer, intermediaries are often influenced by whoever gives them higher profit margin. Selecting the best channel is critical for the success of the product in the target market.
The above factors play a critical role in selection. of intermediaries. Organisations need to balance the factors carefully to design an effective and efficient marketing channel.
Steps Involved In Designing A Marketing Channel
A marketing channel not designed effectively will even an excellent product.
Steps for Designing a Marketing Channel :
- Legal and Political
- Channel Selection
- A channel design starts with analysing the market requirements. – Basis the customer, product category, and marketing environment, the organisation has to choose matching channel strategy – Exclusive distribution, Intensive distribution and Selective distribution.
- Availability and capability of the intermediary from wholesaler, retailer, sales personal, agents and brokers, etc. preferred by producer for selling to target market. If not, the organisation will have to opt the second choice of intermediaries.
- Open own stores for direct selling, etc.
- Functions necessary should be clearly defined that the firm can perform by itself like storage, transportation, after sales service, etc.
- Evaluation process involves study of costs involved, time constraints relevant to channel development, availability of channel members, political and legal constraints, functions and control of the channel members.
- This critical process requires expert planning. For E.g., in intensive distribution at retail outlets, the costs may go up but there is also a great possibility of high sales turnover. In contrast, in the presence of a broker, the organisation will need to invest in promotion activities to create awareness. Personal selling gives the organisation control on its selling efforts.
- Channel implementation takes a long time to generate the desired results. The firm has to decide on a channel that can be developed in the shortest period.
- In Vertical Marketing System, the member which has authority over all the member can be the manufacturer, wholesaler or the retailer. If any independent members try to force influence, there will be conflicts.
- The manufacturer–controlled channel gives the manufacturer control over the prices, customer service, market coverage, etc.
- Sometimes the market leaders control the intermediaries, and threaten to withdraw their products for selling competitors’ products.
- If both the rival firms sell through the same retailer, intermediaries often influence sale of a product that gives them higher profit margin.
Legal and Political
Legal and political constrains need careful consideration for channel development. Every state has local laws that can interfere with the channel functions. Similarly, the firm has to outline the terms and conditions on various aspects of rights that can be given to the intermediaries.
An organisation can select one or more channel alternatives. Two factors that affect the final selection are the reach of the intermediaries to the customers in the target market and economic viability in the channel.
Intermediaries considerations for relationship with a producer :
- Profit margin
- Effect on or reaction from other channel members.
- Manufacturer’s brand image and relationship with other members in the market
- Costs involved in functions like storage, promotion, etc.
It requires careful consideration of various factors before final channel selection as the intermediary is the face of the manufacturer. Customers create an image about the manufacturer through the service they receive from the intermediaries. An organisation has to constantly revise its channel strategies and make changes as per the change in needs and wants of customers.
Managing Retailing, Wholesaling and Market logistics
The Retailers classifications are given above under “Kinds of Intermediaries” i.e. Small Scale Retailers – Unit stores, Street traders, Market traders, Hawkers and Peddlers, Cheap jacks and Large–Scale Retailers – Departmental stores, Discount store, Chain stores, Mail order houses, Super market, Super stores, Convenience stores, and Consumer cooperative.
Managing Major functions of retailers
Buying and Assembling
A retailer deals with different kind of products from different manufacturers and brands. They buy these products from the most economical source, different wholesalers and store them in their shops or stores to be bought by the consumers for profit.
Warehousing and storing
Retailers assemble products from different suppliers and store them to be supplied to the consumers on time. They keep enough supply stored with them so as to meet the demand in the market.
Selling for final consumption
Retailers sell products to final consumers for use and consumption. They are the final link in the distribution channel.
Promotion of brands
The manufacturers and wholesalers encourage retailers to display their products on shelves and selling counters to increase sales. Retailers help a brand in getting exposure in the market. Manufacturers try to give higher profit margins to retailers for meeting certain sale targets. Retailers try their best to make sales through salespersons, display on shelves, window displays etc. to maximize sale of products that gives them higher profits.
Many a times, retailers sell products on credit to buyers. They try influencing buyers by accepting payments on installments, etc. and bear the risk of bad debts.
Like wholesalers, retailers also bear the risk of handling the purchased products. They carefully handle products in their stores till the product is made available to the consumers. For E.g., Perishable commodities like milk and bread need to be sold before the expiry date and fragile products like glass and television sets needs careful handling.
Customer preferences also change so the already purchased products with retailers may have a reduced demand in the market. If these products are not sold the retailer has to bear the risk.
Grading and packaging
Many a times the products which are not graded or packaged by wholesalers are packaged by the retailers for convenient selling. The products are packed in small containers of packages with proper information for the convenience of the customers.
Source of market information
Since the retailers are in constant touch with the consumers, they are the best source of information for doing market analysis by the manufacturers and wholesalers. They have ready some data available regarding the product’s sale, feedback and preferences of consumers.
Manufacturers ensure that the retailers are well educated about their products. Sometimes they even have their representatives sent to retailers for answering queries. Retailers play a big role in passing on the information to the customers about the functions, benefits, utility, and characteristics of a product.
Cater to the needs of all kinds of customers
Retailers cater to the needs of all kinds of customers’ basis their financial as well as social status. Retailer’s advice consumers about products that suits their needs. For E.g., a clothes merchant will advice a rich person to go for a particular branded jeans, while a customer will less paying capacity will be advised for a much cheaper option.
Managing Major Functions of Wholesalers.
The Wholesalers classifications are given above under “Kinds of Intermediaries” i.e. Full function wholesaler, Converter wholesaler, Industrial wholesalers, Drop shipper wholesaler.
Buying and assembling
The wholesalers buy products from various manufacturers and assemble them for supply to retailers. They store these products in their warehouses, and ensure supply of product as per demand in particular region.
The quality of the products is kept intact in the warehouse. The products are shipped to retailers on time, basis the demand ensuring the time lag between manufacturing and consumption is efficient and effective. The products reach the consumers as intended by the manufacturer without wear and tear.
Breaking the bulk
The job of breaking the bulk is done by wholesalers as the consumers buy products for household purposes in small quantities. This helps retailers in storing products in small quantities.
Dispersing of products to retailers scattered in the target market
The wholesalers help in dispersing the products all over the market to the retailers. The wholesaler becomes a source of all buying for the retailers. The retailers do not have to contact the manufacturer.
Source of market information
The information about demand, competitors, customer preferences as well as substitute products is available with wholesalers from the retailers. They also disperse information from the manufacturers to retailers. For E.g., launch of a new product by a manufacturer, market position of a manufacturer, etc.
The wholesalers do business on credit with retailers as well as manufacturers. The retailers receive the goods on credit which helps new retailers in the market who cannot buy products in cash. Similarly, wholesalers give advance money to the manufacturers. This function helps in easy flow of products even when the money is not immediately exchanged.
Grading and Packaging
The wholesalers not only break the bulk, but also package the goods in small quantities and grade the quality on the packaging.
The wholesalers buy products from wholesalers and ship them to their warehouses and go–downs. From there, the products are supplied to the retailers, etc. They may employ their own vehicles for transportation. As the wholesaler is in touch with the retailers, the supply is also done effectively (on time) and efficiently (lowest cost possible).
Products are exposed to many risks like destruction – natural as well as unnatural disasters. They can get spoiled during transportation, climate change or may even get spoiled if not sold before the expiry date.
The wholesaler also bears a risk of not sold because of less demand, reduced prices of competitor or substitute products. As the manufacturer has already sold the product to the wholesaler, this risk is borne by the wholesaler.To avoid such risks wholesalers carefully buy products in right quantities.
The wholesalers also do advertising of new products via pamphlets, hoardings, mouth publicity, etc. This helps manufacturers in market growth.
Market Logistics : Objectives and Decisions
Some of the major Market Logistics objectives of a company are as follows :
- Logistics Decisions
- Market Logistics and Cost
- Market Logistics Decisions
Market Logistics objectives can be described as “getting the right goods to the right places at the right time for the least cost. ” This means a market logistics system has to simultaneously provide maximum customer service at the minimum distribution cost.
Maximum customer service implies large inventories, premium transportation and multiple warehouses, all of these raise market–logistics costs. A company cannot achieve market–logistics efficiency by asking its logistics manager to minimize the logistics costs.
For E.g., rail shipment to a distant warehouse is preferred due to lower costs. At the same time, the railways are slower, rail shipment ties up working capital longer, delays customer payment, and might cause customers to buy from competitors with faster service.
Market logistics activities involve strong trade–offs, decisions must be made on a total system basis. Suppliers desire to meet emergency needs, and re–supply defective pieces to customers quickly at their costs, besides the normal on–time delivery, A company must then research the relative importance of these service outputs. For E.g., for a photo copier machine, the least service– repair time is very important.
Market Logistics and Cost
Let us consider, a machine manufacturer has established the following service standards :
- To deliver at least 95 percent of the dealer’s orders within 7 days of order receipt.
- To fill the ‘dealer’s orders’ with 99 percent accuracy.
- To answer ‘dealer inquiries’ on orders with 99 percent accuracy.
- To answer ‘damage to goods in transit’ does not exceed one percent.
- Given above market–logistics objectives, the company must design a system that will minimise the cost of achieving these objectives.
Market Logistics Decisions
Four major decisions must be made with regard to market logistics :
- How should orders be handled ? Order Processing
- Where should stocks be located ? Warehousing
- How much stock should be held ? Inventory
- How should goods be shipped ? Transportation
Channel marketing focuses on the distribution of products from the
manufacturer to the consumer. It is part of the distribution (“place”)
component in the four P’s of the “marketing mix” – product, pricing,
promotion, and place.