Tag: Market Segmentation

Lucknow University BBA Notes

Types of Intermediaries

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Unless customers are buying a product directly from the company that makes it, sales are always facilitated by one or more marketing intermediaries, also known as middlemen. Marketing intermediaries do much more than simply take a slice of the pie with each transaction. Not only do they give customers easier access to products, they can also streamline a manufacturer’s processes. Four types of traditional intermediaries include agents and brokers, wholesalers, distributors and retailers.

Types of Intermediaries

  • Wholesalers

Wholesalers typically are independently owned businesses that buy from manufacturers and take title to the goods. These intermediaries then resell the products to retailers or organizations. If they’re full-service wholesalers, they provide services such as storage, order processing and delivery, and they participate in promotional support. They generally handle products from several producers but specialize in particular products. Limited-service wholesalers offer few services and often serve as drop shippers where the retailer passes the customer’s order information to the wholesaler, who then packages the product and ships it directly to the customer.

  • Retailers

Retailers work directly with the customer. These intermediaries work with wholesalers and distributors and often provide many different products manufactured by different producers all in one location. Customers can compare different brands and pick up items that are related but aren’t manufactured by the same producer, such as bread and butter. Purchasing bread or medications directly from a manufacturer or pharmaceutical company would be time-consuming and expensive for a customer. But buying these products from a local retail “middleman” is simple, quick and convenient.

  • Distributors

Distributors are generally privately owned and operated companies, selected by manufacturers, that buy product for resale to retailers, similar to wholesalers. These intermediaries typically work with many businesses and cover a specific geographic area or market sector, performing several functions, including selling, delivery, extending credit and maintaining inventory. Although main roles of distributors include immediate access to goods and after-sales service, they typically specialize in a narrower product range to ensure better product knowledge and customer service.

  • Agents and Brokers

Agents and brokers sell products or product services for a commission, or a percentage of the sales price or product revenue. These intermediaries have legal authority to act on behalf of the manufacturer or producer. Agents and brokers never take title to the products they handle and perform fewer services than wholesalers and distributors. Their primary function is to bring buyers and sellers together. For example, real estate agents and insurance agents don’t own the items that are sold, but they receive a commission for putting buyers and sellers together. Manufacturers’ representatives that sell several non-competing products and arrange for their delivery to customers in a certain geographic region also are agent intermediaries.

Role of Intermediaries

  • Purchasing

Wholesalers purchase very large quantities of goods directly from producers or from other wholesalers. By purchasing large quantities or volumes, wholesalers are able to secure significantly lower prices.

Imagine a situation in which a farmer grows a very large crop of potatoes. If he sells all of the potatoes to a single wholesaler, he will negotiate one price and make one sale. Because this is an efficient process that allows him to focus on farming (rather than searching for additional buyers), he will likely be willing to negotiate a lower price. Even more important, because the wholesaler has such strong buying power, the wholesaler is able to force a lower price on every farmer who is selling potatoes.

The same is true for almost all mass-produced goods. When a producer creates a large quantity of goods, it is most efficient to sell all of them to one wholesaler, rather than negotiating prices and making sales with many retailers or an even larger number of consumers. Also, the bigger the wholesaler is, the more likely it will have significant power to set attractive prices.

  • Warehousing and Transportation

Once the wholesaler has purchased a mass quantity of goods, it needs to get them to a place where they can be purchased by consumers. This is a complex and expensive process. McLane Company operates eighty distribution centers around the country. Its distribution center in Northfield, Missouri, is 560,000 square feet big and is outfitted with a state-of-the art inventory tracking system that allows it to manage the diverse products that move through the center. It relies on its own vast trucking fleet to handle the transportation.

  • Grading and Packaging

Wholesalers buy a very large quantity of goods and then break that quantity down into smaller lots. The process of breaking large quantities into smaller lots that will be resold is called bulk breaking. Often this includes physically sorting, grading, and assembling the goods. Returning to our potato example, the wholesaler would determine which potatoes are of a size and quality to sell individually and which are to be packaged for sale in five-pound bags.

  • Risk Bearing

Wholesalers either take title to the goods they purchase, or they own the goods they purchase. There are two primary consequences of this, both of which are both very important to the distribution channel. First, it means that the wholesaler finances the purchase of the goods and carries the cost of the goods in inventory until they are sold. Because this is a tremendous expense, it drives wholesalers to be accurate and efficient in their purchasing, warehousing, and transportation processes.

Second, wholesalers also bear the risk for the products until they are delivered. If goods are damaged in transport and cannot be sold, then the wholesaler is left with the goods and the cost. If there is a significant change in the value of the products between the time of the purchase from the producer and the sale to the retailer, the wholesaler will absorb that profit or loss.

  • Marketing

Often, the wholesaler will fill a role in the promotion of the products that it distributes. This might include creating displays for the wholesaler’s products and providing the display to retailers to increase sales. The wholesaler may advertise its products that are carried by many retailers.

Wholesalers also influence which products the retailer offers. For example, McLane Company was a winner of the 2016 Convenience Store News Category Captains, in recognition for its innovations in providing the right products to its customers. McLane created unique packaging and products featuring movie themes, college football themes, and other special occasion branding that were designed to appeal to impulse buyers. They also shifted the transportation and delivery strategy to get the right products in front of consumers at the time they were most likely to buy. Its convenience store customers are seeing sales growth, as is the wholesaler.

  • Distribution

As distribution channels have evolved, some retailers, such as Walmart and Target, have grown so large that they have taken over aspects of the wholesale function. Still, it is unlikely that wholesalers will ever go away. Most retailers rely on wholesalers to fulfill the functions that we have discussed, and they simply do not have the capability or expertise to manage the full distribution process. Plus, many of the functions that wholesalers fill are performed most efficiently at scale. Wholesalers are able to focus on creating efficiencies for their retail channel partners that are very difficult to replicate on a small scale.

Management Notes

Physical Distribution Channels, Role, Factors, Types

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Physical Distribution Channels refer to the path or route through which goods and services travel from the producer or manufacturer to the final consumer. These channels include intermediaries such as wholesalers, retailers, agents, or distributors, who play an essential role in making the product available to the target market. The goal of distribution channels is to ensure that products reach the right place, at the right time, and in the right condition. Effective distribution channel management helps companies expand market reach, enhance product availability, and optimize costs, contributing to overall business success.

Role of Physical Distribution Channels:

(i) Distribution channels provide time, place, and ownership utility

They make the product available when, where, and in which quantities the customer wants. But other than these transactional functions, marketing channels are also responsible to carry out the following functions:

(ii) Logistics and Physical Distribution

Marketing channels are responsible for assembly, storage, sorting, and transportation of goods from manufacturers to customers.

(iii) Facilitation

Channels of distribution even provide pre-sale and post-purchase services like financing, maintenance, information dissemination and channel coordination.

(iv) Creating Efficiencies

This is done in two ways: bulk breaking and creating assortments. Wholesalers and retailers purchase large quantities of goods from manufacturers but break the bulk by selling few at a time to many other channels or customers. They also offer different types of products at a single place which is a huge benefit to customers as they don’t have to visit different retailers for different products.

(v) Sharing Risks

Since most of the channels buy the products beforehand, they also share the risk with the manufacturers and do everything possible to sell it.

(vi) Marketing

Distribution channels are also called marketing channels because they are among the core touch points where many marketing strategies are executed. They are in direct contact with the end customers and help the manufacturers in propagating the brand message and product benefits and other benefits to the customers.

Role Determining the Choice of Distribution Channels:

Selection of the perfect marketing channel is tough. It is among those few strategic decisions which either make or break your company.

Even though direct selling eliminates the intermediary expenses and gives more control in the hands of the manufacturer, it adds up to the internal workload and raises the fulfilment costs. Hence these four factors should be considered before deciding whether to opt for the direct or indirect distribution channel.

Types of Distribution Channels:

Distribution channels refer to the pathways through which products move from the producer to the final consumer. The choice of distribution channel impacts the product’s availability, cost, and customer experience. There are several types of distribution channels, each suited to different business models and customer needs.

  • Direct Distribution Channel

In a direct distribution channel, the producer sells the product directly to the consumer without involving intermediaries. This can be done through physical stores, company-owned retail outlets, or online platforms. Direct channels allow businesses to have full control over the pricing, branding, and customer experience. They are commonly used for high-value, customized products, or when a business wants to establish direct relationships with customers, as seen in industries like luxury goods, technology, and exclusive services.

  • Indirect Distribution Channel

Indirect distribution channels involve intermediaries between the producer and the consumer. These intermediaries can be wholesalers, distributors, or retailers who help move the product through the market. Indirect channels are common for mass-market products where reaching a larger audience efficiently is crucial. For example, a manufacturer of consumer electronics may sell its products to wholesalers, who then distribute them to various retailers, making the product available in multiple locations.

  • Dual Distribution Channel

A dual distribution channel, also known as a hybrid channel, combines both direct and indirect methods. A company uses direct sales to reach some customers while also using intermediaries to sell through other channels. This type of distribution is useful for companies that want to diversify their sales efforts or reach different market segments. For example, a company might sell directly to large corporate clients but rely on retailers to reach individual consumers. This approach increases market coverage and flexibility.

  • Intensive Distribution

Intensive distribution aims to make the product available in as many locations as possible. This type of channel is used for products with high demand, low unit cost, and frequent purchases, such as consumer packaged goods, snacks, or toiletries. The goal is to saturate the market and make the product widely accessible. The product is sold through multiple retailers, wholesalers, and other outlets to ensure it is readily available for customers.

  • Selective Distribution

Selective distribution involves using a limited number of outlets or intermediaries to distribute products. The company selectively chooses the intermediaries based on their ability to provide quality service, reach specific customer segments, or meet certain brand standards. This approach is often used for moderately priced products such as electronics or appliances. It allows the producer to maintain some control over the product’s distribution while still reaching a broad audience.

  • Exclusive Distribution

Exclusive distribution channels are characterized by a highly selective approach where the producer only sells the product through a few specific intermediaries. This type of channel is often used for luxury or high-end products, where exclusivity and prestige are critical. By limiting the number of distributors or retailers, the brand can control its image and ensure that the product is positioned correctly in the market. For example, a high-end automobile manufacturer may only sell its cars through a select network of authorized dealerships.

Choosing the Right Distribution Channel:

Choosing the right distribution channel is a crucial decision that can significantly impact a company’s success in reaching its target market. The process involves evaluating various options based on the product type, target customer preferences, cost considerations, and competitive environment.

  • Product Type

The nature of the product plays a vital role in determining the best distribution channel. For example, perishable goods like fresh food products may require direct distribution to maintain freshness, while durable goods can be sold through wholesalers or retailers. Similarly, high-end, luxury products may be best suited for exclusive distribution channels, while mass-market items benefit from extensive channel networks.

  • Market Coverage

The level of market coverage needed for the product influences the choice of distribution channel. If the goal is to achieve intensive distribution (wide availability in as many outlets as possible), using intermediaries like wholesalers or retailers is essential. On the other hand, exclusive distribution may require fewer intermediaries to maintain control and exclusivity, which works well for high-end products.

  • Customer Preferences

Understanding how customers prefer to buy products is critical when selecting a distribution channel. In the digital age, many customers prefer purchasing products online, while others prefer a traditional in-store experience. Businesses need to assess the purchasing behavior and preferences of their target market to choose a channel that aligns with their customers’ expectations.

  • Cost Considerations

The cost of using a particular distribution channel is an important factor. Direct distribution, such as selling through a company-owned retail outlet or an e-commerce platform, may involve higher operational costs but provides more control. Indirect channels like wholesalers and retailers may reduce operational costs but may result in lower profit margins due to commissions and markups. Companies need to balance cost considerations with revenue goals to make the most cost-effective choice.

  • Control and Flexibility

When a company chooses a distribution channel, it also determines the level of control it will have over its products and brand. Direct distribution allows a company to maintain more control over product presentation, pricing, and customer experience. However, indirect channels offer less control, as they rely on intermediaries to sell the product. If maintaining control over branding and customer experience is a priority, a company may opt for a direct distribution channel.

  • Competition

The distribution strategy should also consider competitors’ actions. If competitors are using particular distribution channels, entering the same channels could help a company maintain its competitive edge. Alternatively, choosing unique or innovative channels can provide differentiation in the marketplace.

  • Market Reach

The geographical scope of the target market also affects the choice of distribution channels. If a company plans to reach international or distant markets, using a distribution network that includes international agents or global e-commerce platforms might be necessary. Alternatively, for a local or regional target market, a more localized approach with regional wholesalers or retailers may be sufficient.

  • Speed and Efficiency

The time it takes for products to reach customers is another consideration. If the market demands fast delivery, a direct distribution channel, such as e-commerce with quick fulfillment services or direct sales through retail stores, may be ideal. In contrast, some customers may be willing to wait for their products, in which case a slower, but more cost-effective, channel may suffice.

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