Factors Affecting Distribution Channel Selection

In business, in addition to creating quality products, suitable to the tastes of consumers, businesses must focus on selecting distribution channels for their products. Mistakes in the selection of distribution channels lead to serious consequences. The goal of the business is to make a profit, and inappropriate distribution channels hinder this goal. So how to choose the right distribution channel? What problems do businesses face when choosing the distribution channel? What are the factors affecting Distribution Channel selection? Let’s learn how to analyze and select distribution channels.

Factors Affecting Distribution Channel Selection

What is Distribution?

Distribution is a system aimed at bringing a goods, services or a solution to the consumer in the time, place and form that the consumer desires. However, in a more inclusive and complete way, distribution is the decision to put products into distribution channels to reach and appropriately exploit market needs and at the same time make the delivery of the product from the place of production to the end consumer effective.

Distribution has a number of basic constituent elements, namely suppliers (manufacturers), consumers (end consumers), intermediaries (merchants such as wholesalers and retailers, agents, brokers), facilities systems (such as warehouses, berths, transportation pioneers, stores) and market information systems (including people, information technology and market information in order to collect, process and disseminate information for the organization’s objectives).

What is a Distribution channel?

Distribution channel is a system organization of relationships with external businesses and individuals to manage distribution activities of product consumption in order to achieve the market goals of the enterprise.

Manufacturers can set up product distribution systems to consumers directly, indirectly through intermediary or by mixed method. This has formed different distribution channels.

Since distribution channels connect manufacturers and markets, the marketing structure greatly affects channel selection. The density of the market, the size and location of the market, the behavior and habits of consumers should be taken into account in the choice of channels. As the density of the market increases, the use of direct and selective channels is selected. If the number of units forming the market is large and they are spread over a wide geographical area, it is mandatory to move to the long channel and intensive distribution is resorted to. This practice is seen in the distribution of many consumer goods such as food and medicine. Consumer behavior is the most important market factor influencing the choice of distribution channel. Indirect channels should be selected if consumers buy the goods in small sizes and frequently.

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Among the goods attributes affecting the selection of the distribution channel, whether the goods deteriorate physically quickly, unit value, size, adherence to fashion and whether they require after-sales services play a major role. It also affects the choice of channels in the life process of the goods. Short channels are often used for the distribution of goods that deteriorate quickly. E.g.: short channels are required for the distribution of dairy, vegetables and fruits. It is preferable to use direct and selective channels in order to increase the marketing cost in the distribution of goods with high unit costs.

Role of Distribution channels

Distribution channels play an important role in product success:

– Distribution helps businesses bring products to customers, realize the process of exchange between producers and consumers.

– Help convey your marketing efforts to customers.

– Decide on the final price that the customer must pay to be able to own / use the product.

– Reasonable and convenient distribution strategy for buyers will contribute to making products flow smoothly, quickly and easily into the market.

– Create long-term competitive advantages for businesses.

With such important roles, once you choose the wrong business distribution channel, there will be significant consequences.

Consequences of choosing an inappropriate distribution channel

In today’s fiercely competitive market economy, the maintenance and sustainable development of enterprises is always a problem for each business. To solve that problem, businesses not only focus on production activities but also have to pay attention to the process of bringing their goods to consumers so that they cost the least and earn the highest profit. To do that, each business needs to set up its own distribution channel system. However, not all businesses that build a distribution channel system work effectively.

Not meeting business goals

Choosing the wrong distribution channel will lead to the most serious and direct consequences i.e. not meeting business goals. Inappropriate distribution channels will not be able to bring products to customers, you cannot promote products or cannot meet the targets leading to not achieving expected sales.

Inventories

Inappropriate distribution channels cannot guarantee effective sales functionality resulting in product backlogs, especially for imported products – products that typically require a minimum order quantity. Inventories also entail a series of implications for storage costs, warehousing etc.. causing significant losses to the business. Financial stagnation in inventories as well as the pressure to release inventories is a serious problem that no business wants to face.

No guarantee of commitment to suppliers

Choosing the wrong distribution channel will result in a condition of insufficient and inconsistent distribution of the number of products as committed to the supplier (production). This not only affects immediate revenue, but also damages reputation and brand in the long run.

Analysis and selection of distribution channels

When choosing a distribution channel, businesses need to analyze the factors affecting its operations: markets, products, businesses, trade intermediaries and marketing environment.

Characteristics of the target market

The characteristics of the target market are certain fundamental factors that guide the structural design and type of relationship in the distribution channel. There are 5 fundamental factors of the market that particularly affect the channel structure: Market geography, market size, market density, market nature and market behavior

+ Market geography is shown in the position of the market and the distance from the manufacturer to the market. Market geography is the basis for developing a channel structure that covers the entire market and provides efficient product flows to those markets.

+ The market size manifests it through the number of customers of the market and the size of each customer determines the size of the market. The larger the number of independent customers, the larger the market size.

+ Market density is determined by the number of customers per unit area. The lower the market density, the more difficult and expensive the distribution.

+ Market properties are divided into many types: consumer market, business market, industrial market, …

+ Market behavior is shown looking through the following 4 questions “How do consumers buy? When to buy? Where to buy? Who buys?”. Each customer’s purchase behavior can affect the structure of the channel.

From the characteristics of the market, you can make the right distribution channel choice

+ For the consumer market, retailers are essential, while for the business market, businesses can eliminate retailers.

+ If the market size is large / the distance from the manufacturer to the distant market, it is possible to deploy multiple channels, while in a small market / short distance, direct sales can also be profitable.

+ For highly concentrated markets, direct sales are sufficient but for scattered, even widely dispersed markets, businesses need to have many channels.

+ The average size and frequency of customer orders also influence channel decisions. In the sale of food products, we need both wholesale and retail.

The market means those who have money and are willing to buy satisfactory goods. The age, income group, gender, and religion of the client will have to be studied to secure the full information of the target market or market segments. The buying habits of customers and agents will also affect the choice of channels of the business.

Consumer and agents analytics will provide data on the quantity, type, location, purchasing habits of consumers and agents. Select the distribution channel that needs this information. For example, credit desire, one-time shopping priorities, personal service needs, amount of time and effort customers are willing to spend – all of which are important factors in channel selection.

Product Characteristics

Product characteristics include: perishables, weight, size, degree of standardization, product installation and maintenance services, product unit value.

Perishable, bulky products should use short distribution channels. High-technical products, requiring professional support services require the use of professional channels. Depending on each stage of the life cycle choose different channels and distribution intermediary.

+ If an item is fragile or delicate, the manufacturer prefers few channels and a controlled level of distribution. For vulnerable goods that require fast shipping need shorter channels or distribution routes.

+ For durable and standardized goods you may need to design more diverse channels.

+ For technical products requiring specialized sales and service talents, you need the shortest channel possible.

+ Products with high unit value are sold directly by sales force and not through intermediary units.

Characteristics of the Business

Characteristics of the business include: management capacity and experience, financial capabilities, objectives and strategies, …

+ The size of your company determines the size of the market, the size of the larger accounts and the ability to get the cooperation of the intermediary. A large company may have shorter channels.

+ The company’s product line affects the model of the channels. The wider the product line, the shorter the channel will be. If the product line has a higher depth or specialization, the company may prioritize selective or exclusive agents.

+ A company with significant financial resources does not need to rely too much on the intermediary and can afford to reduce the distribution level. A weaker company must depend on the intermediary for financial relief and safe stocking.

+ New companies are heavily dependent on intermediaries due to lack of experience and management ability.

+ A company wishing to implement greater channel control will prefer shorter channels because it will facilitate better coordination, communication and control.

+ Advertising and big promotions can motivate intermediary to participate enthusiastically in public promotion and cooperation campaigns. In such cases, even a longer distribution chain can be profitable. Therefore, the quantity of marketing services provided by the company can directly affect channel choice.

+ Should directly operate the distribution system with many intermediary, many channels if the enterprise has sufficient capacity and management experience.

In addition to the factors on the characteristics of commercial intermediaries (services, prices etc…) and the marketing environment (law, technology, economic situation) also have an influence but not too great on the distribution channel.

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The importance of distribution channels for businesses is undisputed. Choosing the wrong distribution channel will lead to serious consequences for the business. Therefore, choosing the right distribution channel is something that needs attention