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Choosing the right types of distribution channels for your business can be difficult and confusing. Whether your business is a small scale custom t-shirt design company or a giant producer of goods, you will need a distribution strategy. Determining the right distribution channel will impact your company’s marketing strategy, business model, and more.
The Council of Supply Chain Management Professionals (CSCMP) states that distribution can be categorized into direct, indirect, and hybrid channels. Direct channels sell straight to the consumer, while indirect channels use go-betweens like wholesalers or retailers. Hybrid channels combine both approaches, offering flexibility.
Join us as we review the different distribution channel types.
A distribution channel is the method that manufacturers use to get their products to consumers. The idea is to bridge the gap between producer and consumer in the most efficient and effective manner. Distribution channels function whether the gap is a few miles or a few thousand miles.
Groups that use distribution channels are manufacturers of products. They can be any kind of person, from farmers to a creator of handmade embroidered hats.
There are 4 types of distribution channels most businesses use:
Each of these channels consist of institutions whose goal is to manage the transaction and physical exchange of products. Those institutions are the manufacturers, consumers, and middlemen.
The consumer can be an individual, household, government, or business. Additionally, middlemen function at the retail or wholesale level. The goal of a channel is to perform specific functions.
There are transactional functions, which consist of buying, selling, and assuming risk. Logistical functions consist of assembly, storage, and transportation. Finally, facilitating functions are recalls and maintenance, financing, promotion, and leadership.
Depending on the type of channel you use, you can eliminate the institution that performs a function, but you can not eliminate the function itself.
For example, if a producer decides to set up an online storefront, they are removing the retailer from the distribution channel. However, the producer takes on the function and responsibility of storage, sorting, and risk functions that the retailer normally would perform.
There are several factors you should consider when determining your distribution channel.
The first of the four types of distribution channels is direct selling. In a direct selling model, a company distributes products directly to customers without using any intermediaries. For example, Amazon utilizes direct distribution when it sells Kindle products on its own website.
Apple uses this method as well when it sells iPhones out of its own retail stores. Direct selling can be any method that doesn’t utilize intermediaries. These approaches can include brick and mortar locations, online storefronts, door-to-door sales, telemarketing, and more.
According to the United States Direct Selling Association (DSA), direct selling produced the following results in 2018.
|
$35.4 billion |
Retail sales figures. |
|
36.6 million |
Direct sale customers |
|
6.2 million |
Direct salespeople |
Source: usda.org
Direct selling is a good way to manage costs, especially when you own a small business. It allows you to sell your product without having to pay for other individuals to handle marketing, sales, or shipping needs. It also means that those responsibilities belong to the producer.
A business that uses direct distribution may set up an online storefront and promote its products through social media. They are fully in charge of all the marketing, packaging, and shipping of their goods. The same business might set up at an artisan market, fair, or even at local public spaces such as a coffee shop to sell their product.
There are many avenues for direct selling, and it gives owners much more control over their company and products. However, as the business grows, so will distribution needs. Business owners may need to use other means of distribution to reach a larger consumer base to stay competitive.
It is difficult to sell large quantities of your own product when you don’t have an extensive distribution strategy. Similarly, tackling the global marketplace is easier when you have intermediaries to help.
Selling through intermediaries is the second type of distribution channel. It is also known as an indirect channel of distribution. This is where a manufacturer uses wholesalers and retailers to make its products available on the market. The wholesalers and retailers purchase the product from the producer and take on the risk if the product sells poorly.
Wholesalers buy products in bulk at a lower rate than the retail price. They do not usually sell the product to the end customer. Normally, a wholesale buyer will store and warehouse large quantities of product to then sell them to other middlemen in small quantities for a profit.
Retailers, on the other hand, are store owners. The main difference between wholesalers and retailers is their size. Retailers tend to be smaller, catering directly to end users. For example, your local grocery store is a retailer. They buy the products from wholesalers or other distributors to then sell to the end customer for a profit.
As a manufacturer, if you decide to use this type of distribution channel, you should maintain good relationships with your wholesalers and retailers. Create a large base of wholesalers and retailers because they can drop you at any time if your product doesn’t sell well. Know how your reseller’s business is doing and discuss the connection between their success and your products.
Make sure they understand the profitability of your products. Give them information about your product so they feel connected to the brand and always gather feedback. Feedback will teach you how to better market your product and develop brand perception.
If you have ever seen a COACH® purse concession counter within a larger department store, you have seen an example of dual distribution.
Dual distribution is where a manufacturer sells its product directly to customers and indirectly through third-party distributors and retailers. They use more than one distribution channel to reach the end customer, and it allows the product to reach a larger market.
COACH sells its luxury handbags through the “shop-in-shops” method, which includes:
With a direct distribution strategy, the manufacturer can interact directly with customers. When using the indirect distribution strategy, manufacturers will choose to work with distributors or brokers. In this method, they are delegating some of their tasks directly to intermediaries.
These intermediaries are an extension of the manufacturer and most of the time represent the product before the end customer. Brokers tend to handle the sales of the product to retailers, while distributors deal with the transportation of the goods. Distributors buy products from a manufacturer to then sell on a profit margin to retailers.
Using the direct distribution strategy can be expensive, so most companies will choose to use dual distribution and vary their types of distribution strategies.
For instance, Apple uses direct distribution when selling products out of its own stores, but the company also uses indirect distribution when selling phones through service providers such as Verizon. While the direct approach gives the manufacturer more control over the customer's experience, it is pricey.
Dual distribution is the alternative to this, and is generally a good decision when starting out as a manufacturing company. There are several advantages when working with either a broker or a distributor.
When working with a broker, a producer will sign a contract with them, the broker will then be responsible for selling the product to retailers. Brokers usually do not handle the actual shipping of the product, only the selling of it. A broker’s goal is to close the sale.
Additionally, experienced brokers will have a portfolio of manufacturers they work with as well as retailers they sell to. When looking for a broker, try to find one that has strong relationships with retailers and a portfolio of products from the same industry as yours. This will ensure they have quick access to retailers and a higher likelihood of successfully selling your product. Brokers usually offer other services such as invoicing and inventory control as well.
Similarly, when working with a distributor, the manufacturer has the advantage of assuming less risk. A distributor will directly buy the product and then resell it to retailers using the direct distribution strategy at a profit margin. The distributor does everything, from purchasing to shipping and invoicing the products. Distributors are more likely to introduce new products to retailers because they are incentivized to sell their goods.
The disadvantage of working with brokers or distributors is that they can drop your products at any moment. Brokers are expensive to contract, and if the sale of one of their manufacturer’s products goes down, they will likely stop carrying that product. Likewise, a distributor runs the risk of underselling and if a product ends up doing poorly, the distributor is less likely to buy from that manufacturer again.
The first three types of distribution channels discuss how the manufacturer gets their product to the end customer. But, in the reverse channel of distribution, the direction changes. The direction of the product runs from consumer to another consumer or another company in a reverse flow channel.
A traditional distribution channel will look like this:
Company → Warehouse → Distributors → Dealers → Consumers
A reverse channel will look like this:
Consumer → Intermediary → Company
You might wonder who would use reverse channels. People who sell waste to companies so that they can be recycled do so, as do people in the second hand sale business. For example, Goodwill uses the reverse channel system when it sells donated goods. Technology can also be sold back to the original company that manufactured it.
Here are four ways in which the reverse channel of distribution is used.
One other important difference between the traditional distribution methods and the reverse channel is that there is no producer. The reverse channel introduces a beneficiary or user of an existing product.
When selecting a distribution channel, you should keep in mind your organization’s brand, profitability, and the scale of operations for your product. You should first understand that a distribution channel represents the relationship between the manufacturer and the user. A strategic alliance with a retailer will influence that relationship.
You’ll also need to understand your target audience and what their preferences are. Will you be selling to technologically savvy consumers and thus open up a digital storefront? Or maybe your target audience is older and more traditional? Again, think of the cost of the different types of distribution channels. Consider your profit margin and desired volume when choosing a channel.
Another important aspect of selecting a distribution channel is the brand of your organization. Don’t forget to think about the audience's perception of your product and if it needs to be sold in high-end designer stores or if department stores will do. Finally, opening strategic channels of distribution in local markets may or may not enhance the profitability of your products and should be duly considered.
Before choosing a distribution channel, know that there are three things a distribution strategy influences:
When an optimal distribution strategy is chosen, a strategic alliance between a manufacturer and a retailer is struck and both entities profit from the relationship. It will also impact how your target audience interacts with your product. For these reasons, there are several things you should consider when choosing that distribution channel.
One thing to consider in-depth when selecting a distribution channel is the consumer’s preferences. As mentioned earlier, a distribution channel will influence product branding and the buyer and producer relationship. As you move your product from the manufacturing stage to distribution, consider your audience. Who is the product for and why will they buy it?
Research your consumers' habits and behavior to help you select the correct distribution channel. For example, if your consumer regularly buys products from department stores, you should consider stocking those stores with your product. On the other hand, if your products are rare antique rugs, you might want to consider selling them at specialty stores.
Not all costs of distribution channels are equal. Some channels are more expensive than others. For example, a product that doesn’t cost very much to manufacture and sells for a lower price will do better at a low-cost retail store. Additionally, If you are just starting out as a small business, you may want to use direct distribution.
Directly selling eliminates many intermediary costs between the producer and the user. However, you do have to deal with other aspects of distribution that may be costly. For example, you’ll have to deal with logistics, packaging, and shipping.
Another option if you are just starting out or if you are trying to establish your product is to sell to wholesalers. They are willing to buy outright large quantities of your product, although it will be at a significant discount. Your profit margin may not be as high when selling to a wholesaler. However, they have a larger incentive to sell your product, so it will certainly enter the market.
Selling to a wholesaler can be beneficial when you are trying to get your product established. When considering costs, make sure you know your financial situation and know that if you start with low distribution, you can always increase it as your product succeeds.
Overall branding of your product relies heavily on the channel of distribution that you choose. Organizations work together to create strategic alliances that appeal to consumers and result in an overall profit for both entities involved. For example, if an online retailer stocks vintage handmade goods the consumer will associate that retailer with those products. Etsy is a great example of this. This then has an impact on how the consumer views both of those companies.
Similarly, a high-end makeup company will not want to stock their goods at a drugstore retailer as that will reduce the quality of the makeup in the eyes of the consumer. The consumer will not want to spend money on a good that doesn’t match the quality of the requested price. Branding has a huge effect on the profitability of products. Producers should consider how they want to brand their products and how choosing a distribution channel can impact that brand.
Finally, another avenue to consider when selecting a distribution channel is localization. In today’s global economy, producers have many options of markets to pick from. Through effective marketing distribution, a company can enter new markets successfully. To do this, however, companies need to know how to localize and choose retailers in the new market that will appeal to their consumers.
As a producer, it is necessary to learn how to make your brand recognizable and understood when entering new foreign markets. Localizing through strategic channel alliances is one way that producers can achieve this.
Distribution strategies and preferred channels will change based on the target audience. There are two types of markets that use distribution strategies and for each market needs are different.
For a B2C, or business-to-consumer market, the sale of goods transfers from the business to the end-user. The business will either produce its own product or buy it at a wholesale price for resale at a profit.
In B2C markets, the manufacturer must identify the needs of a target audience, then position and price the product to align with that audience, and communicate and sell it in a way that shows its value to the audience.
There are two main methods that a B2C business uses to sell products:
On the other hand, B2B markets place a greater emphasis on personal interaction. B2B means business-to-business sales or commerce interactions between businesses. It refers to the sale of goods between manufacturers and wholesalers or wholesalers and retailers.
B2B sales use some of the same methods as B2C markets. However, they use additional channels not found in the B2C supply chain. For example, many businesses will retain a representative from a selling company to nurture relationships that will lead to sales.
Many B2B sales occur at trade shows. Trade shows are less common in B2C sales and allow businesses to show off their products, learn about rivals, and monitor industry trends. They are usually industry-specific.
The main difference between B2B and B2C sales is that in B2B, the purchaser expects an ongoing relationship with the seller. Meanwhile, in B2C, the purchase is considered the end of the transaction.
You may have reached the conclusion on your own by now that distribution channels sound similar to a supply chain. The confusion is understandable, but there are some differences.
A distribution channel focuses on getting products in front of customers, particularly those that are ready and willing to buy that product.
Meanwhile, the supply chain is concerned with all the details surrounding planning, manufacturing, and logistics. It focuses on the process of purchasing raw materials and transforming them into an end product that a customer will buy.
Sometimes, the supply chain will also become part of the distribution strategy. For example, when the manufacturer needs to control the full customer experience, right down to choosing the location of the retail stores.
The main difference between the distribution channel and supply chain management is that distribution channels specifically involve the demand chain. Meanwhile, the supply chain is concerned with supply and demand.
Ecommerce has essentially “leveled-up” distribution for several reasons. It has evolved from what it was many years ago through data influences and a fluidity companies now have through e-commerce. A company that utilizes e-commerce may consider itself the manufacturer, wholesaler, or even retailer. In fact, the United States is of one of the top ten largest ecommerce markets.
Companies also don’t have to go through as many intermediaries. Storage location needs are reduced and products are available to a larger customer base. Companies who might have paid for research into their target audience can now research it themselves through predictive and prescriptive data analysis.
It is by far the most efficient distribution strategy for a business. There is no longer a need for multiple distributors and brokers to sell your product to a retail store because you can own your own digital storefront. There aren’t as many employees which means the payroll is reduced saving the company even more money. It even gives the producer the opportunity to cross expose products by selling the printer with the ink or the computer with the computer case.
However, all forms of trade become digital. This means integrated databases, online marketing, and user-generated feedback are all things you will have to learn how to manage. If you don’t have the necessary training it may be difficult to set up an e-commerce distribution channel, but it is well worth looking into.
Whatever stage your business plan is in, if you need guidance determining the types of distribution channels that will work best with your company, Product Distribution and Strategy can help. Our experienced professionals will give you advice on how to approach distribution. We will identify the different types of distribution strategies and determine the most effective and profitable one for you.
Learning the best practices for evaluating the economic impact of your distribution channel and how to measure distribution performance are just a few of the things you will learn through our consulting services.
Call our team of experts at (855) 863-7672 or contact us online today to receive a quote or to learn more about how we can support your distribution channel needs.
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