Distribution ChannelDefined with Examples & More

Written By:
Lisa Borga

A distribution channel refers to the chain of businesses and intermediaries that takes a good or service from the producer or manufacturer to the end consumer.

Distribution channels vary considerably and may include producers, wholesalers, retailers, and the end consumer.

The mix that a particular product or service includes depends upon a number of factors that a company must consider in order to ensure good availability of the product to potential buyers.

Distribution Channels Explained

Distribution channels are the path that goods and services take in order to arrive at their end consumer.

These paths can vary widely in length depending on the number of intermediaries they pass through on their route to the buyer.

In some cases, employing multiple distribution channels in order to increase the number of ways a consumer can access a good or service can increase sales.

However, it can also increase the costs and complexity of managing distribution resulting in fewer profits for each intermediary along the way.

Two different primary categories of distribution channels have been developed to bring products to the end consumer, including direct and indirect channels.

Direct Distribution Channels

A direct-distribution channel does not use any intermediaries.

Instead, the producer or manufacturer sells its goods or services directly to the end consumer.

This type of distribution is often used by manufacturers of particularly expensive or niche products as well as highly perishable goods.

Consumers can often benefit from a direct distribution channel due to the reduced costs associated with intermediaries.

Indirect Distribution Channels

Indirect distribution channels incorporate intermediaries in order to bring products or services to the end consumer.

There are three distinct types of indirect channels, which are one-level, two-level, and three-level channels.

• One Level: One level distribution channels deliver a product from a producer to a retailer, where it is then sold to an end consumer. This is a common method of distribution for manufacturers of furnishings, clothing, and many other basic home goods.
• Two Level: With two-level distribution channels, a wholesaler purchases bulk quantities of goods from a producer and then divides them into smaller quantities to be sold to retailers. These retailers then sell the goods to the end consumer. This type of distribution channel is often used for longer-lasting affordable goods.
• Three Level: A three-level distribution channel involves an agent in addition to a wholesaler and retailer who will help in selling goods. This agent handles the distribution of a product in a specific area in return for a commission. This can be beneficial because it allows goods to be moved into the market swiftly after an order is placed. This type of distribution channel is employed in cases where distribution occurs over a large area and demand is high.

Types of Intermediaries

There are several types of intermediaries, including:

Wholesalers

Wholesalers purchase bulk quantities of a good from a manufacturer for a discounted price and then repackage the goods into smaller quantities in order to offer them to retailers at a higher price.

These retailers then offer them for sale in even smaller quantities to end consumers at a higher price.

Retailers

Retailers buy products from wholesalers or manufacturers in large quantities and then sell the products to consumers in smaller amounts for a profit.

Agents

An agent works as a representative of the manufacturer to promote and sell the manufacturer’s products.

These intermediaries connect manufacturers to their customers.

Generally, intermediaries are not involved in manufacturing themselves and instead concentrate on sales and marketing.

As an example, instead of creating a large sales department and shipping network of its own in order to bring its products to consumers, a manufacturer of beach balls may choose to incorporate intermediaries into its distribution channels.

It could sell its products in bulk quantities to wholesalers for reduced prices.

These wholesalers can then sell them to individual retailers, who will then sell the products to beachgoers alongside complementary goods.

Distribution and Digital Technology

Distribution has changed in many ways due to digital technology.

Digital technology has had a significant impact on the traditional channels of distribution when selling services or products, particularly in the following ways.

The availability of digital e-commerce tools at a reasonable price has made it easy for businesses, even small businesses, to sell their products directly to their customers online.

Businesses can use website templates to make their website and have tools available for handling payments. So, they no longer need to rely on forming a relationship with a large retailer.

Digital technology has changed advertising as well.

Businesses can use strategies such as organic marketing, which involves using blog posts, social media, and search engine optimization, as well as other ways of increasing product and brand awareness to market their products instead of having to use paid advertising.

Online advertising also makes it easy to target your company’s preferred area or demographic.

Even if a company uses paid advertising online, it can probably reach its target audience at a reasonable price.

Digital technology makes it easier to maintain relationships with distribution partners as well.

It makes it easier for companies to collect data throughout the distribution process, which can be used to better manage their distribution process, whether direct or indirect.

Choosing a Distribution Channel for Your Business

It’s vital for a company to choose the best distribution channel for each of its products.

One distribution channel may not be right for every product.

There are some things to consider when choosing the right distribution channel.

What Works Best for the Product?

When developing a distribution channel, a company needs to consider how quickly its product needs to get to the customer.

Another issue that needs to be considered is whether or not the product is usually combined with other products when shipped.

Some products need to be shipped very quickly, so with these products, a direct channel can work well.

Whereas there can be other types of products that may sell better if your company works with an intermediary.

Keep Sales Goals in Mind

Companies need to consider their target customers when developing a distribution strategy.

This can help the company make decisions such as whether a direct or indirect distribution channel would work best for accessing their customers.

It is important when deciding on a distribution channel to consider if there is already an effective indirect channel in place for your product, in which case your company could consider working with these intermediaries.

Working with larger wholesalers and retailers can be a very effective strategy for companies trying to reach a large audience for their products.

However, this is not always the best strategy.

It is important to consider your specific circumstances.

Developing a Distribution Strategy

It is essential for a company to develop an overall distribution strategy rather than trying to deal with the individual parts of their distribution system separately.

It is important to consider your customers’ needs when developing a strategy. This involves thinking about how your customers access your product and whether more customers might be able to access your product if you change distribution channels.

Make any decisions based on company data and be careful of channel conflict if you choose to use more than one distribution channel for one product.

Channel conflict occurs when selling one product through more than one distribution channel.

For example, direct selling on the company’s website may take customers away from another distribution channel, such as indirect selling through an intermediary like a retailer.

This situation is known as disintermediating, which means removing distribution partners from the distribution channel.

This doesn’t need to happen if a business considers what customers they are likely to reach through different distribution channels.

It is important to consider distribution partners when creating a distribution strategy since these partners are also customers.

They are just business-to-business customers instead of end customers.

Quick Summary

• A distribution channel is the path a service or product takes to get to the customer.
• A direct distribution channel is a channel in which the manufacturer sells the product directly to its customers.
• An indirect distribution channel is one in which the manufacturer uses intermediaries to get its product to its customers.
• A company should consider its products, customers, and sales goals when deciding which distribution channel to use.
• A company needs to consider its customer’s needs, its distribution channel, and its marketing strategy when developing a distribution strategy.

FAQs

What Is a Distribution Channel?

A distribution channel is a path that a product takes to get from the manufacturer to the customer.

In some cases, this is a short path, such as if the customer buys the product straight from the manufacturer.

However, the path can be much longer if suppliers, distributors, and retailers are involved.

What Are the Main Channels of Distribution?

The two main channels of distribution are direct and indirect.

If a company uses direct distribution, it sells its product directly to its customers.

The company can do this through a brick-and-mortar store or by having a website where customers can purchase its product.

A company could also use indirect distribution.

Businesses that use indirect distribution have wholesalers, retailers, and other intermediaries that help get their products to their customers.

Key Takeaways

• A distribution channel is the path that a good or service takes on its way from the proper manufacturer to the end consumer.
• In most cases, the producer of a good or service is linked to an end consumer through intermediaries, including wholesalers and retailers who may be individuals or other businesses.
• There are two main categories of distribution channels which are direct and indirect, which themselves can be divided into channels based on the number of intermediaries involved before the product reaches the end consumer.