Factors considered in choosing a distribution channel.
There are several factors that a producer must consider in deciding which alternative channel to use.
Factors to be considered when selecting channels of distribution.
• The target market characteristics.
To select an effective channel, producers must look at the size, density, and purchase frequency and the quantity purchased by the customers. Market size refers to the number of customers in the target market. Generally speaking the more the customers, the more likely the firm is to use a long channel of distribution. The concentration of the target market is called market density. The general practice when a market is closely concentrated is that producers should go for a direct channel. On the other hand when the customers are widely scattered the firm should adopt a long channel of distribution.
Channel selection also considers the frequency of and quantity purchased and the services required by the customers. Generally, the smaller the purchase and the more the frequency the longer the channel. However if an item is likely to require considerable after-sales service, the channel will be shorter.
• Nature of the product
Product characteristics important to the choice of channel of distribution include product size and weight, perishability, level of product control, and input required. It is easier to sell and bulky products through short or direct channels. The more perishable a product is the more necessary it is to use a direct channel. When a product requires a lot of producer input and controls such custom-made, installations, or training a short channel is in order.
• Cost efficiencies
Cost factor is very important in channel selection just as in every marketing decision. The goal of the producer should be to find the most cost efficient channel, which balances the cost and accomplishes the necessary channel objectives.
• Company Characteristics
In addition to evaluating customer and product characteristics, the channel analyst must consider company characteristics. The relevant characteristics are the company objectives, financial status, product mix, past channel experiences and the desired degree of channel control.
If a producer wishes to retain a high degree of control over the price the consumer pays for his product as well as how the product is presented to the market, then he will either sell direct or use only one middleman. Again, where a company has a wide and divergent product mix, long channels may be used for some products and short channels for others. For instance, Unilever uses long channels to distribute toilet soaps and short channels to distribute industrial detergents. Thus, the channels used to distribute products are partly determined by company characteristics.
• Middlemen Characteristics
Middlemen characteristics should also be considered in deciding the channel to be used in distributing the producer’s product(s). The major factors here are the markets the middlemen serve, their financial requirements, the services that they provide and their availability.
• Competitive Characteristics
The channels used by competitors tend to be regarded as representing the collective wisdom of the industry. It is also argued that the producer should make his products meet with those of competitor’s head on. The producer should, therefore, make sure that his products are available where his competitor’s products are and this can only be accomplished by using the channels, which the competitors use. Failure to do this may lead to lost business opportunities or customers. Let as take the example of the dairy industry. Suppose that a consumer moved to a new neighborhood, and she is in need of milk. She will visit the nearest retail outlet to buy her preferred brand of milk.
If she does not get it from several retail outlets in her new neighborhood she is likely to buy the brand of milk, which is available. After trying the new brand she may like it , and
Decide to regularly buy the other brand, which means lost business opportunity to the company whose brand was not available.
• Environmental Characteristics
Economic, political, legal, social and cultural factors also influence channel decisions. It is often argued that where economic conditions are depressed, marketers should move their products to the market via the route that is least expensive for the ultimate consumers.
8.5 Functions Performed By Market Intermediaries Or Middlemen
To some people, middlemen or intermediaries are ‘parasites’ and should be eliminated, since they are not productive; to other people they are vital, since they perform certain functions better than producers and/or consumers. We will take the view that the functions that they perform outweigh their weaknesses. The functions they perform include contacting customers, sorting products, Physical distribution, demand stimulation, and market information.
• Contacting Function:
One reason why middlemen are used is that they reduce the number of sales contacts or sales calls needed to reach all the customers.
The number of sellers and/or customers increases, the number of sales contacts increases geometrically when there is no middleman and arithmetically when there is a middleman. The reader needs only to imagine the number of producers represented by retailers to realize the significance of this role.
However, since there are other costs besides contacting costs, it is no wonder that in some cases producers continue selling directly to customers unless the state regulates otherwise.
• Function of sorting
A second reason for the existence of middlemen is that they perform the sorting function. This function has two dimensions: bulk breaking and bulk building.
Bulk breaking involves buying in large units and breaking the units down into smaller units suitable for resale. This sub-function occurs where a producer is large and the intermediaries and consumers buy in relatively small quantities at each level of the distribution pipeline.
The sub-function of bulk-building is the opposite of bulk-breaking. That is, the middlemen buy from different producers and combine the items to make suitable units for resale. This is a very common function in agricultural marketing in developing economies such as those of Kenya, Uganda, Zambia, Zimbabwe and Ghana where co-operative societies and/or purchasing agents buy small quantities from several smallholders, sell to marketing boards, who in turn sell to millers, processors or foreign buyers in large quantities. Commodities such as cotton, pyrethrum, coffee, cocoa and other cash crops in Africa are marketed this way.
• Physical Distribution Function
Another important function performed by the middlemen is the transportation and storage of products as they move from the producer to the final consumer. There is actual physical movement of goods from the manufacturer to the consumer via the middlemen. The transportation sub-function creates utility of place by ensuring that the goods are available where desired. The sub-function of warehousing or storage, on the other hand, creates the utility of time by ensuring that products are available when desired.
The performance of this sub-function facilities continuous production, since the manufacturer’s storage space is consistently emptied by the outflow of stock going to the middlemen.
• Function of Demand Simulation
A fourth function performed by market intermediaries is that of stimulating demand. Middlemen, like producers, are in business to make a profit. They, therefore, stimulate demand in the same way as producers do. Thus they engage in personal selling, advertising, sales promotion, product planning or merchandising and formulating pricing policies. Hence suffice it to say that distributors such as the Uchumi Supermarkets Ltd, Nakumatt and other intermediaries in Kenya are involved in marketing or demand stimulation just as the Unilever, BAT Kenya Ltd And East African Breweries Ltd do. However, it must be noted that retailers such as the Uchumi Supermarkets Limited will not be concerned with stimulating of the manufacturer’s brand. That is distributors are not concerned with increasing sales of, any individual Manufacturer Brand individually.
Another important point to be noted is that occasionally the middlemen stimulate demand co-operatively with producers. In this case the costs of, say, advertising and sales promotion such as exhibiting in the Nairobi International Show will be shared at some previously agreed proportion by the producer of the product and the distributor.
• Function of Market Information
To make effective product, promotion, price and distribution decisions marketers must have the appropriate information. Middlemen are important sources of information about the market place because they, particularly the retailers, are closer to, and interact with the final consumers more than the manufacturers.
There are two flows of this type of information: From the middlemen to the producers and from producers to the consumers via the middlemen. Middlemen can help the producer evaluate prices, styles, competitors’ activities as well as consumer buying patterns. This information together with that provided by sales people, consumers, media owners as well as that which is internally generated is necessary if sound decisions are to be made.
The five functions of sales contact, sorting, physical distribution, demand stimulation and market information as discussed are the ones explain that why middlemen exist.
8.4 Intensity of Distribution decision
Once the producer has decided on the general channels that he will use, he must then determine the number of intermediaries that he will use at each level. This is referred to as the intensity of distribution and is, therefore, concerned with answering the question ‘given that wholesalers and retailers will be used in the distribution of product A, how many wholesalers and how many retailers will be recruited for the job?’ As far as this goes, the producer has three major alternatives.
• Intensive Distribution
If the producer opts for intensive distribution then as many outlets will carry his product as possible. That is, any middleman who wants to distribute the product will be allowed to do so. It appears that the manufacturers of convenience goods (goods which are purchased frequently and with little, if any marketing effort) find it more profitable to follow intensive distribution.
• Selective Distribution
Those who advocate the use of selective distribution argue that not every retail outlet that wishes to carry a given product should be allowed to do so. It is argued that if some outlets are allowed to carry a brand, the prestige of that brand may be lowered. Hence, selective distribution entails a policy of using less than all those willing to distribute the product. Manufacturers of shopping and special goods favour the policy.
• Exclusive Distribution
As the name suggests, the policy of exclusive distribution entails getting into an agreement with a particular middleman whereby the manufacturer gives that middleman exclusive right to market the product in a given market. The middlemen in turn usually agree not to carry any merchandise of competitors. For instance, DT Dobie Kenya Ltd has the exclusive right of distributing Mercedes Benz vehicles and Nissan. Marshals Ltd also has the monopoly of distributing Peugeot vehicles in Kenya.