Designing a Channel System

We have observed that a firm can take its product to the user in more ways than one. It can use different types of intermediaries; it can also structure its channel in different ways. For example, it can have a single-tier or a two-tier or a three-tier channel structure. It can reach different market segments with different channel arrangements or with the same channel arrangement. It can also use different channel arrangements for reaching a single market segment. The options are indeed many.

• How does the firm make the choice? How does it determine which one is the best?
• Should it go for own channels-company showrooms and depots-or prefer conventional intermediaries, i.e. the wholesale/retail trade? How many levels/tiers should there be in the chosen channel design. How many wholesale points should it have to ensure satisfactory market coverage? Where should they be located?
• How many retail points should it have? Which are the places where it should have them?
• What should be the relationship between the wholesalers and the retailers?

Formulating the Channel Objectives Formulation of channel objectives is the first step in designing a channel system. The objectives clarify what is sought to be achieved by having the channels. All firms seek to realize certain common objectives by having the channel. In addition, they may also have some specific objectives depending on their unique circumstances.

Channel Objectives will Decide Channel Design Channel objectives will determine the channel design the firm should adopt.

Objectives, Firms Commonly Seek from Channels

• Effective coverage of the target market
• Efficient and cost-effective distribution
• Ensuring that consumers incur minimum exertion in procuring the product
• Helping the firm to carry on manufacturing uninterrupted, confident that the channels will take care of sales
• Partnering the firm in financing and sub-distribution tasks

Channel Objectives Differ from Firm to Firm; Consequently, their Channel Designs Differ We see that often channel designs of firms differ from one another. Even within a given industry; different firms have different channel designs. This is so, because their channel objectives differ. Even in respect of those objectives, which are by and large common for all firms, we can see variations in emphasis from firm to firm. For example, intensity of market coverage sought from the channels and extent of convenience to be provided to the customer will vary from firm to firm. The weightings will flow from the marketing objectives of the respective firms.

Distinctive Characteristics of Industrial Products

ü   Buyers are few.   ü   Size of at-a-time purchase is large. ü   Have high unit value.

ü   Purchased only once in a while, as their replacement rate is low.   ü   They are complex, technical, and often as per buyers’ specifications.

Identifying Channel Functions Identification of the functions to be performed by the channel is the next step in designing channel system Channel design depends on the functions expected of the channel and that channel functions must be identified in the specific context of the firm in order to get practical direction in designing the channel system.

Linking Channel Design to Product Characteristics Different products require different channel systems. The firm should analyze the characteristics of the product and choose the channel system that matches the product best. Consumer and industrial goods, for example, need different channels. And within the category of consumer goods, different sub-categories such as convenience goods, shopping goods and specialty goods may need different channel systems. Industrial and Consumer Products Need Different Channels Industrial and consumer products usually need different channels as they differ from each other in several vital respects.

Channels for Industrial Products Industrial products need extensive pre-sale service (installation and commissioning service) and post-sale service (maintenance service).

Consumer products on the contrary, are mass products. Non-technical and least most of them are of a low unit value; they are regularly consumed and replaced; and require nil or limited after-sale service. It is in view of these differences that the two can need different channel systems.

Only Some Industrial Products are Amenable for Selling Through Channels: First of all, among industrial products, only some are amenable for selling through channels. The firm should check whether its items are appropriate for selling through channels / distributors. And, if the answer is ‘yes’, it must find out which type of distributors will be appropriate for the items under consideration.

Need for specialist distributors: the firm finds that a given industrial product lends itself for marketing through channels; the firm may proceed to select an appropriate channel. It must remember that:

• Industrial products as a general rule require specialist distributors. Entrusting the products with the traditional consumer product distributors does not bring in the best results.
• Different industrial products need different types of distributors.

For example, some industrial products have to be demonstrated to the customers. Here, specialist distributors with the required demonstration facility will be more suitable. Some industrial products are hazardous from the point of view of distribution. Petroleum products, explosives and certain industrial chemicals are examples of this category these products need specialized distributors, who command specialized transportation and storage facilities. Similar is the case of products that require extensive servicing. They need specialist distributors, who command the required service facilities.

Even within Consumer Products, Channel Requirements of Different Products may Vary We come across three distinct categories of products within consumer goods-viz., (i) convenience goods, (ii) shopping goods, and (iii) specialty goods. We have seen that the different categories of goods require different channel systems, since buying behavior and buying habits differ, depending on the category Convenience goods require intensive market coverage and, therefore, need a comprehensive and high penetration channel arrangement. Shopping goods and specialty goods need lesser intensity of coverage, compared to convenience goods. Often, in these cases, the number of tiers in the channel can be less than those for convenience goods. The number of outlets too can be far lesser. In the matter of location of the outlets too, the requirements will be different in respect of convenience goods on the one hand, and for shopping and specialty goods, on the other. Obviously, there is a need for product-channel matching.

The Product’s PLC Stage too Influences Channel Choice We have seen that the concept of PLC helps product management. PLC also helps channel management. Different channels fit different stages of PLC.

A product in the introduction stage will be relatively unknown to the market; its customer base small; and its sales volume low. At this stage, it may be advantageous to sell the product directly to the customer, dispensing with the channels. Such a move will enable the manufacturer to get direct market feedback on the new product and thereby improve the product as required.

Alternatively, a specialized channel could be used in this stage. A specialized distributor will be in a better position to introduce the product in the market and also provide the required technical support to the user.

When the product moves into the growth and maturity stages, the requirements of distribution will be different. In these stages, the product is almost an off-the-shelf item. Now, convenience in delivery and price competitiveness are more important factors. Therefore, conventional/general purpose distributors would be more suitable. Producers usually appoint a number of general purpose distributors at this stage and also make more and more territories non-exclusive. Some pushing becomes necessary at this stage and conventional market channels admirably suit this requirement.

In the decline stage in the PLC, the market for the product usually gets reduced to select groups of customers and it may be advantageous to revert back to direct marketing to customers at this stage. Alternatively, the firm may serve the select groups of customers through a minimal use of middlemen.

Product Influences Type and Number of Channel Members as well Product characteristics influence not merely the channel design to be opted for; they often influence even the type and number of intermediaries needed. For example, for textiles or shoes, franchisees, who can run showrooms, may be an effective type of intermediary. For a product like detergents, conventional wholesaler-retailer arrangement may be the appropriate one.

Evaluation of the Distribution Environment While selecting the channel design, the firm should also take into account the distribution environment obtaining in the country/territory. It should evaluate the vital features of the distribution environment and ensure that the proposed channel design is compatible with them. Distribution environment in the broader sense includes the trade related legal environment as well. A mention about the legal environment relating to marketing and trade matters has been made in the chapter on The Marketing Environment. The legal implications of channel design must be carefully examined before taking a final decision.

Evaluation of Competitor’s Channel Designs The firm should also study the competitor’s channel patterns before deciding its channel design. While the firm may not necessarily follow the competitors in channel design, it should analyze the plus and minus of the channel patterns adopted by each of its major competitors. Quite a number of firms do settle down for a ‘follow the leader’ policy in channel design. They find it an easy route. But such an approach may deprive them of the chance to score an edge over competition through the channel strategy.

Matching the Channel Design to Company Resources Choice of channel is also governed by the resources available with the organization.

Firms with limited resources settle for conventional channels: Firms with limited resources and small volume of business will normally find it difficult and uneconomical to opt, for own channels. For such firms, establishing branch show- rooms/depots/retail outlets of their own will result in a high unit cost of distribution, which they cannot afford. They are better off by depending on conventional channels. In fact, they are usually content with a small network of conventional intermediaries.

Firms with larger resources have more options: Firms with larger resources and larger marketing operations can go in for varied distribution channels. In fact, in India, in several businesses, firms which are strong in resources, usually operate two parallel channels, one reaching out to the customer through company depots and showrooms, and the other through conventional intermediaries. The textile business is a good example of this phenomenon. Firms like Reliance Industries, Bombay Dyeing, DCM and Mafatlals, have all gone in for such a two-pronged channel design. In some cases, however, even large firms prefer a distribution arrangement wherein they will not be required to pump in much of their resources. They are content with entrusting their distribution job to some distribution houses, appointing them either as the sole-selling agent or as marketers. Many manufacturers of pharmaceuticals, machine tools, agricultural equipment, electric motors and household appliances have adopted this route.

Evaluating the Alternatives and Selecting the Best With the completion of the foregoing steps, the number of alternatives would have narrowed down considerably; the firm must evaluate these alternative designs and choose the best among them.

Keeping the System Flexible The physical distribution system should also be kept flexible. Marketing is never static. Thus, in keeping with the dynamic nature of marketing, the physical distribution system should remain, flexible. At the same time, flexibility has an associated cost. Often, that is why, issue of economy vs. flexibility is raised while designing a physical distribution system. Even at the cost of economy; some flexibility must be retained. It would come to the help of the firm in the future.

Why do we need to segment, position and target in channel design?