To market its products effectively, a suitable distribution channel should be selected by the firm. A number of distribution channels are available. Every type of distribution channel has its relative advantage and disadvantages. Therefore, the marketing company should select the appropriate channel of distribution with very careful consideration of it.
Types of Distribution Channels in Marketing
Important channels of distribution may be described as under:
1. Direct Channel of Distribution
Under the direct distribution, the firm does not take the help of middleman to sell its products. The firm sets its own channel of distributions in its markets to directly sell its products to the consumers.
If the firm is having sound financial resources and intensive knowledge of its markets, then the method of direct distribution may be very appropriate.
Establishment of a direct channel of distribution requires enormous financial resources and sufficient managerial personnel to supervise marketing operations in different markets.
The marketing company may open its own branches or sales centres in markets.
The salesman may be appointed to sell products in markets. Online marketing, telemarketing and mail-order system may also be followed in this regard.
The advantages of direct distribution channel may be discussed as under:
- It is the shortest channel of distribution.
- When the product is highly technical and requires a demonstration, the method is beneficial.
- It is also an appropriate method when the firm is selling very high priced products.
- If the number of customers is limited, the direct channel of distribution is useful.
- The firm may increase its profits because the margins of profits of middlemen are taken over by itself.
- Effective after-sale services may be provided to customers, in the case of durable consumer products and Technical products.
- Full control may be established by the firm over its channel of distribution.
- It is also appropriate when the target customers of the firm are geographically concentrated at a few places.
- The firm may make optimum use of its spare financial resources. These resources may be utilised in the setting of the direct channel of distribution. 15 Major Importance of Creativity in Entrepreneurship.
- The goods or products may be quickly delivered to target customers.
- In the case of some products, it is the only option available to marketers. If the firm is marketing supercomputers, mainframe computers, Aeroplane, Fighter Aircraft, etc. It is the best method to sell products.
- The firm remains in direct touch of the customers. Quick changes’ may be carried out in the marketing mix keeping in view the opinions, reactions and suggestions of customers.
There are following disadvantages of a direct channel of distribution:
- This method increases the distribution costs. The firm has to establish its own sales organisation or network to sell the products in markets.
- The firm has to bear all promotional expenditures.
- It requires huge financial resources, thus is inappropriate for the firms having Limited financial means.
- It increases the responsibilities of Management.
- It is not appropriate for producers or manufacturers. It is very difficult to perform manufacturing and selling task simultaneously.
2. Indirect Channel of Distribution
Under the indirect channels of distribution in marketing company utilizes the services of the middleman to distribute its products to the consumer.
The role of middlemen becomes very significant in indirect channels of distribution.
A middleman is an independent business organisation standing between a marketing company and ultimate consumers.
These middlemen may be further divided into two categories:
1. Merchant Middleman
Merchant middleman is those business organisations which take both titles of the goods and possession of goods.
Therefore, the bear the risk of unsold goods remains with them. Merchant middleman provides the number of services to the marketing company.
Merchant middleman includes wholesalers and retailers.
2. Agent Middlemen
Agent Middlemen are those middlemen who do not take the title of the goods in their name.
They generally do not take possession of goods. Agent middleman merely assists manufacturers or marketing companies in carrying out transactions of sales on behalf of them.
Agent middleman gets Commission for their services and does not bear any risk.
There are different types of Agent middleman, such as a broker, commission agent, carrying and forwarding agent, auction companies, buying agent, etc.
The marketing company can take the following advantages by using an indirect channel of distribution:
- It is the most appropriate method for a new entrant.
- Those firms having Limited financial resources should opt for indirect channels of distribution.
- The distribution costs may be reduced considerably, by using the services middleman.
- Middlemen may provide better services to customers in comparison to manufacturers.
- Rate of customer acceptance may be increased by the indirect channel of distribution. Customers quickly rely on the advice of the retailer from whom they are dealing for a long period.
- When the customers of firms are geographically scattered in the vast areas, then it will be economical to use the services of a middleman.
- The marketing company can take full advantage of the goodwill and established the image of middleman to introduce its products.
- The firm may obtain required marketing information from the middleman such as opinion, reactions, and suggestions of customers.
Appropriate marketing strategies may be designed accordingly. 21 Importance and Role of Entrepreneurs.
The firm has to bear the following disadvantages of indirect channels of distribution:
- It increases the selling price of products because the middleman charges good margin and it is ultimately shifted to customers.
- Middleman may not be loyal to the marketing company. If another firm offers more margins and attractive proposals to middlemen, he will not hesitate to shift.
- It reduces the profits because the marketing company has to pay a good commission to margin to the middleman.
- Marketing firm gets second-hand information from the middle man about consumer behaviour, competitive situation and other elements of the marketing environment.
- In case if the marketing companies not using its own tools and techniques to know its customers it may remain ignorant about the market.
- The role of firms becomes Limited when it is using the services of a middleman.
- The method of indirect distribution is not appropriate for the very high priced, super technical products and where the number of customers is limited.
3. Mixed Channel of Distribution
In order to attain the advantages of above both the methods, the marketing company may use the direct and indirect channel of distribution simultaneously.
For some markets, the method of direct distribution may be used and for remaining markets the indirect channels may be used.
At some places, the firm may directly sell its products to customers and for other places, the services of middlemen can be used.
Therefore, a mixed channel of distribution is a combination of direct and indirect channels. The present Trend is in favour of mix channels of distribution.
4. Cooperative Distribution Channels
Cooperative distribution channels are based on the basic principle of cooperation. Under this type of distribution channel system in order to avoid unnecessary competition.
The firms dealing in the same product category comes together and for a form and apex body. All firms who want to co-operate becomes a member of this body. Governing board is constituted on a democratic basis.
All the products being manufactured by the member firms are sold under the common brand name. Tie-ups are established in markets wit cooperative societies to sell the products.
Profit earned by the Cooperative body in a specific period is distributed among members on the basis of the value of their goods.
Cooperative distribution channel system provides the following benefits:
- It is appropriate for small firms.
- Co-orporate distribution method eliminates unnecessary competition.
- Common branding and collective marketing provide more profits to members.
- Distribution cost and other expenses and maybe substantially reduced.
- Services of talented persons may be used in governing broad.
- The individual size of the marketing company may be small, but when they come together it becomes a mega-size company.
Cooperative distribution channel system has the following disadvantages:
- The longevity of a cooperative distribution channel is always under the question mark.
- Efficient marketing companies Sooner or later depart from it and start their operations separately.
- Firms have to bear unnecessary losses due to the incompetent governing board.
- Quality control becomes a very challenging issue in Cooperative distribution, due to the heterogeneous production of each member.
5. Vertical Marketing System
In recent times vertical Marketing System is becoming popular.
In the conventional distribution system, the wholesalers and retailers were more interested in maintaining their freedom than in coordinating their activities with the producer.
This provided an opportunity for a new type of channel.
A Vertical Marketing System (VMS) is a tightly coordinated distribution channel designed specially to improve operating efficiency and marketing effectiveness.
Types of Vertical Marketing System
There are three types of vertical marketing distribution system they are as under:
1. Corporate Vertical Marketing System
Under this system, a firm at one level of a channel owns the firms at the next level or owns the entire channel.
Some marketing companies such as singer, Goodyear, Tandy Corporation. etc. follow the type of distribution channel.
2. Constructional Vertical Marketing Distribution
In this system, independent wholesalers and retailers operate under contractual obligation.
The retail chain is established under this system. The retail chain maybe wholesaler sponsored or retailer owned.
Franchise system may also be used under a contractual system, As is being used by “Holiday Inn”.
3. Administered Vertical Marketing System
An Administered vertical Marketing System coordinates distribution activities through the market or through the economic power of one channel number or the shared power of two or more channel members.
Thus, now know the types of distribution channels in marketing.