Guide To Distribution Channels: Definition, Types and How To Choose One

By Indeed Editorial Team

Updated August 11, 2021 | Published February 4, 2020

Updated August 11, 2021

Published February 4, 2020

Distribution channels are an important part of a business's marketing process. When you choose a distribution channel, you choose the route your product will take from the manufacturer to the customer. There are several different ways to distribute your product. It will depend on your market, business and product which distribution channels are the best fit.

In this article, we discuss what a distribution channel is, the different types of distribution, intermediaries channels use and how to choose the right channel for your company.

Related: Business Development Skills: Definition and Examples

What is a distribution channel?

A distribution channel refers to the group of entities needed to deliver a product from manufacturer to consumer. Distribution channels can be complex or simple, depending on the product, the size of the company and the reach of the company’s customer base. Complex distribution channels offer customers multiple ways of purchasing a product. This often significantly increases sales but can also make the production process more expensive or challenging.

What are the eight types of intermediaries in distribution channels?

Distribution channels can include a variety of intermediaries, depending on the type of channel being used. Generally, the more intermediaries in a distribution channel, the more fees the manufacturer will have to pay. Short distribution channels are easier to navigate but have less potential for increasing a company's customer base. Also, manufacturers who use short distribution channels often must sell their products at below-market prices to profit.

Here is a list of the eight main types of intermediaries you’ll find in distribution channels:

    1. Direct sales to consumer

    1. Wholesalers

    1. Distributors

    1. Retailers

    1. Digital distributors

    1. Agents and brokers

    1. Sales teams

    1. Resellers

What are the three forms of distribution channels?

Although there are many different intermediaries involved in the distribution process, there are just three main forms of distribution channels:

1. Direct distribution channel

A direct-distribution channel allows the consumer to purchase goods from the manufacturer. Many customers take advantage of direct distribution channels by shopping online. Manufacturers who use online web stores or services to sell their products take orders from individual customers and ship the product to them directly.

Customers who shop directly typically pay less for products since they are acquiring them from the source and not from an intermediary.

2. Indirect distribution channel

Indirect distribution channels let manufacturers sell products through a wholesaler or retailer. Most physical retail stores use indirect channels by buying their inventory from a manufacturer and then selling it to their loyal customer base.

Intermediaries, such as wholesalers and retailers, often charge manufacturers for the privilege of using their services. Because of this expense, products sold in retail stores are typically priced higher than they would be if consumers purchased them from the manufacturer.

3. Hybrid distribution channel

Hybrid distribution channels use both direct channels and indirect channels to reach consumers. For example, a manufacturer of a product or service will have a relationship with an intermediary to distribute a product or service, though the manufacturer may also be making the sale directly with the consumer. This example appears in some digital transactions when you purchase from a manufacturer’s website but the product is delivered to you by an intermediary.

What are the different types of distribution channels?

There are three different types of distribution channels that businesses use in today's market:

Three-step model

The three-step model is the longest distribution channel and includes a manufacturer, wholesaler and retailer before a product reaches the consumer. If a manufacturer is using the three-step model, they will first sell a product to a wholesaler. Next, the wholesaler will sell the product to a retailer. Finally, the retailer will sell the product to a consumer.

Manufacturer - Wholesaler - Retailer

Each entity in the model receives a portion of the profit from the sale of the product. The manufacturer will also typically pay the wholesaler to find a buyer for the product and the retailer usually pays the additional costs of marketing and shipping the product to consumers.

Example Due to federal regulations, alcohol producers must sell their products to a wholesaler instead of directly to a retailer. After receiving a shipment of wine, the wholesaler will sell to a retailer who will then stock and sell the wine. The wine retailer could take the form of several businesses, including a grocery store, hotel or restaurant.

Two-step model

The two-step model eliminates one of the intermediaries: the wholesaler. Manufacturers who use the two-step model sell directly to a retailer who, in turn, sells to a customer. This model is simpler than the three-step process because it only makes use of one intermediary. The two-step model is also cheaper for the manufacturer because they do not have to pay a wholesaler for their services.

Manufacturer - Retailer

Manufacturers will typically sell their products to a retailer at a price that allows the producer to profit. The retailer is then able to price and market the product to their customer however they see fit.

Example The manufacturer of camera equipment could produce a large number of camera lenses and then sell them directly to an electronics retailer. The electronics retailer would distribute the lenses to a number of their physical locations and then sell them to their customer bases. The electronics retailer is then responsible for running advertising campaigns and delivering the products to the consumer.

Direct-to-consumer model

The direct-to-consumer model allows the customer to purchase a product from the manufacturer without having to use any intermediaries. This model is the shortest distribution channel and cuts out both the wholesaler and the retailer. Direct-to-consumer models benefit manufacturers because they do not have to pay fees or negotiate contracts with intermediary entities.

Manufacturer - Consumer

Because this model is cheaper for the manufacturer, most consumers will expect to pay less than retail value for the product. Small-business owners will often seek out manufacturing vendors and purchase their inventory directly to minimize their business operating costs.

Example A lumber company that produces wood products and then sells them directly to customers. The manufacturer would be independently responsible for creating the product, locating buyers and arranging transportation and delivery.

Read more: 7 Ways To Market a Small Business

How to choose the right distribution channel for your product

Choosing which distribution channel depends on your business model, products and budget. Here are some steps you can follow to choose a distribution channel that’s right for you:

1. Consider your company's goals

A distribution channel needs to align with a company's purpose and goals. If a company promotes itself as being customer-oriented, it may need to choose a distribution channel that allows customers multiple options for how and where they purchase the product. If a company prioritizes affordability, it may need to choose a simple distribution channel that cuts out expensive intermediaries.

Frequently, companies might set short- or long-term goals that focus on increased growth, profit or marketability. To reach these goals, companies may need to reevaluate and adjust their distribution methods to improve a product's profitability and success. In many cases, companies might need to use different distribution channels for different products to maximize results and meet strategic goals.

Read more: SMART Goals: Definition and Examples

2. Be practical

Not all distribution channels are suitable for all products. Companies will need to consider their options carefully to decide which channel best serves a particular product. For example, a company that produces perishable goods like produce, medicines or raw ingredients may be limited to using distribution channels that deliver products to consumers very quickly.

Certain products may not have the shelf-life necessary to go through a three-step distribution process. Other products may be difficult to market or transport to retailers and are more profitable when sold to customers directly. Distributing different types of products creates unique challenges and each must be evaluated individually.

3. Look for natural partners

Choosing one's intermediaries wisely is an important element of deciding on the best distribution channel. A company's best intermediaries 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 mutually beneficial.

The agreement could benefit the manufacturer by saving money on marketing and shipping costs. Similarly, the retailer could benefit from the increased variety of inventory in their store. Distribution entities who are natural partners are likely to create and maintain long-term business relationships.

4. Minimize conflict

When choosing a distribution channel, companies must decide on an option that does not cause internal conflict. If a manufacturer sells the same product through a physical retailer and an online wholesaler, this might create unnecessary competition for the channels.

Additionally, if a manufacturer prioritizes one channel, it might overpower the others and cost the manufacturer a disproportionate amount of money. Retailers must also avoid conflict by not stocking too many competing products in their stores. The goal of a company's distribution channel is to sell goods and services at competitive prices while still maximizing the products' overall profitability.

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