1

MARKETING CHANNEL CONCEPTS AND CHANNEL PARTICIPANTS

• Even before the product is ready for its market, management must determine
what methods and routes will be used to get the product into the market.

• This task involves the establishment of a strategy covering Channels of

Distribution and the Physical Distribution of the product.

Middlemen and Channels of Distribution

WHO IS A MIDDLEMAN?

• A Middleman is an independent business concern that operates as a link

between producers and ultimate consumers or industrial users.

• A Middleman renders services in connection with the purchase or sale of

products moving from producers to consumers.

• A Middleman either takes title to the merchandise as it flows from producer

to consumer (Merchant Middlemen) or actively helps in the transfer of
ownership (Agent Middlemen).

• The importance of Middlemen operations is their active and prominent role

in the negotiations involving the buying and selling of the goods.

• The involvement of Middlemen in the transfer of ownership is what

differentiates middlemen from other business institutions such as
transportation firms, insurance companies, warehouses and banks.

• These other institutions known as (Facilitors) help in the marketing process,

but they do not take with and are not actively involved in the purchase and
sale negotiations.

WHAT IS A CHANNEL OF DISTRIBUTION?

• Definition: “A Channel of Distribution or a Trade Channel for a product

is the route taken by the title to the product as it moves from the producer to
the ultimate consumer or industrial user. A channel always includes both the
producer and the final customer for the product, as well as all the middlemen
involved in the title transfer.”—Stanton
 2

• “The external contractual organization which management operates to

achieve its distribution objectives.”---Bert Rosen bloom

• There are four key terms in this definition, which should be specially noted.
They are (1) External (2) Contractual Organization
(3) Operates (4) Distribution

(1) External: Means the Marketing channel, regardless of its type or

structure, exists outside the firm.

• Management of the marketing channel therefore involves the use

of inter-organizational management rather than intra-
organizational management.

• In simple terms the distribution channel is not a part of the firm’s

internal organization structure.

(2) Contractual Organization: Refers to those firms or parties who are

involved in negotiatory function as a product moves from the producer
to the ultimate user.
• Negotiatory functions consist of buying, selling, and transferring
title to the products.

• Facilitating agencies do not come under this contractual

organization.

(3) Operates: Is meant to suggest involvement by management in the

affairs of the channel.

(4) Distribution objectives: Means that management has certain

distribution goals in mind.
• The marketing channel enlists as a means for achieving these
goals.

• The involvement of other business institutions such as

transportation firms, insurance companies and banks are very
important in the movement of the product from the producer to the
ultimate user, but they are called facilitators and are not included
as middlemen in the distribution channel.
 3

HOW IMPORTANT ARE MIDDLEMEN

• Middlemen are very important in virtually all cases where

consumers are involved.

• Usually it is simply not practical for a producer to deal directly

with ultimate consumers.

• There is old saying in marketing that “you can eliminate the

middlemen, but you cannot eliminate their services.”

• Middlemen serve as purchasing agents for their customers and as

sales specialists for heir suppliers.

• Middlemen frequently provide various financial services for both

their suppliers and their customers.
MAIN FUNCTIONS PERFORMED BY MIDDLEMEN
The three main functions performed by the middlemen are,
( 1) Concentration (2) Equalization (3) Dispersion.

The job to be done involves

(1) Collecting or concentrating the outputs of various
producers.

(2) Equalization- subdividing these outputs into the amounts

desired by customers and then putting the various items together
in the assortment wanted and,

(3) Dispersing this assortment to consumers.

Creation of Utility
• Middlemen help in the creation of time, place, and possession utilities.

CHANNEL PARTICIPANTS:

• The channel manager should have thorough knowledge about the

capabilities of the institutions performing distribution tasks.

• Such knowledge would enable the channel manager to make better

decisions about who should participate in the channel.

• The three basic constituents of the marketing channel are,

(1) Producers (2) Intermediaries (3) Final users.
 4

Classification of Channel Participants

All channel Participants
Do they perform negotiating function?

Member Participants Non Member Participants

Yes No

Contractual Organization Facilitating Organization

(Marketing Channel)
Transport Insurance Banks Warehousing

Producers Intermediaries Final Users

Wholesalers etailers Consumers Industries

WHOLESALING

Definition: “Wholesaling or wholesale trade includes the sale and all

activities directly incident to the sale of the products or services to those
who are buying for resale or for the business use.”

• In simple terms wholesaling includes sales by any firm to any

customer except an ultimate consumer who is buying for personal and
non-business use.

• The only difference between wholesaling and retailing is the purpose

for which the buyer is buying the product.

TYPES OF WHOLESALING:
There are essentially four types of wholesalers.

(1) Merchant Wholesalers: They are primarily engaged in buying,

taking title to, usually storing and physically handling goods in large
 5

quantities and reselling the goods, usually in smaller quantities, to

retailers or industrial users or business users.

(2) Agent Brokers: Functional middlemen who do not take title to

the goods in which they deal, but negotiate sales or purchases for clients.
They are compensated in the form of commission on sales and
purchases.

(3) Manufacturer’s Sales Branches: Establishments that are

maintained by manufacturing plants and which are operated by them
primarily for marketing of their own products at wholesale.

• Some of these have warehousing facilities where stocks of

goods are maintained, where as others are merely sales
offices.

(4) Assemblers: Establishments engaged in purchasing farm products or

seafood in growers markets or producing regions. They usually purchase
in relatively small quantities, concentrate large supplies and thus
assemble economic shipments for movement into major wholesale
market centers.

 Such establishments may be owned and operated by merchant

wholesaling firms and hence really part of the wholesale merchant
classification.

Economic justification of wholesaling:

• Many manufacturing firms are small and specialized and they

do not have the needed capital to maintain a large sales force to contact
many small retailers who are their customers.

• Even the manufacturers who have sufficient capital, their output

is too small to justify the necessary sales force.

• On the other hand, most retailers buy in small quantities and

they have very little knowledge of the market and sources of supply.

• Thus, there is a wide gap between the retailer (buyer) and the
producer (seller).
 6

• The wholesaler can effectively fill this gap by pooling the

orders of many retailers and furnish a market for the small manufacturers.

• From a macro-marketing point of view, wholesaling brings the

economies of skill, sale and transactions to the distribution system.

• Wholesalers essentially can perform the wholesaling functions

at an operating expense percentage much lower than what a manufacturer
can do the job.

Eg: if four manufactures want to sell to six retailers without a wholesaler

there are 24 transactions. Where as with a wholesaler the number of
transactions is reduced to 10. 4 occur when the producer sells to the
wholesaler and another 6 when the wholesaler sells to the retailers.

Services provided by the wholesalers to the producers:

Wholesalers have survived and even grown in numbers and volume because
as specialists in the performance of distribution tasks, they can operate at
higher levels of effectiveness and efficiency.

(1) Planning local distribution.

(2) Providing low costs sales contact over a wide

geographical area.

(3) Providing low cost warehousing and delivery.

(4) Offering credit and capital to finance inventories and

extending credit.

(5) Accepting relatively large shipments, thus achieving

sustainable transportation and order processing savings.

Tasks performed to their customers:

(1) Anticipating customer’s requirements and

maintaining inventories tailored to meet their requirements.

(2) Assembling locally the varied products of many

suppliers and holding them available for delivery on short notice.
 7

(3) Buying in large quantities and bulk breaking to suit

customers and also passing on some of the savings affected from buying
in larger lots.

(4) Providing rapid delivery.

(5) Extending credit.

(6) Providing guarantees, making adjustments and

handling returns and allowances.

NATURE OF RETAIL MARKET

Retailing: Includes all activities directly related to the sale of goods or

services to the ultimate consumer for personal, non-business use.

• Any manufacturer, wholesaler or retailer that sells something to

ultimate consumer for their non-business use is making a retail
sale.

• A retail store is a business enterprise that sells more than half

the stores sales volume to household consumers for non-
business use.

Economic justification for retailing:

• To get into retailing is easy and it is all the more easily to be

thrown out of the retailing.

• The consumer determines the very survival of the retailer.

• To survive in retailing, a firm must do a satisfactory job in its

primary role catering to the consumer and in its secondary role
serving the producers and wholesalers.

• This dual responsibility is both the justification for retailing and

the key to success in retailing.
 8

Services provided by the retailer to the consumer and wholesaler and the
producer.

Buyers for Consumers Selling for Producers

Anticipate wants Sales specialists
Bulk Breaking Retailing Advertisers
Storage and Transportation Middlemen Interprets wants
Installation and Repair Acts as a buffer
Financing Bulk breaking
Guarantees the product Financing and storing

Classification of Retailers

By Sales By Product By form of By Method of

Volume
large scale Line Carried
• -General Ownership
• -CorporateOperation
• -Full Service
Retailers. Merchandise chain. Retailing.
Small scale Stores. • - • -Super
Retailers. • - Independent Market
Departmental Stores. Retailing.
Stores. • -Discount
• -Variety Retailing.
Stores. • -Non-Store
• -Limited Line Retailing.
Stores. • -Door-to
• Eg: Shoes,
Bakery, and