Question

Sefalana (Pty) Ltd has recently expanded its operations across borders. Assume that the company has to make decisions on appropriate distribution channels to use in the new markets. Discuss the factors that need to be taken into account when selecting distribution channels for Sefalana (Pty) Ltd. (20 Marks)

Answer 1

Some of the factors to consider while selecting channels of distribution are as follows: (i) Product (ii) Market (iii) Middlemen (iv) Company (v) Marketing Environment (vi) Competitors (vii) Customer Characteristics (viii) Channel Compensation.

We have to consider the following factors for the selection of channel of distribution:

(i) Product:

Perishable goods need speedy movement and shorter route of distribution. For durable and standardized goods, longer and diversified channel may be necessary. Whereas, for custom made product, direct distribution to consumer or industrial user may be desirable.

Also, for technical product requiring specialized selling and serving talent, we have the shortest channel. Products of high unit value are sold directly by travelling sales force and not through middlemen.

(ii) Market:

(a) For consumer market, retailer is essential whereas in business market we can eliminate retailing.

(b) For large market size, we have many channels, whereas, for small market size direct selling may be profitable.

(c) For highly concentrated market, direct selling is preferred whereas for widely scattered and diffused markets, we have many channels of distribution.

(d) Size and average frequency of customer’s orders also influence the channel decision. In the sale of food products, we need both wholesaler and retailer.

Customer and dealer analysis will provide information on the number, type, location, buying habits of consumers and dealers in this case can also influence the choice of channels. For example, desire for credit, demand for personal service, amount and time and efforts a customer is willing to spend-are all important factors in channels choice.

(iii) Middlemen:

(a) Middlemen who can provide wanted marketing services will be given first preference.

(b) The middlemen who can offer maximum co-operation in promotional services are also preferred.

(c) The channel generating the largest sales volume at lower unit cost is given top priority.

(iv) Company:

(a) The company’s size determines the size of the market, the size of its larger accounts and its ability to set middlemen’s co-operation. A large company may have shorter channel.

(b) The company’s product-mix influences the pattern of channels. The broader the product- line, the shorter will be the channel.

If the product-mix has greater specialization, the company can favor selective or exclusive dealership.

(c) A company with substantial financial resources may not rely on middlemen and can afford to reduce the levels of distribution. A financially weak company has to depend on middlemen.

(d) New companies rely heavily on middlemen due to lack of experience.

(e) A company desiring to exercise greater control over channel will prefer a shorter channel as it will facilitate better co-ordination, communication and control.

(f) Heavy advertising and sale promotion can motivate middlemen in the promotional campaign. In such cases, a longer chain of distribution is profitable.

Thus, quantity and quality of marketing services provided by the company can influence the channel choice directly.

(v) Marketing Environment:

During recession or depression, shorter and cheaper channel is preferred. During prosperity, we have a wider choice of channel alternatives. The distribution of perishable goods even in distant markets becomes a reality due to cold storage facilities in transport and warehousing. Hence, this leads to expanded role of intermediaries in the distribution of perishable goods.

(vi) Competitors:

Marketers closely watch the channels used by rivals. Many a time, similar channels may be desirables to bring about distribution of a company’s products. Sometimes, marketers deliberately avoid channels used by competitors. For example, company may by-pass retail store channel (used by rivals) and adopt door-to-door sales (where there is no competition).

(vii) Customer Characteristics:

This refers to geographical distribution, frequency of purchase, average quantity of purchase and numbers of prospective customers.

(viii) Channel Compensation:

This involves cost-benefit analysis. Major elements of distribution cost apart from channel compensation are transportation, warehousing, storage insurance, material handling distribution personnel’s compensation and interest on inventory carried at different selling points. Distribution Cost Analysis is a fast growing and perhaps the most rewarding area in marketing cost analysis and control.