What Are Distribution Channels?
Distribution channels are a huge part of your business — and it’s important to have them all figured out. Distribution channels refer to the path that goods and services take from their source to the consumer, so it’s crucial that you know how your business can get its products in the hands of customers.
There are a number of channels you can use to reach customers. When choosing channels, consider the level of customer service you offer and which ones offer the greatest potential for growth. Is your business prepared for the different challenges that each channel presents? An e-commerce site is just one example of a distribution channel, but it's one that can be highly effective. Consider all of your options before choosing the appropriate channels to meet your objectives.
Distribution channels are a vital link between all your marketing efforts and end-users. As with any marketing initiative, it's necessary to understand your distribution channels clearly, as this will ensure you understand where the biggest opportunities lie and how best to capture them.
In this blog, we'll take a look at:
what are distribution channels?
the types of channels
three distribution methods
the various levels of distribution
the main intermediaries
how to define the different channels
What Are Distribution Channels?
Distribution channels are the paths products take from their places of production to their final sale points. The goal of distribution channels is to put products in front of as many people as possible as efficiently as possible. That's because they directly impact a company's sales, so you want to make them as efficient as possible.
There are many different types of distribution channels — for example, you can sell your new fashion line at a shop, on Amazon, or through your own e-commerce site. Each type of channel is made specifically for the products it sells, and it's important that you chose the right one for you.
The Three Types of Distribution Channels
There are three main types of distribution channels.
• The first type is known as the “direct” method. With this method, a company sells its product to buyers using a personal visit, a phone call, a catalogue, a Web site, or a mail-order. This is a one-to-one relationship.
• The second type is known as the “indirect” method. With this method, a company manufactures a product and sells it to a wholesaler. The wholesaler, in turn, sells the product to a retailer. This is a one-to-many method.
• The third type is known as the “multiple-step” method or “hybrid” method. In this method, a company sells its product to a wholesaler, who then sells it to a retailer. The retailer, in turn, sells the product to the final buyer. This is a many-to-one method.
1. Direct Channels
A direct channel is a distribution channel in which manufacturers sell their products directly to the consumer. There are several advantages of going direct: no middleman, higher profit margins, and better quality control.
Direct to consumer is a model that has been gaining traction for years, even before Amazon got in the game. With direct to consumer channels like the Alibaba platform, businesses can connect with consumers directly, maximising their profits and shortening their delivery cycle times.
The benefit of this model is that it makes it possible to sell products and services at high volumes, which is ideal for retailers. Because there are no intermediaries in the chain, this model allows companies to charge lower prices on their goods, as they don't have to pay any kind of commissions for the sale.
Exclusivity can be a strong selling point when you're trying to position your brand as premium. It works especially well when you're selling direct-to-consumer and you can differentiate yourself from other options by offering a unique selection.
If you are selling on-demand, this is an excellent option. Products can be produced according to customer demands, meaning a higher inventory turnover rate.
2. Indirect Channels
Indirect channels enable manufacturers to outsource their distribution network and maintain control from behind, but also open up a world of new distributors, wholesalers, retailers, and brokers.
The benefits of working with intermediaries are that brands can sell their products to a wider range of customers. However, there are drawbacks — for example, the products might have higher prices due to commissions paid to the intermediaries.
3. Hybrid Channels
Hybrid channels are a mix of the two main ways to sell products and services, bringing together the strengths of both models. In this model, manufacturers have relationships or partnerships with intermediaries who help customers find and purchase products or services. This means that they promote products on their (online for example), but that they don't deliver these items directly to customers. Instead, they use intermediaries like authorised distributors.
Manufacturers may also use their own employees or hire outside companies to handle direct sales and marketing. This allows for more control and accountability over sales and pricing, turning intermediaries from competition into allies.
Hybrid distribution channels enable brands to promote products online and ship them to customers via third-party distributors. For example, Nike products are available for sale on Amazon but are shipped directly from Nike's warehouse instead of from Amazon's storage centre. This approach gives retailers the opportunity to access customers who would not normally make purchases from their store.
Three Methods for Distribution Channels
There are three different distribution methods for retailers:
1. Exclusive Distribution
Exclusive distribution can be a great way to incorporate high-quality products into the marketplace. In this model, manufacturers directly appoint sales outlets as distributors who exclusively sell products in a specific marketplace. Retailers can play an important role in the process, by providing valuable insight and decisions related to pricing and distribution strategies.
2. Selective Distribution
Selective distribution is a strategy in which a company allows sales to a specific group of intermediaries who are responsible for selling items to final customers — these intermediaries can be wholesalers, agents, catalogues, or other retailers who then sell the items to the end consumer.
The effectiveness of this strategy is dependent on the reputation of the intermediaries; retailers with good reputations will be able to sell your item more effectively than those who do not have strong credibility.
3. Intensive Distribution
Intensive distribution is the most common method of product distribution. It consists of placing products in a large range of sales outlets as possible. This can take one of two forms. The manufacturer themselves can stock their own product in every outlet, which is known as-in house distribution. Alternatively, the manufacturer can instruct a commercial representative to do so on their behalf, which is known as agency distribution.
The intensive distribution method works well when there is a high demand for a product at an affordable price. The manufacturer can afford to place its products in several outlets because it believes that its sales will outweigh its costs.
Manufacturers of low-cost products with a high frequency of consumption use this method on a regular basis. Examples include companies that sell inexpensive items such as kitchen appliances, butane lighters and party decorations.
Distribution Channel Levels
There are many types and ways to distribute products. Besides the ways of distribution channel, distribution levels also can be referred to as the distance between the manufacturer and final consumer.
Level 0 Distribution Channel
The earliest, most basic form of brand distribution is direct-to-consumer, which means that the manufacturer has a direct relationship with the customer. While this means that customers know exactly how to reach you and how to purchase from you, it also means that manufacturers need to invest significant resources into communicating with and meeting the needs of consumers.
While this can be a profitable option for many businesses, it comes with its own set of challenges. A larger number of touchpoints and direct relationships with customers can lead to more customer complaints, decreased sales conversions and added shipping costs — all of which is why more and more brands are seeking out a more streamlined approach.
Level 1 Distribution Channel
In the level 1 distribution channel, the manufacturer sells products to the distributor who then sells it to retailers or wholesalers. The distributor can be just as important as the manufacturer in deciding how consumers will use and view a product.
The distributor is responsible for selling and distributing the product to sales outlets of their choice. They are also responsible for any costs associated with the transport, storage, and sales of the product.
The goal of distributors is to bring products to consumers in need while supporting brands with distribution services. To do this, they search for opportunities to sell products in retail outlets or large chain stores.
Level 2 Distribution Channel
Level 2 is similar to level 1. Level 2 distributors are the most common type of distributor you'll find. They're responsible for making sure all products get from their manufacturers to the stores where you shop, but they don't necessarily have power over how much these goods cost.
Level 3 Distribution Channel
The distribution model of a Level 3 channel is much easier than the retail and wholesale channels. This is a traditional distribution model, with the producer being required to sell to the distributor and further on to the retailer. The manufacturer makes the product (or has it made), the distributor distributes it to retailers, and customers buy it. It’s a straightforward process that leads to a predictable revenue stream for all three parties.
However, even though this is a traditional method, there are many advantages of using this method. It is best used for companies that want to control their brand and are not interested in outsourcing.
One of the biggest advantages of this model is the ability to reach a larger number of consumers. On the other hand, each party involved in this model has increased operational costs — meaning that products have a higher price tag.
Who Are The Main Intermediaries in Distribution Channels?
Intermediaries are an essential part of business. They provide important services to businesses and consumers, enabling the efficient exchange of goods and services between buyers and sellers. Businesses like yours rely on them to help you grow your company, expand into new markets, get access to new customers and make the most of your warehouse space.
Intermediaries come in many different shapes and sizes ...
1. Retailers
Retailers – supermarkets, pharmacies, speciality shops, restaurants, bars, and many others – are intermediaries used frequently by brands. These intermediaries buy products wholesale from manufacturers and resell them at a higher price to consumers.
2. Wholesalers
Wholesalers are a crucial link in the supply chain, buying products in bulk and then reselling to businesses that will put them on shop shelves. Businesses use wholesalers because they don't have the capital to pay for large amounts of inventory or storage space. The lower cost of wholesale goods is often passed along to customers.
3. Resellers
Resellers are businesses or individuals who buy products from third party retailers or wholesalers to then sell them at profit to the consumer.
4. Agencies & Agents
Agencies are the intermediate between online brands and their final consumers. Brands use agencies to sell their products to their customers directly; they hire companies to make sales on their behalf. Agencies are paid a commission per transaction, so the more sales they make, the more money they make.
5. Distributors
Distributors are centralized sources that offer products and support to retailers and wholesalers. They organize inventory and logistics, allowing retailers to focus on running their storefronts while still maintaining a healthy inventory. Though their focus is on the distribution of products, they also help with marketing, providing valuable market research and data analysis.
6. Brokers
Brokers are also hired to sell and receive a commission, like real estate brokers and insurance brokers. The difference is that brokers have short term relationships with the company - they're brought on just when they're needed and then let go when a project is complete.
7. Sales Teams
Businesses can also open up sales teams to reach new audiences and drive interest. Sales teams can make calls and presentations in-person or online, depending on the product or service.
8. The Internet
The internet means that businesses can reduce or eliminate the costs of distributing and selling their products. Companies no longer need to worry about setting up physical stores, transporting supplies, or maintaining a fleet of delivery trucks — all they need to do is build an online store and start accepting orders.
Through an e-commerce platform, businesses have the ability to reach a global client base with just a few clicks
9. Catalogue
Catalogue sales, or selling through a catalogue, is when a salesperson is connected to a company and sells its products using a magazine. Salespeople in this model usually earn a commission for their sales. This is a common model in the cosmetics and skincare industry, with brands like Avon and the Brazilian Natura leading the way.
Six Characteristics of Distribution Channels
There are a lot of distribution channels and intermediaries in the e-commerce space. However, not all are equal. The most successful brands know how to evaluate various channels and intermediaries and choose the one that best suits their company's goals. Choose your channel according to your target customers' needs and your company's values.
Understanding customer needs will help you choose the right channel. For example, if your product requires high-quality packaging, you should focus on premium-packaging distribution channels to reach the kind of customers who are willing to spend money on their online shopping experience.
There are six characteristics of distribution channels. Characteristics include cost, capacity, consequences of breakdown, number of intermediaries, the number of customers the channel serves, and the degree of customer interaction.
1. Benchmarking
Businesses can learn a lot by analyzing the benchmarks set by their competitors.
Benchmarking is a technique that involves studying how your direct and indirect competitors are presenting their products, then adopting a similar model to achieve quantifiable success. You can benchmark your competition on everything from their location to how they advertise their products, to their pricing to what goods they sell.
For example, let's say you want to sell blue jeans online. You can benchmark your competitors by looking at their prices, their marketing strategies, even the way they package their products.
Once you've found some companies that are similar to yours, study what they're doing—and what they're not doing. You might find that they are more successful in certain areas of their business model. You can then make a spreadsheet of your findings and market your blue jeans with a similar pricing strategy and marketing plan.
2. Costs and Benefits
It is important to compare the cost of distribution channels. When looking at the cost-benefit ratio, it's not enough to have a rough idea of costs. To correctly analyze if your chosen distribution channel is worth it, be sure to record every cost and analyze if the benefits of this channel are worth it.
It is important to note that, in some cases, it can be easy to identify which distribution channel will be most profitable. Something to look at when comparing distribution channels is which channels are more popular. If one channel is more popular than another, then chances are this is generally the most profitable distribution channel for your industry.
3. Review
You have identified best practices in the marketplace, and have analysed the costs associated with your chosen distribution channel. However, before you move forward with your project, check for errors. If they are there, optimise the process and adapt the project to suit the type of sales you want to make.
4. Market Potential
Understand that using an intermediary will mean you're involving a third party (a distributor, the producer, a wholesaler) into your supply chain. Make sure to thoroughly research each option before moving forward to ensure that each party has the experience and skills to get your product or service in front of consumers.
You need to research the channels that you're going to work with, not only the ones where your products will be sold. After all, it is up to you to get your product into the hands of customers. However, channels have their own reputations and niches — anything from price to service quality. Analysis needs to be done in order to create a list of trustworthy sellers and ultimately find a sales channel that suits your goods best.
5. Logistics
Logistics are key to the success of your business. How will you deliver goods to potential customers? When they buy your goods, how far will they need to travel to pick up the goods? And how will you handle receiving goods from your suppliers — are you prepared for the volume? All of these logistics questions must be considered when starting any kind of business.
6. Location
Of course, you need to take into account the intermediaries that will be selling your product. Whether they're resellers, retailers, wholesalers, or distributors, you need your product to end up in the hands of a customer — and that customer needs to live in the region where your target audience is. This is especially true of niche products; if you supply a specific market with a speciality item, you need to make sure that the customer is being served.
Reverse Distribution Channel
Reverse Distribution as a customer-focused strategy involves sending products that are defective or need to be returned back to manufacturers, who then reimburse customers or send new replacements.
Return policies can prove to be complex, especially for e-commerce sites that allow returns of used items. According to some businesses and sellers, returns can be costly and tedious to manage, so keep return policies simple by making all of their details available on your website. If you’re not able to offer a return policy for the products you sell online, provide a direct customer service contact who users can reach out to for any questions or concerns.
How Do You Manage Your Distribution Channels?
It's the job of marketing to manage distribution channels, but it's the job of everyone in a supply chain to track key performance indicators (KPIs) and make sure that your brand is always reaching its target audience.
Make sure your business is being monitored at a high level that covers both your sales process and the health of your brand. Analysing your data will let you know how well you're doing in those two areas: if the numbers are on track to meet your forecasts and objectives, great! Otherwise, take steps to make improvements. It's also important to know what customers expect from you: their feedback can help you understand where there is room for improvement.
Examples of Distribution Channels
Shein
Shein is an online fashion retailer that primarily serves the Chinese community. By working with direct and hybrid distribution techniques, Shein supplies customers directly from their own warehouses. Customers are able to purchase products online through the Shein website, and products are delivered directly from their Chinese warehouse.
Direct distribution means that Shein keeps a stock of inventory in the United Kingdom and thus they can ship products directly from the UK. This reduces shipping time as well, making the process more efficient.
Coca-Cola’s Distribution Channels
This huge drink manufacturer uses a range of different sales channels throughout the world. This structure relies on three key players — distributors, manufacturers, and retailers. Distributors play an important role in the company's global network. They transport beverages to major retailers, who then sell directly to final consumers.
Avon's Distribution Channels
Avon is one of the most successful companies in the world – and it built its success on magazine distribution. Originally, Avon was sold through door-to-door sales, but today it is available through a network of over 6 million salespeople. Avon's network of beauty experts is hard to ignore; every month, these consultants sell thousands of new products to their friends and family through colourful catalogues.
Distribution Channels Conclusion
You're one step closer to selling your product or service in stores and online. You learned how to create a sales outlet analysis, so you can start profiling your ideal buyer.
You now know what kinds of stores and digital marketplaces could be the best place for your company. You have identified your target audiences, so it's time to get started building your distribution channels.
The fastest way to grow is through the careful management of distribution channels by choosing the right partners. By understanding which partnerships and outlets will lead to sustained, long-term sales and profits, you can build a strong business that endures through the good times and bad.