What is a Distribution Channel?
Distribution channel refers to the network used to get a product from the manufacturer or creator to the end user.
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. Intermediaries 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.
Direct vs. Indirect Distribution Channels
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.
On a larger scale, 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 distribution channels 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.
Distribution Channel Considerations
Businesses with products should ask a number of questions before determining a distribution program. Those questions include:
- 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?
The distribution channel will have an impact on pricing. With indirect distribution, 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 indirect distribution. Not offering a “direct to you” discount protects retailer relationships and offers the manufacturer or creator a higher profit on the product.