What is a distribution channel?
A distribution channel is the pathway or network that your product travels through from creation to the customer. Some companies create and manufacture their products in house and ship the resulting product directly to the customer, while others use multiple third-party companies along the chain to manufacture and distribute the product. All methods offer various benefits and disadvantages to both the primary company and the consumer.
Overview of how distribution channels work
Every distribution channel includes at least two intermediaries (the owner and the customer) and up to four or five other companies. These include:
- Owner: The owner is the company that created the idea for the product. In some cases, they also serve as the manufacturer, distributor and retailer.
- Manufacturer: The manufacturer produces the actual product.
- Distributor: The distributor ships the product to either the retailer or the customer.
- Retailer: The retailer sells the product directly to the customer, often in person.
- Customer: The customer purchases the product and is always the final step in the distribution channel.
Distribution channels differ from business to business depending on the type of product they sell, where they sell the product and the volume of sales they have. Generally, the company who created the product selects every other company along the distribution chain. For example, if the company can’t manufacture the product in-house, then they must select a manufacturer to make it. From there, the company will hire a distributor to either ship the product straight to the customer or take it to the store where they sell the products in person.
Different types of distribution channels
There are three common types of distribution channels, and one distribution channel that can vary depending on sales conditions. Most companies use one of these types of distribution for their products:
With direct distribution, a single company creates the idea, manufactures the product and distributes it to the customer. There are no intermediaries within a direct distribution channel. Direct distribution is common in industries that produce products with no expiration date since the company can make and store the product indefinitely while fielding buyers. An example might be a jeweler.
Brokers or distributors
With a broker or a distributor, a single company creates and manufactures a product, but they outsource the distribution to a third party. With this model, the original company doesn’t have to worry about selling directly to customers. Instead, they sell their product to a distributor who then sells the product to the consumer. Farmers and other food manufacturers often use this type of distribution channel.
In the multi-step model, the original company only creates the idea for the product. They then outsource the production to a manufacturer, who distributes it to a retailer, who sells it to the consumer. Many companies in a variety of industries use this approach, particularly those who might manufacture and sell products all over the country and world and therefore need a wide-reaching chain of distribution supports.
For many e-commerce companies, there’s less of a distinction between the roles of manufacturer, distributor and realtor. Many exclusively online businesses adjust their distribution channel strategy regularly to meet the fluid needs of their customers. For example, a t-shirt manufacturer might produce and sell individual shirts directly through their e-commerce site, but if they receive a large bulk order, they may outsource the production and distribution to third-party companies.
Tips and considerations for establishing a distribution strategy
When determining the best distribution channel strategy for your business, it’s necessary to take a few considerations into account. Use these factors to help you decide which strategy makes the most sense for your industry and individual company:
You need to know what your customers prefer before selecting a distribution channel. Some may want to purchase products in person exclusively in order to see the product before buying. Others may like the cost savings that come from buying directly from the manufacturer.
Some industries, like alcohol, face regulations about who can distribute the product and how they sell the product. It’s important to recognize and understand your industry’s specific regulations and how those guidelines may impact your distribution channel strategy before committing to one.
Installation, service and maintenance
Products that require installation, service or maintenance often call for a shorter distribution channel to ensure the original company can assist the customer with any needs as efficiently and cheaply as possible.
The more companies you involve in your distribution channel, the more costly the final product will be for the consumer. Consider the price points for you and for your customers to find a balancing point on which you’re able to turn a profit, but the product is still affordable for the consumer.
Look at how your competitors manufacture and distribute their products. Some may have great success with their chosen distribution channel, while others face challenges like cost and time from production to consumer. Use the information you find out from their strategies to inform your own.
Benefits and disadvantages
More than likely, you’ll have more than one distribution channel strategy to choose from that meets your needs. Carefully assess the potential benefits, like cost savings, with disadvantages, like extensive time to consumer, when deciding which strategy is best for your company.
Look at your company’s projected growth before committing to a distribution channel strategy. For example, you may currently be a direct to consumer organization, in which you manufacture and distribute your product straight from your office, but with plans to expand your operation. It may not make fiscal sense or continue to be logistically feasible to continue as a direct to consumer business, so establishing an effective distribution channel early on may prove beneficial.
Generally speaking, the more stops there are along your distribution channel, the longer it will take the product to reach the consumer when you’re managing e-commerce sales. Know how long it takes for your product to go from manufacturing to the customer once ordered. If another distribution channel can complete the process quicker, consider using that strategy instead.
Distribution channels impact every business, whether you sell directly to your customers or not. Understand how every major distribution channel functions to ensure you’re using the best strategy for your company and your customers.