Table of Contents
More Distribution Content
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Table of Contents
More Distribution Content
Get the latest e-commerce industry news, best practices, and product updates!
A distribution channel is a series of organizations or middlemen through which goods or services flow before reaching the end consumer. Retailers, wholesalers, distributors, end consumers, and the internet are some essential components of distribution channels.
What are distribution channels?
A channel of distribution is the flow of services or goods from manufacturing to the end consumer. Distribution channels are subsets of the downstream process that answers the question –’How to deliver the product to the consumer?’ Distribution channels are how money passes back from buyers to manufacturers.
Once we define the distribution channel, it is vital to understand the expected characteristics. A distribution channel must be effective and efficient. It implies that transportation and other logistical supplies must be used at maximum capacity and cheapest possible rates.
For producers, it is vital to prepare a combination of distribution channels that consumers can easily access. Depending on the variety and opportunity of a manufacturing firm or other business involved in the distribution process, the related company must deploy channel(s) that enable good sales and easy consumer access.
Understanding Distribution Channels
In simple terms, a distribution channel is a route through which all services and goods must pass to reach the target consumer. It also defines the end consumers’ payments to the original point of sale or vendor.
After identifying the channels of distribution, the next aspect is its length. The length of distribution channels varies based on the number of intermediaries needed to deliver a good or service. Occasionally, goods and services reach consumers via multiple channels, including a combination of long and short mediums. Longer distribution channels can also imply less profit than every intermediary charges from a manufacturer for its good or service.
Functions of Distribution Channels
After we define the channel of distribution, we need to understand the functions of distribution channels. The critical role of the distribution channel is to collect the goods from various manufacturers and make them accessible to the consumer.
In addition, the channel members also carry out functions like purchasing, performing inventory, selling, financing, transporting, etc. Such procedures facilitate the efficient and timely flow of information and products from the manufacturer to the user.
Here is a breakdown of the significant functions of distribution channels:
Understanding what a channel of distribution is will not suffice. You must also be familiar with the key functions that denote how these channels function.
The transactional function is associated with different transactions for transporting goods from one channel to another. Various functions it entails are purchasing, selling, and risk-bearing, all performed by channel members.
Manufacturer or producer sells goods to different intermediaries who, in turn, sell them to the end consumers. Note that the movement of goods can incorporate changes in titles from one point to another.
Logistical functions include storage, assembling, categorizing, and transportation for a physical undertaking of the goods from one point to another. These functions focus on proper assortment and storing goods in the right place. Channel members must ensure that the stored goods are transported on time so customers can access them.
As the name implies, these functions simplify the performance of various operations. Channel members can perform their activities smoothly through these functions.
Standard functions include credit facilities, financing, maintenance, after-sale services, etc. These days, the acquisition of most goods are supplemented by different services such as credit facilities, loan facility, free servicing, etc., that ease the tasks of channel members.
List of other essential distribution channel functions
- Assists in merchandising
- Assortment of products
- Offers market intelligence
- Price stability
- Provides salesmanship
- Title to the goods, services, and trade
- Matching demand and supply
- Matching buyers and sellers
- Standardising transactions
- Time and place utility
The Three Types of Distribution Channels
After thoroughly learning what the channels of distribution are and what their functions are, the next significant aspect is to understand the types of distribution channels.
There are no intermediaries in the direct distribution channels. The producer or manufacturer directly sells goods or services to the end consumer. Generally, these types of mediums are used by manufacturers or producers of niche and costly goods that are perishable.
The direct channels adopt the shortest and simplest route to convey goods from the manufacturer to the consumer. Since the direct channels don’t involve any intermediary, they are also called the zero-level distribution channels.
The manufacturer can directly sell to their customers through the below ways:
- By opening a retail shop
- Via travelling salesmen
- Via mail order business
Examples of direct channels include selling goods like industrial machinery, computers, and luxury automobiles directly to consumers. Other examples include chain stores (Bata, Nike, etc.), e-business, direct selling (Oriflame, Amway, etc.), direct mail-order houses, etc. If some manufacturers open their retail shops in various localities and directly sell goods to consumers, it can be considered an example of a direct channel.
The indirect distribution channel involves intermediaries to let manufacturers bring their products to market. It is known as indirect selling when a manufacturer uses one or multiple intermediaries to sell and dispense their product to customers.
In this distribution channel strategy, goods transit from the place of production to the site of consumption via a distribution network.
The indirect channels of distribution can be:
- Producer—Consumer (includes industrial goods with high technical content)
- Producer—Retailer—Consumer (through large department stores)
- Producer—Wholesaler—Consumer (majority of industrial products)
- Producer—Wholesaler—Retailer—Consumer (majority of consumer goods)
- Producer—Sole Agent—Wholesaler—Retailer—Consumer (typically for an agreed geographical area).
Three types of indirect channels
i. One-level channel
In one-level channel, a product passes from a producer to a retailer to the end buyer. Firstly, the retailers purchase the product from the manufacturer and then sell it to the end consumers. Typically, the one-level channel is appropriate for manufacturers of clothing items, furniture, toys, etc.
ii. Two-level channel
The two-level channel follows a unique process, lengthier than the one-level channel. In this type, wholesalers usually make bulk purchases, buy from the manufacturer, and distribute the goods into smaller packages to sell them to retailers. Subsequently, the retailers sell the goods to the end consumer.
Generally, the two-level channel is appropriate for more cost-effective, long-lasting goods featuring a bigger target market.
iii. Three-level channel
The three-level channel is identical to the two-level channel, but the goods flow from the manufacturer to an agent and finally to a wholesaler. In this channel, agents help sell the goods and quickly deliver the goods to the market.
Typically, the agents get a commission and are assigned the task of product distribution in a specific region. This indirect channel is appropriate for in-demand goods and a target market throughout the country.
With the enhancement of channel possibilities and customer segments, many companies implement multi-channel distribution systems, usually known as hybrid marketing channels. In recent years, there has been a surge in hybrid channel systems.
When a firm deploys two or multiple marketing channels to reach single or more customer segments, multi-channel marketing emerges.
The flow is such that the manufacturer directly sells goods to ‘consumer segment-1’ via direct-mail catalogues and telemarketing. It then reaches ‘consumer segment-2’ via retailers. Note that it indirectly sells to ‘business segment-1’ via dealers and distributors and to business segment-2 via its salesforce.
Hybrid channels benefit companies facing vast and complex markets. Every time a new channel is created, the company increases its sales and market exposure. Moreover, it attains opportunities to customise its services and products to the explicit requirements of varied customer segments.
Compared to other indirect channels, hybrid channel systems are more challenging to control. They create conflict because more channels contend for sales and customers.
Three Methods for Distribution Channels
Let’s answer the question -“what are the channels of distribution?”
- Exclusive Distribution
- Selective Distribution
- Intensive Distribution
In this method, intermediaries carry the firm’s products to particular sales outlets. Usually, this task is handled by a sales representative. It implies that only the exclusive retail outlets can sell goods to consumers.
Based on the product quality, this method is excellent for manufacturers and even for the retail outlets or chain stores.
In this method, the company facilitates sales to a particular group of intermediaries accountable for selling goods to the final customers.
The success of the selective distribution method depends on the reputation of intermediaries. The reason is their reputation directly influences the company’s overall performance. The intermediary turns out to be the actual counsellor for consumers. They answer questions from consumers and also recommend suitable products meeting their needs.
The producer attempts to place their product in the maximum possible sales outlets in this distribution method. In addition to manufacturers, other members involved in this channel are commercial representatives and sales teams. All of them are accountable for distributing goods to the sales outlets.
Manufacturers of affordable products commonly employ this distribution method with a massive frequency of consumption.
Distribution Channel Levels
We already defined the channel of distribution based on types and methods. Besides methods and types, they can also function on various levels. Their levels indicate the distance between the producer and the end consumer. Let’s get more details about various distribution channel levels.
Level 0 Distribution Channel
Level 0 distribution channel depicts a direct and close relationship between the client and the manufacturer. For a particular company, the expenses of the consumer relationship are more significant.
Level 1 Distribution Channel
At this level, the manufacturer sells goods to the distributor, who may sell them to consumers through wholesalers or retailers. Here, the distributor has some rights to the product. Furthermore, the distributor is accountable for sales prices and transportation to the sales outlets.
Level 2 Distribution Channel
Identical to Level 1, the only difference is that in Level 2, the distributor supplies products only to retailers, then retailers sell them to consumers.
Level 3 Distribution Channel
Level 3 represents a conventional distribution model. The product passes through distributors and retailers and then reaches customers. The essential advantage of using this distribution method is that it can reach more consumers.
The marketing and sales expenses are shared among the parties. The products will have a higher price due to the operational costs of parties involved in the flow.
The Nine Main Intermediaries in Distribution Channels
You can know how and what distribution relates to the intermediaries when you look at the details of significant intermediaries in the distribution channels. Here’s a list of nine major intermediaries that convey goods to end consumers.
Companies frequently use retailers as one of their key intermediaries. Usually, product prices are quite higher in retailers.
Examples of retailers include supermarkets, restaurants, bars, and pharmacies. All these kinds of businesses own full sales rights.
These intermediaries purchase and resell products to retailers. They will only sell products to those retailers who sell in their stores. Generally, prices are lower because the sales incorporate products in larger quantities.
Generally, these intermediaries don’t sell products in small quantities to end consumers, hence, the name ‘wholesalers’. The exception is supermarkets that sell products in the wholesale model.
Distributors sell, accumulate, and provide technical support to wholesalers and retailers. Usually, their operations are dedicated to particular regions.
Agents are legal bodies appointed to sell a company’s goods to final consumers and are paid a commission for each sale. Agents establish long-term relationships between companies and intermediaries.
In distribution channels, brokers are recruited to sell and obtain a commission. Unlike agents, brokers establish short-term relationships with the organization. For example, a company can hire insurance brokers and real estate agents.
For those firms who sell software and tech products, the internet functions as the intermediary in the distribution channel. The consumer simply needs to download the material to gain access. Note that e-commerce companies also use the internet in the form of a distribution intermediary.
A company can have a dedicated sales team responsible for selling services or goods. If the company owns a broad range of products to be distributed, it can set up multiple teams to sell goods or services to different audiences and segments.
Resellers are people or companies who purchase goods from retailers or manufacturers or simply sell to end consumers in retail.
As the name suggests, catalogue sales occur when a sales associate connects to a company and sells its products through a magazine. Usually, a salesman in this form of intermediary earns a commission for their sales.
Catalogue sales are commonly observed in the beauty segment, for example, in brands like Brazilian Natura and Avon.
Reverse Distribution Channel
Going through the above sections, you are now familiar with the methods and types available for goods to reach end buyers. You can now make an informed decision about which distribution channel strategy to use.
But one question arises–what to do when consumers want to return products to manufacturers? Well, consumers have to depend on the reverse distribution if they have received defective products or wish to return clothes, shoes, etc. purchased online (want to return due to imperfect fit).
In this distribution channel, the end consumer is accountable for returning the product. They must find enough information from the manufacturer on how to return. Usually, the website for the product will instruct how to return the items.
What Is the Difference Between Direct and Indirect Distribution Channels?
It is imperative to know the difference between direct and indirect distribution.
Direct distribution channels allow service providers or manufacturers to deal with their end consumers directly. For example, a company that manufactures shoes and directly sells to customers through an e-commerce platform is considered to be using a direct distribution channel.
In indirect distribution channels, manufacturers depend on a network of retailers and wholesalers to sell their products.
What Are the Benefits of Direct Sales?
Let’s understand how distribution benefits the company via direct sales.
Total control of products
Companies using the direct sales method of distribution own complete control over how their product is marketed and sold. When manufacturers sell products wholesale to a retailer or distribution agent, they are enabling them to endorse, display, and distribute their products.
Establish genuine relationships with end consumers
In direct sales distribution channel strategy, brands can build honest relationships with end consumers. They can respond to product performance reviews and customer feedback. Moreover, brands get the opportunity to set up customer loyalty and faith by directly dealing with them.
Amass valuable marketing data
One of the key benefits of direct distribution is that companies can collect important marketing data about their customers’ demographics, buying habits, and more. Based on this data, they can know what improvements are needed and how to boost sales.
No need to hire intermediaries
With direct sales methods, manufacturers can eliminate the high costs associated with employing intermediaries for product distribution. Since they directly sell to customers, they benefit from higher profit margins over their products.
You are your own boss
You will work for yourself and answer to no one. You can work flexibly without anyone’s restrictions.
What Are the Benefits of Indirect Sales?
Saves time, money, and effort in setting up infrastructure
Whether you intend to distribute via wholesalers, retailers, or agents, you rely on companies who have already deployed the infrastructure and sales processes to convey your goods to the market and end consumers. You will save time, money and effort otherwise spent on establishing new infrastructure.
No funding or resources required
Unlike direct distribution, the indirect distribution channel strategy doesn’t demand start-up costs. No need to have funding or research. Also, it is not required to select infrastructure components, like vehicles, staff, and warehouses, to begin distributing.
One notable benefit of an indirect distribution channel is its scalability. Scaling saves money and time. It lets you easily make a new contract with your existing retailer or wholesaler or switch to some different intermediary.
Let you focus on the core process of your business
In an indirect distribution channel, you can outsource all the management from the distribution to experts, and ultimately focus on the essential business processes. Also, it gives you time to invest in direct distribution. No need to wait for products to go to market.
Indirect sales agents or resellers can frequently rely on their sales and marketing teams. They usually have all the essential processes deployed to convey cost-effective results.
Factors Determining the Choice of Distribution Channels
Now you already know various types of intermediaries and distribution channels. But this knowledge will be useless if you don’t know how to choose the appropriate channel of distribution. So, find below the factors that simplify your choice of distribution channel.
i. Setting a reference
ii. Channel review
iii. Cost-benefit ratio
iv. Business' routine
v. Market potential
Think about the logistical questions like,
- What about goods storage?
- How will goods be transported?
- What will be the average delivery time?
- Is there security when the products are in transportation and/or when they are in storage?
- Considering these logistics aspects is significant to ensure goods reach sales outlets flawlessly.
Whether your intermediaries are retailers, resellers, distributors, or wholesalers, it’s essential to know their location. This is because your product should be sold in the region where your target audience exists, specifically if your product belongs to a particular market niche.
Understanding distribution channels is essential to ensure end buyers receive the products for which they placed an order. Depending on your business practices and targets, you can choose any of the discussed distribution channel types and explore the maximum possible benefit. Analysing the cost-benefit ratio is essential before selecting any distribution channel.
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Distribution channels are the flow that a good or service tracks from manufacturing to the end buyer. Commonly, distribution channels incorporate a manufacturer, a retailer, a wholesaler, and the end buyer. Moreover, distribution channels depict how money flows backward from end buyers to the manufacturer.
Here are the drawbacks of longer distribution channels:
- Reduced selling costs in a concentrated retail segment
- Reduced production
- Failure to enter high-end distribution channels
- Higher aggregate markups
- Consumers charged with lower prices
- The inclusion of more organizations and stages will raise the order of deviation between manufacturers and end buyers
The primary distribution channels are:
- Indirect (Intermediary)
- Dual Distribution
The choice of these distribution channels depends on the overall business objectives and configuration.
- Reduced costs
Heavy focus on your core competencies
- Efficient marketing
- Broad customer reach
- Easily available feedback
- Logistics support
- Quick growth
- Options available for prompt distribution
- No customers feel left out when distribution channels are used properly
Three-level channel of distribution includes an agent in addition to the retailer and wholesaler who helps sell goods. These agents prove helpful when goods need to be moved rapidly into the market immediately after the order is placed. The flow of three-level channels of distribution is—Manufacturer to Agent to Wholesaler to Retailer to Customer.