by Distribution channels are an essential component of a company’s marketing strategy.
When you select a distribution channel, you are deciding how your product will be delivered from the manufacturer to the customer.
You can distribute your product in a variety of ways.
Which distribution channels are best for your market, business, and product will be determined by your market, business, and product.
In this article, we will discuss what a distribution channel is, the various types of distribution, the use of intermediaries channels, and how to select the best channel for your company.
However, before we continue this important discussion, make sure you’ve also joined the scmguide telegram channel, where I have a lot more to say about supply chain management.
Table of Contents
What is a distribution channel?
A distribution channel is the collection of entities required to deliver a product from the manufacturer to the consumer.
Depending on the product, the size of the company, and the reach of the company’s customer base, distribution channels can be complex or simple.
Customers can buy a product in a variety of ways, thanks to complex distribution channels.
This frequently increases sales but can also make the manufacturing process more expensive or difficult.
What are the 8 types of distribution channel intermediaries?
Depending on the type of channel used, distribution channels may include a variety of intermediaries.
In general, the more intermediaries there are in a distribution channel, the more fees the manufacturer must pay.
Short distribution channels are easier to navigate, but they have less potential for expanding a company’s customer base.
Furthermore, manufacturers who use short distribution channels must frequently sell their products at below-market prices in order to profit.
The following are the 8 major types of intermediaries found in distribution channels:
- Direct consumer sales
- Wholesalers
- Distributors
- Retailers
- Online distributors
- Brokers and agents
- Sales teams
- Resellers
What are the different types of distribution channels?
Despite the fact that many different intermediaries are involved in the distribution process, there are only three major types of distribution channels.
Direct distribution channel
A direct-distribution channel allows consumers to buy goods directly from the manufacturer.
Many customers shop online to take advantage of direct distribution channels.
Manufacturers who sell their products through online web stores or services accept orders from individual customers and ship the product directly to them.
Customers who shop directly typically pay less for products because they obtain them directly from the source rather than through an intermediary.
Indirect distribution channel
Manufacturers can sell their products through an indirect distribution channel by selling them to a wholesaler or retailer.
Most physical retail stores buy their inventory from a manufacturer and then sell it to their loyal customer base through indirect channels.
Wholesalers and retailers, for example, frequently charge manufacturers for the privilege of using their services.
Because of this cost, products sold in retail stores are typically more expensive than if consumers purchased them directly from the manufacturer.
Hybrid distribution channel
To reach consumers, hybrid distribution channels use both direct and indirect channels.
A manufacturer of a product or service, for example, will have a relationship with an intermediary to distribute the product or service, though the manufacturer may also sell directly to the consumer.
This example can be found in some digital transactions where you buy from a manufacturer’s website but the product is delivered by an intermediary.
What are the various kinds of distribution channels?
In today’s market, businesses use 3 different types of distribution channels.
Three-step model
Before a product reaches the consumer, it must pass through three distribution channels: a manufacturer, a wholesaler, and a retailer.
Using the three-step model, a manufacturer will first sell a product to a wholesaler.
The product will then be sold to a retailer by the wholesaler.
Finally, the product will be sold to a customer by the retailer.
Each entity in the model receives a share of the profit from the product’s sale.
The manufacturer will also usually pay the wholesaler to find a buyer for the product, while the retailer will usually pay the additional costs of marketing and shipping the product to consumers.
Example some product producers are required by regulations to sell their products to a wholesaler rather than directly to a retailer.
After receiving a shipment of the product, the wholesaler sells it to a retailer, who stocks and sells it.
The product retailer could be any of several businesses, such as a grocery store, hotel, or restaurant.
Two-step model
One of the intermediaries is eliminated in the two-step model: the wholesaler.
Manufacturers who use the two-step model sell to a retailer, who then sells to a customer.
Because it only uses one intermediary, this model is simpler than the three-step process.
The two-step model is also less expensive for the manufacturer because it eliminates the need to pay a wholesaler for their services.
Manufacturers typically sell their products to retailers at a price that allows them to profit.
The retailer can then price and market the product to their customers in any way they see fit.
Example A camera equipment manufacturer could produce a large number of camera lenses and then sell them directly to an electronics retailer.
The lenses would be distributed to a number of the electronics retailer’s physical locations before being sold to their customer bases.
The electronics retailer is then in charge of running advertising campaigns and delivering products to customers.
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Model of direct-to-consumer sales
The direct-to-consumer model allows a customer to buy a product directly from the manufacturer without the use of any intermediaries.
This is the shortest distribution channel because it eliminates both the wholesaler and the retailer.
Manufacturers benefit from direct-to-consumer models because they do not have to pay fees or negotiate contracts with intermediary entities.
Because this model is less expensive for the manufacturer, most consumers will expect to pay less than the product’s retail price.
To reduce their business operating costs, small-business owners will frequently seek out manufacturing vendors and purchase their inventory directly.
Example A lumber company that manufactures and sells wood products directly to customers.
The manufacturer would be responsible for developing the product, locating buyers, and arranging transportation and delivery on their own.
How to select the appropriate distribution channel for your product
The distribution channel you choose is determined by your business model, products, and budget.
Here are some steps you can take to select the best distribution channel for you.
Consider your company’s objectives
A distribution channel must be consistent with the purpose and goals of a company.
If a company promotes itself as customer-focused, it may need to select a distribution channel that gives customers multiple options for how and where they buy the product.
If a company prioritizes affordability, it may need to select a simple distribution channel that eliminates the need for costly intermediaries.
Companies frequently set short- and long-term goals centered on increased growth, profit, or marketability.
To achieve these objectives, businesses may need to reevaluate and adjust their distribution methods in order to improve a product’s profitability and success.
To maximize results and meet strategic goals, companies may need to use different distribution channels for different products in many cases.
Be pragmatic
Not every distribution channel is appropriate for every product.
Companies will need to carefully consider their options in order to determine which channel best serves a specific product.
A company that manufactures perishable goods such as produce, medicines, or raw ingredients, for example, may be limited to using distribution channels that deliver products to consumers quickly.
Certain products may not have the shelf-life required for a three-step distribution process.
Other products may be difficult to market or transport to retailers, but they are more profitable when sold directly to customers.
Distributing various types of products presents unique challenges that must be assessed individually.
Seek out natural partners
Choosing the right intermediaries is an important part of determining the best distribution channel.
The best intermediaries for a company are entities that already have relationships with the company’s desired customer base.
If a manufacturer and a retailer are both marketing to the same audience, they are natural partners, and a distribution channel could be beneficial to both.
The manufacturer may benefit from the agreement by saving money on marketing and shipping costs.
Similarly, the retailer may benefit from a wider range of inventory in their store.
Natural partners in distribution are more likely to form and maintain long-term business relationships.
Reduce conflict
When deciding on a distribution channel, businesses must choose an option that will not cause internal conflict.
If a manufacturer sells the same product through a physical retailer and an online wholesaler, the channels may face unnecessary competition.
Furthermore, if a manufacturer prioritizes one channel, that channel may overpower the others, costing the manufacturer a disproportionate amount of money.
Retailers must also avoid conflict by stocking a limited number of competing products in their stores.
The goal of a company’s distribution channel is to sell goods and services at competitive prices while maximizing the overall profitability of the products.
7 ways to boost your distribution network
A well-defined distribution network can help your company reach new heights.
A strong distribution network functions almost like automation, in that you manufacture the product, and if the distribution network is strong, the product reaches the end customers very quickly.
Setting up a distribution network entails meeting with dealers and distributors and negotiating a contract with them.
But how does one go about designing a high-performance distribution network?
Maintain a list of channel dealers
You can clearly see which areas need improvement, which areas could still expand, and which areas you may have to abandon if you keep track of your distribution channel and channel dealers.
You’d figure out where you need more channel dealers.
If you have to abandon an area, prepare to open a new area in order to expand your existing distribution network and mitigate the losses you would have incurred.
Inventory control and tracking
Meticulous inventory of your stock in various sales outlets, as well as subsequent sales data, will reveal your averages.
With that average in hand, you’ll be able to see which areas are selling your products well and which aren’t.
Another thing that may be useful is to keep a record of your marketing histories in all regions where you have distribution networks.
This history will reveal whether or not all areas have been subjected to the same marketing campaigns.
If so, do you try to use more programs or do you leave it alone?
Find out which programs you haven’t used yet if you try to use more. Experiment with something new.
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Concentrate on local markets
Remember to never rest on your laurels if the sale is great and not much marketing has been done.
Continue to bombard your target markets with surveys and promotional surveys as a cover for stealth data mining.
Just because you’re selling well doesn’t mean that everyone is interested.
It could be a matter of population density in the area. That means you’ll have more customers to sell to.
You have an untapped market and have left it that way.
Concentrate on segmentation (for example, geographic)
When sales are below average, revisit the marketing history.
What has been done in this case?
What hasn’t been done in this case?
If your marketing efforts are distributed evenly across the entire distribution network, the low sales may be due to lower population densities.
The grocer may be located in a more affluent part of town.
This means that lot and house sizes are generally larger than in the suburbs.
Lower population density equates to lower sales.
If you launch marketing campaigns on an as-needed basis, look at the marketing histories of other excellent distribution networks.
It’s possible that something happened there that wasn’t done here.
Marketing or product development
If your distribution channel remains stagnant after several years, you may have reached the limits of that market for that particular product.
Other products are on the market.
Perhaps you were regularly marketing 8 to 10 products.
You can now add more.
In this situation, the only way the market will change is if population density increases; however, just because the market isn’t growing doesn’t mean you should abandon it.
After all, you’ve already saturated the market.
This is your success story, a model for all other distribution networks to emulate.
Just keep in mind not to rest on your laurels.
Competitors are ALWAYS actively working to steal your customers.
When necessary, switch channel members
Know who the leaders of your distribution networks are in each area.
Each of them will have a preferred method of operation.
It would be pointless to compel them to use alternative marketing methods if their current methods are failing.
Simply move leaders laterally to different regions where their expertise is most required.
Unfortunately, the rank and file will have to make do.
Monitor market changes
A customer will occasionally buy a product to try, but they will mostly buy the same product they like over and over again.
And they will continue to buy it because it contains something they desire.
This is where surveys come in handy.
We like your peanut butter, but we don’t like all of its selling points.
Some people prefer saltier, spreadable peanut butter, while others prefer sweeter, even softer peanut butter.
Keep in mind that your market is influenced by outside factors. If you can get up close and personal with your customer, you’ll be halfway to establishing a successful distribution network.
The other half is creating a product that will address the customer’s whim while also ensuring that the product will not fall apart after a few months of use.
Expand your market by snooping around for other potential customers.
Maintain an analytical mindset because your competitors are always doing something.
If you sell peanut butter to millions of customers across the country, it won’t hurt to give away a car or two to one-up your competitors and steal their customers.
The cost is only a couple of sedans compared to the millions of dollars in profits you already make every month.
After you’ve stolen your competitors’ customers, use surveys to reach out to them.
Try to keep them as long-term customers.
This opportunity is unquestionably more valuable than a couple of sedans.
It’s also tax deductible.
Conclusion
Distribution channels are the collection of entities required to deliver a product from the manufacturer to the consumer.
There are eight major distribution channel intermediaries, and there are only three major types of distribution channels.
Short distribution channels are easier to navigate, but they have less potential for expanding a company’s customer base.
Wholesalers and retailers charge manufacturers for the privilege of using their services.
Products sold in retail stores are typically more expensive than if consumers purchased them directly from the manufacturer.
The hybrid distribution channel uses both direct and indirect channels to get products to consumers.
The distribution channel you choose is determined by your business model, products, and budget.
The direct-to-consumer model allows a customer to buy a product directly from the manufacturer without the use of any intermediaries.
To maximize results and meet strategic goals, companies may need to use different distribution channels for different products.
When deciding on a distribution channel, businesses must choose an option that will not cause internal conflict.
Some products may not have the shelf-life required for a three-step distribution process, but they are more profitable when sold directly to customers.
The goal of a company’s distribution channel is to sell goods and services at competitive prices.
If your distribution channel is stagnant, you may have reached the limits of that market for that particular product.
Keep a record of your marketing histories in all regions where you have distribution networks.
If you have to abandon an area, prepare to open a new area in order to expand your existing distribution network.
If your market isn’t growing, you’ve already saturated the market.
This is your success story, a model for all other distribution networks to emulate.
Move leaders laterally to different regions where their expertise is most needed.
Give away a car or two to one-up your competitors and steal their customers.
I hope it is useful!
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