Marketing channels ensure smooth movement of products from the company to the customers. This movement of products can be forward, backward or two-directional. Different activities performed by the channel members are possession of goods, ownership (transfer of title), inventory management, promotion, negotiation, financing, risk bearing, ordering, payment and physical distribution. Different channel members perform different channel activities. For example, the CFAs only facilitate the transfer of title from the company to the wholesaler without taking the ownership of products.
Different costs are incurred by different channel partners. The possession and ownership of products gets transferred from the company to the customers. During the transfer of products, the costs involved are for storage and transportation of goods from one channel member to another. Here, the costs involved are inventory costs, opportunity costs, and transportation. Few channel members like distributors and retailers also promote the products. For example, many distributors have their their own sales team to promote the products of the different companies at the retail levels. The costs involved in promotion of products will include the costs for personal selling, advertising and sales promotional, etc.
Financing is also an important cost factor. Few companies give some credit period to their distributors or wholesalers for making payment, even after these channel members have received the goods. For example, many pharmaceutical companies give credit period of 7 days to their local wholesalers, and credit period of 14 days to their outstation wholesalers. Whereas these wholesalers have to give credit period of up to 60-90 days to the retail pharmacies. Here, the costs incurred by the channel member involve the loss of income that could have been earned by investing the same money elsewhere. This cost can also be the loss of interest.
Also, there are lot of risks involved in the channel management. The channel members bear the risk in the transfer of goods. These risks can be because of the perishable nature of the products, spoilage, price changes and theft. The usual costs associated with these risks are insurance, maintenance costs for perishable goods, warranties, repairs, loss of sales tax in expiry and breakage, bad debts, etc. It is critical for an organization to minimize the different costs in the marketing channels. Many companies make use of information technology to minimize the chances of expiry of products. Automation is also used to make the marketing channels more effective.
Different industries offer different margins to their channel partners. Typically, carrying and forwarding agents gets a margin of 2-5 percent, a distributor or a wholesaler receives a margin of 5-10 percent and the retailer receives a margin in the range of 8-15 percent in the FMCG sector. Whereas, in the pharmaceutical industry, carrying and forwarding agents gets a margin of 2-5 percent, a wholesaler or a stockist receives a margin
of 8-10 percent, and the retailer receives a margin in the range of 16-20 percent. In consumer durables, companies offer margins of 5-20 percent across different formats. Channel members get additional margins through the trade schemes that run throughout the year. These trade schemes offer benefits like discounts, gifts, extra credit period, and free goods, etc.
Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.