In the present day world of mass production in anticipation of demand, there is always a pressing need for intermediaries of one type or the other, for enabling the goods to reach the ultimate consumer. The purpose is to sell everything that is produced.
However, it is really difficult for the producers to undertake the distribution of goods directly to the consumers all by themselves. Therefore, the responsibility of distribution is undertaken by a number of intermediaries who are often termed as the channels of distribution.
The word ‘channel’ has been derived from the French word ‘canal’. These channels or pathways connect the producers to the ultimate consumers. Thus, ‘channel of distribution’ otherwise called a ‘trade channel’ is the route through which goods or services pass from the point of production to the point of ultimate consumption.
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It comprises a number of agencies through which the product moves physically, before it reaches the ultimate consumers. The channels of distribution usually include producers, wholesalers, agents, middlemen and retailers.
The primary objective of the channels of distribution is to assist the producers in marketing the goods and services on the one hand and to satisfy the demand of the consumers, on the other. The channel of distribution helps the consumers by providing goods of right quantity at the right time, place and at the right price.
Every channel contains one or more transfer points where there is either an institution or a final buyer. In other words, legal ownership of the product changes hands at least once. When the producer sells directly to the final buyers and there are no intervening middlemen, it is called direct selling.
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However, in most cases the product passes from the producer to the ultimate consumers or industrial users through a series of middlemen (distributive institutions). These middlemen perform duties of purchase and sale of goods in the process of their flow from producers to the final buyers.
Selecting a channel for distribution for his product is one of the important problems faced by the manufacturer. It is quite difficult to identify a specific channel, which can be considered as the best Therefore, each producer must carefully select a channel which will suit his requirement and bring best results to the firm.
Manufacturers often use more than one channel for distribution of goods and services. To reach one part of the market, (one segment of consumers), they may sell directly to large retailers where as to reach another they may sell to the wholesalers who in turn sell to the retailers.
The channels of distribution can broadly be divided into two categories e.g. direct and indirect, as shown in the above chart. Under direct channel of distribution, manufacturer sells directly to the consumers, without any middlemen, whereas, under indirect channel of distribution, producer sells through various middlemen like wholesalers, agents, retailers, etc.