With any business, especially one with an ecommerce focus, there are many faucets to being succesful. Understanding the basics of everything from marketing, to finance, to logistics will help you stand apart from the crowd. One important concept to understand well is the distribution channels.
In this article we'll cover everything you need to know about distribution channels, as well as provide specific examples of them in action.
What is a distribution channel?
A distribution channel is the path used to get a product from the manufacturer or creator to the end user. In other words, how the customer gets their product after purchase, which often include intermediaries. Distribution channels can be long or short, direct or indirect. In general, the more complex, the higher the cost to both the business and consumers.
When a distribution channel is “direct,” the manufacturer is selling directly to the end user without a middleman. When the distribution channel is “indirect,” the product changes hands several times before reaching the ultimate consumer.
Middlemen between the manufacturer and the consumer in an indirect distribution channel might include:
- Manufacturer’s representative
There might be just one intermediary; there might be many. Ultimately, the types of distribution channels each have their own benefits and disadvantages. A large global organization for example may be able to afford a more complex distribution channel, where as a solo ecommerce founder may need to keep things simple.
The distribution channel you use is fluid throughout the life of your business. You may start out only wanting to use a direct channel, but as you grow you may want to change your main distribution channel focus to indirect. Many businesses have multiple distribution channels. You don't need to lock yourself into a corner when it comes to distribution.
Direct vs. indirect distribution channels
Direct distribution channel
A company that sells directly to consumers through direct mail, a catalog of its own products, or its own ecommerce site represents a business that uses a direct distribution channel. For example, entrepreneurs who create and sell digital products that include workbooks, audio training, and online courses from their own websites are using a direct distribution channel.
The digital products go directly from the creator to the customer. Having a distribution channel that is direct to consumer helps keep costs down and can generally mean larger profits. With the digital product example, the business owner only really needs to invest in the cost of website hosting etc. There's no shipping, or chance of needing to replace a product with a new product entirely. As you can imagine, having a direct channel is ideal in many ways, but it's not the only way to be successful in ecommerce.
With the direct distribution channel, you also have much more oversight in terms of quality and customer service.
Indirect distribution channelUnlike the direct distribution channel, indirect channels are a little more complex and involve more 3rd parties. That isn't necessarily a bad thing, but it does require a little more strategic planning.
For example, the beverage alcohol industry uses a multi-tier, indirect distribution channel. Distillers and wineries sell to distributors, who sell to retailers, who sell to consumers. But while wineries must use indirect to get their wines into retail outlets where consumers can buy them, many also sell directly to consumers onsite at wineries. Using both approaches lets wineries reach a mass market through an indirect distribution channel and a smaller market through direct distribution via on-site retail operations that they own.
Larger companies who have more resources may in fact find indirect distribution channels to be most efficient and profitable. If you're selling a new spin on cola for example, educating your customers online may be the most inefficient route. Instead, you could work to have distribution in a large supermarket which helps you get your Cola product off the ground quickly.
Distribution channel considerations
When choosing which distribution channels are right for your business, there are many factors to consider. Remember, you can take advantage of both direct and indirect channels, depending on the resources you have.
Here are a few questions to consider before choosing your initial distribution channel route to go.
- How does the end-user like to purchase these types of products? Does the consumer want to touch and examine the product or is it a product that the target audience likes to buy online?
- What, if any, are the local, regional, or national regulations regarding the product category’s distribution channels?
- Does the customer need personalized service?
- Does the product itself need to be serviced?
- Does the product need to be installed?
- How is the product typically distributed and sold in your industry?
Distribution channel impact on price
The distribution channel you choose will have an impact on how to price your products. With indirect, a product that goes from the manufacturer to a distributor before it goes to a retail outlet needs to be priced at wholesale so that both the distributor and retailer can mark up the price. With a multi-tier distribution channel, it looks like this:
- The manufacturer’s customer is the distributor.
- The distributor’s customer is the retailer.
- The retailer’s customer is the consumer.
The manufacturer, distributor, and retailer all need to make money on that product.
The direct-to-consumer price is often the same as the price of a product that has been marked up several times through an indirect channel. Not offering a “direct to you” discount protects retailer relationships and offers the manufacturer or creator a higher profit on the product.
With indirect channels, you'll almost always have to increase the price accordingly. With direct distribution channels you can often keep the price lower than if you go the indirect route. Of course, depending on the type of the product you choose, that added price may not impact your bottom line negatively. If you sell healthy cereal online for example, your customers may not mind paying a little more to be able to pick it up from their favorite grocery story.
Customers looking to purchase luxury items may not care so much about the price as they do convenience or being able to get the product quickly.
While the types of distribution channels do affect your overall pricing structure, what matters is you choose the price point that your customers feel comfortable buying at. Your company's marketing strategy will play a crucial role in the types of distribution channels you choose.
Distribution channels FAQ
What is a distribution channel?
It's how the customer gets their product after purchase.
What are the three distribution channels?
Distribution channels go beyond just indirect and direct. The three distribution channels are retailers, wholesalers, and direct-to-consumer sales. There are a few other distributional channels that fall under the big three as well.
What is the best type of distribution channel?
The various distribution channels each have their own benefits and disadvantages. There is no on size fit all. Direct to consumer can generally generate the most profit, but indirect channels can help scale your business as you grow.