Channel Design – Intensive, Exclusive and Selective Distribution

Manufacturers are faced with various channel design decisions. Many times manufacturers wrestle between what is ideal and what is practical in the process of designing marketing channels.

To design any marketing channel system, a marketer must take into consideration various important aspects like

  1. Analysing customer needs and wants,
  2. Establish channel objectives and constraints,
  3. Identifying major alternatives, and
  4. Evaluating major channel alternatives.

Analysing Customer Needs and Wants

Understanding a few factors help estimate the needs and want of customers that in turn, profits the business. Such factors are:

1. Lot size

It is the number of items a quintessential customer is allowed to buy at a single time.

2.Waiting and delivery time

It is the number of items a quintessential customer is allowed to buy at a single time. Customers almost always prefer an ever-increasing speed in the delivery channels.

3. Spatial convenience

It is the extent to which the purchase of a product is made easy for the customers by the marketing channel.

4. Service backup

These are the add-on services offered by the channels. Services like credit, delivery, installation, repairs. The greater the service back up, the higher is the advantage provided by the channel.

5. Service backup

It is the wide array of products and their various options provided to the customer by the marketing channel. Generally, a customer prefers higher options because more of the options more are the chances of finding what they need. Although sometimes, too many options can have a negative effect.

Establish channel objectives and constraints

At this juncture, the next thing for the company to do would be to decide its marketing channel objectives. The channel objectives of a company are influenced by many factors like the nature of the company, the products it produces, its marketing intermediaries, the companies competition and the market environment.

The advantages and shortcomings of all different types of intermediaries should be taken into consideration by the channel design.

The objectives of a channel differ according to the product attributes.

  • Direct marketing is required for perishable products.
  • The products that are colossal in size need channels that will reduce the shipping distance and the amount of handling—for example, building materials.
  • Products that are not standard in size or sold directly by the sales representatives of the company. For example, custom-built machinery and specialised business forms.

Identifying Major Alternatives

Channel design has multiple alternatives. Let’s talk about alternatives differing in these three major ways:

Types of Intermediaries

Firstly, the company needs to recognise all the different channel members who will be able to work for the producer and help carry out its channel work.

For example:

Right from sales forces, agents, distributors, dealers, direct mail, telly marketing to the internet, every channel has special strengths and weaknesses.

Sales forces can handle complicated products and transactions, but they are expensive. The internet is extremely inexpensive but might not be the best effective option for complex products.

The Number of Marketing Intermediaries

A company must begin by establishing the number of channel members at every level of marketing intermediaries.

There’re three strategies

1. Intensive distribution

An intensive distribution strategy is a strategy in which the goods or services can be placed in as many outlets as possible.

2. Exclusive distribution

An exclusive distribution strategy is a strategy in which the producer gives the right to distribute the companies products to only a finite number of dealers.

3. Selective distribution

Selective distribution strategy lies somewhere in between intensive distribution and exclusive distribution. Here the company relies on more than one but less than all intermediaries to carry out the efforts of selling the company’s products.

4. Responsibilities of Channel Members

The producer and all the channel members shall come to an agreement on the terms and conditions. It is important that both parties maintain their respective responsibilities for easy and smooth functioning. The producer and all the channel members should agree upon price policies, sale conditions and territory rights.

Every channel member needs to work in unity with all other channel members. Having a mutual understanding between all channel members can lead to an effective and profitable experience.

Evaluating the Major Alternatives

Every channel substitute has to be evaluated against economic, control and adaptive criteria.

1. Economic

Each channel member will produce a separate level of sales and costs.

2. Control

The control issues should be taken under consideration by all companies. This means that lesser control should be given over product marketing, whereas other factors should be balanced as equally as possible.

3. Adaptability criteria

A company has to have the ability to adapt in order to sustain in all favourable as well as unfavourable situations.

Examples – Tesla

Tesla doesn’t operate through third-party dealers. Tesla’s approach towards work is different from other traditional automakers. They entirely skip franchises with the help of direct sales. This provides them with better control over the customers buying experience.

Tesla continues that they cannot rely on third-party dealerships to adequately explain to their customers the upper hand that their cars have over conventional vehicles with an internal combustion engine.

It is because of this approach towards business that Tesla faced many dealership disputes in multiple U.S. states because of the local laws. As of September 2020, Tesla operates more than 130 stores and galleries in the United States. It also has its own stores and galleries in 34 other countries. They own all the stores and sell to the customers directly via the internet and also in non-US stores.

Examples – Nike

Nike has discontinued its collaboration with a number of major retail partners in the United States. With the aim to reach customers as much as possible, Nike has been speeding up its direct sales strategy.

Nike announced the Triple Double Strategy (2X), their growth plan, in 2017. The company made a promise to double its “cadence and impact of innovation,” double its speed to market and double its “direct connections” with consumers.

Nike has siphoned sales to its own website and network of stores by reducing the number of retailers selling their products. And this move of directly reaching the customers is a part of this “Consumer Direct Offence”

Direct-to-consumer (DTC) growth accounted for 33% of Nike’s revenue in FY20, up 3% from FY19. So currently Nike has been focusing on online sales (Nike Digital) and on its own shops instead of the wholesale channel.