Selecting appropriate channels

Four main factors that a business considers when deciding on a distribution channel

Four main factors that a business considers when deciding on a distribution channel

• Nature of the product

• Cost of the channel

• The market

• Level of control

Nature of the product

Different types of products may require different distribution channels. Some examples are given below.

• Most services are sold directly to consumers. It would not be appropriate for window cleaners, gardeners and hairdressers, for example, to use intermediaries.

• Fast-moving consumer goods, such as breakfast cereals, confectionery, crisps and toilet paper, cannot be sold directly by manufacturers to consumers. Wholesalers and retailers play an important role in the distribution of these goods because they break bulk.

• Businesses producing high-quality ‘exclusive’ products, such as perfume and designer clothes, will choose their outlets very carefully. The image of their products is important so they are not likely to use supermarkets, for example.

• Some products need explanation or demonstration.

 

Cost of the channel

• Businesses will choose the cheapest distribution channels.

• They will also prefer direct channels.  This is because each time an intermediary is used they will take a share of the profit. 

• Large supermarkets will try to buy direct from manufacturers. This is because they can bulk buy and get lower prices. 

• Independents are more likely to buy from wholesalers and so have to charge higher prices as a result because the intermediary needs to take a ‘cut’, or a payment for their service, and the independent needs to recover that cost. 

• Many producers now sell direct to consumers from their websites, which helps to keep costs down.

The market

• Producers selling to mass markets are likely to use intermediaries.

• In contrast, businesses targeting smaller markets are more likely to target customers directly. For example, a building contractor in a small town will deal directly with customers. Producers selling in overseas markets are likely to use agents because the agents will know the market better.

• Businesses selling goods to other businesses are likely to use more direct channels.

Level of control

• For some producers, it is important to have complete control over distribution.

• For example, producers of exclusive products do not want to see them being sold in ‘down market’ outlets because this might damage their image.