While a manufacturer of a product is located at one place, its consumers are located at innumerable places spread all over the country or the world. The manufacturer has to ensure the availability of his goods to the consumers at convenient points for their purchase. He may do so directly or through a chain of middlemen like distributors, wholesalers and retailers.
The path or route adopted by him for the purpose is known as channel of distribution. A channel of distribution refers to the pathway used by the manufacturer for transfer of the ownership of goods and its physical transfer to the consumers and the user or buyers (industrial buyers).
Stanton has also defined it as "A distribution channel consists of the set of people and firms involved in the transfer of title to a product as the product moves from producer to ultimate consumer or business user".
Basically it refers to the vital links connecting the manufacturers and producers and the ultimate consumers or users. It includes both the producer and the end user and also the middlemen or agents engaged in the process of transfer of title of goods. Primarily a channel of distribution performs the following functions:
It helps in establishing a regular contact with the customers and provides them the necessary information relating to the goods.
It provides the facility for inspection of goods by the consumers at convenient points to make their choice.
It facilitates the transfer of ownership as well as the delivery of goods.
It helps in financing by giving credit facility.
It assists the provision of after sales services, if necessary.
It assumes all risks connected with the carrying out the distribution function.
Types of Channels of Distribution
Generally, we do not buy goods directly from the producers. The producers or manufacturers usually use services of one or more middlemen to supply their goods to the consumers. But sometimes, they do have direct contact with the customers with no middlemen in between them. This is true more for industrial goods where the customers are highly knowledgeable and their individual purchases are large.
1. Zero Stage Channel of Distribution
Zero stage distribution channel exists where there is direct sale of goods by the producer to the consumer. This direct contact with the consumer can be made through door-to-door salesmen, own retail outlets or even through direct mail. Also, in case of perishable products and certain technical household products, door-to-door sale is an easier way of convincing consumer to make a purchase. For example, Eureka Forbes sells its water purifiers directly through their own sales staff.
Manufacture → Customer
M → C
2. One Stage Channel of Distribution
In this case, there is one middleman - the retailer. The manufacturers sell their goods to retailers who in turn sell it to the consumers. This type of distribution channel is preferred by manufacturers of consumer durables like refrigerator, air conditioner, washing machine, etc. where individual purchase involves large amount. It is also used for distribution through large scale retailers such as departmental stores (Big Bazaar, Spensors) and super markets.
Manufacture → Retailer → Customer
M → R → C
3. Two Stage Channel of Distribution
This is the most commonly used channel of distribution for the sale of consumer goods. In this case, there are two middlemen used - wholesaler and retailer. This is applicable to products where markets are spread over a large area, value of individual purchase is small and the frequency of purchase is high.
Manufacture → Wholesaler → Retailer → Customer
M → W → R → C
4. Three Stage Channel of Distribution
When the number of wholesalers used is large and they are scattered throughout the country, the manufacturers often use the services of mercantile agents who act as a link between the producer and the wholesaler. They are also known as distributors.
Manufacture → Agents → Wholesaler → Retailer → Customer
M → A → W → R → C