Distribution Channel

What Is a Distribution Channel?

A distribution channel :is the network of businesses or intermediaries through which a

good or service passes until it reaches the final buyer or the end consumer.

 Distribution channels can include wholesalers, retailers, distributors, and even the
internet.

Distribution channels are part of the downstream process, answering the question "How do
we get our product to the consumer?

 " This is in contrast to the upstream process, also known as the supply chain, which
answers the question "Who are our suppliers?"

Key Takeaways

 A distribution channel represents a chain of businesses or intermediaries through

which the final buyer purchases a good or service.
 Distribution channels include wholesalers, retailers, distributors, and the Internet.
 In a direct distribution channel, the manufacturer sells directly to the consumer.
Indirect channels involve multiple intermediaries before the product ends up in the
hands of the consumer.

Understanding Distribution Channels

A distribution channel is a path by which all goods and services travel to arrive at the
intended consumer.

 Distribution channels can be short or long, and depend on the number of

intermediaries required to deliver a product or service.

Increasing the number of ways a consumer can find a good can increase sales but it can also
create a complex system that sometimes makes distribution management difficult.

 Longer distribution channels can also mean less profit for each intermediary along
the way.
 Components of a Distribution Channel

• Producer: Producers combine labor and capital to create goods and services for
consumers.

• Agent: Agents commonly act on behalf of the producer to accept payments and transfer
the title of the goods and services as it moves through distribution.

• Wholesaler: A person or company that sells large quantities of goods, often at low prices,
to retailers.

• Retailer: A person or business that sells goods to the public in small quantities for
immediate use or consumption.

• Consumer: A person who buys a product or service.

Types of Distribution Channels

Direct

A direct channel allows the consumer to make purchases from the manufacturer. This
direct, or short channel, may mean lower costs for consumers because they are buying
directly from the manufacturer.

Indirect

An indirect channel allows the consumer to buy the goods from a wholesaler or retailer.
Indirect channels are typical for goods that are sold in traditional brick-and-mortar stores.

Hybrid

Hybrid distribution channels use both direct channels and indirect channels. A product or
service manufacturer may use both a retailer to distribute a product or service and may
also make sales directly with the consumer.

Special Note: When a manufacturer uses both direct and indirect channels to reach the
consumer, that is called a hybrid channel. Suppose a manufacturer sells its product online
directly from its own e-commerce website. Besides that, they also have a relationship with an
intermediary to distribute the same product in the market.

Advantages and Disadvantages of Direct Channel:

 advantages of direct distribution channels;

 The direct distribution channel gives businesses total control over how their
product is marketed and sold.
  It allows a brand to build genuine relationships with the end users.
 Direct channel ensures e-commerce consumers’ satisfaction with the speedy
delivery of products.
 It eliminates the cost of hiring intermediaries.
 It allows companies to distinguish themselves from their competitors.
 It allows companies to collect data regarding their customer’s buying habits,
demographics, and other important information directly.

 disadvantages too;

 It requires warehouse management to deal with the inventory.

 Businesses with direct distribution channels miss the opportunity to widen their
reach.
 Setting up its own warehouses, showrooms, and delivery system can be cost-
sufficient and time-consuming.

Advantages and Disadvantages of Indirect Channel:

 advantages of indirect distribution channels;

 It allows a business to share its shipping and shortage costs.

 It reduces startup costs.
 Easy for customers to find your product in the market.
 Businesses can benefit from third-party’s experience, Salesforce, and infrastructure.
 The chances of expanding business are high.
 It allows companies to better focus on their core competencies.
 Instant process.

 disadvantages;

 The effective cost of the product increases.

 Profit is also very low using this type of distribution system.
 It gives businesses partial control over how their product is marketed and sold.
 It includes the cost of hiring intermediaries.
 The delivery process is comparatively slow with this type of distribution channel.

Distribution Channel Levels

Level 0

This is a direct-to-consumer model where the producer sells its product directly to the end
consumer.

 This is the shortest distribution channel possible, cutting out both the wholesaler
and the retailer.
Level 1

A producer sells directly to a retailer who sells the product to the end consumer. This level
includes only one intermediary.

Level 2

Including two intermediaries, this level is one of the longest because it includes the
producer, wholesaler, retailer, and consumer.

Level 3

this level adds the role of the individual who may assemble products from a variety of
producers, stores them, sells them to retailers, and acts as a middle-man for wholesalers
and retailers.

A distribution channel, also known as placement, can be part of a company's marketing

strategy, which also includes the product, promotion, and price.

Distribution Channels in the Digital Era

Digital technology has transformed the way businesses, especially small businesses use
direct channels of distribution. With increasing consumer demand for online shopping and
easy-to-use E-Commerce tools, direct selling means more success for businesses.

Online advertising through social networks and search engines targets specific areas or
demographics and social media networks are increasingly considered the industry
standard and changing marketing strategies.

If a company continues to use indirect channels of distribution, digital technology also

allows them to manage relationships with wholesale and retail partners more efficiently.

Choosing the Right Distribution Channel

Not all distribution channels work for all products, so companies need to choose the right
one. The channel should align with the firm's overall mission and strategic vision including
its sales goals.

The method of distribution should add value to the consumer. Do consumers want to speak
to a salesperson? Will they want to handle the product before they make a purchase? Or do
they want to purchase it online with no hassles? Answering these questions can help
companies determine which channel they choose.

Secondly, the company should consider how quickly it wants its product(s) to reach the
buyer. Certain products are best served by a direct distribution channel such as meat or
produce, while others may benefit from an indirect channel.
If a company chooses multiple distribution channels, such as selling products online and
through a retailer, the channels should not conflict with one another.

 Companies should strategize so one channel doesn't overpower the other.

What Is a Distribution Channel and What Components Does It Have?

The term “distribution channel” refers to the methods used by a company to deliver its
products or services to the end consumer. It often involves a network of intermediary
businesses such as manufacturers, wholesalers, and retailers. Selecting and monitoring
distribution channels is a key component of managing supply chains.

What Is the Difference Between Direct and Indirect Distribution Channels?

Direct distribution channels are those that allow the manufacturer or service provider to
deal directly with its end customer. For example, a company that manufactures clothes and
sells them directly to its customers using an e-commerce platform would be utilizing a
direct distribution channel. By contrast, if that same company were to rely on a network of
wholesalers and retailers to sell its products, then it would be using an indirect distribution
channel.

How Is Placement Important in a Distribution Channel?

Placement is the way a company ensures its target market has access to its products or
service in the location they would be most likely to look for that product or service.

 An effective distribution system ensures that products are placed in the right
location as needed.

The Channel Management Process

The channel management process contains five steps.

1. Analyze the Consumer

 We begin the process of channel management by answering two questions.

 First, to whom shall we sell this merchandise immediately?
 Second, who are our ultimate users and buyers? The immediate and ultimate
customers may be identical or they may be quite separate. In both cases,
certain basic questions apply: There is a need to know what the customer needs,
where they buy, when they buy, why they buy from certain outlets, and how they
buy.
 2. Establish the Channel Objectives

Once customer needs are specified, the marketer can decide what the channel must
achieve, which can be captured in the channel objectives. Channel objectives are based on
customer requirements, the marketing strategy, and the company strategy and objectives.
However, in cases where a company is just getting started, or an older company is trying to
carve out a new market niche, the channel objectives may be the dominant objectives.

 For example, a small manufacturer wants to expand outside the local market. An
immediate obstacle is the limited shelf space available to this manufacturer. The
addition of a new product to the shelves generally means that space previously
assigned to competitive products must be obtained. Without this exposure, the
product is doomed.

there is wide diversity of channel objectives. The following areas encompass the
major categories:

 Growth in sales by reaching new markets and/or increasing sales in existing

markets.
 Maintenance or improvement of market share
 Achieve a pattern of distribution by a certain time, place, and form
 Reduce costs or increase profits by creating an efficient channel

3. Specify Distribution Tasks

After the distribution objectives are set, it is appropriate to determine the specific
distribution tasks (functions) to be performed in that channel system. The channel
manager must be very specific in describing the tasks and also detail how these tasks will
change depending upon the situation.

For example, a manufacturer might deliget the following tasks as necessary to profitably
reach the target market:

 Provide delivery within 48 hours after order placement

 Offer adequate storage space
 Provide credit to other intermediaries
 Facilitate a product return network
 Provide readily available inventory (quantity and type)

4. Evaluate and Select Among Channel Alternatives

Determining the specific channel tasks is a prerequisite of the evaluation and selection
process. There are four considerations for channel alternatives: number of levels, intensity
at the various levels, types of intermediaries at each level, and application of selection
criteria to channel alternatives.

 In addition, it is important to decide who will be in charge of the selected channels.

Number of Levels

Channels can range in levels from two to several (five is typical). The two-level channel
(producer to consumer) is a direct channel. The number of levels in a particular industry
might be the same for all the companies simply because of tradition. In other industries,
this dimension is more flexible and subject to rapid change.

Intensity at Each Level

Once the number of levels has been decided, the channel manager needs to determine the
actual number of channel components involved at each level. How many retailers in a
particular market should be included in the distribution network? How many wholesalers?

The intensity decision is extremely critical, because it is an important part of the firm's
overall marketing strategy. Companies such as Starbucks and Hershey's have achieved high
levels of success through their intensive distribution strategy.

Types of Intermediaries and Application of Selection Criteria

As we discussed, there are several types of intermediaries that operate in a particular

channel system. The objective is to identify several possible alternative channel structures,
and evaluate these alternatives with respect to some set of criteria such as company
factors, environmental trends, reputation of the reseller, and experience of the reseller.

Who Should Lead?

Regardless of the channel framework selected, channels usually perform better if someone
is in charge, providing some level of leadership.

 the purpose of this leadership is to coordinate the goals and efforts of channel
institutions. The level of leadership can range from very passive to quite active
verging on dictatorial. The style may range from very negative, based on fear and
punishment, to very positive, based on encouragement and reward. In a given
situation, any of these leadership styles may prove effective.

Under which conditions should the manufacturers lead? The wholesaler? The
retailer? While the answer is contingent upon many factors,
 in general, the manufacturer should lead if control of the product (merchandising,
repair) is critical and if the design and redesign of the channel is best done by the
manufacturer. The wholesaler should lead where the manufacturers and retailers
have remained small in size, large in number, relatively scattered geographically,
 are financially weak, and lack marketing expertise. The retailer should lead when
product development and demand stimulation are relatively
relatively unimportant and when
personal attention to the customer is important.

5. Evaluating Channel Member Performance

The need to evaluate the performance level of the channel members is just as important as
the evaluation of the other marketing functions. Clearly, the marketing mix is quite
interdependent, and the failure of one component can cause the failure of the whole. There
is one important difference, though: the channel member is dealing with independent
business firms, rather than employees and activities
ac under its control, these firms may
be reluctant to change their practices.

All organizations expect to manage some level of behavioral conflict in the channel. They do
this by:

 Establishing a mechanism for detecting conflict

 Evaluating the effectss of the conflict
 Resolving the conflict