What Are Distribution Channels? Definition and Examples
Updated March 3, 2023
Distribution channels are an important element of a business's marketing processes. When you pick a distribution channel, you choose your product's route from the manufacturer to the customer. There are several ways to distribute your product depending on your market, business and product to determine which distribution channels are the best fit.
In this article, we explain a distribution channel, define what intermediaries are and their role in the marketing process, discuss the different distribution channel models and list steps to choose the right channel for your company.
What is a distribution channel?
A distribution channel refers to the group of entities needed to deliver a product from a manufacturer to a 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 intermediaries?
Distribution channels can include a variety of intermediaries, which are third-party firms that can help a company promote and sell its products to buyers, depending on the channel used. The more intermediaries in a distribution channel, the more fees the manufacturer has 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's a list of main types of intermediaries you might find in distribution channels:
Direct sales to consumer
Agents and brokers
3 forms of distribution channels
Although there are many intermediaries involved in the distribution process, there are just three main forms of distribution channels, including:
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're gaining 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 typically cost more than they would 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 product or service manufacturer has a relationship with an intermediary to distribute a product or service. However, the manufacturer may also make the sale directly with the consumer. This example appears in some digital transactions when you purchase from a manufacturer's website.
What are the different distribution channel models?
There are three different distribution channels that businesses use in today's market:
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 first sell a product to a wholesaler. Next, the wholesaler can sell the product to a retailer. Finally, the retailer sells the product to a consumer.
Each entity in the model receives a portion of the profit from selling the product. The manufacturer also typically pays 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 sells it to a retailer, who then stocks and sells the wine. The wine retailer could take the form of several businesses, including a grocery store, hotel or restaurant.
The two-step model eliminates one intermediary: 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 uses one intermediary. The two-step model is also cheaper for the manufacturer because they don't have to pay a wholesaler for their services. Manufacturers typically sell their products to a retailer at a price that allows the producer to profit. The retailer can then price and market the product to their customer however they see fit.
Example: The camera equipment manufacturer could produce many camera lenses and then sell them directly to an electronics retailer. The electronics retailer would distribute the lenses to several physical locations and then sell them to their customer bases. The electronics retailer is responsible for running advertising campaigns and delivering the products to the consumer.
Related: 4 Types of Channel Intermediaries
The direct-to-consumer model allows the customer to purchase a product from the manufacturer without using 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 don't have to pay fees or negotiate contracts with intermediary entities. Because this model is cheaper for the manufacturer, most consumers can expect to pay less than the retail value for the product. Small-business owners often seek 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.
Related: How To Be Successful at Direct Sales
How to choose the right distribution channel
Choosing which distribution channel depends on your business model, products and budget. Here are some steps you can follow in choosing a distribution channel that's right for your business:
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 customer-oriented, it may need to choose a distribution channel that allows customers multiple options for how and where to 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 focusing on increasing growth, profit or marketability. Companies may need to re-evaluate and adjust their distribution methods to improve a product's profitability and success to reach these goals. Companies might need to use different product distribution channels to maximize results and meet strategic goals.
2. Be practical
Not all distribution channels are suitable for all products. Companies may need to consider their options carefully to decide which channel best works for a particular product. For example, a company that produces perishable goods like produce, medicines or raw ingredients may have limitations when using distribution channels that deliver products to consumers quickly.
Certain products may not have the lifespan necessary to undergo 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 products creates unique challenges, and each requires individual evaluation.
3. Look for natural partners
Choosing one's intermediaries wisely is important in 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 marketing to the same audience, they're 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 that 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 doesn't 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.
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. A company's distribution channel aims to sell goods and services at competitive prices while maximizing products' overall profitability.
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