Management should constantly reappraise channels of distribution to make cost savings.
Marketing channels are determined by company policy and this determines how the sales force should be organized.
A sales channel is the route that goods take through the selling process from supplier to customer. Sometimes the channel is direct, especially where goods sold are incorporated into a manufacturing process. Final goods might then be sold through a different channel. Selecting/reappraising sales channels
When selecting or reappraising channels, the company must take into consideration:
- The market;
- channel costs;
- The product;
- Profit potential;
- channel structure;
- Product life-cycle; and
- Non-marketing factors.
This must be analyzed to ensure that as many potential consumers as possible will have an opportunity to purchase the product or service. Channel compatibility with similar products in the marketplace is important. Consumers tend to be conservative and any move from the accepted norm can be viewed with suspicion. Unless there are sound reasons for so doing, it does not make sense to go outside the established channel.
Generally, short channels are the costliest. A company selling direct may achieve large market coverage, but in addition to increased investment in the sales force, the firm also incurs greater transportation and warehousing costs. This is balanced against the fact that there will be a greater profit margin, by virtue of the fact that distributive intermediaries are obviated and their margins will not have to be met. In addition to such financial criteria, short channels have an advantage of being nearer to end-users, which means the company is in a better position to anticipate and meet their needs.
There has been a trend in recent years for manufacturers to shorten their channels to control more effectively distribution of their products, particularly where advertising has been used to pre-sell the goods to consumers.
Normally, low-cost, low-technology items are better suited to longer channels. More complex items, often requiring much after-sales service, tend to be sold through short channels, which is why most industrial products are sold direct from the producer to user. The width of the product line is important, in that a wide product line may make it worthwhile for the manufacturer to market direct because the salesperson has a larger product portfolio with which to interest the customer, which makes for more profit-earning potential.
A narrow product line is more suited to a longer channel because along the distribution chain it can be combined with complementary products of other manufacturers, resulting in a wider range of items with which to interest the customer. In this case, distributive intermediaries and not manufacturers are performing the final selling function. An example here is a manufacturer of bathroom fittings who sells through builders’ merchants. Builders’ merchants then sell these fittings to builders alongside other materials they require.
There comes a point when the costs of obtaining more sales through a channel outweigh revenue and profits to be gained from increased sales. For instance, a manufacturer of an exclusive perfume would not distribute through supermarkets or advertise during peak-time television viewing. If the company did so, then sales would no doubt increase, but the costs involved in achieving those sales would make it unprofitable. It is an accounting problem and a balance must be struck between channel expense, profit and gross margins.
A manufacturer using short channels is more likely to have high gross margins, but equally higher channel expenses. A manufacturer using longer channels will have relatively lower gross margins, coupled with lower channel expenses.
To some extent a manufacturer’s choice of distributive intermediaries is governed by the members in that channel. If members of the channel are strong (by virtue of, say, their size), then it will be difficult for a manufacturer to go outside the established channel.
In some cases it may be difficult to gain entry to the channel unless the product is differentiated by way of uniqueness or lower price from those products already established in the channel. An example is the potential difficulty that a new detergent manufacturer would have in attempting to sell products through larger supermarkets.
The manufacturer would have to convince members of the channel that the detergent was in some way better than those already on the market, or offer advantageous prices and terms. In addition, detergent is mainly marketed using a ‘pull’ strategy that relies on consumer advertising to create brand loyalty and pre-sell the product to end-customers. A new manufacturer would have to spend a lot on mass advertising to create brand loyalty for the product, or attempt to ‘push’ the product through the channel by providing trade incentives, with probably a lower end price than competitive products coupled with larger profit margins for retailers. It can be seen that it would be a daunting task for a new detergent manufacturer to enter the market in a big way without large cash resources at its disposal.
Consideration must be given to how far the product is along the product life-cycle. A new concept or product just entering the life-cycle might need intensive distribution to start with to launch it on the market. As it becomes established it may be that after-sales service criteria become important, leading to a move to selective distribution, with only those dealers that are able to offer the necessary standard of after-sales service being allowed to sell the product. It would then be the case that only a select few distributors are needed in the early stages of the life-cycle.