Marketing intermediaries:the distribution channel

Many producers do not sell products or services directly to consumers and instead use marketing intermediaries to execute an assortment of necessary functions to get the product to the final user. These intermediaries, such as middlemen (wholesalers, retailers, agents, and brokers), distributors, or financial intermediaries, typically enter into longer-term commitments with the producer and make up what is known as the marketing channel, or the channel of distribution. Manufacturers use raw materials to produce finished products, which in turn may be sent directly to the retailer, or, less often, to the consumer. However, as a general rule, finished goods flow from the manufacturer to one or more wholesalers before they reach the retailer and, finally, the consumer. Each party in the distribution channel usually acquires legal possession of goods during their physical transfer, but this is not always the case. For instance, in consignment selling, the producer retains full legal ownership even though the goods may be in the hands of the wholesaler or retailer—that is, until the merchandise reaches the final user or consumer.
Channels of distribution tend to be more direct—that is, shorter and simpler—in the less industrialized nations. There are notable exceptions, however. For instance, the Ghana Cocoa Marketing Board collects cacao beans in Ghana and licenses trading firms to process the commodity. Similar marketing processes are used in other West African nations. Because of the vast number of small-scale producers, these agents operate through middlemen who, in turn, enlist sub-buyers to find runners to transport the products from remote areas. Japan's marketing organization was, until the late 20th century, characterized by long and complex channels of distribution and a variety of wholesalers. It was possible for a product to pass through a minimum of five separate wholesalers before it reached a retailer.
Companies have a wide range of distribution channels available to them, and structuring the right channel may be one of the company's most critical marketing decisions. Businesses may sell products directly to the final customer, as Land's End, Inc., does with its mail-order goods and as is the case with most industrial capital goods. Or they may use one or more intermediaries to move their goods to the final user. The design and structure of consumer marketing channels and industrial marketing channels can be quite similar or vary widely.
The channel design is based on the level of service desired by the target consumer. There are five primary service components that facilitate the marketer's understanding of what, where, why, when, and how target customers buy certain products. The service variables are quantity or lot size (the number of units a customer purchases on any given purchase occasion), waiting time (the amount of time customers are willing to wait for receipt of goods), proximity or spatial convenience (accessibility of the product), product variety (the breadth of assortment of the product offering), and service backup (add-on services such as delivery or installation provided by the channel). It is essential for the designer of the marketing channel—typically the manufacturer—to recognize the level of each service point that the target customer desires. A single manufacturer may service several target customer groups through separate channels, and therefore each set of service outputs for these groups could vary. One group of target customers may want elevated levels of service (that is, fast delivery, high product availability, large product assortment, and installation). Their demand for such increased service translates into higher costs for the channel and higher prices for customers. However, the prosperity of discount and warehouse stores demonstrates that customers are willing to accept lower service outputs if this leads to lower prices.

 

Channel functions and flows

In order to deliver the optimal level of service outputs to their target consumers, manufacturers are willing to allocate some of their tasks, or marketing flows, to intermediaries. As any marketing channel moves goods from producers to consumers, the marketing intermediaries perform, or participate in, a number of marketing flows, or activities. The typical marketing flows, listed in the usual sequence in which they arise, are collection and distribution of marketing research information (information), development and dissemination of persuasive communications (promotion), agreement on terms for transfer of ownership or possession (negotiation), intentions to buy (ordering), acquisition and allocation of funds (financing), assumption of risks (risk taking), storage and movement of product (physical possession), buyers paying sellers (payment), and transfer of ownership (title).
Each of these flows must be performed by a marketing intermediary for any channel to deliver the goods to the final consumer. Thus, each producer must decide who will perform which of these functions in order to deliver the service output levels that the target consumers desire. Producers delegate these flows for a variety of reasons. First, they may lack the financial resources to carry out the intermediary activities themselves. Second, many producers can earn a superior return on their capital by investing profits back into their core business rather than into the distribution of their products. Finally, intermediaries, or middlemen, offer superior efficiency in making goods and services widely available and accessible to final users. For instance, in overseas markets it may be difficult for an exporter to establish contact with end users, and various kinds of agents must therefore be employed. Because an intermediary typically focuses on only a small handful of specialized tasks within the marketing channel, each intermediary, through specialization, experience, or scale of operation, can offer a producer greater distribution benefits.