Functions of Intermediaries in Distribution Channel
A distribution channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user.
Why are marketing intermediaries used?
Most producers use intermediaries to bring their products to the market and, in so doing, forge a distribution channel.
- Intermediaries make goods available to target markets more efficiently – through their contacts, experience, specialization, and scale of operation, they offer more than the firm can achieve on its own.
- They also provide economies of scale and reduce the number of contacts; this reduces the amount of work that must be done by both producers and consumers.
- They also transform the assortment of producers’ assortment into assortments wanted by the customer, thus playing a critical role in matching supply and demand.
- Many producers lack financial resources to carry out direct marketing
- In some cases, direct marketing is not feasible for producers because if they establish retail shops, they have to sell many products.
Functions of Intermediaries in Distribution Channel
Members of the marketing channel perform the following functions:
Functions Performed by Marketing Intermediaries
Marketing channel Intermediaries perform following functions:
Contacting Function
They reduce the number of sales contacts on sales needed to reach all the customers. As the number of sellers and customers increases, the number of sales contacts increases geometrically, otherwise arithmetically, in cases where there are middlemen.
Matching and Sorting Function
This involves bulk breaking (buying in large units and breaking down into smaller units for resale) and bulk building (intermediaries buy from various small producers, selling to marketing boards, millers, or Processors of foreign buyers, especially in the marketing of coffee).
Basically, it shapes and fits the offer to buyers’ needs, including manufacturing, grading, assembling, and packaging.
Physical Distribution Function
Transportation and storage of products from producer to the final consumer. Transportation creates utility by ensuring goods are available where desired.
Warehousing and Storage
Ensures that products are available when expected. This ensures continuous production since manufacturers’ storage space is continuously emptied by the outflow of stock going to intermediaries. The middlemen assume ownership of goods/merchandise, thus financing the inventory and taking the risk.
Demand Stimulation
In a bid to make a profit, intermediaries engage in marketing functions as the marketing mix variables. Though they engage in marketing, they stimulate sales of their stock, which also include competitor products.
If a company’s product is not in demand, then they may phase it out. At times manufacturers may stimulate demand for their products by offering incentives to retailers.
Demand stimulation by intermediaries is appropriate for small producers who do not have fiancés to promote their products.
Market Information
They gather and distribute marketing research information about factors and forces in the marketing environment needed for planning and aiding exchange, e.g., potential customers and competitors.
They provide information from producers to consumers or from consumers to producers. This information backs up what sales associates, consumers, and the media offer.
Middlemen explain to consumers how to use and maintain the company’s products and where to take them for repair—questions regarding the product’s function by customers, warranties, and guarantee conditions.
Marketing and Promotion
Intermediaries provide many producers lacking the resources to carry out direct marketing with an avenue to sell their products.
Negotiation
They attempt to reach a final agreement on the price and other terms so that transfer of ownership can be affected.
Ordering
It involves communicating the intentions to buy to the manufacturer.
Financing
The acquisition and allocation of funds required to finance inventories at different levels of the marketing channel.
Risk-taking
The assumption of risks connected with carrying out the channel work.
Title
The actual transfer of ownership from one organization or person to another. Intermediaries are necessary; if a manufacturer performs channel functions, his costs go up, and the prices become higher.
When some functions are shifted to intermediaries, the producers’ costs and the expenses become lower.
Many businesses should outsource distribution functions and concentrate on core business, i.e., production.
The use of intermediaries should not be viewed negatively to be a way of placing a firm’s destiny in their hands because both producers and buyers gain several advantages from these intermediaries who do a lot to smoothen the flow of goods services.
Factors Influencing the Type of Distribution Channel to Be Used
In deciding the combination of channels to use, the following factors should be considered:
Company Characteristics
These include such factors as company objectives and constraints, financial status, past channel experience, and desired degree of channel control required by the company.
Product Characteristics
These include such factors as perishability (require more direct marketing), bulky products (require channels that minimize shipping distance and handling), non-standardized products(sold directly by the company’s sales force, e.g., custom-built machines), products requiring installation are usually sold by the company or by franchised dealers.
Middlemen Characteristics
These include such factors as financial capabilities, payment policies, capability in reaching consumers, and any strengths and weaknesses.
Competitive Characteristics
The channels used by the competitors may represent the wisdom of the industry. Therefore, the company may use them to make available its product where the company competitors are; alternatively, the company might use a different channel to differentiate its products.
Environmental Characteristics
Political, legal, economic, and technological characteristics influence channel decisions. When the economy is depressed, producers may wish to use shorter channels to reach consumers at less cost.
Government legislation against producers doing their own marketing may also influence the channel decisions.
Customer Characteristics
Key questions here include:
- – What is the output level desired by the customers?
- – What is the lot size purchased by the customer?
- – Does the customer expect service back-up?
- – Are the target customers centrally located or dispersed?
Intermediaries in Distribution Channel FAQs
1. Why do we use intermediaries in the distribution channel?
Intermediaries are used in the distribution channel mainly because of limitations in production, marketing and transport capabilities.
For reasons such as limited competition, technical barriers, or on-going economic reforms, manufacturers may not be able to conduct full-fledged (direct) marketing.
As a result, they contract out the channel functions to intermediaries who perform them for a fee on their behalf.
2. What are marketing intermediaries
Marketing intermediaries are organizations in the distribution channel between producers and consumers that carry out marketing functions, e.g., advertising, pricing, product design, etc.
3. What are wholesalers?
Wholesalers are intermediaries that purchase products in large quantities from producers at lower prices for resale to retailers at higher prices.
They are also known as distributors, jobbers, middlemen or dealers (in some countries). Their main function is to transfer goods from manufacturers to retailers (or consumers).
4. What are retailers?
Retailers are intermediaries that sell products to the final consumer. They purchase products from wholesalers and marketers at a lower price and then resell these goods at a higher price to the ultimate consumers.
They usually have small lots so they require short distribution channels to minimize transportation costs.
According to WTO statistics, about 30% of world trade is between manufacturers and retailers, proving the importance of the retail trade in international marketing.
5. What are consumers?
Consumers are the ultimate consumers in the distribution channel that purchase products from retailers for their final use.
The single most important function of intermediaries in the distribution channel is to reach out to consumers at reasonable prices by performing marketing functions required in direct marketing.
6. What are producers?
Producers are organizations that supply good or services to intermediaries in the distribution channel through manufacturing, processing, assembling, packaging, storing, transporting, delivering and after-sales servicing of products.
7. What are distribution intermediaries examples?
- Distribution channel examples in business-to-business markets include:
Manufacturers sell their products directly to wholesalers or set up their own sales force to sell the products directly to retailers or consumers directly.
Manufacturers often sell directly to retailers or consumers, using distributors or independent sales organizations (ISOs) that act as intermediaries.
- Distribution channel examples in business to consumer markets include:
Manufacturers sell their products directly to retailers, using their own sales force. They may also use distributors or ISOs that act as intermediaries in the distribution channel.
Manufacturers allow retailers to act as their own distributors, selling the manufacturers’ products directly to consumers.
Retailers often sell directly to consumers, using advertising and promotions (such as coupons) to attract them into the store.
How can we identify the key functions performed by intermediaries?
Marketers can identify the key functions performed by intermediaries by looking at their job descriptions.
For example, if a company’s customer service representatives are responsible for talking to customers, orienting new customers, answering their questions about products and services, and changing or canceling orders, it is obvious that it is performing some of its key functions through this channel.
Intermediaries perform the following functions:
- Evaluate new products.
- Keep up with market trends.
- Help manufacturers decide which products to make.
- Decide whether a product will sell well enough to make it worth their while to handle it.
- Search for new customers and develop relationships that will allow them to sell products from multiple manufacturers.
- Resell products that have been taken as trade-ins from customers who have purchased newer models from them.
- Provide valuable services such as credit to their customers.
- Maintain customer loyalty by selling customers’ trade-in vehicles on credit, resale of trade-in vehicles, and financing of leased vehicles.
It is important to identify an organization’s distribution system when working out strategies for improving it.
For example, if the organization’s production capacity is not in line with its sales goals, it may need to increase its output in order to meet this goal.
However, adding capacity means that more inventory will be available for sale during slack periods. When this happens, the risk of stock-outs increases.
This makes it all the more important for manufacturers to identify their channels of distribution and determine how they can best coordinate their activities with those channels.
8. What is the difference between distributors and intermediaries in the distribution channel?
Distributors and intermediaries in the distribution channel can be defined as follows:
Distributors and intermediaries in the distribution channel specialize and specialize only in particular stages of a marketing process, such as: production, marketing, and distribution. They assume their responsibilities voluntarily.
Distributors sell goods to intermediaries or consumers under contract negotiated with manufacturers or retailers.
Distributors assume responsibility for the sale of goods on behalf of the manufacturer or retailer.
Distributors assume responsibility for production, marketing, and distribution. They also assume responsibility for price quotations given to intermediaries or consumers on behalf of the manufacturer or retailer.
9. What is the difference between manufacturers and producers in the distribution channel?
The most important difference is that manufacturers do not have ownership of the product, but producers have ownership of the product.
Manufacturers are organizations that sell products to distributors or consumers. Producers are organizations that produce and sell products to distributors or consumers.
Manufacturer’s design and produce a variety of products, which can be sold individually or in a large lot to intermediaries for resale at a higher price.
They also perform marketing functions such as advertising and promotion, product design, packaging and labeling as required by intermediaries or consumers.
Producers also design and produce a variety of products, which can be sold individually or in a large lot to intermediaries for resale at a higher price.
They also perform marketing functions such as advertising and promotion, product design, packaging and labeling as required by intermediaries or consumers.
Manufacturers are also known as producers or first-stage distributors. Producers are also known as second-stage distributors.
10. What is the difference between wholesale distribution and retail distribution?
Wholesale distribution deals with product movement from manufacturer to wholesaler to retailer whereas retail distribution deals directly with retailer to the end consumer.
Wholesale distribution is an integral part of manufacturing business whereas retail distribution is an integral part of consumer business.
11. How do intermediaries manage risk?
The risk-taking behavior of intermediaries is determined by the following:
Intermediaries take goods from producers and pass them on to buyers to maximize their own profits. They hedge against risks, such as: price fluctuations, inventory obsolescence and changes in consumer demand.
They also take risks that arise during the marketing process (e.g., pricing, branding, etc.). They may also bear major market risks such as those related to the quality of products and services they sell. Intermediaries usually seek to avoid risk-taking by:
12. What is the relationship between channels of distribution and marketing?
Channels of distribution are dependent on the marketing strategy of a product. In addition, channels of distribution play a vital role in marketing management.
The main functions of channels of distribution are as follows:
- The place where the product enters the channel from its point of origin (i.e., production).
- The access point for customers or customers’ agents to enter the channel to purchase goods or services.
- The point at which goods or services are taken out of the channel.
- A product that travels through the distribution channel.
Where intermediaries in the distribution channel find products, they can resell.
Products are routed to intermediaries in the distribution channel through “order” or “invoice” processing.
Order processing refers to the process used by intermediaries to receive orders for products from customers, enter these orders into their computer systems, and send them on to manufacturers or manufacturers’ representatives responsible for filling them.
Invoice processing refers to the processes used by manufacturers or manufacturers’ representatives to send invoices quoting prices for products to intermediaries, who may then pay for the products directly.
It is important for marketers to understand how goods and services flow through an organization’s distribution channel.
Organizations that distribute goods and services should be able to provide information about the flow of goods and services in their distribution channels.
Organizations that use their own distribution channels can track this information in detail because they control all aspects of the process.
However, organizations that use the channels of independent intermediaries can obtain information about the flow of goods and services only indirectly.
The flow of goods and services is typically explained using a supply chain diagram. The supply chain diagram shows:
This part of the supply chain diagram is usually referred to as the “upstream” part because it shows how products move from manufacturers to distributors or manufacturers’ representatives, who then pass them along to customers or customers’ agents.
In addition, the supply chain diagram can also include a “downstream” part of the supply chain. The downstream part of the supply chain usually shows how goods and services move from intermediaries to customers or customers’ agents.
The flow of goods and services is an important concept for many organizations, especially those that use a distribution channel.
It is also important for marketers because understanding how products move through an organization’s distribution channel can help them monitor inventory levels and thus improve their marketing management.
13. What is a distribution system?
A distribution system is a set of formal and informal relationships between the participants in the distribution channel.
Informal relationships are those that occur without an explicit, ongoing contract or agreement between participants.
A formal relationship, on the other hand, exists when two or more organizations have written and signed contracts that describe how the relationship will operate and how disputes will be resolved.
Distribution systems can be classified by:
- The number of channels through which products pass from manufacturers to customers.
- The number of intermediaries in the distribution channel.
- The number of products involved.
- The number of intermediaries from whom each product is sold.
One-product channels have one distributor at each point through which a product passes on its way from manufacturers to customers. For example, a company that uses a direct sales force has a one-product channel.
Two-product channels have two distributors at each point through which a product passes on its way from manufacturers to customers.
For example, a company that uses both direct sales and wholesalers to sell its products has a two-product channel.
Multi-product channels have more than two distributors at each point through which a product passes on its way from manufacturers to customers.
For example, a department store chain uses both direct sales and wholesaling to sell the products it carries.
It also sells some products directly to customers. Because of these additional roles, it is classified as having a multi-product channel.
14. What are the functions performed by intermediaries?
Most intermediaries perform following function:
- Invest in the distribution channel.
- Resupply goods and services to intermediaries.
- Sell goods to intermediaries.
- Buy products for resale.
Other functions performed by intermediaries include:
- Collect payments from customers or customers’ agents, especially when selling through a sales force.
- Collect payments from customers, especially when selling through a sales force or at a discount store or supermarket, and also collect cash from customers who pay with credit cards.
- Stock high-value items such as jewelry and electronic goods to minimize the risk of theft.
- Provide valuable services such as credit to their customers.
