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Unit 10: Logistics and Distribution

An entrepreneur producing a wide range of products may find it economical to set Notes
up his own retail outlets and sell directly to the consumers. On the other hand, firms
producing a narrow range of products may their products distribute through
wholesalers and retailers.

A new product needs greater promotional efforts in the initial stages and hence few
middlemen may be required.
Market Consideration: Another important factor influencing the choice of distribution channel
is the nature of the target market. Some of the important features in this respect are:
If the market for the product is meant for industrial users, the channel of distribution
will not need any middlemen because they buy the product in large quantities.
While in the case of the goods meant for domestic consumers, middlemen may have
to be involved.

If the number of prospective customers is small or the market for the product is
geographically located in a limited area, direct selling is more suitable. While in
case of a large number of potential customers, use of middlemen becomes necessary.

If the customers place order for the product in big lots, direct selling is preferred. But
if the product is sold in small quantities, middlemen are used to distribute such
products.

Other Considerations: There are several other factors that an entrepreneur must take into
account while choosing a distribution channel. Some of these are as follows:

A new business firm may need to involve one or more middlemen in order to
promote its product, while a well established firm with a good market standing
may sell its product directly to the consumers.

A small firm which cannot invest in setting up its own distribution network has to
depend on middlemen for selling its product. On the other hand, a large firm can
establish its own retail outlets.

The distribution costs of each channel is also an important factor because it affects
the price of the final product. Generally, a less expensive channel is preferred. But
sometimes, a channel which is more convenient to the customers is preferred even
if it is more expensive.

If the demand for the product is high, more number of channels may be used to
profitably distribute the product to maximum number of customers. But, if the
demand is low only a few channels would be sufficient.

The nature and the type of the middlemen required by the firm and its availability
also affects the choice of the distribution channel. A company prefers a middlemen
who can maximise the volume of sales of their product and also offers other services
like storage, promotion as well as aftersale services. When the desired type of
middlemen are not available, the manufacturer will have to establish his own
distribution network.
All these factors or considerations affecting the choice of a distribution channel are interrelated
and interdependent.

!

Caution An entrepreneur must choose the most efficient and cost effective channel of
distribution by taking into account all these factors as a whole in the light of the prevailing
economic conditions. Such a decision is very important for a business to sustain long term
profitability.

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