FLASHBACK NOTES// CLASS XII

MARKETING// TOPIC: PLACE AND DISTRIBUTION

MEANING OF DISTRIBUTION CHANNEL

According to Philip Kotler, “According to Philip Kotler,
“Every producer seeks to link together the set of
marketing intermediaries that best fulfil the firm’s
objective, This set of marketing intermediaries is called
marketing channel.”
William Stanton, “A distribution channel for a product
is the route taken by the title to the goods as they move
from the producer to the ultimate customer.”

PARTICIPANTS OF CHANNEL OF DISTRIBUTION

Participants of channel of Distribution

Manufacturers Intermediaries Facilitating agencies Consumers

Channels of distribution are mainly concerned with the transfer of title to a

product which may be affected directly or through a chain of intermediaries.
It comprises of set of four participants of distribution system:
(1)Manufacturers: The starting point of distribution is the Manufacturer
who produces the goods after identifying the needs of the
consumers. For Example the manufacturer might be a remote
location and consumers are scattered geographically
throughout India. The goods can only reach the consumers
with the help of intermediaries in between the manufacturer
and consumer

(2)Intermediaries: The second participant being Intermediaries, they are in

direct negotiation between buyer and seller. They identify the
needs of the consumers and the manufacturers who produce
various products. In the process, they perform various
functions like buying, selling, assembling, standardisation and
grading, packing and packaging, risk bearing. etc.

(3) Facilitating agencies: The third participant being the Facilitating

agencies are the independent business organisations other
than intermediaries. These agencies facilitate the smooth
distribution of goods from producers, through intermediaries,
to consumers. The major facilitating agencies are banking
institutions, insurance companies, and transportation agencies
and warehousing companies.
(4) Consumer: The fourth category of participants in the distribution system
i.e., consumers, are the final destination for goods in the
distribution system. Who consumes the goods for the
satisfaction of wants.

FUNCTIONS PERFORMED BY CHANNEL OF DISTRIBUTION

Transactional Functions

Functions Performed by
Logistical Functions
channel of distribution

Facilitating Functions

The functions performed by the middlemen in distribution channels may be

grouped into three categories as follows:

1) Transactional Functions: the primary function of distribution channel is to

bridge the gap between production and
consumption for which various transactions
performed for movement of the goods from one place
to another are called transactional functions. Buying,
selling and risk bearing functions come under
this category. Buying takes place as producers sell
the goods and intermediaries buy them. Later
intermediaries sell the goods and consumers buy them.
Because of this buying and selling by the channel
participants, title to goods changes hands and goods
flow from producer to consumer.

2) Logistical Functions: The functions involved in the physical exchange of

goods are called logistical function. The goods are
produced by producer /manufacturer and
assembled in different assembly lines. Assembling
refers to the process of keeping the goods,
purchased from different places, at a particular place.
Assembling of goods is done only after they have
been bought. Not only assembling but also storage,
grading, sorting and transportation are essential
for physical exchange of goods which forms
logistical functions of physical distribution.
3) Facilitating Functions: These functions facilitate both the transaction as
well as physical exchange of goods. These
facilitating functions of the channel include post-
purchase service and maintenance,
financing, market information etc. Sellers
provide necessary information to buyers in
addition to after sales services and financial
assistance in the form of Sale on credit.
Similarly, traders are often guided by
manufacturers to help them in selling goods,
while the traders also inform manufacturers
about the customers' opinions about the products.

MEANING OF PRODUCT PROMOTION

Types of channel of distribution

Direct
Channel Indirect Channel

One level Two level Three level

channel channel channel
It involves advertising and sales promotion activities organised by
manufacturers. Middlemen are also involved in various activities like
demonstration of product, display and contest etc. to increase the sale of
products.

MEANING OF NEGOTIATION
Negotiation takes place between manufacturers
and customers before closing a deal. Negotiation
in terms of quality of product, guarantee, after sale
services and finally price takes place before the
transfer of ownership is done.

TYPES OF CHANNEL OF DISTRIBUTION

A manufacturer can choose from direct distribution channel to indirect
distribution depending upon the kind of product or market they serve. The two
main types of distribution channels are as follows:

I. Direct Channel
II. Indirect Channel
I. Direct Channel (Zero level)
The most simple and the shortest mode of distribution is direct channel. In this
channel, the manufacturer directly provides the product to the consumer. In
zero level there are no intermediaries involved, the manufacturer is selling
directly to the customer. This is called the 'direct channel’ or direct selling.
In this the manufacturer or producer supplies the product to the customer
through its own retail outlets and salesmen present there (e.g. Mc Donald,
Patanjali stores).
Example: Maruti Udyog selling it cars through NEXA company owned
showrooms is direct channel.

II. Indirect Channel:

In this channel, a manufacturer doesn’t sell directly to the consumer
rather chooses various intermediaries to sell a product to the consumer
that is why called indirect channel. When a manufacturer/producer
employs one or more intermediary to move goods from point of production
to point of consumption also called indirect marketing channel.

a. One level channel (Manufacturer-Retailer-Consumer): In this only one

intermediary is involved. Normally the manufacturer supply goods directly to
retail which finally sell to the end consumer. In this case the producer
ascertains the requirements of retailers at periodical intervals and goods are
supplied accordingly. As and when required, the retailer may also procure
goods from the producer's godown located in that region. For Example:
Maruti Udyog selling it cars through company approved retailers like DD
Motors is called indirect channel.
b. Two level channel (Manufacturer-Wholesaler-Retailer-Consumer):
When the manufacturer can use the services of the wholesaler as well as the
retailer. This is the most common adopted distribution network for consumer
goods. In this case the manufacturer may supply his products in bulk to
wholesalers. The retailer may buy periodically from the 'wholesaler and
sell the same to the consumers located in his locality. As there are two
middlemen (both wholesaler and retailer) in this channel, it is referred to
as two level channels (2 level channel) and helps in covering a larger market.
For Example: Consumer goods like oils, cloths, sugar, pulses and soaps etc
sold through nearby retail outlets.

c. Three level channel (Manufacturer-Agents-Wholesaler-Retailer-

Consumer): Another alternative channel of distribution consists of
mercantile agents, wholesaler and retailer. In this case, the manufacturer
deals with a mercantile agent. Then the wholesalers buy the goods from the
agents and sell the same to retailers. In turn the retailer sells it to the
ultimate consumers. This type of channel is referred to as three level channel
as there are three types of middlemen involved in the distribution. This
level is used particularly when the manufacturer carries a limited product
line and has to cover a wide market where an agent in the major areas are
appointed who further contact wholesalers and retailers.

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 FLASHBACK NOTES
CLASS XII // MARKETING
TOPIC: PLACE AND DISTRIBUTION
TERM-II

TYPES OF MARKET INTERMEDIARIES

The four basic types of marketing intermediaries are agents, wholesalers,
distributors and retailers.

Middlemen: Anybody acting as an intermediary between the manufacturer and

consumer

Agents: The agent as a marketing intermediary is an independent individual

or company whose main function is to act as the primary selling arm of the
producer and represent the producer to users. Agents take possession of
products but do not actually own them. Agents usually make profits from
commissions or fees paid for the services they provide to the producer and
users. For Example: travel agents, insurance agents and the organisers of party-
based selling events of Tupperware.

Wholesalers: Wholesalers are independently owned firms that take title to the
merchandise they handle. In other words, the wholesalers own the products
they sell. Wholesalers purchase product in bulk and store it until they can
resell it. Wholesalers generally sell the products they have purchased to other
intermediary usually retailers, for a profit.

Distributors: Distributors are similar to wholesalers, but with one key difference.
Wholesalers will carry a variety of competing products, for instance Pepsi and
Coke products, whereas distributors only carry complementary product lines,
either Pepsi or Coke products. Distributors usually maintain close
relationships with their suppliers and customers.

Retailers: The retailer will sell the products it has purchased directly to the
end user for a profit. A retailer takes title to, or purchases, products from
other market intermediaries. Retailers can be independently owned and
operated, like small “mom and pop” stores, or they can be part of a large chain,
like Aditya Birla’s More Mega Stores.
FUNCTIONS OF INTERMEDIARIES
(a)Wholesaler: The term wholesaler applies to all
merchant or traders who purchase and sell in large
quantities. A wholesaler provides an important link
between the manufacturer or producer and the retailer.
It takes title to the goods he handles and assumes
marketing risks in the process of distribution of goods.
He purchases in bulk and sell in small lots to the retailer
or industrial users and is generally away from the
ultimate consumers.

Functions performed by wholesalers

Buying and Selling

Storage

Transportation

Grading and Packing

Financing

Risk-taking

Promotion

(i)Buying and Selling: The wholesaler make an estimate of demand for the
goods, and then purchase and assembly different varieties of goods from
different manufacturers spread throughout the country. They also undertake
import of goods from different countries.

(ii)Storage: Wholesaler keep the goods assembled by them in their warehouse to

supply them to retailers whenever require. They help the manufacturers and
retailers by making storage arrangement.

(iii)Transportation: Wholesalers make transportation arrangement from the

premises of manufacturers to their godowns and from their godowns to the
retail stores. They often maintain their own fleet of vehicles for this purpose.
(iv)Grading and Packing: Wholesalers grade the goods according to certain
standards which they have purchased from different manufacturers. Some
manufacturers also give brand names to graded products to convince the
consumers or industrial users about the quality of the products they deal in.
They also undertake the packaging of goods in convenient lots.

(v)Financing: Wholesalers provide financial accommodation to both the

manufactures and the retailers. They generally purchase goods on cash basis
from the manufactures and sometimes also give advance to the manufactures.
Thus, the manufactures need not wait till product are sold. The wholesalers help
the retailers by selling the goods on credit.

(vi)Risk-taking: Wholesalers assumes a large number of risks in the

process of distribution of goods. These risks may occur on account of charges
in prices and demands, spoilage of goods, and bad debts. Thus, they undertake
many marketing risks which would have been undertaken by the manufacturers
and retailers.

(vii)Promotion: The wholesalers job’s does not end with the selling of goods
to the retailers. They also assist in the dispersal of goods by the retailers situated
in various markets. They perform advertising and other sales promotion
activities in order to promote the sale of their product.

(b)Retailers
Retailing or retail trade involves all such activities
which are related to direct sale of goods to the
ultimate consumer. Retail trade is usually done by the
retailers. A retailer may be defined as a dealer in
goods and services who purchases from
manufacturers and wholesaler and sells to the
ultimate consumer.

Function of Retailers

Collection of goods

Time Utility

Transportation

Financing

Customer Education

Spokesperson of Customers
(i)Collection of goods: Retailers purchase and collect goods from large
number of wholesales and manufactures to meet the needs of the ultimate
consumers.
(ii)Time Utility: Retailers keep a large number of products of different varieties in
stock to sell them to the customers whenever they require. Thus, they create
time in searching variety of products.
(iii)Transportation: Retailers perform transportation function by carrying
the goods from the wholesaler and handing them over to the ultimate
consumers. Sometimes, they also provide free home delivery of products to the
customers.
(iv)Financing: Retailers sell the goods on credit to the consumers and thus they
increase their short-term purchasing power. In this process, they undertake
the risk of bad debts.
(v)Customer Education: Retailers educate the customers by informing them
about the availability and diverse uses of new products along with their
demonstration.
(vi)Spokesperson of Customers: Retailers act as the spokesperson or agents
of the customers. They communicate the needs or demands of their
customers to the wholesalers and manufactures. Thus, they help the
customers in getting the want- satisfying products and help the manufacturers
in producing the products which are desired by the customers.

Basis Wholesaler Retailer

1.Quantity Deals in large quantities and on Deals in small quantities and
a large scale. on small scale
2. Number of Handles a small number of items Handles a large number of
Items and varieties items and varieties
3.Outlet First outlet in the chain of Second outlet in the
distribution chain of distribution
4. Sale Sells to retailers and industrial Sells to consumers
users
5.Location Location of a wholesaler’s shop Location of retailers’s shop
is not very important near the residential areas is very
6.Window Window display is not very important
Window display is a must to
Display important attract customers
7. Profit Sells at a very low margin of Sells at a higher margin of
Margin profit as turnover is very fast profit as he has to spend on
window display and pay higher
8. After sale rent for accommodation
Do not provide after-sale service Provide in a
after-sale service
services central place
FACTORS AFFECTING THE SELECTION OF
CHANNEL OF DISTRIBUTION

The following factors affect the selection of the

channel of distribution:

FACTORS AFFECTING CHOICE OF CHANNEL OF

DISTRIBUTION

Factors Factors Factors

Factors
pertaining perataining pertaining Other
Pertaining
to to to Factors
to Product
Consumer Middleman producer

1) Factors Pertaining to the Product

Keeping in view the nature, qualities and
peculiarities of the product, could only the channel
for distribution be properly made. The following
factors concerning the product, affect the selection
of the channel of distribution:

Price of Product

Perishability

Size and Weight

Technical Nature

Goods made to Order

After Sales Services

(a)Price of the Product. The products of a lower price have a long chain of
distributors. As against it, the products having higher price have a smaller chain.
Very often, the producer himself has to sell the products to the consumers
directly.

(b)Perishability. The products which are of a perishable nature need lesser

number of the intermediaries or agents for their sale. Under this very rule,
most of the eatables (food items), and the bakery items are distributed only by
the retail sellers.

(c)Size and Weight. The size and weight of the products too affect the
selection of the middlemen. Generally, heavy industrial goods are distributed by
the producers themselves to the industrial consumers.

(d)Technical Nature. Some products are of the nature that prior to their
selling, the consumer is required to be given proper instructions with regard to
its consumption. In such a case less of the middlemen arc) required to be used.

(e)Goods Made to Order. The products that are manufactured as per the
orders of the customers could be sold directly and the standardized items could
be sold off only by the middlemen.

(f)After-Sales Service. The products regarding which the after-sales service

is to be provided could be sold off either personally or through the authorized
agents.

2)Factors Pertaining to the Consumer or Market

The following are the main elements concerned with the
consumer or the market:

Number of Customers

Expansion of the Consumers

Size of the Order

Objective of Purchase

Need of the Credit Facilities

(a)Number of Customers. If the number of customers is large, definitely the
services of the middlemen will have to be sought for. As against it, the products
whose customers are less in number are distributed by the manufacturer himself.

(b)Expansion of the Consumers. The span over which are the customers
of any commodity spread over, also affects the selection of the channel of
distribution. When the consumers are spread through a small or limited sphere,
the product is distributed by the producer himself or his agent. As against it,
the goods whose distributors are spread throughout the whole country, for
such distributors, services of wholesaler and the retailer are sought.

(c)Size of the Order. When bulk supply orders are received from the
consumers, the producer himself takes up the responsibility for the supply of
these goods. If the orders are received piece-meal or in smaller quantities, for
it the services of the wholesaler could be sought. In this way, the size of the
order also influences the selection of the channel of the distribution.

(d)Objective of Purchase. If the product is being purchased for the industrial

use; its direct sale is proper or justified. As against it, if the products are being
purchased for the general consumption, the products reach the consumers after
passing innumerable hands.

(e)Need of the Credit Facilities. If, for the sale of any product, it becomes
necessary to grant credit to any customer, it shall be helpful for the producer
that for its distribution the services of the wholesaler and retailer businessmen
be sought. In this way, the need of the credit facilities too influences the selection
of the channel of distribution

3) Factors Pertaining to the Middlemen

The following are the main factors concerned with the
middlemen:

• Services Provided by Middlemen

FACTORS • Scope or Possibilities of Quantity
PERTAINING of Sales.
• Attitude of Agents towards the
TO Producers' Policies
MIDDLEMAN • Cost of Channel of Distribution
(a)Services Provided by Middlemen. The selection of the middlemen be made
keeping in view their services. If some product is quite new and there is the need
of its publicity and promotion of sales, then instead of adopting the agency
system, the work must be entrusted to the representatives

(b)Scope or Possibilities of Quantity of Sales. The same channel should be

selected by means of which there is the possibility of more sales.

(c)Attitude of Agents towards the Producers' Policies. The producers

generally prefer to select such middlemen who go by their policies. Very often
when the distribution and supply policies of the producers being disliked by
the middlemen, the selection of middlemen becomes quite limited.

(d)Cost of Channel of Distribution. While selecting the channel of distribution,

the cost of distribution and the services provided by the middlemen or agents
too must be kept into consideration. The producers generally select the most
economical channel.

4)Factors Pertaining to the Producer or Company

The following factors, concerning the producer,
affect the selection of the channel of
distribution:

Level of Production

Financial Resources of the Company

Managerial Competence and Experience

(a)Level of Production. The manufacturers who are financially sound and are
of a larger category, are able to appoint the sales representatives in a larger
number and they could distribute the commodities (products) in larger
quantities. As against it, for the smaller manufacturers, it becomes necessary to
procure the services of the wholesalers and the retail traders.

(b)Financial Resources of the Company. From the financial point of view, the
stronger company needs less middlemen.

(c)Managerial Competence and Experience. If some producer lacks in the

necessary managerial experience or proficiency, he will depend more upon the
middlemen. The new manufacturers in the beginning remain more dependent
upon the middlemen.
5)Other Factors
(a)Distribution Channel of Competitors. While determining the channel of
distribution, the channels of distribution of the competitors too must be borne in
mind.

(b)Social Viewpoint. What is the attitude of society towards the distribution,

this fact too must be kept into consideration while selecting the middlemen.

(c)Freedom of Altering. While selecting the agents, this fact too must be kept
into mind that in case of need, there must be the liberty of changing or
replacing the agents (middlemen).

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