Unit IV

Pricing and Channels of distribution:

Pricing: Pricing objectives – Pricing methods – Pricing strategies.
Channels of Distribution: Nature and types of marketing channels – wholesale
distribution-retail distribution – direct marketing – selection of channels, Logistics,
Third Party Service providers

Pricing: Pricing objectives

Meaning of Pricing in Marketing:
Definition: Pricing is the method of determining the value a producer will get in the exchange of
goods and services. Simply, pricing method is used to set the price of producer’s offerings
relevant to both the producer and the customer.
Every business operates with the primary objective of earning profits, and the same can be
realized through the Pricing methods adopted by the firms.
Criteria in Deciding Pricing:
While setting the price of a product or service the following points must be kept in mind:
 Nature of the product/service.
 The price of similar product/service in the market.
 Target audience i.e. for whom the product is manufactured (high, medium, or lower class)
 The cost of production viz. Labour cost, raw material cost, machinery cost, inventory cost,
transit cost, etc.
 External factors such as Economy, Government policies, Legal issues, etc.
Pricing Objectives
The objective once set gives the path to the business i.e. in which direction to go. The following
are the pricing objectives that clears the purpose for which the business exists
The main goals in pricing may be classified as follows:
1. Pricing for Target Return (on Investment) (ROI):
Business needs capital, i.e., investment in the shape of various types of assets and working
capital. When a businessman invests capital in a business, he calculates the probable return on
his investment. A certain rate of return on investment is aimed. Then, the price is fixed
accordingly. The price includes the predetermined average return. This is seller-oriented policy.
Many well-established firms adopt the objective of pricing in terms of “return on investment.”
Firms want to secure a certain percentage of return on their investment or on sales. The target of
a firm is fixed in terms of investment. For instance, a company may set a target at 10 or 15%
return on investment. Further, this target may be for a long term or short term. Wholesalers and
retailers may follow the short term, usually a year.
They charge certain percentage over and above the price, they purchased, which is enough to
meet operational costs and a desired profit. This target chosen can be revised from time to time.
This objective of pricing is also known as pricing for profit. Certain firms adopt this method as a
satisfactory objective, in the sense they are satisfied with a certain rate of return.
2. Market Share:
The target share of the market and the expected volume of sales are the most important
consideration in pricing the products. Some companies adopt the main pricing objective so as to
maintain or to improve the market share towards the product. A good market share is a better
indication of progress.
For this, the firm may lower the price, in comparison to the rival products, with a view to capture
the market. By reducing the price, customers are not exploited, rather benefited. The
management can compare the present market share with the past market share and can know well
whether the market share is increasing or decreasing.
When the market share is decreasing, low pricing policy can be adopted by large-scale
manufacturers, who produce goods needed daily by the consumers. So margin of profit comes
down because of low price, but the competitors are discouraged from entering the market. By
low pricing policy, no doubt, market share can be increased, besides attracting new users.

3. To Meet or Prevent Competition:

The pricing objective may be to meet or prevent competition. While fixing the price, the price of
similar products, produced by other firms, will have to be considered. Generally, producers are
not in a haste to fix a price at which the goods can be sold out. One has to look to the prices of
rival products and the existing competition and chalk out proper price policy -so as to enable to
face the market competition.
At the time of introduction of new products to the market, a low price policy is likely to attract
customers, and can establish a good market share. The low price policy discourages the
competitors. This low price policy can be adopted before the obsolescent stage under PLC.
4. Profit Maximization:
Business of all kinds is run with an idea of earning profit at the maximum. Profit maximization
can be enjoyed where monopolistic situation exists. The goal should be to maximize profits on
total output, rather than on every item. The scarcity conditions offer chances for profit
maximization by high pricing policy. The profit maximization will develop an unhealthy image.
When a short-run policy is adopted for maximizing the profit, it will exploit the customers. The
customers have a feeling of monopoly and high price. But a long-run policy to maximize the
profit has no drawbacks. A short-run policy will attract competitors, who produce similar goods
at low cost. As a result, price control and government regulations will be introduced.
5. Stabilise Price:
It is a long-time objective and aims at preventing frequent and violent fluctuations in price. It
also prevents price war amongst the competitors. When the price often changes, there arises no
confidence on the product. The prices are designed in such a way that during the period of
depression, the prices are not allowed to fall below a certain level and in the boom period, the
prices are not allowed to rise beyond a certain level. The goal is to live and let live. Thus firms
forego maximum profits during periods of short supply of products.
6. Customers’ Ability to Pay:
The prices that are charged differ from person to person, according to his capacity to pay. For
instance, doctors charge fees for their services according to the capacity of the patient.
7. Resource Mobilisation:
This is a pricing objective, the products are priced in such a way that sufficient resources are
made available for the firms’ expansion, developmental investment. Marketers are interested in
getting back the amount invested as speedily as possible. A product may have a short PLC. The
management may fix a higher price and this trend will invite competitors with low priced similar
products.
8) Survival:
The foremost Pricing Objective of any firm is to set the price that is optimum and help the
product or service to survive in the market. Each firm faces the danger of getting ruled out from
the market because of the intense competition, a mature market or change in customer’s tastes
and preferences, etc.Thus, a firm must set the price covering the fixed and variable
cost incurred without adding any profit margin to it. The survival should be the short term
objective once the firm gets a hold in the market it must strive for the additional profits.
The New Firms entering into the market adopts this type of pricing objective.
9) Product –Quality Leadership:
Many firms keep the price of their goods and services in accordance with the Quality
Perceived by the customers. Generally, the luxury goods create their high quality, taste, and
status image in the minds of customers for which they are willing to pay high prices. Luxury cars
such as BMW, Mercedes, Jaguar, etc. create the high quality with high-status image among the
customers.
Importance of Price Policy
A well-formed price policy has special importance if price rises in a continuous process in
planned economy. It has not only influenced the living standard of people but due to increase in
the expenditure of full planning, the prescribed aims and objectives of the planning are disturbed.
As a result, there is obstacle of economic development. But in under-developed countries, with
economic development, price rise is quite natural. Till the increase in monetary income of the
public is more than price rise, there is no problem. But when these, is more price rise than
investment and national income, there is a need to protect from the defects of monetary
fluctuations. It requires price regulation. In short, in developing countries, the significance of
price policy can be known from the following facts:
1. To maintain appropriate living standard, price control is essential.
2. To maintain planning process in a fine manner, price should be controlled at all costs.
3. Protect from monetary fluctuations, i.e., fluctuation defects are created, so to remove them
appropriate price control is required.
4. Establishment of balance in demand and supply; if not hardship develops with consumer,
producer, and investor. So, balance is needed in a proper way.
5. It is necessary to control the consumer price for well distribution management.
6. The major objective of economic planning is multi faced development of national resources.
Thus, price policy should be quite independent as price regulation can adjust this motto.

Pricing methods
Pricing Methods- Definition:
The Pricing Methods are the ways in which the price of goods and services can be calculated by
considering all the factors such as the product/service, competition, target audience, product’s
life cycle, firm’s vision of expansion, etc. influencing the pricing strategy as a whole.
The pricing methods can be broadly classified into two parts:
 1. Cost Oriented Pricing Method
2. Market Oriented Pricing Method
1. Cost-Oriented Pricing Method: Many firms consider the Cost of Production as a base for
calculating the price of the finished goods. Cost-oriented pricing method covers the following
ways of pricing:
 Cost-Plus Pricing: It is one of the simplest pricing method wherein the manufacturer calculates
the cost of production incurred and add a certain percentage of markup to it to realize the selling
price. The markup is the percentage of profit calculated on total cost i.e. fixed and variable cost.
E.g. If the Cost of Production of product-A is Rs 500 with a markup of 25% on total cost, the
selling price will be calculated asSelling Price= cost of production + Cost of Production x
Markup Percentage/100
Selling Price=500+500 x 0.25= 625
Thus, a firm earns a profit of Rs 125 (Profit=Selling price- Cost price)
 Markup pricing- This pricing method is the variation of cost plus pricing wherein the
percentage of markup is calculated on the selling price.E.g. If the unit cost of a chocolate is Rs
16 and producer wants to earn the markup of 20% on sales then mark up price will be:
Markup Price= Unit Cost/ 1-desired return on sales
Markup Price= 16/1-0.20 = 20
Thus, the producer will charge Rs 20 for one chocolate and will earn a profit of Rs 4 per unit.
 Target-Return pricing– In this kind of pricing method the firm set the price to yield a required
Rate of Return on Investment (ROI) from the sale of goods and services.E.g. If soap
manufacturer invested Rs 1,00,000 in the business and expects 20% ROI i.e. Rs 20,000, the
target return price is given by:
Target return price= Unit Cost + (Desired Return x capital invested)/ unit salesTarget Return
Price=16 + (0.20 x 100000)/5000Target Return Price= Rs 20
 Thus, Manufacturer will earn 20% ROI provided that unit cost and sale unit is accurate. In case
the sales do not reach 50,000 units then the manufacturer should prepare the break-even chart
wherein different ROI’s can be calculated at different sales unit.
2. Market-Oriented Pricing Method: Under this method price is calculated on the basis of
market conditions. Following are the methods under this group:
 Perceived-Value Pricing: In this pricing method, the manufacturer decides the price on the
basis of customer’s perception of the goods and services taking into consideration all the
elements such as advertising, promotional tools, additional benefits, product quality, the channel
of distribution, etc. that influence the customer’s perception.
E.g. Customer buy Sony products despite less price products available in the market, this is
because Sony company follows the perceived pricing policy wherein the customer is willing to
pay extra for better quality and durability of the product.
 Value Pricing: Under this pricing method companies design the low priced products and
maintain the high-quality offering. Here the prices are not kept low, but the product is re-
engineered to reduce the cost of production and maintain the quality simultaneously.
E.g. Tata Nano is the best example of value pricing, despite several Tata cars, the company
designed a car with necessary features at a low price and lived up to its quality.
 Going-Rate Pricing- In this pricing method, the firms consider the competitor’s price as a base
in determining the price of its own offerings. Generally, the prices are more or less same as that
of the competitor and the price war gets over among the firms.
E.g. In Oligopolistic Industry such as steel, paper, fertilizer, etc. the price charged is same.
 Auction Type pricing: This type of pricing method is growing popular with the more usage of
internet. Several online sites such as eBay, Quikr, OLX, etc. provides a platform to customers
where they buy or sell the commodities. There are three types of auctions:
1. English Auctions-There is one seller and many buyers. The seller puts the item on sites such
as Yahoo and bidders raise the price until the top best price is reached.
2. Dutch Auctions– There may be one seller and many buyers or one buyer and many sellers. In
the first case, the top best price is announced and then slowly it comes down that suit the bidder
whereas in the second kind buyer announces the product he wants to buy then potential sellers
competes by offering the lowest price.
3. Sealed-Bid Auctions: This kind of method is very common in the case of Government or
industrial purchases, wherein tenders are floated in the market, and potential suppliers submit
their bids in a closed envelope, not disclosing the bid to anyone.
4. Differential Pricing: This pricing method is adopted when different prices have to be charged
from the different group of customers. The prices can also vary with respect to time, area, and
product form.
E.g. The best example of differential pricing is Mineral Water.The price of Mineral Water varies
in hotels, railway stations, retail stores.
Thus, the companies can adopt either of these pricing methods depending on the type of a
product it is offering and the ultimate objective for which the pricing is being done.
5. Transfer Pricing:
Involves selling of goods and services within the departments of the organization. It is done
to manage the profit and loss ratios of different departments within the organization. One
department of an organization can sell its products to other departments at low prices.
Sometimes, transfer pricing is used to show higher profits in the organization by showing
fake sales of products within departments.
6. Promotional pricing: In promotional pricing, a lower-than-normal price is used as a
temporary ingredient in a firm‘s selling strategy. Some promotional pricing arrangements form
part of recurrent marketing initiatives. Some may be to introduce a promotional model or brand
with special pricing to begin competing in a new market.
Promotional pricing takes several forms and some of them are described below.
a. Geographical pricing: Geographical considerations strongly influence prices when costs
must cover shipping heavy, bulky, low-unit-cost materials. Buyers and sellers can distribute
transportation expenses in several ways: (1) The buyer pays all transportation charges; (2) The
seller pays all transportation charges; or (3) the buyer and the seller share the charges. This
choice has particularly important effects for a firm seeking to expand its geographic coverage to
distant markets. The seller‘s pricing can implement several alternatives for handling
transportation costs.
b. International pricing: A wide variety of internal and external conditions can affect a
marketer‘s global pricing strategies. Internal influences include the firm‘s goals and marketing
strategies, the costs of developing, producing and marketing its products, the nature of the
products and the firm‘s competitive strengths
Pricing strategies
Pricing strategy in marketing, in simple terms, is adjusting prices according to market
determinants. Price is the value one assigns to a good or service which they determine by
research. A pricing strategy considers market conditions, consumer willingness to pay,
competition, trade margins, costs incurred, etc. Pricing involves setting a price for ownership
and usage of goods.
Setting a price varies from pricing strategy. It employs factors that are not taken into
consideration while selecting a price. For example, the approach considers the timing of the
market, the seasonality of demand, and the customer’s preferences and purchasing patterns in
addition to the analysis of the products available in the market. However, the strategy is most
beneficial when consumers are heterogeneous (varying tastes and preferences). And when
demand variability and uncertainty are high, especially with stable production levels (a chance to
reap greater profits).
Pricing Strategy is a tool used to fix the price of a particular product or service by considering
various factors like the consumption of resources, Market conditions, the ability of customers,
demand and supply, need of the product like regular item or occasional, etc.
Types of Pricing Strategies
We have had different Pricing Strategies available in practice form for a long time.
Organizations can opt for a suitable strategy that meets their requirements and expectations.
Let us see all the product Pricing Strategies one by one to get a clear idea.
1. Premium Pricing:
In the premium Pricing Strategy, the prices of goods and services are a bit higher than the
general prices. These are especially concentrated on premium segment people. Some people
may have a perception that if the price of the product is high, then only the quality maintains
up to the mark. If anyone announces a discounted sale or half price, they even suspect the
reliability and quality of that product. Especially for those people, the premium Pricing
Strategy was used at the same time they needed to maintain the quality, which means that
price.
2. Penetration Pricing:
Penetration Pricing Strategy is one of the three major Pricing Strategies. Generally, it is used
by the new traders to gain a foothold in the market. The sellers wanted to attract more
customers by decreasing the price of the product. So that the customers can show interest in
purchasing them and they can know the users and the quality of that particular product. Once
the customers get used to that product, the price may increase.
3. Economy Pricing:
Economy pricing is one of the best Pricing Strategies, which considers the generalized
category of customers. These are majorly affordable and reasonable prices as much as they can
provide. The economy class can be easily understood if we consider the scenario of flight
tickets. The least amount required for the entire journey will be fixed as the price for the
economy category.
4. Price Skimming:
It is an occasional Pricing Strategy where the well-known product has reduced its sales
drastically. Even though its market share is very good for some time, with any kind of factor,
they may be reduced, yeah abnormally. Then to regain the market share and to get back its
customers, the price will be reduced.
5. Psychological Pricing:
Among the three major Pricing Strategies, psychological pricing is also there. This Pricing
Strategy can be seen everywhere. For example, Bata introduces a new kind of shoes, and the
price is rupees 1,999 /-. The psychology of the human brain is ready to accept 1999 rupees,
and it is not ready to take 2,000 figure 2. That's the reason several companies use this
psychological Pricing Strategy. Usually, electronic appliances were tagged with this Pricing
Strategy. Bata, Samsung, Amazon, etc., can be considered as examples of Pricing Strategies.
6. Product Line Pricing:
It is one of the differential Pricing Strategies. Here the prices may vary based on the size of the
product. Even though the product is the same if we purchase a single product, the price may be
10 rupees. If we purchase 5 pieces, the price may be rupees 45. Similarly, 100gm oil is 20/-
500ml is 80/-.
7. Pricing Variations:
Another differential Pricing Strategy is variations in the pricing structure. It is usually
observed in travel agencies. For example, if we book an air ticket 2 months before, the price
will be less. If we book the ticket as we thought it would be before, the price may increase
slightly. If we want to buy Tatkal tickets, the price may increase more.
These are the various types of product Pricing Strategies. It is to be noted that apart from these
types, we have different kinds of classifications based on the requirement, scenario, product,
etc. So, the company needs to choose according to its product, Market share, competitors, etc.
8. Value-based Pricing:
A concept is similar to premium-based pricing. Here, the business decides the price based on the
customer’s valuation of the product’s worth. This is best suited for unique products.
9. Dynamic Pricing: A dynamic pricing strategy in marketing involves changing the price of the
items based on the present market demand.
Channels of Distribution- Concept
Distribution channels are the path products take from their initial manufacturing stage to selling
them to consumers. The main goal of these channels is to make goods available to final
consumers in sales outlets as soon as possible.
Distribution channels are also known as marketing channels or marketing distribution channels.
Definition: “A distribution channel is the network of individuals and organizations involved in
getting a product or service from the producer to the customer.”
“A distribution channel is a network of intermediaries that facilitates product delivery from the
manufacturer to the end consumer and transfers payments from the buyer to the producer. In
other words, it is the route through which a product travels from the production end to the point
of consumption.”
Components of a Distribution Channel
• Producer: Producers combine labor and capital to create goods and services for consumers.
• Agent: Agents commonly act on behalf of the producer to accept payments and transfer the
title of the goods and services as it moves through distribution.
• Wholesaler: A person or company that sells large quantities of goods, often at low prices, to
retailers.
• Retailer: A person or business that sells goods to the public in small quantities for immediate
use or consumption.
• End Consumer: A person who buys a product or service.
Nature, Functions, and Importance of marketing channels/ Distribution Channels
Nature:
a. Marketing Channels Create Utility
 Marketing channels create three types of utility: time, place, and possession.
 Time utility–created by having products available when the customer wants them
  Place utility–created by making products available in locations where customers wish to
purchase them
 Possession utility–created by the customer having access to the product to use or to store
for future use
 Channel members sometimes create form utility by assembling, preparing, or otherwise
refining the product to suit individual customer tastes.
b. Marketing Channels Facilitate Exchange Efficiencies
 Marketing intermediaries can reduce the costs of exchanges by efficiently performing
certain services or functions. Intermediaries provide valuable assistance because of their
access to, and control over, important resources used in the proper functioning of
marketing channels.
 Despite these efficiencies, the press, consumers, public officials, and other marketers
freely criticize intermediaries, especially wholesalers.
 Critics accuse wholesalers of being inefficient and parasitic.
 Buyers often wish to make the distribution channel as short as possible, assuming
that the fewer the intermediaries, the lower the price will be.
 Because suggestions to eliminate them come from both ends of the marketing
channel, wholesalers must be careful to perform only those marketing activities
that are truly desired.
 Critics who suggest that eliminating wholesalers would lower customer prices do not
recognize that this would not eliminate the need for services that wholesalers provide.
Although wholesalers can be eliminated, the functions they perform cannot.
c. Marketing Channels Form a Supply Chain
An important function of the marketing channel is the joint effort of all channel members to
create a supply chain, a total distribution system that serves customers and creates a competitive
advantage.
 Supply chain management refers to long-term partnerships among marketing channel
members working together to reduce inefficiencies, costs, and redundancies in the entire
marketing channel and to develop innovative approaches, in order to satisfy customers.
 Supply chain management involves manufacturing, research, sales, advertising, shipping
and, most of all, cooperation and understanding of tradeoffs throughout the whole
channel to achieve the optimal level of efficiency and service.
 Whereas traditional marketing channels tend to focus on producers, wholesalers, retailers,
and customers, the supply chain is a broader concept that includes facilitating agencies,
such as component parts suppliers, shipping companies, communication companies, and
other organizations that take part in marketing exchanges.
 Supply chain management is helping more firms realize that optimizing the supply chain
costs through partnerships will improve all members’ profits.
 Supply chains start with the customer and require the cooperation of channel members to
satisfy customer requirements.
 Technology has dramatically improved the capability of supply chain management on a
global basis.
 Supply chain management should not be considered just a new buzzword. Reducing
inventory and transportation costs, speeding order cycle times, cutting administrative and
handling costs, and improving customer service–these improvements provide rewards for
“all” channel members.
The Importance or Role of distribution channels can be summarized as follows:
1. Distribution channels offer salesmanship: The distribution channels offer pivotal role
of a sales agent. They help in creating new products in market. They specialize in word of
mouth selling and promotion of products. They assure pre-sale and post-sale service to
the consumers. Since these channels are in direct and regular contact with the consumers,
they do salesmanship very well and at the same time provide true and valuable feedback
to the producers.
2. Distribution channels increase distributional efficiency: The intermediary channels
ease the sales process as they are in direct contact with the customers. They narrow down
the gap between producers and consumers both ecoomically and efficiently. These
intermediaries reduce the number of transactions involved in making products available
from producers to consumers.
For instance, there are four producers who are targeting to sell their products to four
customers. If there is no distribution channel involved, then there will be sixteen
transactions involved. But if the producers use distribution channels, then the number of
transactions involved will be reduced to eight( four from producer to intermediary and
four from intermediary to customer), and thereby the transportation costs and efforts will
also be reduced.
3. The channels offer products in required assortments: Just like the producers have
expertise in manufacturing products, similarly the intermediaries have their own
expertise. The wholesalers specialize in moving and transferring products from various
producers to greater number of retailers. Similarly, the retailers have expertise in selling a
wide assortment of goods in less quantity to a greater number of final customers.
Due to the presence of distribution channels(wholesalers and retailers), it is possible for a
consumer to buy the required products at right time from a store conveniently
located(geographically closer) rather than ordering from a far located factory. Thus, these
intermediaries break the bulk and meet the less quantity demand of the customers.
4. They assist in product merchandising: It is actually the merchandising by
intermediaries which fastens the product movement from the retail shop desk to the
customer’s basket.
When a customer goes to a retail shop, he/she may be fascinated by the attractive display
of some new product, may get curious about that new product, and may switch over to
that new product leaving his/her regular product. Thus merchandising activities of the
intermediaries serve as a quiet seller at a retail store.
5. The channels assist in executing the price mechanism between the firm and the final
customers: The intermediaries help in reaching a price level which is acceptable both to
the producers as well to the consumers.
6. Distribution channels assist in stock holding: The intermediaries perform various other
functions like financing the products, storing the products, bearing of risks and providing
required warehouse space.
Thus, the distribution channels are a vital constituent of a firm’s comprehensive marketing
strategy. They assist in expanding product reach and availability, as well in increasing revenue.
Types of marketing channels/ Distribution Channels
A set of middlemen or intermediaries who help an organisation in the flow of goods and
services from the manufacturers to the consumers are known as Channels of
Distribution. The intermediaries along with the help in the physical movement of goods, also
help in the movement or title or transfer of ownership. The two types of channels of
distribution or distribution level are Direct Channel and Indirect Channel.
The Three Types of Distribution Channels
There are three ways to make sure a product gets to the final consumer.
1. Direct Channels
As the name suggests, a direct channel or zero level is a distribution level through which an
organisation directly sells its products to the customers with the involvement of any
intermediary. For example, jewellers use direct channels, Apple sells its products directly to
the customers through its stores, Amazon sells directly to the consumers, etc. Some of the most
common types of direct channels of distribution are direct sales by appointing salesmen,
through Internet, teleshopping, mail order house, etc.
Since the manufacturer alone is responsible for delivering products, this channel generally
makes it impossible to have a high number of customers.
At the same time, it’s possible to offer lower prices, since the company does not have to pay
commission to intermediaries.
2. Indirect Channels
With indirect channels products are delivered by intermediaries, not by the sellers.
These intermediaries could be wholesalers, retailers, distributors, or brokers.
Indirect channels of distribution can be classified into three categories; viz., One Level
Channel, Two Level Channel, and Three Level Channel.
i) One-Level Channel

One level channel means that there is only one intermediary involved between the
manufacturer and the customer to sell the goods. This intermediary is known as a retailer. In
simple terms, under one level channel, the organisations supply their products to the retailers
who sell them to the customers directly. For example, goods like clothes, shoes, accessories,
etc., are sold by companies with the help of a retailer.
ii) Two-Level Channel

A most commonly used channel of distribution that involves two intermediaries for the sale of
products is known as Two Level Channel. The intermediaries involved
are wholesalers and retailers. The producer sells their products to wholesalers in bulk
quantity, who sells them to small retailers, who ultimately supply the products to the
customers. This channel is generally used to sell convenient goods like soaps, milk, milk
products, soft drinks, etc. For example, Hindustan Unilever Limited sells its goods like
detergent, tea leaves, etc., through wholesalers and retailers.
iii) Three-Level Channel

Three level channel means that there are three intermediaries involved between the
manufacturer and the customer for the sale of products. The three intermediaries involved
are Agent Distribution, Wholesalers, and Retailers. It is usually used when the goods are
distributed across the country and for that different distributors are appointed for different
areas. For example, wholesalers purchase goods from different distributors, like North India
Distributors and then pass the goods to the retailers, who ultimately sell the goods to
customers.
In this case, manufacturers do not have total control over distribution channels.
The benefit is that this makes it possible to sell larger volumes and sell to a range of customers.
However, products have higher prices due to the commissions paid to intermediaries.
3. Hybrid Channels
Hybrid channels are a mix of direct and indirect channels.
In this model, the manufacturer has a partnership with intermediaries, but it still takes control
when it comes to contact with customers.
One example is brands that promote products online but don’t deliver them directly to customers.
Instead, they nominate authorized distributors.
Reasons for Emergence of Channels
Meaning: Marketing channels or channel of distribution can be viewed as sets of interdependent
organizations involved in the process of making a product or service available for consumption
or use.
1. Efficiency rationale for intermediaries
2. Discrepancy of Assortment and Sorting
The sorting function is performed by intermediaries that include the following activities:
• Sorting out: This involves breaking down a heterogeneous supply into separate stocks
that are relatively homogeneous.
• Accumulation: It concerns bringing similar stocks from a number of sources together
into a larger homogeneous supply. Wholesalers accumulate varied goods for
retailers, and retailers accumulate goods for their customers.
• Allocation: It refers to breaking a homogeneous supply down into smaller and smaller
lots. Goods received in truck loads are sold in case lots. A buyer of case lots in
turn sells individual items. The allocation process generally coincides with
geographical dispersal and successive movement of products from origin to end
consumer.
 • Assorting: This is the building up of an assortment of products for resale in association
with each other. Wholesalers built assortment of goods for retailers, and retailers
build assortment for their customers.
3. Reutilization
4. Searching
Functions and Flows in Marketing Channels
The functions that need to be necessarily performed in a channel system include
1. Transfer of ownership through selling,
2. Transfer of possession through transportation,
3. Order processing,
4. Inventory carrying,
5. Storage, Sorting,
6. Negotiation and
7. Promotion.

Figure 1. Marketing Flows in Channels

Participants in the Channel
(a) Primary participants
i. Wholesalers: Wholesalers are defined as all establishment or places of business primarily
engaged in selling merchandise to retailers to industrial commercial, industrial institutional or
professional users, or to other wholesalers or acting as agents in buying or selling merchandise to
such companies. Two classes of wholesaler establishments can be clearly distinguished. These
are the merchant wholesaler and the manufacturers’ agents. The former are characterized by the
fact that they take title to the goods they distribute. Manufacturer’s agents buy and sell on behalf
of the manufacturer and nowhere in the exchange process take title to goods. Merchant
wholesalers may be of several types for example commission merchants, selling agent, buying
agents cash and carry wholesalers etc.
ii. Retailers: Retailers are all the establishments engaged in selling merchandise for personal or
household consumption. They are distinguished from wholesalers by the fact that they sell
primarily for ultimate use. Although wholesalers may also sell to ultimate consumers, this selling
activity does not form the bulk of their operation. A variety of types of retail establishments exist
in the Indian market today ranging from sophisticated departmental stores and supermarkets to
limited time stores catering to a few customers and carrying limited merchandise.
(b) Facilitating Participants
i. Financial Institutions: Financial institutions provide the essential finances needed to finance
primary participants of the channel system. A very significant financing need relates to the
provision of capital for inventories, which must be financed at many levels as inventories move
from production to consumption.
ii. Public warehouses: The public warehouses rent space to owners of inventory thereby
eliminating the need to invest in storage facilities. For agricultural products the both government
owned or privately owned warehouses are extensively used.
iii. Public carriers or transport carriers: Transportation forms a cost centre in distribution
management. To a large extent distributive effort is dependent upon the services of public
carriers like transporters and railways to affect the transfer of physical possession of goods. The
efficiency of the transportation system influences the size of inventories which must be
maintained channel system. If a reliable transport system is readily available, products can flow
through the channel at a constant rate, thus minimising the need for maintaining large
inventories.
iv. Advertising agencies: These facilitating agencies help in facilitating negotiation, by creating
awareness of products and stimulating demand. They function at each level of the channel for
producers, wholesalers and retailers. Without the kind of information given through these
agencies at various levels, seeking and selecting product sources would become a tedious task
for buyers. Advertising agencies, therefore, help in the search process.
Designing Distribution Channels
(a) Specifying the role of distribution
A channel strategy should be designed within the context of the entire marketing mix. First the
firm’s marketing objectives are reviewed. Next the roles assigned regarding product, price, and
promotion are specified. Each element may have a distinct role, or two elements may share an
assignment.
A company must decide whether distribution will be used defensively or offensively. Under a
defensive approach, a firm will strive for distribution that is as good as, but not necessarily better
than, other firms’ distribution. With an offensive strategy, a firm uses distribution to gain an
advantage over competitors.
(b) Selecting the type of channel
Once distribution’s role in the overall marketing programme has been agreed on, the most
suitable type of channel for the company’s product must be determined. At this point in the
sequence, a firm needs to decide whether middlemen will be used in its channel and, if so, which
types of middlemen.
(c) Determining intensity of distribution: The next decision relates to intensity of distribution,
or the number of middlemen used at the wholesale and retail levels in a particular territory. The
target market’s buying behaviour and the product’s nature have a direct bearing on this decision.
(d) Choosing specific channel members
The last decision is selecting specific firms to distribute the product. When selecting specific
firms to be part of a channel, a producer should assess factors related to the market, the product,
its own company, and middlemen. Two additional factors are whether the middleman sells to the
market that the manufacturer wants to reach and whether the middleman’s product mix, pricing
structure, promotion, and customer service are all compatible with the manufacturer’s needs.
Types of channels:
Producer --> Consumer: The producer sells the goods or provides the service directly to the
consumer with no involvement with a middle man such as an intermediary, a wholesaler, a
retailer, an agent, or a reseller.
Producer --> Retailer --> Consumer: Retailers, like Walmart and Target, buy the product from
the manufacturer and sell them directly to the consumer. This channel works best for
manufacturers that produce shopping goods like, clothes, shoes, furniture, tableware, and toys.
Since consumers need more time with these items before they decide to purchase them, it is in
the best interest of the manufacturer to sell them to another user before it gets into the hand of
the consumers
Producer --> Wholesaler/Distributor --> Consumer
Wholesalers, like Costco, buy the products from the manufacturer and sell them to the consumer.
In this channel, consumers can buy products directly from the wholesaler in bulk. By buying the
items in bulk from the wholesaler the prices of the product are reduced. This is because the
wholesaler takes away extra costs, such as service costs or sales force costs, that customers
usually pay when buying from retail; making the price much cheaper for the consumer.
Producer --> Agent/Broker --> Wholesaler or Retailer --> Consumer
This distribution channel involves more than one intermediary before the product gets into the
hands of the consumer. This middleman, known as the agent, assists with the negotiation
between the manufacturer and the seller. Agents come into play when the producers need to get
their product into the market as quickly as possible.
Wholesale Distribution- Types- Benefits and Problems
Wholesale distributors play a vital middleman role in the journey of products from the
production line to their final customer. By purchasing goods in bulk from manufacturers and
distributing them to retailers, they make sure stores have products to sell while enabling
manufacturers to focus on designing and building innovative products. Wholesale distribution
businesses often specialize in specific industries or product categories and sometimes develop
long-term relationships with manufacturers.
They make a profit by buying products in bulk at a discount and reselling them in smaller
quantities at a higher price to individual retailers.
Wholesale vs. distribution.
The terms “wholesaler” and “distributor” are sometimes used interchangeably to describe any
companies that buy products from manufacturers and sell them to retailers and other businesses
(as opposed to selling directly to consumers). However, the term “distributor” is often applied
more specifically to a narrower subset of companies that have long-term relationships with
particular manufacturers and help market and support their products.
Other common names for wholesalers and distributors.
To further muddy the waters, the way wholesalers and distributors are described can vary by
industry and product. Some of the other common labels include:
 Supply house.
 Importer/exporter.
 Dealer.
 Jobber.
 Buying/selling group.
 Trading company.
Types of Wholesale Distributors
A variety of companies can be involved in wholesale distribution, even within a single market or
industry sector. Some of these participants include:
a. Manufacturers.
In addition to making products, some manufacturers distribute them to retailers. This is
especially true of boutique manufacturers, which may also sell directly to consumers. But large
companies do this, too, and sometimes find themselves competing with traditional distributors.
b. Exclusive or specialized distributors.
Some distributors act as the sole resellers for specific manufacturers. They often help analyze the
marketplace and actively market and sell the manufacturers’ products as well.
c. Regional distributors.
These companies focus on a specific country or geographic region. They bring valuable regional
knowledge of customer preferences, languages, trends, regulations and import procedures. They
may have exclusive rights to distribute products in their territory.
d. Wholesalers.
In some industry sectors, wholesalers are differentiated from distributors, partly because they
don’t represent specific manufacturers. They buy a wide selection of products in bulk from a
variety of manufacturers or distributors and then resell them. They focus on competitive pricing,
storage and order fulfillment.
e. Agents and brokers.
Agents generally don’t own or stock the products they sell; instead, they focus on finding
customers, negotiating pricing and making the sale on behalf of the manufacturers or distributors
that supply the products. They may work on a commission basis.
f. Jobbers.
In some sectors, individuals or small companies — jobbers — make daily deliveries of products
to retailers.
a. Benefits of Wholesale Distribution
Wholesale distribution provides advantages for all businesses involved in the supply chain,
including manufacturers and retailers. Those benefits include:
 Increased reach.
Manufacturers that work with wholesale distributors can invest less to expand their market, since
the wholesaler is responsible for distributing the product to far-flung retailers. Manufacturers
don’t need to hire, develop or maintain expensive armies of salespeople with the expertise to sell
directly to customers.
 Simpler operations.
Wholesalers simplify business operations for both manufacturers and retailers. Manufacturers
can work with a relatively small number of distributors to fulfill several large orders, instead of
many small ones. And retailers can get their supplies from just a few distributors, instead of
dealing with many individual manufacturers, thus simplifying ordering and reducing shipping
costs.
 Lower cost of business.
Because wholesale distribution simplifies operations for manufacturers and retailers, it can also
reduce their operating costs. Retailers that buy from wholesalers may also pay lower prices than
when buying small quantities directly from manufacturers.
 Storage capability.
Wholesalers often have extensive warehouse capacity for storing inventory, freeing
manufacturers and retailers from the burden and cost of maintaining large stocks of products.
 Supply chain stability and mitigation of risk.
By buying and maintaining inventory, wholesalers help secure a stable supply of products and
reduce risk of shortages for other companies in the supply chain.
b. Wholesale Distribution Challenges/Problems:
Wholesale distribution has been the dominant model for connecting manufacturers and retailers
since the dawn of the industrial age.
However, wholesale distributors currently face challenges on several fronts:
 New competitors.
Established wholesale distributors face growing competition from online entities. These include
online retailers and marketplaces moving into business-to-business (B2B) sales, using their scale
and existing platforms to offer low-cost products, transparent pricing and fast shipping. Adding
to the competition, overseas suppliers can sell internationally using online stores, often
undercutting domestic distributors.
 Manufacturers selling direct.
Some manufacturers are opting to sell directly to consumers, either online or via their own retail
channels, both to increase their profit margins and to maintain greater control over their brand
and customer experience.
 Rising customer expectations.
Distributors need to meet increased customer expectations, which have been fueled by retail
ecommerce experiences: fast delivery, real-time visibility into orders and delivery status, and
24/7 customer service.
 Profit pressure.
In an era of global trade, the downward pressure on prices — particularly for commodity goods
— is tremendous. Shrinking margins force distributors to increase operating efficiency, another
form of pressure.
Wholesale Distribution Industries
Wholesale distributors tend to specialize in an industry or product category. This enables them to
deal effectively with nuances unique to that market segment, such as regulatory requirements and
 seasonal shifts in demand. Four of the largest preferred sectors within the wholesale distribution
industry are:
 Food and beverage.
The food and beverage industry is a high-volume wholesale segment — and one with exacting
requirements for storage, handling and distribution. Food and beverage wholesalers must comply
with freshness, hygiene and refrigeration standards. They also must be experts in seasonal,
promotional and unexpected shifts in demand.
 Health care.
Health care distributors play a critical role with regard to partnering with manufacturers to
deliver drugs, medical equipment and surgical supplies to hospitals, clinics and governments.
Health care is a particularly challenging and fragmented marketplace, requiring detailed
knowledge of regulatory issues. By handling customer interactions, wholesale distributors enable
manufacturers to focus on their core competencies.
 Technology.
Distributors underpin many high-tech and other electronics supply chains. These companies
typically must manage inventory from many suppliers while staying on top of rapidly shifting
technology trends and retailer demands.
 Industrial.
This broad category includes suppliers that manage vast inventories of many thousands of
products for industrial customers or B2B retailers.
Service of Wholesaler- Service to Manufacturers or Producers, Retailers, and Consumers
The wholesaler renders a number of services to trade, industries and commerce.
A. Services to Manufacturers or Producers:
The services provided by the wholesaler to manufacturers or producers are explained
as follows:
1. Economies of Large Scale:
A wholesaler buys the goods in large quantities which enable the producers to manufacture
goods on a large scale. Economies of Large scale bring down the average cost of
production. In other words, production on a big scale helps in reducing the cost of
production per unit.
2. Facilitate Distribution of Goods:
Presence of wholesalers in the distribution channel relieves the producers from the hassle of
finding out the customers for their products. A wholesaler facilitates the producers to reach
out to their target market by buying goods in bulk from the producer for distribution and
making them accessible to the consumers via the retailers located in different areas.
3. Warehousing and Marketing:
There is a time lag between production and consumption. The wholesalers purchase the
goods from the producers instantly after production and store the goods in their private
warehousing facility. Thus, the producers are absolved from the burden of storing their
produce. The wholesalers do the grading and packing of goods for further selling to
retailers.
4. Financial Assistance:
A wholesaler places bulk orders for the producer’s goods. He either pays for the goods in
advance or makes the settlement within a short period of time after making the purchase.
Once the goods are produced, the wholesaler promptly buys them from the producer. In this
way, the manufacturer does not have to block his working capital in maintaining a huge
stock, and thus, can carry out production activities on a regular basis.
5. Risk Bearer:
As the wholesaler places advance orders for the goods, the producer gets a ready market for
their produce. The wholesaler relieves the producer from the risk of loss due to the
variations in demand and storage of goods; also cutting down risk by matching seasonal
demand and supply.
6. Forecasting of Demand:
The wholesalers provide helpful information to the manufacturers regarding the needs and
wants of the consumers. They collect the information from the retailers about the nature and
scope of demand and share it with the producers. Thus, the wholesaler assists the producers
to manufacture the goods which are in tune with the fashion, taste and needs of the market.

7. Regulate Production:
The wholesalers are the medium of exchange of information between the producer and the
retailer. They gather dated information about the market trends, demand and taste of
consumer and pass it on to the producers. With the help of this information, the producers
produce the right quantity and quality of goods.
8. Stabilisation of Prices:
Wholesalers diminish fluctuations in the prices of products. When the prices of commodities
fall in the market, the wholesalers begin buying large quantities of goods to prevent further
declines in the prices. Alternatively, in the event of price rise, the wholesalers start selling
the goods stored by them in the warehouses. These measures help in checking price
fluctuations.
9. Link:
A wholesaler plays the part of a vital link between the producers and the retailers. They
make the job of both the producers and retailers easier by facilitating regular procurement
(producers) and supply of goods (retailers).
B. Services to Retailers:
The services made available by the wholesaler to the retailers are numerous.
They are described as under:
1. Convenient Buying:
Retailers have to deal with different kinds of customers. It is, therefore, important for
retailers to stock a wide range of goods at their outlet. However, they cannot afford to
source the stock from so many producers directly. But, wholesalers store the stock of goods
procured from different producers at their warehousing facility and provide the facility to
the retailers to buy the stock in desired quantity at convenient time. Thus, wholesalers make
it easy for the retailers to buy goods for sale.
2. Risk Taking:
A wholesaler assumes a lot of risks of packing, transporting, storing and marketing the
goods. For example, by warehousing the goods at his or her own facility, the wholesaler
takes the risk of market fluctuations in prices or wastage of goods in warehouses due to
pests, natural calamities, etc. In this way, the retailer is saved from such risks.
3. Knowledge about New Product:
The wholesalers use the salesmen employed by them to introduce the retailers to the new
kinds of products which are going to be launched in future. The wholesaler also uses trade
circulars, newspaper advertisements and showroom visits to pass on this information.
Retailers can place the order in advance for the new products and thus receive attractive
discounts.
4. Benefit of Specialisation:
The wholesalers generally prefer to excel in a few varieties of products. They purchase at a
bargain from manufacturers that produce high quality goods. Retailers derive the advantage
of this specialisation by buying the best products from the wholesalers’ stock for their own
shopping outlet.
5. Grading:
Grading can be defined as the process of dividing the goods into lots which are similar in
terms of shape, size, weight, quality, performance, etc. The wholesaler performs the process
of grading the products of different qualities and / or of similar features by separating them
into different lots or packages. With everything sorted or graded systematically, it becomes
easier for the retailer to sell the goods.
6. Stabilisation of Prices:
The wholesaler keeps the price line intact by maintaining the balance of demand and supply.
They enable the distribution and sale of goods when there is scarcity in the market, and
store them in warehouses when they are not in demand. Thus, the retailers are saved from
the risks resulting from the rise and fall of prices.
7. Financial Aid:
Wholesalers finance the retail trade by providing goods on credit. Owing to low capital in
hand, the retailers buy goods on credit from the wholesaler and repay the debts when they
are able to collect enough money from the sale of goods to the consumers. Hence, the
wholesaler makes it easy for the retailers to trade with limited capital.
8. Transport Services:
Wholesalers provide transport facility to the retailers by sending goods to their doorsteps as
and when required. Some wholesalers maintain their own vehicles for the distribution of
goods to the retailers.
9. Consultancy Services:
The wholesalers provide valuable advice to the retailers on a number of marketing activ ities
such as displaying goods on the shop window, etc. They also provide the advertisement
material to the retailers which describe and promote the qualities of the product.
C. Services to Consumers:
The services rendered by the wholesalers to the consumers are as follows:
1. Ready Supply:
The wholesalers enable the consumer to buy the desired quantity and quality of goods at the
convenient time and place because they supply goods regularly to the retailers. Hence, the
consumer does not have to wait for the stock to arrive at the retailer’s shop.
2. Fair-Priced Goods:
Since the Wholesaler buys the goods from manufacturers in bulk and allows him to reap the
benefit of economies of large scale production thereby bringing down the cost per unit,
which ultimately benefits the customers.
3. Stabilisation of Price:
The wholesaler is in a better position to stabilise prices of the products by adjusting demand
and supply. The consumers are benefited to a great extent due to the stabilisation of prices.
4. Matching Consumer Demand:
The wholesalers supply the goods as per the requirement and demands of the consumers.
Thus, consumers get to choose from a diverse range in accordance to their demand.
5. Advertising the Goods:
Wholesalers advertise their goods extensively to enlighten the consumer about its uses,
types and qualities and availability. The consumers get knowledge about the goods and are
in a better position to make their buying decisions.
6. Market Research:
Some wholesalers carry out market research frequently to identify any improvement areas in
the existing products and scope for development of new products. Further, they help the
producers to stay updated with the dynamic market trends and consumer tastes by sharing
useful information gathered through their market research. Consequently, the consumer gets
quality products at a reasonable rate. Thus, the wholesaler is a valuable link between the
producer (manufacturer), the retailer and the consumer in the channels of d istribution
Retail Distribution: Characteristic Features-Functions- Types- Importance
Meaning of Retail Distribution:
Retail is the final channel of distribution where small quantities of goods (or services) are sold
directly to the consumer for their own use.
Two key phrases in this definition that separate retail from wholesale are –
 Small quantities of goods: Unlike manufacturing or wholesale, the number of goods
involved in a retail transaction is very less.
 Directly to the consumer: Retail stores are the last channels of distribution where the
actual sales to the customer happen.
Retailing Meaning:
Retailing is the distribution process of a retailer getting the goods (either from the manufacturer,
wholesaler, or agents) and selling them to the customers for actual use.
In simple terms, retailing is the transaction of small quantities of goods between a retailer and the
customer where the good is not bought for resale purpose.
Retailer Meaning:
A retailer is a person or a business that sells small quantities of goods to customers for actual
use.
Characteristics of Retailing
Retailing can be differentiated from wholesaling or manufacturing because of its certain distinct
characteristics, which include –
 Direct contact with the customer – Retailing involves direct contact with the end
customer and retailers act as a mediator between the wholesaler and the customer or the
manufacturer and the customer depending upon the distribution channels used.
 Relationship with the customers – Retailers form a bond with the customers and help
them decide which products and services they should choose for themselves.
 Stock small quantities of goods – Retailers usually stock small quantities of goods
compared to manufacturers and wholesalers.
 Stock goods of different brands – Retailers usually stock different goods of different
brands according to the demand in the market.
  Customers’ contact with the company – Retailers act as the company’s representatives
to the end customers who give them their feedback and suggestions.
 Have a limited shelf space – Retail stores usually have very limited shelf space and only
stock goods which have good demand.
 Sells the goods at maximum prices – Since retailing involves selling the products
directly to the customers, it also witnesses the maximum price of the product.
Retailing Types
Retailing can be divided into five types. Here are the types of retailing that exists today –
 Store retailing: This includes different types of retail stores like department stores,
speciality stores, supermarkets, convenience stores, catalogue showrooms, drug stores,
superstores, discount stores, extreme value stores etc.
 Non-store retailing: Non-store retailing is a type of retailing where the transaction
happens outside conventional shops or stores. It is further divided into two types – direct
selling (where the company uses direct methods like door-to-door selling) and automated
vending (installing automated vending machines which sell offer a variety of products
without the need of a human retailer).
 Corporate retailing: It involves retailing through corporate channels like chain
stores, franchises, and merchandising conglomerates. Corporate retailing focuses on
retailing goods of only the parent or partner brand.
 Internet retailing: Internet retailing or online retailing works on a similar concept of
selling small quantities of goods to the final consumer, but they serve a larger market and
don’t have a physical retail outlet where the customer can go and touch or try the product.
 Service retailing: Retailers not always sell tangible goods; retail offerings also consist of
services. When a retailer deals with services, the process is called service retailing.
Restaurants, hotels, bars, etc. are examples of service retailing.
Functions of Retailing
Retailers have many important functions to perform to facilitate the sale of products. These
functions include –
a. Sorting
Manufacturers produce large quantities of similar goods and like to sell their inventories to a few
buyers who buy in lots. While customers desire many varieties of goods from different
manufacturers to choose from. Retailers balance the demands of both sides by collecting and
assorting the goods from different sources and placing them according to the customers’ needs.
b. Breaking Bulk
Retailers buy goods from manufacturers and wholesalers in sufficiently large quantities but sell
to the customers in small quantities.
c. Channel of Communication
Since retail involves direct contact with the end consumers, it forms a very important
communication channel for companies and manufacturers. The manufacturer tries to
communicate the advantages of their products as well as the offers and discounts through
retailers.
Retail also acts as a mediator between the company and the customer and communicates the
feedback given by the customers back to the manufacturer or wholesaler.
d. Marketing
Retail stores are the final channels where the actual decisions are made. Hence, they act as
important marketing channels for the brands. The manufacturers execute smart placements,
banners, advertisements, offers, and other strategies to increase their sales in retail stores.
Importance of Retailing
Retailing is important for the creators, customers, as well as the economy.
Retail stores are the places where most of the actual sales to the customers take place. They act
as both a marketing tool for the brands and a support tool for the customers to exchange and
communicate important information.
Besides this, retailing is a great asset to the economy. It provides jobs, adds to the GDP, and acts
as a preferred shopping channel during the holiday season.
How Retail Works?
Retail works on a simple revenue model of mark up. The retailers buy the goods at a cost price,
add up the cost of labour, equipment, and distribution to it along with the desired profit margin,
and sell it at a higher price.
Retailing Examples
The most common examples of retailing are the traditional brick-and-mortar stores like Walmart,
Best Buy, Aldi, etc. But retailing isn’t limited to them. It also includes small kiosks at the malls,
online marketplaces like Amazon and eBay, and even restaurants which sell food and service.
Services offered by Retailers
Retailers are business enterprises involved in selling goods and services directly to the ultimate
customer. They buy goods from wholesalers in large quantities and sell them in smaller
quantities to the ultimate customer. Apart from buying and selling, retailers are also involved in
the promotions, after-sales services, and are information providers. They extend their support to
wholesalers and manufacturers as well as to the end consumers in various ways.
Services offered by Retailers to Wholesalers and Manufacturers:
1. Helps in the distribution of goods: Retailers are last in the distribution chain. With the help
of retailers, finished products are delivered to the final consumers. Manufacturers and
wholesalers cannot reach directly to the end consumers as they are less in number, so they need
retailers who can directly engage with the end consumers.
2. Personal selling: Retailers provide a personal touch in the buying and selling process. They
interact directly with the customers and infuse personal selling efforts into the process. Retailers
act as a representative of the manufacturers and help them in the process of actualising the sale
of the products.
3. Enabling large-scale operations: Retailers allow manufacturers and wholesalers to be free
from the tension of individual sales to final consumers. Wholesalers and Manufacturers can
focus on other necessary activities.
4. Collecting market information: As retailers are in direct contact with the final customers,
they can gather information from them and pass it to the wholesalers and manufacturers about
the tastes, preferences and attitudes of customers. With the help of such information, important
marketing decisions can be taken.
5. Help in promotion: Manufacturers and Distributors carry out various promotional activities
from time to time to increase their sales. Retailers participate in these activities to make them
successful. Manufacturers, with the help of retailers, offer coupons, gifts, etc., to consumers as
part of promotional activity.
Services offered by Retailers to Customers:
1. Regular availability of products: The most important aspect of a retailer is to maintain the
regular availability of products for the end consumers, which enables the buyers to choose from
various products.
2. New product information: Retailers are the last element in the distribution channel. They
give information to consumers about new products or services through the effective display of
products and personal selling efforts.
3. Convenience in buying: Retailers are situated very near to the residential areas and operate
for long hours, which gives convenience to the customers as they can buy products at times they
need.
4. Wide variety of products and services: Retailers offer a wide range of products and services
to the consumers, so that they can select products and services based on their use, preference,
needs and choice. Having various options to choose from is always good from the point of view
of a customer.
5. After-sales services: Retailers provide important after-sales services that include home
delivery, supply of spare parts, pre-installation services, online support, etc., which becomes a
vital element in the customer’s decision to repeat the purchase of the products.
6. Provide credit facilities: Sometimes, retailers offer products on credit to their regular
customers, which increases customers’ level of consumption and satisfaction, and ultimately
improves their standard of living.
Direct Marketing
Direct marketing – is a type of promotion that offers the transfer of information about а product,
service, or company directly to the client. Thus, the target audience receives all advertising
information without intermediaries and third parties.
Direct marketing is directed through advertising right to the consumers in order to obtain from
them a direct response to the appeal of advertising: it is often viewed as one of the tools of
marketing communications.
The methods of direct marketing may be aimed at two purposes in mind: the development of a
strong relationship with buyers and actually selling.
Types of direct marketing
Let’s take look at some of the most popular direct marketing methods:
1. Emails notifications
Email marketing is a simple, affordable, and measurable way to communicate with customers.
Here are some examples of effective strategies:
2. Mobile Marketing
This type of direct marketing is considered to be 4-5 times more effective than any other form of
online advertising. It is based on sending out promotional materials to your mobile devices. With
the help of mobile marketing, marketers for instance talk about current offers, sales, or inform
buyers about the status of their orders.
3. Push notifications
Push notifications are messages sent to users via a browser, which appear in the corner of a
mobile screen or computer. Push notifications allow marketers to interact with potential
customers person-to-person. There is no need to collect email addresses or other personal data
because subscribers are identified by information stored in the used browser.
However, don’t forget to remember the possible risks while sending push notifications, for
instance, they can become intrusive or even be considered spammy, which will scare users
away. Intrusive notifications will only force users to unsubscribe. Also, push notifications
have setted character limit, where the title can’t exceed 64 characters and the text – 240
characters. Therefore, take care of the relevance and usefulness of your content to raise interest.
What is more, keep in mind that these notifications are displayed only once and it will be
difficult to find them again.
4. Messenger marketing
With this type of direct marketing, you can create a chatbot for popular messengers such as
Telegram, Facebook Messenger, WhatsApp. Chatbots help brands automate answers to
frequently asked questions from customers, allow them to place orders, and book a table in chat,
as well as to learn more about the company.
5. Face-to-Face Marketing – This is one of the oldest forms of direct marketing. Authorised
sales representatives are employed to meet prospects directly. The goal of each representative is
to reach out to these prospects, convert them into profitable consumers and thus promote the
business of your organization.
6. Door-to-Door Marketing – Door-to-Door sales (D2D) are another form of face-to-face
marketing. It simply means that your sales representative is participating in door-to-door
prospective, which indicates a system of direct contact with your targeted audience. Rather than
relying on any other kind of marketing, a D2D salesman goes from one place to another,
engaging prospects in a conversation about the products and services you offer implementing
various compliance techniques with the intention of doing business with them.
7. Kiosk Marketing – Public places that get a lot of crowds are always full of opportunities to
gain people’s attention towards your business. Representatives stationed at kiosks in these places
such as shopping malls can directly talk to potential customers by catching their eyes with your
products and services.
8. Leaflet Hand-outs – This type of direct marketing involves handing out leaflets to the
targeted audience that contain printed information about the products and services you offer,
giving your potential customers the option to contact you, should they decide to make a
purchase. Leaflets are sometimes also handed out at kiosks, to encourage a more positive
engagement from your prospects. These leaflets may also sometimes contain offers and coupon
codes that are redeemable for only a limited amount of time, thereby enticing your prospects
further into making a purchase from you.
9. Telemarketing – The process of contacting your prospects individually and trying to get them
interested in purchasing what your business has to offer has rapidly grown in the past few years.
Representatives at call-centres contact a list of people who would be interested in your product
and inform them the perks and advantages of making the purchase. This technique is often used
by AT&T and Vodafone to inform both existing and potential consumers about the services they
offer.
10 Targeted Advertisements – Internet has opened the gates to yet another form of direct
marketing – Targeted Advertisements. Almost every activity a user perform over the internet is
recorded in the form of a cookie or other data. This data along with the user’s demographics is
used by advertisers to target personalised ads to him directly. An example of targeted
advertisements is remarketing where user witnesses the advertisements of the products he
abandoned while visiting an ecommerce website.
Need for direct marketing
In the past, direct marketing was considered to be a lottery: you shot and hoped to hit someone.
Currently, direct marketing strategies become a lot more integrated and reliable. Here come the
reasons why you should implement them:
 Boost the process of attracting leads: Direct marketing campaigns allow you to quickly
connect with your target audience and make the right offer at the right time.
Using direct marketing enables you to reach certain customer segments with personalized
messages. What is more, you can optimize your marketing efforts by devoting your time to study
and determining the clients who are most likely to need or wаnt your goods and services.
А well-targeted direct marketing strategy would also give you a clear view of how your clients
respond to your offerings.
 Allows you to send personalized content: Marketers collect information such as age,
income, behavioral factors in order to send personalized messages. Thus, with relatively
small effort, brands show interest in every customer.
By using direct marketing correctly, you can build long, trusting relationships with the target
audience. You communicate directly with the customer, who will gladly tell you what you like
and what you don’t like. Try to make a personal promotional offer and there is no way for the
client to refuse.
 Promotes effective marketing of services and products: Unlike other strategies, direct
marketing allows you to create targeted campaigns to attract highly motivated potential
customers. This ensures maximum efficiency when sending promotional emails to a
segmented audience.
For instance, to identify the demand for a certain product you have an opportunity to
communicate directly, find out the attitude towards a product or service, adjust the commercial
offer and the messages on the site – to make the potential buyer feel like you foresee his desires.
 Easy to measure the performance: Brands track the success of their campaigns based
on metrics such as customer response rates, revenue generated, and ROI. What’s more,
direct marketing lets you know how much customers are willing to spend on certain
products or services.
It is measured by an increase or decrease in audience activity: reviews, comments on social
networks, actual purchases.
Direct marketing opens up great opportunities for planning your budget, by analyzing the
performance of the previous campaigns.
Key components of successful direct marketing
1. Contact database
So, what is a contact database? It is the key component without which direct marketing is
literally impossible; the collection of records containing information about customers, both
potential and existing (btw, just for the record, the process of creating, maintaining, and using
databases is called database marketing).
With a quality contact database, the company has a chance to interact with thousands of clients
simultaneously and at the same time, with each consumer individually.
2. Unique offer
A lot of people are convinced that offers are actually goods and services, which are introduced or
could be introduced by a company on the market. This may be so, but not in direct marketing!
An offer is basically a deal you make, usually including a specially low price, an exclusive
bonus, or maybe an opportunity to try a product for free during a certain period. Your proposal is
the essence (core task) of every interaction with your target audience. Therefore, you must make
the offer as unique and attractive as possible.
For example, take a look at how Deezer, which is an online music streaming service, gives you
an opportunity to use their Premium account services for free for 3 months. They included
minimum text emphasizing their unique deal, put visible CTA (call-to-action) on the email, and
added an extra bonus for people who want something different (in this case it is a family package
that allows connecting more than one account for a smaller price). In addition, they even made
links that will lead you right to downloading their applications, depending on the type of device
you use.
3. Creative
The aim of the creative part is to make offers as tempting as possible, to evoke emotions in the
consumer, which will lead to a wanted response.
Even though creativity in direct marketing does not rank as highly as a database or offer, it
cannot be neglected. With a high-quality database and worthwhile offer, a great creative will
significantly increase the response rates.
The creative is basically the content of the text and design (layout) of an offer.
4. Communication method
The means of communication are actually the media component of direct marketing, namely,
they are responsible for how the key idea of the proposal will be conveyed to the target segment.
There are a lot of ways to transfer your message to the client: orally(real-life or online meetings),
in writing(emails, social media, and texting campaigns), or visually(by making sure that there is
strong visual support to your offer).
Advantages of Direct Marketing
A good direct marketing campaign focuses on promoting and selling to your prospective
customers by:
 Helping you build a better relationship with both returning and new customers by
contacting them directly.
 Testing the appeal of your products and services and getting direct feedback from your
target audience, which can also be used to improve the products and services you offer.
 Helping you understand which marketing technique could be a better way to reach out to
your target audience directly in order to do business with them.
 Providing your customers with any compelling content that they could share with other
potential customers.
 Providing a positive boost in sales by gaining loyal customers for your business.
Selection of Channels
A distribution channel is the network of individuals and organizations involved in getting a
product or service from the producer to the customer.
Need for Selecting an Appropriate Channel of Distribution
It is a fact that the distribution channels are greatly required by the manufacturers. The need
for selecting an appropriate channel can be understood on the basis of the parameters
considered, which highlight the fact for need of selection of distribution channels.
a) Attention – Little attention of companies to their distribution channels may damage
results such as profit, brand, number of customers etc.
b) Imaginative distribution systems – Companies can use imaginative distribution
systems to take competitive advantage. For example Dell, Flipkart.com etc. Dell is the
best example of revolution in Distribution channel. Dell is selling its products directly to
 the consumer rather than through retailer.
c) Difficult to Replace – Companies can change their products, advertising and Pricing
easily but not their distribution channels. It is not an easy task to change distribution
channel, franchisees, dealers and retailers.
d) Value Addition – Distribution Channel Members can provide greaterefficiency in
making availability of goods to the target markets through their Contacts,
Specialization, experience, and scale of operation. Thiscan add value to the product
or service at each level of distribution.
e) Reduced number of Channel Transactions – Marketing intermediaries or channel
members help to reduce the number of channel transactions.
f) Information – Gathering and distributing information is very helpful.
g) Promotion – Communication to the consumer regarding product information and offers
through advertising and promotion.
h) Financial support – Offering financial support for example Purchase on credit,
exchange options, purchase using payment plans.
i) Other – Financing, Physical Distribution and Risk Taking are other parameters that
influence a channel selection decision Reduces Distribution cost and time
Factors to be Considered while Selecting Channels of Distribution
Some of the factors to consider while selecting channels of distribution are as follows: (i)
Product (ii) Market (iii) Middlemen (iv) Company (v) Marketing Environment (vi)
Competitors (vii) Customer Characteristics (viii) Channel Compensation.
We have to consider the following factors for the selection of channel of distribution:
(i) Product:
Perishable goods need speedy movement and shorter route of distribution. For durable and
standardized goods, longer and diversified channel may be necessary. Whereas, for custom made
product, direct distribution to consumer or industrial user may be desirable.
Also, for technical product requiring specialized selling and serving talent, we have the shortest
channel. Products of high unit value are sold directly by travelling sales force and not through
middlemen.
(ii) Market:
(a) For consumer market, retailer is essential whereas in business market we can eliminate
retailing.
(b) For large market size, we have many channels, whereas, for small market size direct selling
may be profitable.
(c) For highly concentrated market, direct selling is preferred whereas for widely scattered and
diffused markets, we have many channels of distribution.
(d) Size and average frequency of customer’s orders also influence the channel decision. In the
sale of food products, we need both wholesaler and retailer.
Customer and dealer analysis will provide information on the number, type, location, buying
habits of consumers and dealers in this case can also influence the choice of channels. For
example, desire for credit, demand for personal service, amount and time and efforts a customer
is willing to spend-are all important factors in channels choice.
(iii) Middlemen:
(a) Middlemen who can provide wanted marketing services will be given first preference.
(b) The middlemen who can offer maximum co-operation in promotional services are also
preferred.
(c) The channel generating the largest sales volume at lower unit cost is given top priority.
(iv) Company:
(a) The company’s size determines the size of the market, the size of its larger accounts and its
ability to set middlemen’s co-operation. A large company may have shorter channel.
(b) The company’s product-mix influences the pattern of channels. The broader the product- line,
the shorter will be the channel.(v)
If the product-mix has greater specialization, the company can favor selective or exclusive
dealership.
(c) A company with substantial financial resources may not rely on middlemen and can afford to
reduce the levels of distribution. A financially weak company has to depend on middlemen.
(d) New companies rely heavily on middlemen due to lack of experience.
(e) A company desiring to exercise greater control over channel will prefer a shorter channel as it
will facilitate better co-ordination, communication and control.
(f) Heavy advertising and sale promotion can motivate middlemen in the promotional campaign.
In such cases, a longer chain of distribution is profitable.
Thus, quantity and quality of marketing services provided by the company can influence the
channel choice directly.
(v) Marketing Environment:
During recession or depression, shorter and cheaper channel is preferred. During prosperity, we
have a wider choice of channel alternatives. The distribution of perishable goods even in distant
markets becomes a reality due to cold storage facilities in transport and warehousing. Hence, this
leads to expanded role of intermediaries in the distribution of perishable goods.
(vi) Competitors:
Marketers closely watch the channels used by rivals. Many a time, similar channels may be
desirables to bring about distribution of a company’s products. Sometimes, marketers
deliberately avoid channels used by competitors. For example, company may by-pass retail store
channel (used by rivals) and adopt door-to-door sales (where there is no competition).
(vii) Customer Characteristics:
This refers to geographical distribution, frequency of purchase, average quantity of purchase and
numbers of prospective customers.
(viii) Channel Compensation:
This involves cost-benefit analysis. Major elements of distribution cost apart from channel
compensation are transportation, warehousing, storage insurance, material handling distribution
personnel’s compensation and interest on inventory carried at different selling points.
Distribution Cost Analysis is a fast growing and perhaps the most rewarding area in marketing
cost analysis and control.
Logistics/ Logistics Service Provider (LSP)/ Third-party Logistics (3PL) Providers
Many small businesses and start-ups initially prefer to handle every part of fulfilling orders
themselves to ensure a high-quality experience for every customer. But as a company grows,
especially its ecommerce operations, staff may not have the time or resources to efficiently box
up every package, stamp every envelope and ship every item. When operating at capacity,
businesses are often faced with two primary options if they want to grow: Expand the workforce
or outsource some of the responsibility. For businesses looking to rely on external expertise —
and the potential savings that can bring — logistics service providers offer a wide range of
services that can help a business meet its logistics needs, letting managers spend less time taping
up boxes and more time growing the company.
 Logistics Service Provider (LSP)/ Third-party Logistics (3PL) Providers/ Logistics:
Logistics service providers (LSPs), commonly referred to as third-party logistics (3PL)
providers, are companies that specialize in the handling, storage and transportation of goods
also known as logistics. These goods include the raw materials used to create products, as well
as the final products shipped to customers. Some companies are capable of handling their own
logistics, but that can present a challenge as companies grow, especially for wide-reaching
ecommerce businesses with customers expecting quick delivery times.
LSPs provide warehouse capacity wherever a company does business, offering a more affordable
solution than building and maintaining multiple warehouses. LSP services can range from simple
shipping solutions to complex operations that control clients’ entire supply chain, so it’s
important for businesses interested in LSPs to understand their own logistics needs to effectively
balance the benefits with the costs they will accrue.
 Logistics service providers help businesses manage their supply chains, including warehousing,
inventory management, shipping and returns (reverse logistics).
 Logistics service providers typically range from in-house, first-party LSPs to complex fifth-party
LSPs. Different levels of LSPs provide different services and maintain varying levels of control
over a business’s operations.
 LSPs offer many services to help businesses grow efficiently, but they can be costly if a business
is able to more affordably maintain some aspects of its logistics itself.
Logistics Service Providers Explained
Logistics as a management service has evolved from its beginnings in military science to now
apply to the processes needed for any complex operation.
In fact, the Merriam-Webster dictionary lists both definitions.
The first is the “procurement, maintenance and transportation of military material, facilities and
personnel”.
The second defines logistics more broadly as “the handling of the details of an operation”.
As a business’s order volume increases, so, too, do its logistics needs.
For example, if it takes one worker 10 minutes to package and ship one order, the rate that
orders can be fulfilled is about six orders per hour per worker (60 minutes / 10 minutes per
order).
A business with a small staff — let’s say five workers — can expect a fulfilment rate of about 30
per hour (5 workers x 6 orders per worker).
While it is possible to increase staff to raise orders to 36, 42, 48 per hour, it may be more cost-
effective to outsource order fulfilment to a logistics service provider that can more quickly
process orders, leaving staff to focus on growth tasks, such as research and development and
creating new marketing strategies.
Need For Using Logistics Service Providers by Businesses
Businesses that no longer want to handle their own logistics can benefit from using an LSP both
directly through efficiency and cost-saving measures and indirectly from the LSP’s expertise and
support. Here are some common reasons why companies choose to work with LSPs.
 Scalable growth and efficiency: Companies that start out handling their own logistics often
realize that doing so is unsustainable in the long run as their business grows. When staff is
working at capacity and no productivity improvements can be found, efficiently expanding staff
can present a challenge, especially for businesses with inconsistent sales periods or unexpectedly
increasing demand. Growth may also bring unforeseen logistics costs, such as higher shipping
rates, shipping insurance and packing materials that chip away at profits. Those costly aspects of
 logistics — both in terms of time and money — can be better controlled by an LSP that is
already an expert in the field of logistics. Instead of taking a risk on a new factory or a wave of
new hires, many businesses turn to LSPs to efficiently scale their operations.
 Optimized supply chain: If a business has a complex supply chain or a far-flung customer base,
an LSP can help ensure that customers’ needs are met while minimizing waste and adding value
at each step of the supply chain more quickly and effectively than most businesses can handle on
their own. In the era of two-day or even same-day shipping, many customers will abandon their
carts and look for another source if they see week-out or month-out shipping estimates. LSPs can
effectively allocate inventory among warehouses spread throughout a region — be it statewide,
nationally or globally — to ensure quick and cheap delivery for customers, regardless of where
they reside. Returns, or reverse logistics, can be similarly streamlined through local drop-off
points or return processing centers, saving on shipping and increasing customer satisfaction
throughout the sales and returns process.
 Industry networking and experience: Many LSPs work with other logistics companies to
handle tasks like shipping and custom packaging. By partnering with the right LSP, a business
may also gain access to a large network of bulk discounts and customizable options for all its
logistics needs. This can help minimize costs and speed up order fulfillment, creating a win-win
for both companies and customers. Additionally, LSPs can use these networks to give businesses
time-tested advice to plan future decisions, such as how to effectively allocate inventory or how
to cost-effectively reach their customer base.
Why Businesses May Handle Logistics In-House
Not every business will benefit from using a logistics service provider. Here are two main
reasons why some companies may decide to keep logistics management in-house.
 Cost: LSPs are often large companies with long or expensive contracts, especially for businesses
just starting out. If a business’s staff can effectively handle the logistics responsibilities involved
in day-to-day operations, especially businesses with low order volume, an LSP may end up
costing more than just hiring a few more pairs of hands.
 Loss of control: Some businesses may not want to relinquish control of their product or their
operations to a second or third party. For example, a business that offers personalized products
may include a note to each customer or provide some other type of customized experience with
specific orders. This could be a marketing strategy to capture repeat customers, increase word of
mouth or help the product go viral. By giving up the hands-on approach to order fulfillment, a
business may lose what makes it special and end up losing customers. It’s important for
companies to analyse the impact that outsourcing can have on the final product and customer
experience.
Types of Logistics Services
Logistics services look different depending on the needs of the client, but generally speaking,
most services handled by an LSP fall into one of three main categories: warehousing, freight
shipping and courier services. Businesses may choose to handle one or more of these categories
in-house and outsource the others or let their LSP handle all three.
a. Warehousing Services
A business’s inventory needs to be stored somewhere during the period between manufacturing
and final product delivery to customers. For companies looking to expand into new regional
markets or for those with far-reaching client bases, purchasing or building and maintaining
warehouses may be too expensive to effectively handle in-house. By partnering with an LSP that
runs and maintains disparate warehouses, a business can store its goods closer to its customers
without the large real-estate investment typically needed to maintain multiple warehouses.
Instead, the business can pay only for the warehousing service, leaving the warehouse rent and
upkeep to the LSP. And for clients that don’t sell enough goods in an area to justify an entire
warehouse, many LSPs store multiple companies’ products in a single warehouse, known as
multi-tenancy, eliminating the waste in rent and utilities that can accompany a half-empty
warehouse.
b. Freight Shipping
For domestic companies, freight may primarily involve a fleet of trucks moving goods from one
location to another — both inbound materials and outbound products. But as a company’s
operations expand, freight shipping can involve tasks that may be too complex for a company
without a specialized — and expensive — transport management system. These tasks may
include optimizing “less-than-truckload” shipments, using multiple transportation modes — such
as air, ship and truck travel, known as multimodal transportation — route planning and more.
Many LSPs are equipped with the technology to handle these tasks more efficiently than a
business that doesn’t specialize in transport management. Additionally, LSPs can manage the
extra requirements that international shipping may need, including customs forms and tariff
payments. Businesses without the infrastructure to handle their freight needs can rely on LSPs
and avoid having to employ an on-site staff of experts to manage their more complex shipments.
c. Courier Services
Courier services typically provide the final delivery to customers but may also offer services for
shipments with special circumstances, such as fragile products that need extra care during
delivery, small items or low-volume orders. Because courier services are often the most likely to
directly interact with customers, businesses must make sure these LSPs are reliable, or they run
the risk of losing customers. Businesses that are unable to reliably handle their direct deliveries
or lack the special equipment needed for deliveries that require features like temperature control
can enlist an LSP to help meet those needs without incurring the large startup investments that
come with creating a delivery fleet from the ground up. LSPs may also offer more detailed
tracking, regular updates and customizable delivery times to give customers more options and
businesses more confidence that their customers’ needs are being met.
Tasks of Logistics Service Providers:
Logistics service providers handle more than just storage and transportation — unless they’re
first- or second-party LSPs, which only handle shipping (more on that later). For LSPs third-
party and above, a more comprehensive list of tasks they manage may include:
a. Incoming-goods logistics:
When raw materials or supplies are brought in, the logistics service provider will make sure the
shipment matches the initial purchase order and allocate the materials to their appropriate
destinations. For companies with multiple production facilities, this may involve cross-checking
current levels to make sure that no factory is left waiting while another has more supplies than it
needs. More complex LSPs may also handle the ordering process in addition to incoming
logistics.
b. Inventory management:
Inventory management is the entire process of managing inventories from raw materials to
finished products. An LSP can help businesses identify and respond to trends to ensure there’s
always enough stock to fulfill customer orders, and it can provide proper warning of a shortage.
c. Warehousing:
For finished goods, warehousing is more than just storage. Proper cataloguing is crucial to ensure
that goods can be picked and shipped quickly. Without proper labelling, orders can be left
unfulfilled, leading to dissatisfied customers. For LSPs that use multi-tenant warehouses,
accurate organization and cataloging ensure that different clients’ goods are kept separate and
accounted for.
d. Order tracking:
When orders are received, it is the LSP’s responsibility to manage and fulfill them. Often, orders
are placed and managed through a business’s own enterprise resource planning (ERP) system,
which should be integrated with the LSP, allowing for both the client company and the LSP to
effectively track orders. Without proper integration, orders can be left unfulfilled, or in-transit
orders may be mistakenly labeled “not yet sent” and reshipped.
e. Invoicing:
Many companies prefer to bill their customers themselves and pass the orders along to an LSP,
but some LSPs offer direct customer invoicing. These invoices should be matched with original
order numbers and prices to ensure accuracy before orders are shipped. Payment receipts should
be saved and tracked to keep accurate records for the future.
Logistics service providers also regularly bill their clients based on the terms of their contract —
often monthly or yearly. LSPs typically have several clients at one time and may bill flat rates or
vary charges by the services provided. LSPs offering more complex services will generally have
higher costs.
f. Picking and packing:
After an order is placed, the items must be picked and processed. The LSP will handle item
picking and label generation, often using internal track-and-trace systems with “license plate
numbers” (LPNs) to ensure that every item and package are kept together as entire orders are
completed. These tracking systems also keep inventory counts current and accurate.
g. Shipping:
Logistics service providers will either have their own fleet of vehicles for shipping or outsource
this service to another company. When an order is placed through the client company, customer
information is forwarded to the LSP with the order details to initiate the delivery. Businesses that
have specific delivery requirements, such as time-sensitive arrivals or temperature-controlled
environments, often use LSPs as a more affordable shipping option. This is especially true if
these types of deliveries account for only a small fraction of a business’s sales, which doesn’t
justify the large investment needed to purchase a specialized fleet of its own.
h. Payment and finance management:
LSPs manage the day-to-day costs of shipping and warehousing goods, including labor and
packing materials, with client companies outsourcing the payment management responsibilities
from an internal accounts payable team to the LSP. Through detailed analysis of logistics key
performance indicators (KPIs), such as shipping cost per unit, shipping cost per mile/km traveled
or shipping cost per lb/kg of package, LSPs are able to identify trends and optimize their
shipping methods and logistics operations to minimize waste and reduce costs for themselves
and their clients. Businesses can also receive bulk discounts through their LSPs that they would
not qualify for on their own, freeing up capital for other financial needs, like growth or
managerial investments.
Many LSPs process customer payments for their clients as well. Businesses relying on LSPs to
collect payments from customers must make sure accounts are properly integrated so that
payments end up where they belong – with the client’s accounts receivable team. And for
businesses extending credit terms to customers, it is important to ensure that payments are
properly linked to purchase orders and shipping confirmations to match what goods were sent.
Not every LSP takes over responsibility for payment collection, so in-house accounts receivable
staff must fully understand what they are responsible for and what is being outsourced to the
LSP. Otherwise, customers may get their goods without ever receiving an invoice, resulting in
losses for the company.
i. Returns:
Returns, also known as reverse logistics, can present a challenge for a company operating with
small margins. Many LSPs handle customer returns and also raw materials returns to suppliers.
Because LSPs typically have more locations and a wider reach than their clients, customer
returns through an LSP can be cheaper and more convenient for both customers and suppliers at
either end of the returns process. Easier return policies can give customers more confidence
when shopping and lead to more repeat customers, even when orders need to be returned.
j. Disposal:
Some products will inevitably need to be disposed of due to damage, malfunction or outdated
and discontinued product lines. Businesses often end up with storage units and warehouse
shelves filled with goods that will never be sold, so many turn to logistics service providers to
handle the disposal of unwanted inventory, freeing up space and reducing carrying costs.
Types of Logistics Service Providers
Third-party logistics service providers (3PLs) are the most common structure for LSPs, but there
are several others that businesses can choose from, commonly ranging from first party to fifth
party. With the growing popularity of environmental and social accountability and advances in
artificial intelligence (AI) and machine learning, some innovators have begun to imagine sixth-
through tenth-party LSPs; however, many elements of those higher-level LSPs are theoretical
and have not been widely accepted or implemented.
a. First-Party Logistics Service Provider (1PL)
First-party logistics service providers (1PLs) are companies that handle all their logistics in-
house. They have their own fleet of delivery vehicles and don’t outsource any steps in their
logistics workflow, retaining complete control. 1PL is also called self-logistics.
b. Second-Party Logistics Service Provider (2PL)
Second-party logistics service providers (2PLs) offer intermediary transportation options. 2PLs
have their own fleet of vehicles and offer customer delivery or freight options but don’t handle
warehousing or other services. Businesses that use 2PLs, or traditional transportation providers,
package their goods themselves and either drop them off or arrange a pickup location for the 2PL
to deliver the goods to their next destination.
c. Third-Party Logistics Service Provider (3PL)
Third-party logistics service providers (3PLs) control both inbound and outbound transportation
and warehousing. 3PLs typically lease warehouse space to clients and handle shipment
preparation — like labeling and packaging — as well as transportation. They may own their own
fleet of vehicles or outsource the actual delivery to a 2PL. Once goods are shipped, 3PLs may
handle tasks such as tracking, delivery status and customs. Many insiders use the term logistics
service provider to refer exclusively to third-party LSPs.
d. Fourth-Party Logistics Service Provider (4PL) or Lead Logistics Provider (LLP)
Fourth-party logistics service providers (4PLs) take further control of a client’s supply chain than
3PLs. Not only do 4PLs control inbound and outbound transportation and warehousing, but they
 also oversee the rest of a business’s supply chain, taking a hands-on approach with suppliers,
retailers and other relevant parties to the business’s operations. 4PLs, also called supply-chain
overseers, don’t own any physical assets themselves for moving goods. Instead, they play a
consulting and managerial role by contracting with 2PLs and 3PLs for shipping and
warehousing.
e. Fifth-Party Logistics Service Provider (5PL)
Fifth-party logistics service providers (5PLs), also known as logistics aggregators, combine,
contract and oversee multiple 3PLs to create a large supply network. These networks may grow
large enough to create market leverage and lead to further discounts for client companies. 5PLs
often provide businesses a full framework for how to best plan and execute their supply-chain
operations. 5PLs require significant trust and communication from their clients as 5PLs take over
more responsibilities and control of a business’s operations than the other types of LSPs.
Self-Shipping vs. Logistics Service Providers
Some smaller businesses, especially those that offer personalized or one-of-a-kind products and
experiences, may prefer to handle all their shipping needs themselves, using a self-shipping
model. If a small business isn’t looking to scale larger or give up any control to another party, a
logistics service provider may not be a good fit. However, every hour spent packaging and
shipping is an hour that can’t be used to create more products, find areas for improvement or
focus on growth.
Businesses looking to expand into new regional markets often turn to LSPs for a more affordable
way to keep shipping quick and cheap — or even free — for customers, something that more and
more customers every year value when shopping. According to a June 2022 X Delivery and
Santa Clara University Retail Management Institute survey of almost 2,500 adults who regularly
shop online, 90% said that delivery should take fewer than five business days. For businesses
looking to build a far-reaching ecommerce customer base, partnering with an LSP can help meet
customer shipping expectations without the high overhead of building, stocking and staffing
decentralized distribution centers.
Benefits of Logistics Service Providers
Logistics service providers offer services that cater to a business’s needs, from 2PLs taking over
deliveries through 5PLs managing the entire supply chain. Some common benefits that LSPs
provide include:
 Access to industry-leading processes and technology. LSPs are highly skilled in running a
wide network of shipping processes and generally operate more advanced shipping technology
than many small businesses have in-house, including transportation management planning
systems, transportation management scheduling systems and warehouse/distribution center
management systems. By partnering with an LSP, businesses can take advantage of this
technology to bring their customers a more reliable experience without needing to build state-of-
the-art infrastructure from the ground up. LSPs can also offer clients the benefits of advanced
technologies, such as Internet of Things (IoT) devices, which provide real-time information on
the location and status of goods, as well as data analytics that provide valuable insight into
clients’ operations.
 More shipping options. Logistics service providers are able to offer flexibility in how and when
they ship goods because of their robust fleets of delivery vehicles, often including planes, ships
and trucks. Using these multimodal shipping options, LSPs give their clients a range of options
to minimize cost, maximize speed or meet other company-specific needs.
 Faster and cheaper returns process. LSPs offer return-by-mail or drop-off locations in many
areas, giving customers a convenient and quick way to process returns. This reverse-logistics
process saves customers and businesses time and money by avoiding long-distance shipping to
one central return location, which can be plagued by shipping delays or bottlenecks. When an
LSP handles returns, it also frees up a business’s staff to focus on making new sales, not
refunding old ones.
 Scalability. Business growth can create logistics problems for companies as orders pile up
beyond what current staff can handle. Logistics service providers have the infrastructure needed
to increase operations and meet customer demand as it grows, helping businesses avoid the stress
and expense of quickly hiring and training an expanding work force to meet rising demand.
 Expertise. Logistics service providers offer more than just logistics management. They also
provide their customers with a large network of diverse experts. For example, businesses looking
to expand into a new region or effectively navigate market volatility can get time-tested advice
and insight from their LSP.
LSPs vs. Freight Forwarders
A freight forwarder arranges transportation for a company’s goods and plans shipments, often
using multiple transportation methods and vehicles, much like a logistics service provider.
However, the difference is that LSPs offer wider-reaching services than freight forwarders and
tend to have longer working relationships with their clients. A freight forwarder typically acts as
a liaison between a company and the transportation company, whereas an LSP traditionally
handles additional services, including warehousing and returns. For businesses that primarily
handle their logistics in-house with only a few complex shipments at a time, a freight forwarder
may be a more affordable option to arrange shipments that require extra care. For ongoing
logistic needs, an LSP may be the more efficient choice.
Logistics/Third Party Service Providers
Logistics involves getting goods from one point to another. This complex process requires
careful planning and execution and impacts the overall supply chain by adding value to the
offering. Resources managed through logistics include tangibles such as food, materials,
equipment, and liquids, and intangible factors such as time and information. Additionally,
logistics includes integrating packaging, production, warehousing, transportation, and security.
There are many ways in which a company can transport its merchandise. Some of these modes
of transportation include trucking, shipping, rail, air, and pipeline. Often, merchandise may be
transported through more than one mode. However, choosing the right mode or modes can be
complex. For example, the nature of the product can impact how quickly a product needs to get
to market. Dairy products and fresh flowers require modes of transportation that will get them
into the hands of the consumer quickly, while transportation choices for furniture and clothing
can include slower modes. Additionally, items of high value need to be transported quickly to
avoid the risk of theft along the way.
This one is crucial, as it encapsulates the role of a third-party logistics company: every third-
party logistics service provider must be competent in the specific service areas that meet the
client company’s needs. Just because a provider is a rock star in one area, it’s not a foregone
conclusion that they can service your business properly.
Also, they should have a set of abilities that can satisfy both your short-term and future
requirements. For instance, EDI-capability may not be a requirement for you today, but what if
it does become required for you in 12-24 months? Do you want to unwind all the on boarding
and integration work invested in a new relationship?
Dig a little deeper and ask:
Are truckload lanes repetitive, originating from limited shipping points and terminating to a
relatively limited number of consignees?
Are shipments time-sensitive, or do they require drop trailers? A mid-sized, asset-based carrier
would meet these needs without getting sidetracked by their exceedingly extensive list of clients.
Are truckload lanes sporadic? Is there live loading/unloading, or do shipments come from
many origins that terminate to an increased number of receivers? If so, a 3PL provider or broker
might be a better fit.
Do you require access to dedicated trucking assets and 3PL? A logistics provider with assets
and a 3PL division may offer optimal solutions.
Does the logistics provider claim to possess all the capabilities “under the sun,” but your
organization requires only a few core services? Be wary of a company that is a “jack of all
trades” and master of none.
2. Focus on Customer Satisfaction
Does the logistics provider prioritize customer service, responsiveness, fluid lines of
communication, and effective problem-solving? These elements can be challenging to
ascertain early on but do your homework.
Virtually all companies claim to have excellent customer service, but how do you know? You
ask their customers. Ask for references, preferably from companies in similar industries and
needs. Good customer service is no accident. If the customer service is consistently excellent, it’s
likely a result of a well-documented and repeated process that will continue over the years.
Another yield of good process execution is safety. It is uncommon for a logistics provider to
achieve excellent results in customer service and poor outcomes in safety or vice versa. You can
deduce that a safe logistics provider probably provides good customer service.
3. Commitment to Technology
When you’re selecting a third-party logistic service provider, consider technology that works
for you and with you. The 3PL’s technology should simplify and streamline your processes,
automating your most tiresome tasks. It’s essential to ask the 3PL these questions:
How does their technology connect to your online store or existing software systems?
How does their software use your data to its maximum advantage?
In addition to the third-party’s fulfillment services, their scalable technology should include a
cloud-based warehouse management system and electronic data interchange (EDI) capabilities.
Technology should help you with automation, processing orders, inventory management,
tracking orders, and managing e-commerce returns. Find a 3PL committed to staying on the
cutting edge of technology because the last you want to worry about when managing your
business is whether the technology can support your growth.
4. Safety Record
Due to the ever-changing landscape of safety regulations, you must select a carrier with a strong
safety record. A review of safety ratings and statistics is available to the public here. Also, see
how we value safety.
5. Adaptability
Not all businesses are the same. While a 3PL might have a full range of logistics and fulfilment
services, your business might not need access to all of them right now or ever. The right 3PL
understands the importance of creating a custom plan specific to your business needs and vision.
As you grow and your needs change, your 3PL partner will be there to help accommodate your
business’s expansion.
6. Company Stability
Whether your supply chain is complex or straightforward, select a logistics provider with overall
company stability. Top suppliers are consistent suppliers. You can jeopardize quality as
companies experience rapid change. How long has the company been around? (Since 1958,
we’ve been saving time and money for our customers with logistics services.)
Furthermore, if one high-liability event occurs and your provider cannot withstand the fallout,
the liability often shifts, in effect, to you, the shipper. You can ease this concern if the provider’s
“word,” name, and reputation have remained intact through decades of market turbulence and
economic uncertainty.
7. Company Reputation
In a new business arrangement, you can rest assured that the relationship will be tested at some
point. Often, the test will reveal the service provider’s leadership and character at this juncture.
Before it is too late, investigate whether the provider will respond with integrity and honor. Time
will reveal whether the firm has a good, bad, or ugly reputation with customers, suppliers, and
employees.
How do they treat their suppliers and employees?
Are they an active and positive force within their community?
What type of reviews do they have online?
What are the consistent themes that repeatedly appear in their marketing material?
How long have they been in business?
The answers will go a long way to determining how the provider will be as a supplier and
partner.
Bonus: Double-check all elements if a supplier’s price is significantly lower than the market.
What good is a cheap price if a provider doesn’t deliver consistently or provide an adequate
response in the event of a mishap?
What good is a cheap price if service failures cause you to lose revenue?
What good is a cheap price if your team spends countless hours resolving claims and
problems?
 Think about the total cost associated with selecting a long-term solution provider. The
provider that offers you the overall lowest cost of working together is the partner you want
around for years to come.
8. Inventory Management
A well-managed inventory can make a big difference to the success and growth of your
company. A good 3PL offers an integrated warehouse management system (WMS). A
sophisticated WMS can display real-time inventory for all your items, sync inventory with your
online store, and reorder inventory to avoid items going out of stock. Quality load tracking and
inventory tracking software can significantly impact your business’s efficiency through instant
alerts and notifications about pickup and delivery. With the right 3PL partner, expect critical
inventory operations to be streamlined and enjoy the ability to identify potential issues before
they become a problem.
9. E-commerce Product Fulfilment
With all the competition in e-commerce, find a 3PL that backs up its e-commerce fulfillment
services with reliability and proven results. You don’t have to be limited to what you’re doing
today. Find a provider who will offer more than 70 pre-built integrations to different shopping
carts, marketplaces, and ERP systems. Look for an affordable e-commerce fulfillment services
provider who treats your customers like their own. Everyone wants their customers to stay
happy.
10. Location
Are you limiting your business’ potential by only operating out of one region? The right third-
party logistics companies have access to many locations through an expansive network of
fulfillment centers. The ability to tap into a network of fulfilment centers and distribution
warehouses in major cities allows you to reduce the cost of shipping and significantly trim the
transit time for orders. A 3PL can provide nationwide coverage and a range of logistics services
to expand your business’s reach.
Third Party Service Provider:
A third-party service provider is generally defined as an external person or company who
provides a service or technology as part of a contract.
Some examples of third-party vendor goods and services
Goods and services obtained from third-party vendors can include, but aren’t limited to:
 Cloud web hosting services. A cloud hosting vendor might provide everything from disk space
and bandwidth to encryption and high-tech security solutions.
 Cloud-based software solutions. SaaS software vendors provide access to software programs
either for your business or your customers. For example, marketing automation platforms,
CRMs, accounting packages, etc.
 Equipment maintenance. The company that fixes your copy machine and the team that
manages your network security are third-party vendors.
 HVAC servicing. The local HVAC Company that services your unit is providing third-party
vendor services.
 Contractors of any kind. Any contractor, short- or long-term, is a third-party vendor.
 Call center providers. If you host your call center with another company, it is considered a
third-party vendor.
 Bookkeeping/financial auditors. Any person or business hired to manage your finances, budget
or audit your finances is a third-party vendor.