Distribution Channel: Everything You Need to Know
A distribution channel is the way that your products reach your customers.6 min read
A distribution channel is the way that your products reach your customers. This is a break down of everything you could possibly want to know about this process.
When goods or services are passed through a series of companies or intermediaries before reaching the actual customer, this is known as a distribution channel. This process can involve the World Wide Web as well as retail and wholesale entities. The channel is divided between forms that are either direct or indirect. A “direct” channel allows consumers to purchase products straight from manufacturers, where “indirect” channels give consumers the chance to make purchases at wholesale or retail businesses.
A Breakdown of 'Distribution Channel'
This “distribution channel” can be considered the process through which every good or service has to be transported in order to reach a paying customer. On the other hand, the term is also utilized to explain the path through which payments from the customer reach the people who made the product. These channels vary in length based on exactly how many steps exist between consumer and vendor.
Marketing Distribution Channels: Channel 1
Depending on the number of organizations involved, distributions can vary in the number of stages involved. The two stages separating consumers and producers are known as Channel 1. Channel 1 represents the stages of the wholesaler and the retailer. Generally, the wholesaler purchases and stores goods from multiple producers in large supplies. These stocks of goods are then sent out in bulk to a large number of retailers who keep a smaller stock of each product. While this may seem convoluted, it actually saves significant cost to retailers on the small side who can’t order large volumes of products at once.
The Three Main Types of Distribution Channels
Marketing Distribution Channels: Channel 1
Sometimes it feels like there is no end to a distribution channel, but they can actually be broken up into three primary types. The longest one is called “first channel” and includes each of the four major steps. The alcohol industry is a good example. A perfect example of this is the industry of adult beverages such as wine. Here, because of laws originating back to the days of prohibition, retailers cannot directly purchase product from a winery.
It functions in a three-tier system, meaning the business is legally required to first sell its product to a wholesaler, who then sells to a retailer. This is essentially a three-tier system. The winery must sell products to wholesalers, who can then actually sell to retailers. From there, the end consumers actually make their purchase at the retailer.
Marketing Distribution Channels: Channel 2
This channel is one where the producer sells directly to a retailer, who then sells the producer's product to the end consumer. In the second channel, the producer is able to skip the wholesaler entirely. They sell direct to the retailer, who in turn can sell to end consumers. In this case, there’s just a single intermediary — the retailer. For instance, Dell is a large enough company where they can afford to send their products directly to major retailers like Best Buy.
- Channel 2 contains one intermediary. In a Channel 2 setup, there’s just one intermediary.
- Usually, this is a retailer in consumer markets.
- This is the most common channel in the UK market for electronic goods.
- Bigger retailers are better for this process such as Tesco, Comet, Best Buy, and Amazon.
Marketing Distribution Channels: Channel 3
The shortest possible distribution channel is considered the most direct process, known as Channel 3. An example of this would be Amazon, who uses their own company platform to sell their own products like the Kindle directly to their customers. Because it cuts out all the middle-men, Channel 3 is often referred to as a “direct-marketing” channel. Specifically, the company who actually makes the product is able to sell their products directly to the end consumer. This is the exact process you see in places like factory outlet stores. Lots of seasonal businesses have worked to transition to this model so that they can remove their most common middle-man, travel agents.
After Designing Your Distribution Channels
As you’re creating a new channel, you’ll need a pricing strategy and a sales process. While creating a brand-new distribution channel, it is imperative that you develop a strategy for pricing and selling your product. Once everything is ready to go, provide your partners with the resources to implement new marketing campaigns targeting your customers.
Remember that distribution channels represent a classic “4 P’s” of marketing (product, promotion, price, and placement/distribution). This process is critical to every marketing strategy for your company. It will allow you to experience unprecedented exposure and revenue growth.
Minimize Pricing Conflicts
You have to be careful in mapping out the pricing structure for each step in a distribution channel, especially if you’re utilizing multiple channels. Make sure each intermediary is being properly compensated for their work. Once you’ve done this, you must consider the final price paid by the consumer. Your partners will raise legitimate questions if the consumer can get different prices from different channels. This sort of conflict on price is very commonplace, but it can be the thing that tears your whole strategy apart. Be certain you’ve properly mapped out the pricing structure at each stage and created a solution that works for everyone.
Drive Revenue Through the Channel
If you’re at the top of the channel, you have to treat the other stages of the channel as if they were your most important customers. Work together so that everyone can make money. Make sure everyone has enough funds to market the product, or run your own marketing campaigns, provide materials, and help create leads you can provide to those intermediaries.
Business-to-Business (B2B) Distribution
Sometimes distribution is done directly between two companies. This changes a few things:
- Often, this takes place when end users actually desire raw materials rather than finished products.
- For instance, a logging company needs a channel of distribution that connects it with the manufacturer who creates the raw lumber material for buildings and furniture.
- The remaining step returns the materials back to the producer.
- That same lumber manufacturer sells the material to the furniture maker, who then creates the furniture and sells it to a retailer, who can ultimately get it in the hands of customers.
Direct Distribution Channel
When considering the marketing process, distribution is divided into two primary channel categories — direct and indirect. Direct distribution channels are used when products or services leave a producer and are then directly sent to consumers without intermediaries. This process is more common when selling services. For example, a barber and a car wash will both utilize a direct distribution model since customers receive the service straight from the company producing that service. That said, you will also see this model used with products like jewelry, which can be purchased by the customer directly from a manufacturer.
Indirect Distribution Channel
You find an indirect distribution model any time an intermediary gets involved. Using our earlier example in the lumber industry, the manufacturer, retailer, and furniture maker would all be middle-men. As more intermediaries are added to the channel, the price gets higher and higher for the end consumer. Every level needs to receive a cut, and that cost is passed along to the customer.
Distribution Channel Factor: Nature of the Product
When choosing a distribution channel, consider the following:
- How complicated is the product? The more complex, the more specialized distributors you’ll need.
- How customizable is the product? Direct distribution is usually better when the customer wants a specialized version of the product.
- Consider the details of your product and how they’ll be affected by the process. Is it a specialty product? Something a person would pick up while out shopping?
- How do you want the product to look to customers? Any middle-men used should match that image.
Distribution Channel Factor: The Market
- How much geographical reach will your product have?
- Will you need to sell overseas?
- Research the scope of your competition. How do they get their products to consumers?
Distribution Channel Factor: The Business
- Your manpower — can this product cover its own distribution channel in-house?
- Your objectives in marketing — are you aiming for solid revenue or maximum profit?
- What’s out there — is there already a set distribution chain for this type of product, or do you need new options?
- Control — how much control over the product will you need at all stages? Longer channels are always more difficult to control.
Distribution Channel Factor: Legal Issues
- Will you have to limit supply?
- Are there any risks of middle-men inappropriately selling to customers?
If you need help with managing distribution channels, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.