DISTRIBUTION CHANNELS

CHAPTER 2-CHANNEL DESIGN DESIONS

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Synopsis:
2.0 Introduction
2.1 Analyze Customers Desired Service Output Levels
2.2 Establish objectives and constraints
2.3 Identify & evaluate major channel alternatives

2.0 Introduction
Channel design decisions are of great importance, as they involve huge expense to establish a new
marketing channel or refining an existing channel. Any flaw in the design will be disastrous due to
huge cost involved in such a decision. Marketing channel design decision involves two major tasks
viz., (a) designing the right channel and (b) implementing that channel.
Design step involves segmenting the market, identifying optimal positioning responses to
segments demands, targeting the segments to focus channels efforts, establishing the channel to
manage in market place.
Implementation step involves understanding each channel members sources of power and
dependence, an understanding of the potential for channel conflict. Effective execution of optimal
channel design is called channel coordination.
Others things being equal (particularly price), end users will prefer to deal with a marketing
channel that provides a higher level of service outputs. Channel design decision calls for a fine art
of balancing the cost involved and meeting the expected service level outputs of the end-user.
2.1 Analyze Customers Desired Service Output Levels
Marketing channel system design and management, like the management of any other marketing
activity, requires starting with the end-user. The channel manager must first understand the nature
of end-users demands in order to design a well-working channel that meets or exceeds those
demands. The most useful demand-side insights for marketing channel design are not about what
end-users want to consume, but about how end-users want to buy and use the products or services
being purchased. Here, marketing effort is more focused on how to sell rather than on what to sell.
To understand the desired service output levels, it is critical to know the end-user demands and
preferences in the market places. The demand for service output varies depending on the time
taken to search, waiting time, storage and other costs. The service output levels differ depending
on the end-user preferences and the market segment to which he belongs to. Consider the
following table for more clarity:

Service Output
Bulk-breaking

Spatial
Convenience

FAMILY
Descriptor

Service Output
Demand Level
I buy groceries Low
weekly for my
family, and all of
us like soft drinks
I
drive
to Low
supermarkets in
my area to shop

Waiting
and We actually have Low
delivery time
some extra cans
of soft drink in
the house, so I
will just come
back the next
time if I cant
find the soft
drinks I want on
this trip.
Assortment and My husband and High
variety
I like Coke and
Pepsi, but our
kids
are
not
permitted to drink
caffeinated soft
drinks. They like
caffeine-free

OFFICE EMPLOYEE
Descriptor
Service Output
Demand Level
I am on my High
coffee break and I
have time for
only one can of
soft drink
I have only 15 High
minutes for my
break, so I need
to buy whatever
is handy
If I dont get my High
soft drink right at
3.00 when my
break starts, I will
never have a
chance to go back
later and get one.

I cant be too Moderate

particular about
which soft drink I
pick.
It
is
important to me
to get one, as
long as it has
caffeine.

Above referred service output list is a generic one. This can be customized to any particular
application. These four service output categories cover the major types of demands end-users make
of different channel systems.
Bulk-breaking: Bulk-breaking refers to the end-users ability to buy its desired (possibly small)
number of units of a product or service, even though they may be originally produced in large,
batch-production lot sizes. When the marketing channel system allows end-users to buy in small
lot sizes, purchases can more easily move directly into consumption, reducing the need for the enduser to carry unnecessary inventory. However, if end-users must purchase in larger lot sizes i.e.,
benefit from less bulk-breaking, some disparity between purchasing and consumption patterns will
emerge, burdening end-users with product handling and storage costs. Consequently, the more
bulk-breaking the channel does, the smaller the lot-size the end-users can buy and the higher the
channels service output level is to them. This in turn can lead to a higher price for the end-user.
Spatial Convenience: Spatial convenience provided by market decentralization of wholesale or
retail outlets increases consumers satisfaction by reducing transportation requirements and search
costs. Community shopping centres and neighbourhood supermarkets, convenience stores, vending
machines, and gas stations are but a few examples of channel forms designed to satisfy customers
demand for spatial convenience.
Waiting Time: Waiting time or delivery time, the third service output, defined as the time period
that the end-user must wait between ordering and receiving goods. The longer the waiting time, the
more inconvenient it is for the end-user, who is required to plan or predict consumption far in
advance. Usually, the longer end-users are willing to wait, the more compensation (i.e., the lower
the prices) they receive. Usually, the longer end-users are willing to wait, the more compensation
(i.e., the lower the prices) they receive.

Breadth of Assortment: Finally, the wide the breadth of assortment or the greater the product
variety available to the end-user, the higher is the output of the marketing channel system and the
higher are overall distribution costs, because greater assortment typically entails carrying more
inventories.
2.2 Establish objectives and constraints
Firms decide their marketing channel objectives in terms of targeted levels of customer service.
Normally, a firm can identify several segments wanting different levels of service. It should decide
which segment; the company wants to minimize the total channel cost of meeting customer service
requirements.
Channel objectives are also influenced by the nature of the company, its products, its marketing
intermediaries, its competitors and the environment. A companys size and financial situation
determine which marketing function it can handle itself and which it must give to intermediaries.
Companies selling perishable products may require more direct marketing to avoid delays and too
much handling.
In some cases a company may want to compete in or near the same outlets that carry competitors
products. In other cases, producers may avoid the channels used by competitors. For example, it
normally takes eight to twelve weeks to get a custom-ordered piece of furniture, because furniture
typically have not engaged in flexible manufacturing for quick response to product demands. In
such a situation, a manufacturer that currently supplies furniture in four to six weeks already beats
the competition on the waiting and delivery time service output dimension.
Finally environmental factors such as economic conditions and legal constraints may affect
channel objectives and design. For example, in a depressed economy, producers want to distribute
their goods in the most economical way, using shorter channels and dropping unneeded services
that add to the final price of the goods. With the recent spiraling inflation in India, the FMCG
companies like HUL, Britania and ITC have not reduced the prices of their packed goods, instead
have marginally reduced the quantities in the standard packaged goods they used to deliver. This is
the off-shoot of the objective of satisfying the consumers price consciousness.
Constraints: Constraints refers to legal constraints that restrict the optimal level of a chosen
distribution channel. For example, consider banking service as a channel. Suppose a particular
bank wants to increase its footprint in a particular area, so as to be available to the customers
within the closest proximity. Customers prefer to avail banking services, if the bank within the
shortest distance from their homes/offices/businesses. But RBI has its own regulations in place, for
any bank to open a branch. There are stipulations to maintain certain distance from branch to
branch and as well as bank to bank. Similar is the constraint for distribution channels implemented
by the oil distribution companies. Likewise there are several legal and environmental constraints
that bar the distribution channels from their optimal performance. Therefore the companies have to
consider such constraints while deciding their marketing policies.

Following table gives us examples of certain legal constraints that are faced by Indian enterprises::
S.N
o.
1

ACT

Key Provisions

How a Constraint

Industrial
Development &
Regulation Act

Substantial expansion of production

requires licence from Government.

A company wants to take up

Intensive distribution and the
costs are prohibitive. To
meet the additional cost of
distribution and at the same
time not to increase the
prices, intends to minimise
the cost of production by
increasing the production

Small Scale Industry foregoes certain

fiscal concessions if its investment in
plant and machinery exceeds a certain
prescribed limit

Same as above

Chapter IIIB containing Section 18G deals with

powers of the Central Government to control the
supply, distribution and price, etc. of certain articles

Company's distribution
policy's freedom gets
restricted
Registration of such
agreements is mandatory.
Refusal of registration on the
ground of restriction of
competition is a possible
hindrance to the channel
planned for.
Onus is on the company to
prove that there is no
appreciable adverse effect
competition

3
4

MRTP Act

If a manufacturer stipulates a condition that the

wholesale purchaser shall sell only his products
and not of others or shall resell the goods only at
the prices stipulated by him or forces the wholesale
purchaser to procure the entire line of manufacture
from him, the result may be a distortion of
competition in the market.

The Competition Act,

2002

Exclusive distribution agreement includes any

agreement to limit, restrict or withhold the output or
supply of any goods or allocate any area or market
for the disposal or sale of the goods

2.3 Identify & evaluate major channel alternatives:

Identification: The channel alternatives are identified in terms of types of intermediaries, the
number of intermediaries and the responsibilities of each channel member.
Types of intermediaries to use: Given that the decision has been made to use intermediaries, the
manufacturers need to decide what sorts of intermediaries to use. Nonretail or retail intermediaries
can be used. Some questions are common to the decision to add either a non-retail intermediary or
a retail intermediary. One is what channel flow or flows must be performed by that intermediary to
meet target end-users service output demands. For example, if it is important to have product
stocked throughout a market area in the warehouse of an intermediary i.e. the intermediary must
perform the physical possession flow in order to meet demands for spatial convenience, an
independent sales representative is not a good choice, because usually they do not hold stock. On
the other hand, suppose end-users value customer education more than spatial convenience. Then
the promotion flow, as represented by sales effort, is the crucial input and not physical possession
and stocking. The manufacturer can then choose an independent sales rep agency rather than an
employee sales force and be able to meet service output demands very well. The following table
lists other possibilities for types of intermediaries capable of performing particular flows.
Intermediaries and their flows mapped:
Flow to be performed
Physical Possession

Ownership
Promotion
4

Examples of Intermediaries that can perform flow

Contract warehouse
Shipping Company (eg. FedEx, Gati, TCI, UPS)
Distributor
Retailers (including bricks and mortar, catalog, on-line)
Contract warehouse
Distributor
Retailers (including bricks and mortar, catalog, on-line)
Contract warehouse

Negotiation
Financing

Risking

Ordering

Payment

Distributor
Retailers (including bricks and mortar, catalog, on-line)
Independent Sales Representative
Broker
Franchisees
Distributor
Export Marketing Company
Independent Sales Representative
Broker
Distributor
Retailers (including bricks and mortar, catalog, on-line)
Credit Card Company
Banks
Franchisees
Distributor
Retailers (including bricks and mortar, catalog, on-line)
Credit Card Company
Franchisees
Distributor
Independent sales representative
Retailers (including bricks and mortar, catalog, on-line)
Franchisees
Distributor
Retailers (including bricks and mortar, catalog, on-line)
Shipping company
Franchisees

Number of Marketing Intermediaries

Companies must also determine the number of channel members to use at each level. Three
strategies are available intensive distribution, exclusive distribution and selective distribution.
Producers of convenience products and common raw materials typically seek intensive
distribution- a strategy in which they stock their products in as many outlets as possible. These
goods must be available where and when consumers want them. For example, toothpaste, candy
and other similar items are sold in millions of outlets to provide maximum brand exposure and
consumer convenience.
By contrast, some producers purposely limit the number of intermediaries handling their products.
The extreme form of this practice is exclusive distribution, in which the producer gives only a
limited number of dealers the exclusive right to distribute its products in their territories. Exclusive
distribution is often found in the distribution of new automobiles and prestige womens clothing.
Between intensive and exclusive distribution lies selective distribution, -the use of more than one,
but fewer than all, of the intermediaries who are willing to carry a companys products. Most
television, furniture and small-appliance brands are distributed in this manner. Selective
distribution gives producers good market coverage with more control and less cost than does
intensive distribution.

Evaluation of Major Alternatives:

Having identified several channel alternatives, selecting one among them fulfills the long-term
objectives of the channel. Each alternative should be evaluated against economic, control and
adaptive criteria.
Using economic criteria, a company compares the likely sales, costs and profitability of different
channel alternatives. The company must also consider control issues. Using intermediaries usually
means giving them some control over the marketing of the product, and some intermediaries take
more control than others. Other things being equal, the company prefers to keep as much control as
possible. Finally, the company must apply adaptive criteria. Channels often involve long-term
commitments, yet the company wants to keep the channel flexible so that it can adapt to
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environmental changes. Thus, to be considered, a channel involving long-term commitments

should be greatly superior on economic and control grounds.
The distribution strategy of any manufacturing firm should respond to market changes. As markets
evolve, products mature, and competition intensifies, the distribution plan of the firm has to be
modified. One cannot assume that a distribution plan, once evolved, will continue to deliver results
for the entire period of the products life. This is because of changing buyer behavior and
characteristics of customers who adopt the product at different time intervals. While in the
introduction and early growth phases customers (innovators and early adopters) are willing to pay
any price and go to any place to buy it, at the later stages of growth and early maturity, customers
(or the early majority) demand convenience in buying it. But as products enter the later part of
maturity, customers (late majority) become price and convenience sensitive. They shop for low
prices, discounts, and even low period brands. Reflecting these changes in the distribution
channels over the products life cycle, it is suggested that in planning the distribution strategy a
firm should consider value addition by the channel and market growth rate.
High

Market
Growth
Rate

Low
High

Growth (b)

Mature (c)

Dedicated Stores
Computer Stores
Shoppers Stop
Introductory (a)

Department Stores

Specialist Channels like

Boutiques in fashion
Designer wear

Discount Stores
Low cost alternatives

Decline (d)

Low

According to this distribution grid, at the introductory stage, value addition by the channel member
is expected to be high. They are believed to attract innovators and early adopters. Specialist
channels like boutiques in fashion goods are a common example. As the market expands, customer
interest in the product grows and higher volume channels like specialty stores and stores dedicated
to only one product group appear. Computer Point and Computer World were examples of such
stores. Shoppers Stop is another example of a dedicated store for ready-made garments and all
other fashion goods and accessories. Once the product enters the maturity phase, low-cost channels
are required to keep the firm floating and finally in the decline phase the product is seen being
traded in discount stores and discount sales counters in leading stores.