Choosing the number of channel tiers correctly

A proper decision is very important regarding the number of tiers. How many tiers should the channel has? This issue is related in a way to channel intensity. In a majority of cases, the choice will be between single tier and two tiers, while in a few cases, firms may find it necessary to go in for a three tier channel. When a firm opts for a sole selling agency or marketer, the latter will have their own channel arrangement and the tiers that operate under them automatically become a part of the firm’s channel.

The decision depends on a number of factors In a given business. A particular channel pattern might have taken roots and they may be some advantage in going long with the established trade pattern. The product characteristics are perhaps the most important consideration. For example, for selling passenger cars, a firm need have only a single tier distribution channel. Here, the intermediaries at one level can effectively link the maker and the buyer. In a product like toothpaste, or cosmetics, or cigarettes it may be necessary to have a two or three tier channel pattern in view of the mass nature of the product. It may be difficult to achieve adequacy of market coverage in such products, with just a single tier of marketing intermediaries.

Comparative merits of single tier and two tier channel

The single tier and two tier channel patterns have their associated advantages and disadvantages. The single tier pattern provides better motivation to each member in the channel, as in such a pattern, the trade discount is available in full measure to the retailer. The pattern also brings in savings to the firm by the avoidance of multiple transport and handling. The firm can also service all the outlets directly in this pattern. But, the pattern involves greater administrative burden for the firm. It will have to perform many functions that could otherwise be passed on to the channel. It will have to increase the number of field storage points and the size of sales force to make up for the absence of the wholesale middlemen. The pattern may also sometimes result in inadequate market coverage. The two tier pattern helps quicker outflow of stocks and more intensive coverage of the market. But, it results in lower profits to retailers as the available trade margin has to be shared between two tiers. It also weakens the principal’s control over the outfit with a single tier pattern.

So, the choice depends on the context. The governing principle is that the chosen channel must have the capability to sell the product and to sell the product and to provide the required market coverage. It should also ensure that the user gets the products with the minimum of effort or strain n his part. And it must be cost effective. The channel must also be amenable to the control of the company to the extent required for operating the marketing system.

In recent years, as a general trend, the number of tiers in the distribution channel is getting shorter. Businesses that used to have a three tier structure earlier now have a two tier structure and those with a two tier structure earlier are now trying to manage with a single tier channel. And often, the axe falls on the stockists. Asian Paints is an example. It chose, as a matter of conscious policy, a single tier channel going directly to the retail trade.