There are several paths to success in any business, particularly one focused on ecommerce. Understanding the fundamentals of everything from marketing to finance to logistics can set you apart from the competition. The distribution channel is a crucial idea to grasp.
In this post, we'll go over everything you need to know about distribution channels and show you concrete instances of how they work.
What is a distribution channel?
Is a journey that a product takes from its originator or producer to the final user. In other words, how the buyer receives their goods after purchasing them, frequently involves middlemen. Channels of distribution might be lengthy or short, direct or indirect. In general, the higher the expense to both industry and consumers, the more complicated the system.
When a distribution channel is referred to as “direct“, the manufacturer sells directly to the end user without the need for an intermediary. When the distribution channel is “indirect“, the product passes through numerous hands before reaching the end user.
In an indirect distribution channel, middlemen between the manufacturer and the consumer may include:
- Wholesaler/distributor
- Dealer
- Retailer
- Consultant
- Manufacturer’s representative
- Catalog
- Internet
There may be only one intermediate, or there may be several. Finally, each form of distribution channel has advantages and downsides. For example, huge multinational businesses may be able to afford a more sophisticated distribution channel, but a solitary ecommerce operator may need to keep things simple.
Throughout the life of your company, the distribution channel you utilize changes. You may want to utilize exclusively a direct channel at first, but as your business grows, you may want to shift your primary distribution channel focus to indirect. Many businesses have many avenues of distribution. When it comes to distribution, you don't have to put yourself in a bind.
Direct vs. indirect distribution channels
Direct distribution channel
A company that employs a direct distribution channel sells directly to consumers by direct mail, a catalog of its business, or its ecommerce site. Entrepreneurs that generate and sell digital products such as workbooks, audio training, and online courses from their websites, for example, are employing a direct distribution channel.
Digital products are delivered directly from the artist to the client. Having a direct-to-consumer distribution channel reduces costs and can result in higher revenues. In the case of a digital product, the business owner just needs to spend on the cost of website hosting, for example. There is no shipment or the possibility of having to replace a product totally with a new one. As you might expect, having a direct channel is advantageous in many ways, but it is not the only way to succeed in ecommerce.
You also have considerably more control over quality and customer service with the direct distribution channel.
Indirect distribution channel
In comparison to the direct distribution channel, indirect channels are more complicated and include more third parties. That isn't always a terrible thing, but it does need a little more strategic thought.
The beverage alcohol sector, for example, employs a multi-tiered, indirect distribution channel. Distilleries and wineries sell to distributors, who in turn sell to retailers, who in turn sell to customers. While vineyards must employ indirect methods to get their wines into retail shops where consumers can buy them, many wineries also sell directly to people onsite. Using both options allows wineries to reach a large number of people through an indirect distribution channel and a smaller number of people through direct distribution through their own on-site retail business.
In reality, larger companies with more resources may find indirect distribution channels to be the most efficient and lucrative. For example, if you're offering a fresh twist on cola, teaching your clients online may be the most inefficient method. Instead, you may aim to have your Cola product distributed in a big supermarket, which will help you get your 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 choose to buy these kinds of products? Is the product something the buyer wants to touch and explore or is it something the target demographic prefers to buy online?
- What, if any, local, regional, or national restrictions govern the distribution routes for the product category?
- Is individualized service required for the customer?
- Is it necessary to service the product?
- Is it necessary to install the product?
- In your sector, how is the product normally delivered and sold?
Distribution channel impact on the price
The distribution channel you select will influence how you price your products. In the case of indirect, a product that travels from the manufacturer to a distributor before reaching a retail outlet must be priced at wholesale so that both the distributor and the retailer can mark it up. It looks like this with a multi-tier distribution channel:
- 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 must all profit from the product.
The price of a product that has been marked up numerous times through an indirect channel is frequently the same as the direct-to-consumer price. Not providing a “direct to you” discount maintains merchant connections while increasing the manufacturer's or creator's profit on the product.
When dealing with indirect channels, you nearly always have to raise the price proportionately. Direct distribution channels may frequently maintain prices cheaper than indirect distribution networks. Of course, depending on the products, the additional cost may not have a negative influence on your bottom line. If you offer nutritious cereal online, for example, your clients may be willing to spend a little extra if they can pick it up at their preferred grocery store.
Customers trying to acquire luxury things may be more concerned with ease or the ability to have the product promptly.
While the various distribution channels have an impact on your entire pricing structure, what is important is that you pick the price point at which your clients feel comfortable purchasing. The distribution channels you pick will be heavily influenced by your company's marketing strategy.
Distribution channels FAQ
Each distribution channel has its own set of pros and downsides. There is no one-size-fits-all solution. In general, direct-to-consumer can yield the most profit, but indirect channels can help you scale your business as it grows.
There are more distribution channels than simply direct and indirect. Direct sales to consumers, wholesalers, and retailers make up the three distribution channels. The top three are joined by a few more distributional channels.
