Choosing The Number of Tiers Correctly

The second decision concerns the number of tiers. How many tiers should the channel have? This issue is related in a way to channel intensity; in a majority of cases, the choice will be between single tier and two tiers, while in a few cases, firms may find it necessary to go in for a three-tier channel. When a firm opts for a sole-selling agency or marketer, the latter will be have their own channel arrangement and the tiers that operate under them automatically become a part of the firm’s channel.

The decision depends on a number of factors. In a given business, a particular channel pattern might have taken roots and there may be some advantage in going along with the established trade pattern. The product characteristics are perhaps the most important consideration. For example, for selling passenger cars, a firm need have only a single-tier distribution channel. Here, the intermediaries at one level can effectively link the maker buyer. In a product like toothpastes, or cosmetics, or cigarettes it may be necessary to have a two or three-tier channel pattern in view of the mass nature of the product. It may be difficult to achieve adequacy of market coverage in such products, with just a single tier of marketing intermediaries.

Comparative merits of single tier and two-tier channel:

The single-tier and two tier channel patterns have their associated advantages and disadvantages. The single-tier pattern provides better motivation to each member in the channel, as in such a pattern, the trade discount is available in full measure to the retailer. The pattern also brings in savings to the firm by the avoidance of multiple transport and handling. The firm can also service all the outlets directly in this pattern. But, the pattern involves greater administrative burden for the firm. It will have to perform many functions that could otherwise be passed on to the channel. It will have to increase the number of field storage points and the size of sales force to make up for the absence of the wholesale middlemen. The pattern may also sometimes result in inadequate market coverage. The two-tier pattern helps quicker outflow of stocks and more intensive coverage of the market. But, it results in lower profits to retailers as the available trade margin has to be shared between two tiers. It also weakens the principal’s control over the outfit compared with a single-tier pattern.

Exiting an Established Channel Structure is Difficult: P&G Example

As mentioned earlier, P&G had embraced a highly intensive, two- tier channel structure in India. It was more or less akin to the channel structure of HLL.     Over the year, it become clear to P & G that it did not need such a structure, as in business growth and pattern of sale, it differed from HLL. P & G then went in for a reorganization of the channel set up. It has to face several problems.   P & G had earlier gone in for nearly 200 stockiest and 4,000 dealers all over the country. But sales had remained limited. A large number of the Stockiest and dealers were not notching up enough sales. In other words, P & G’s channel productivity had become low. The company was incurring a Disproportionately large cost on channel. Moreover, the company’s sales were coming primarily from the urban market, as this market Alone was willing to pay the premium price, which P & G normally charged for its Products.   P & G then downsized and revamped its channel structure, drastically pruning the number of Stockiest. In the revised scheme, it appointed state-wise sole distributors and derecognized more than 150 ongoing stockiest in the bargain. At the retail level too, thousands of dealers became a casualty.

P & G also went in for the ECP (efficient consumer response) approach. ECP focuses on containing costs and improving bottom lines. In the ECP approach, stocks are replenished at the retail shop at more frequent intervals. This enables the retailers to operate with smaller inventories. And consequently, a cut in retailer’s margin would be in order.     P & G drastically cut the trade margins on its best selling products. It cut stockiest margin from 10 to 3 per cent and retailer margin from 12 to 8 per cent.   P & G did inform the stockiest beforehand about the new scheme. But, many stockiest had set up a lot of infrastructure over the past two decades, much of its specifically for marketing P & G products, and with the loss of P & G stockiest role, they faced financial hardship.   They went on a warpath. In a collective bargaining move, most of them banned P & G products. The retailers too, especially those in mofussil areas, went on a war-path and banned P & G products.

So, the choice depends on the context. The governing principle is that the chosen channel must have the capability to sell the product and to provide the required market coverage. It should also ensure that the user gets the products with the minimum of effort or strain on his part. And it must be cost-effective. The channel must also be amenable to the control of the company to the extent required for operating the marketing system.

In recent years, as a general trend, the number of tiers in the distribution channels is getting shorter. Businesses that used to have a three-tier structure earlier now have a two-tier structure and those with a two-tier structure earlier are now trying to manage with a single- tier channel. And often, the axe falls on the stockiest. Asian Paints, again, is an example. It chose, as a matter of conscious policy, a single-tier channel-going directly to the retail trade.