Factors affecting choice of a Distribution Channel

Dominant factors affecting channel selection:

1. Factors Related to Products

Product is a prime factor in channel selection. Product-related factors are among most relevant and powerful factors affecting channel decision. Channel must be fit the type and nature of company’s products.

Such factors include:

(a) Perishability of Product: Perishable products must be sold and consumed immediately after production. So, for perishable products, normally, direct or short channel is advisable. For durable products, indirect or multilevel channel is preferable. However, due to availability of rapid means of transportation and advanced cold storage facilities, the perishable product can also be sold by long-indirect channels.

(b) Technical Aspects: Technical products cannot be used without sufficient information and direct supervision. Even, they need more frequent services. It is advisable to adopt indirect and multilevel channels to assist consumers to use the technical product properly and safely. For simple products, direct channels can be used.

(c) New v/s Existing Product: Consumers need more information and attention for new products. More efforts and time are required to convince consumers. As a result, a company may opt for indirect channel to take help of middlemen in this task. For existing products, the company can use direct and/or indirect channels.

(d) Complexity and Risk Related to Use of Product: Complex and risky products are sold via middlemen as consumers expect more direct supervision and assistance.

(e) Size of Product: In case of heavy and bulky products, direct or short channel is more suitable. This is due to difficulties related to physical movement of the product.

(f) Divisibility of Product: Mostly, indivisible products are distributed directly to customers. Divisible products can be conveniently distributed by middlemen.

(g) Unit Price of Product: Precious products, like gold, jewellery, certain chemicals, software, etc., are distributed using direct or short channels of distribution. Use of direct and short channel can minimize risk of theft or robbery.

(h) Legal Aspect: Quite obviously, permitted (legal) products can be distributed by any convenient channel of distribution. But, illegal products are distributed by direct channels for secrecy purpose.

2. Factors Related to Company

Company’s internal situations have direct impact on choice of marketing channel. Manager has to analyze company-related factors to decide the best fit channel(s).

Company-related factors include:

(a) Company’s Financial Position: Financially sound companies can maintain separate and well-equipped departments for distribution of products. Such companies can open and manage own retail outlets and can hire salesmen to manage distribution effectively. They do not require services of middlemen and, hence, can distribute the product directly. But, financially weak companies have to opt for indirect channels to share resources and expertise of channel members.

(b) Product Mix of Company: A company’s product mix consists of product lines and product items in each product line. Many product lines and several product items/ varieties in each of the product lines can enable the firm to offer multiple choices to a large number of consumers. Even, the firm can take benefit of the scale of economy. In such case, direct channels are more advisable. Small companies with limited product lines and/or product items should distribute products via wholesalers and retailers, who sell products of many companies.

(c) Desire for Control: If a company desires to have direct and close control over production and selling activities, direct channels are preferred and vice-versa.

(d) Experience and Expertise: Successful distribution needs considerable experience and expertise. If a company possesses necessary experience, expertise, and staff, it can manage selling activities by its own. When a company lacks such experience and skills, it has to involve middlemen, and prefers indirect channels.

(e) Facilities and Staff: Sufficient facilities and capable staff are essential for effective distribution of products. If a company manages for needed facilities and staff, direct channels are used, otherwise indirect channels are used.

3. Factors Related to Middlemen

Companies consider several middlemen-related factors while deciding on channels.

Most common factors include:

(a) Creditworthiness of Middlemen: Middlemen’s credibility is an important criterion to decide on the channel. If middlemen have good reputation and creditworthiness, a company can multiply its gain and, as a result, prefers to involve them in their distribution activities. Creditworthiness is a critical aspect while offering dealership or franchise for definite area.

(b) Attitudes of Middlemen: Positive attitudes of middlemen make companies to involve them in distribution activities. Companies like to select indirect channel with one or more levels. Opposite situation leads companies to select direct channels.

(c) Services Rendered by Middlemen: Channel decisions depend on number and quality of services offered by middlemen to customers. When the channel members are ready to provide several services to customers, like home delivery, free repairing, credit facility, installment payment schemes, and other post-sales services, the manufacturers like to involve them in distribution to avail such services to their customers. When middlemen do not provide the useful services to customers, companies prefer direct channels.

(d) Financial Capacity of Middlemen: Strong financial capacity of middlemen attracts manufacturers. This is due to the fact that strong financial position benefits both manufacturers and customers. Strong financial position results into speedy recovery of bills receivable, less chances of bad debts, immediate payment, credit facility to customers, and also advanced payment.

(e) Terms and Conditions: When terms and conditions laid down by middlemen are not favourable, the manufacturers don’t like to involve them in distribution activities. They prefer direct distribution channels.

4. Factors Related to Market

Market (consumer behaviour) is a crucial factor in channel selection.

Main factors related to market include:

(a) Size of Market: In case of a large and concentrated market, it is economically affordable for a company to manage its own distribution setup. When market is small, it is advisable to assign distribution task to middlemen.

(b) Geographical Concentration: When firm’s customers are highly concentrated (living in nearby area) in particular region, it can directly deal with customers by using any of the direct channels. But, when customers are scattered in several regions, it is not convenient to use direct channels. Middlemen can do better job with less costs.

(c) Services Expected by Market: Number and types of services expected by the target market, and company’s capacity and readiness to meet them are important issues to be considered in this connection. For example, if the market expects a lot of services, and the company is unable and/or unwilling to satisfy them, indirect channels are preferred to avail the services from middlemen.

(d) Habits of Consumers: Distribution channels must be fit with habits of consumers. Manager should find out why, how, when, where and from whom the consumers like to buy. For example, if consumers are habituated to buy a little quantity frequently from nearby retailer on credit, a company must involve retailers (along with wholesalers) to avail products at all the places where consumers reside.

(e) Current Market Trend: Firm’s distribution system must be compatible with the recent market trend. Trend includes a number of variables like policies and practices of giant national and multinational companies, functioning of departmental stores and corporate retailers, cyber marketing and network marketing, business partnering with banking, insurance, and other service providers, customers’ awareness, and so on. Manager must observe these reforms and innovative practices minutely and accordingly a suitable channel should be selected.

5. Factors Related to Competition

Current and anticipated competition affects company’s decision on marketing channel. Relevant competition-related aspects must be analyzed while selecting the channel.

Competition-related factors include:

(a) Intensity of Competition: When there exists a severe competition in the market, a company must consider competitors distribution strategies and practices while selecting marketing channels. In case of less competition, a company choice will be independent of competition.

(b) Response and Reactions of Competitors: Reactions and response of the close competitors must be taken into account while deciding on distribution channel. A company must select such channels that can help availing competitive advantages.

(c) Company’s Competitive Position in Market: A leader company can design its own distribution network. It can select a specific channel of distribution as per its requirements. But, the follower companies have to follow market leader. Their choice depends on leader’s practice.

6. Factors Related to Environment

Marketer has to consider overall business environment while deciding on marketing channel. Domestic and global environmental forces have direct or indirect impact on company’s activities and operations.

Main environmental forces that affect channel decision include:

(a) Economic Condition of Country: Country’s economic condition affects firm’s operations. In economically poor countries, short or direct channels are used to sell product at low price. In developing and developed countries, normally, indirect channels are used to distribute products.

(b) Phases of Trade Cycle: Phases of trade cycle, like recession, recovery, prosperity, etc., indicate the country’s economic condition. Normally, in prosperity stage, long and indirect channels are used due to need for mass distribution and willingness of people to pay high price for the product. Direct and short channels are more suitable when the economy is passing through recession phase as direct and short channels keep the selling price low.

(c) Legal Provision: Government policies and legal provisions have direct or indirect implication on firm’s distribution activities. Manager must identify relevant provisions affecting distribution activities and, accordingly, an appropriate channel(s) should be selected. Taxes, charges, administrative procedures, restrictions, and other issues are worth noted in this regard.

(d) Availability of Facilities: Availability, costs, and quality necessary facilities play decisive role in channel selection. Facilities like transportation, communication, warehousing, banking, insurance, supporting government agencies at national and international level, degree of harmony among states of the country, and relations among nations at large affect firm’s channel decisions.