DESIGNING A CHANNEL SYSTEM
We have seen that a firm can take its product to the user in more ways than one. It can use different types of intermediaries it can also structure its channel in different ways. For example, it can have a single tier or a two-tier or a three-tier channel structure. It can reach different market segments with different channel arrangements or with the same channel arrangement. It can also use different channel arrangement for reaching a single market segment. The options are indeed many.
* How does the firm make the choice? How does it determine which one is the best?
* Should it go for own channels—company showrooms and depots— or prefer conventional intermediaries i.e. the wholesale/retail trade?
* How many levels/tiers should there be in the chosen channel design?
* How many wholesaler points should it have to ensure satisfactory market coverage? Where should they be located?
* How many retail points should it have? Which are the places where it should have them?
* What should be the relationship between the wholesalers and the retailers?
Formulating the Channel objectives
Formulation of channel is the first step in designing a channel system. The objectives clarify what is sought to be achieved be having the channels. All firms seek to realize certain common objectives by having the channel. In addition, they may also have some specific objectives depending on their unique circumstances.
Channel Objectives will Decide Channel Design
Channel objectives will determine the channel design the firm should adopt. When Hindustan Lever lays down the objective that Lifebuoy should be available in more than 80% of the villages of India, its channel design takes shape in line with this objective. Similar is the case, when FACT, the fertilizer firm, lays down the objective that in the home market of the company, no farmer should have to travel more than 3 km to buy its products.
We can take this forward a little more and state that marketing objectives determine channel objectives, and the latter determine the channel design. Usually, with the determination of channel objectives, the broad contours of the channel design also get fixed. In the Lifebuoy example, given the channel objective to cover 80% of the villages, the channel design has to naturally ensure a very intensive network of dealers spread through every nook and corner of rural India. As a corollary, a multi-tier channel, consisting of C&F agents, re-distribution stockists, retailers, and village-level shops, will have to be the choice. In fact, HLL uses almost every village shop to sell Lifebuoy.