Channel compensation

Widely varying practices are prevalent in India in this aspect The

variations are primarily because ofthe industry nature, deg-ree of
dependence of the manufacturers on the intermediaries and the
number of intermediaries involved. A broad picture covering a
random assortment ofdifferent industry-types, based not on any
specific research work but on our broad understanding of the market
situations, may be presented here:

1.Range of channel compensation: 5% to

60% or 70%
2.Industry-type Channel Compensation
Rates [on Sale Value]
3.EngineeringHeavy Machinery 5% - 10% &
Equipment 4.Light Engineering 10% - 20%
5.Industrial Consumables 10% - 30% l
6.Consumer Durable (white goods) 15% 30%
7.Drugs & Pharmaceuticals 20% - 30%
8.Consumer Soft / FHCG 40% - 60%
9.Publications (books etc) 45% 50%
10.TextilesMan-made Fabrics 45% 60%
Besides the predetermined rates of channel compensation as
in order to motivate the dealers, manufacturers offer from timellf ,
time additional incentives which take different forms minis;
quantity discount, incentive for prompt payment. bonus offcrauom
dealer/stockist award, special reward for fulfilling 9' j free
which could vary from a cell-phone to an automobile 0r
foreign trip.

The different transport Modes

Rail India is very well developed

Road roadways which are also
used very extensively

Water Tremendous existing potential, inland water

transport system Is still in a nascent stage in India. Transportation
of goods through water routes is hardly to be seen, excepting around coastline areas.
coastline areas, for connecting one port with another. i

AirDue to prohibitive freight charges, air transport is not popular

in India. Air shipment of goods takes place only in cases of products
having low weight, smaller dimension but very high value,
emergency requirements and meeting deadlines when due to natural
calamities or other reasons rail and road transport are not available
or convenient.

4.

DISTRIBUTION
CONTROL

COST

ANALYSIS

AND

The major elements of distribution cost, apart from

1. Channel compensation, are
2. transportation,
3. warehousing
4. Storage
5. insurance
6. material handling,
7. credit & collection,
8. finance &'
9. general administration
10. (including invoicing data Processing
11. Distribution personnels-compensation etc.)

EVALUATION OF DISTRIBUTION EFFECTIVENESS

Distribution costs are bound to go up not only with increase in
the volume of sales but also with the efforts towards achieving
higher market share through better coverage and penetration Into
new markets.
Objective
(a) how far is the distribution channels-mix aquuate to enable the company to improve upon
its market share and
(b) whether the total cost of distribution is kept to the minimum.
As regards the second aspect, viz., _
Minimizing the cost of distribution, approaches discussed above
would be useful to marketers
Dr. Donald R. G Cowan in his paper Eleven Approaches to the
problem of Distribution Costs
:

1. The Product Approach : It is of Prime importance ensure that the right product is being offered for sale
This is because the volume of sales and earnings depend upon a rms distribution expenses besides
salesmens efciency. .
The Product - Line Approach : The distribution of a
- product-line rather than of a single product will frequently
reduce marketing costs, when certain conditions are met.
Briey, products suitable for a line should be sold in the
same market, and should be distributed through the same
channels without involving different methods and
problems.
3. The Channels Approach : Many alternative marketing
channels are available, and the choice made will greatly
affect distribution costs and efciency. Moreover, as a
firms output grows, it is necessary to reconsider what
channels can provide more efcient distribution and to
revamp the structure of discounts and commissions4. The Engineering Approach : Distribution involves many
physical activities in the moving and storing of gOOdS to
make them available at proper places and in Propsr
quantities to cater to the ultimate buyers. This involves
both transportation and space utilization betWeen it
within various establishments.
(Refrigerated Vans)
5. The Accounting Approach : The accounting approach is
more familiar to sales executives, but has not been
exploited fully in distribution. Typically, it involves the
classication of a rms distribution expenses, volume
and eamings by salesmans territories, by a general line
and special, salesman, by departments and products, by
activities performed, and the like. The resulting comparisons of expenses, volume and earnings are helpful in
indicating the comparative protability of the classied
segment of distribution. Some rms have prot and 1088
statements for brancheS, individual salesmen, product
departments, and sales departments, and ask each
responsible person to operate his unit as protably as
possrble.
6. The Operations Research Approach : The operations
research approach, recent and closely allied to
engineering, offers many possibilities of alternatives in
minimizing efforts and costs in accomplishing a given
end.
7. The Economic Approach : The economic approach takes
up where accounting leaves off. It is concerned with

changing marketing conditions, sales potential of markets,

areas and the application of selling, advertising and other
such efforts under conditions of diminishing returns to
the point of marginal balance between expenditure and
income and further to the point of maximum total prot
or minimum loss.
Personnel Approach : The personnel approach
, Distribution efciency somewhat different from those
aready described. In the long run, the ability of its
istrlbutlon employees is a powerful inuence in aspects
SM distribution. Especially the customer selling function
teannot be reduced to the impersonal and informal
iactivities of a machine. Hence, the selection, training '
gnd compensation of distribution personnel, and the
tness of the employees to the task are important long
urm factors inuencing distribution costs. Yet the
gpportunities for improvement are far from exhausted in
multitude of companies.
Organisational Approach : The organizational
each is much wider than the Personnel appmafnllmg about a dynamic organisation therernustlo
:xiperception and definition of thl
at each level of managementf
wgrking relationship and communications.
between these tasks must be worked out, authority
commensurate with responsibility must be delegated,
procedures and inducements for stimulating maximum
efforts must be applied and regular evaluation of
performance must be undertaken at all levels to eliminate
ineffective personnel or unprotable activities.
The Standardization Approach : Distribution comprises
a multitude of activities in which the human element '
looms large and in which, therefore, there is much
variation in performance. The difficulties of bringing
about standardization in case of human activities
constitute the basic reason for lack of mechanization in
many phases of distribution, especially in buying and
selling. Nevertheless, there are important opportunities
for increasing efficiency through standardization. 11. The Management Approach : The management approach
includes and employs all the other approaches Just
outlined, but there is always that something extra, a
priceless ingredient, which makes its contribution
distinctive. It is not only managements comprehenslm
of the various avenues of efficient and economical
distribution, but also of new methods under condttltzln; .
of continual changes in distribution.

6. STRATEGIC DIMENSION
Distribution could be a very effective tool of marketing strategy.
In fact one of the primary reasons underlying the runaway success
of consumer MNCs in India like Hindusthan Lever Ltd.(HLl4),
ITC, P & G as well as some relatively new Indian companies like
Nirma is using distribution as a strategic weapon.
Success in launching new products in the consumer soft category dpcf'd:
to a very great extent on having or creating an effective dismbution
set up. The industries in India are becoming more and more
Aware of the potential of strategic distribution, as evident from
a few distribution strategy examples cited here ;

1) Single versus multiple outlets

- A premium brand gents

apparels manufacturer continues to have only one outlet (in

Mumbai only) when several other competitors in the same
market segment have been opting for multiple outlets in all
major cities in India. The former is competing effectively '
With others, banking entirely on brand equity.

2) Cutting down distribution channels

Several large textile mills (e.g. Reliance, Bombay Dyeing etc) have set up
exclusive retail shops for their products in metro cities and _
even in mini-metros.

3) Launching new products/brands

Developing an efcient distribution network for current products/brands would
immensely facilitate new additions or product range extension,
ensuring at the same time high cost- effectiveness too, for
both old and add-on products / brands.

4) Deeper penetration strategy

An example is greater emphasis on rural marketing by several
large companies in order to
take advantage of increasing purchasing power of the rural
people, particularly big agriculturists, thanks to the scal
and other pro-farmers policy of the Government of India.

5) Strategic Industrial Marketing.

Synergy ' A Private Sector industrial marketing organisatlon succeeds? m Obiammgt

sole selling concessionaire for_ construction cowering;

manufactured by a leading public sector enterpris 5.118er
commission was very lows Promotoal expenses, were t
e d the private sec or
equally by the two compales ald- sales and service
organisation made use of their a la duct all over the
network to effectively dlsmbme the Przte sector company
country. The net margin earned by the p111:W rather negative.
by distributing this product 35 Very
But this helped the company substantially in getting greater
mileage in sales of several other industrial products, mainly
of their own manufacture including some important
components and spare parts of the public sector companys
product. This is an example of what we may call strategic
industrial marketing synergy.

7. A FEW CONTENTIOUS ISSUES

What with some legal provisions or Government regulations and
what with ethically questionable practices of the intermediaries,
even manufacturers, often times some contentious issues arise
like:

i) Exclusive dealership - This is prohibited under the MRTP

Act, but manufacturers tend to bypass the relevant provision
by camouaging dealers as their respective own repair
workshops (example, market leader in moulded luggage in
India.)

11) .Conict. of interest

This may arise when the same de 1
IS handling two or more competing brands (examples sala Ci"
TV sets, refrigerators, washing machines etc. in India) "Phis
lS dealt. With generally through a warfare of sorts in
dealership commission and incentives. Since dealers in India
are almost exclusively guided by profit motive, a dealer will
provide the so-called guidance to an uninformed buyer, which
is tantamount to misguiding, for selling a particular brand
that gives the dealer himself highest compensation,
irrespective of the quality or performance of the brand visa-vis that of other brands (example again, sale of white goods
mentioned above) - ' '

iii) Provision MRP (Maximum Retail Price)

Although the
spirit behind this provision is to ensure uniform Retail Price
Maintenance (RPM) for mass consumption items all. over
- the country, this is subverted by most of .the retailers tag:
advantage of a loophole called local taxes extra Jug
measures to tackle this issue have failed so far, due to varying
indirect tax rates from one state to another.

iv) Terms of payments -

Ensuring adherence to terms of payments

is an endemic problem in dealing with the intermediaries in

India. This is faced almost by all types of organisations,
barring only mighty MNCs like HLL, lTC etc., who are
privileged to enjoy a tremendous bargaining power over the
dealers and stockists.= Blatant unethicality on the part the
dealers and stockists takes different forms e.g. creating
articial shortage of mass consumption items by hoarding,

charging high prices, selling at normal prices inferior quality

products (say, date-expired pharma and food products and
seconds or thirds instead of good quality products),
inadequate and/or ineffective after sales services, etc. Even
though stringent laws are there to deal with such issues, at
times the situation tends to become uncontrollable and
regulatory mechanism appear to be ineffective. The personnel
engaged in distribution function of different marketing
organisations have a role to play in order to reduce the
magnitude and intensity of such activities through close
monitoring, particularly with respect to delinquent