A Marketing Channel is a system of relationships existing among businesses that participate in the process of buying and selling products and services.
Marketing channel decisions are often harder to change than price, promotion, and product decisions. Legal contracts may limit changes and developing effective relationships with Marketing channel members, often takes longer and costs more. It may also be hard to move retail outlets and wholesale facilities once they are set up. E. Raymond Corey writes in his book:
Normally it takes years to build (distribution channel), and it is not easily changed… It represents a significant corporate commitment to large numbers of independent companies whose business is distribution – and to the particular markets they serve.
Most manufacturers do not sell their products directly to end-users. Between the end-user and the producer, there are Marketing Channel members performing a variety of functions. Some of these resellers such as wholesalers and retailers purchase from producers, take ownership title, and in turn resell the products to parties or consumers at the next level. They are called merchants. In contrast brokers, agents, and producer’s sales- persons search and negotiate with buyers on behalf of the producer and do not acquire ownership title to merchandise. Other Marketing Channel members work as facilitators in the process of distribution and include transporters, privately owned warehouses, banks, and others who neither negotiate with buyers or sellers on behalf of producer nor take ownership title of merchandise.
A single channel member may perform all these functions in certain situations. However, in most of the situations, channel members at different levels are involved in performing the following functions jointly:
Channel Members Create Utility: Marketing channel creates time, place, and possession utility. Time utility refers to making products available to customers when they want them. They create place utility by making products available in locations, where customers desire them to be available for buying. Possession utility means customers having access to obtain and have the right to use or store for future use. This may occur through ownership or some arrangements such as rental or lease agreements that entitle the customer the right to use the product.
Channel Members Facilitate Exchange Efficiencies: Channel members offer exchange efficiencies and help reduce the exchange costs by providing certain functions or services. Let us assume that three customers seek to buy products from four producers. If there are no middlemen involved, the total transactions with three customers will be twelve. If these four producers sell to one reseller, the total transactions for producers will come down to four (one for each producer), and in turn, the reseller will handle three transactions with customers. The costs of three transactions for each producer are likely to be more than just one transaction with a reseller for each producer. In this situation, just one reseller serves both producers and the customers. Cost is a major factor coupled with better service to customer needs for using channel intermediaries.
Channel Members May Reduce Discrepancies and Separations: For most customers, producers are located far from them and customers may want different product assortment and quantity of the manufacturer’s produce. Customers too may not be very clear about their product choices and channel members help adjust these discrepancies.
Assortment discrepancy refers to the difference between the product lines a company produces and the assortment customers want. A company may be specialist in producing cricket balls only, but a typical cricket enthusiast would also be interested in cricket bat or gloves, and other complimentary products and may not prefer to shop for these items elsewhere. The resellers adjust these discrepancies.
Quantity discrepancy means the difference between what quantity is economical for the company to produce, which in most cases is quite large. The cricket ball manufacturers might be producing 10 or 15 thousand balls in a given period. The average buyer would buy far less number of balls at a time. Channel members may also help in handling this discrepancy. Middlemen collect and accumulate products from various producers. Wholesalers buy in bulk, break it into different grades or qualities desired by different customer groups, and sell smaller quantities to retailers, who sell to the customer one or few units at a time.
Other Functions: Distribution channels share financial risk by financing the goods moving through pipeline and also sometimes extend the credit facility to next level operators and consumers as well as handle personal selling by informing and recommending the product to consumers, and partly look after physical distribution such as warehousing and transportation, provide merchandising support, and furnish market intelligence.
The main criticism about using intermediaries is that this increases prices. Customers prefer lower prices and would like the channels as short as possible. The assumption is that lower the number of intermediaries, the lower the prices. This thinking ignores the fact that channel members perform certain functions and producers cannot escape these functions by not involving intermediaries. The functions and associated costs are simply transferred to a producer.
Role of Marketing Channels
A distribution channel moves goods from producers to consumers. It overcomes the major time, place, and possession gaps that separate goods and services from those who would use them from those who make them. Marketing channel members perform many roles: buying, carrying inventory, selling, transporting, financing, promoting, negotiating, conducting marketing research and servicing. These functions are summarized in the following table and a smooth conduct of these functions will enable products to flow from producers to consumers in a timely and efficient manner.
Channel Design Decisions
The most important task in channel management is the design of an effective and efficient channel for a smooth flow of products, titles, payments, and information and promotion programs. A systematic approach should be followed for designing distribution channel by analyzing the demands of customers. This is because there may be different kinds of requirements for different market segments. The end user analysis helps in identifying an optimum flow; removing all bottlenecks and developing desired customer value. The company should also evaluate its existing channel alternatives for sales, delivery, and service to customers in terms of efficiency and effectiveness. This analysis should be done in relation to company’s objectives and positioning decisions about its products and services. A constraint analysis should be conducted to identify limits, which have to be built into any proposed channel structure. These include evaluation of customer loyalty level, sales target of the company etc. Once these evaluations are over, the company can identify the gaps, which exist and then plan for the ideal channel design by evaluating possible channel alternatives.