Channel Strategy Formulation in Industrial Marketing

Formulating the channel strategy in industrial marketing involves an analysis of conditions which have a bearing on the best choice among structural alternatives and on the relationship between them and the manufacturer which will be most productive. In general, the industrial marketer has a choice of three types of structural arrangements.

  1. Direct to users – through the manufacturers own sales force, with or without a network of branch warehouses.
  2. Indirect to users – through agents or wholesale distributors. The choice of an indirect channel system involves the choice of a selective (only one or a few outlets in each market area) or intensive (a number of outlets in each market area) relationship. 
  3. Mixed structure – the nature of the structural network differs with the segmentation of the market. One segment may buy the manufacturer’s product in standard grades, while another may want special quality variations. While indirect distribution may be suitable for the former, direct distribution may be required for the latter.

Some conditions which influence the choice of industrial channel structure arise from the nature of the market; others are related to the peculiarities of the product; still others are linked to the character and situation of the firm itself.

  1. Is the market horizontal or vertical? If a product can be sold only to the members of one or a few industries, and the number of firms in each industry is small, direct distribution is the most profitable method. A few salesmen will be needed to make direct contact with all probable users. Closer contact can be maintained with customers and prospective customers, and the sales are usually improved by this method. If, on the other hand, the market is horizontal and the product must be sold to buyers in many industries, the number of buyers is large, and the chances of economically reaching all or a large portion of them usually are enhanced by selling through distributors. 
  2. Is the market potential large or small? If the nature of the product is such that a substantial volume of sales is available in the average area served by a single salesman or branch warehouse, direct marketing may prove profitable. If, on the contrary, the probable volume of sales in a market area is small, the direct method may be too expensive. 
  3. To what extent are the possible purchasers concentrated geographically? The tendency toward localization of industry makes it possible to market direct to the user many industrial products whose small sales volume would preclude the possibility of selling direct, even to retailers, if they were consumer goods. If 70 or 80 percent of the total possible sales volume of a product is concentrated in one or two limited market areas direct marketing is viable. 

In the past, it was common for purchasing officers in large firms to insist on buying direct in order to avoid paying the distributor’s margin, and in the hope of getting quantity discounts. Many firms have streamlined purchasing by setting up continuing relations with selected suppliers with whom orders are placed by telephone, unpriced simplified purchase order, or even a tub-file inventory punched card. For this system to work, the purchasing officer must select one or two distributors and place all his orders with them. This increases the importance of the distributor as an outlet for the makers of many supplies, materials, and component parts. It also may be expected to decrease the effectiveness of the limited franchise arrangement, whereby the manufacturer markets through only one or two distributors in a market area. How far it will go and how long this method of buying will last are unanswered questions. To streamline the expensive order procedures the following points are to be considered.

  • What is the gross profit margin?
  • How volatile is the price?
  • Must the product he installed?
  • How much technical service does the product require in use?
  • How important is quality?
  • How bulky is the item?
  • What kind of repair and maintenance service does the user need and how much?
  • What is the firm’s size and financial position?
  • What are the seller’s marketing objectives?

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