Distribution channels, or “channels of distribution”, are the paths that products and services take on their way from the manufacturer or service provider to the end consumer.
For instance, a manufacturer of light bulbs may produce the light bulbs, but the distribution channel that takes them from factory to customer is likely to include wholesalers and retailers. These links in the sales chain are the light bulbs’ channel of distribution.
Companies develop various distribution strategies or channel strategies for their products and services, based on a variety of factors and potential steps in the distribution process or intermediaries.
Channels of distribution can be sorted into two main categories: direct and indirect.
- A direct channel of distribution is one where a company sells directly to the end consumer. For instance, an athletic apparel company who manufactures sports shoes and sells them through an e-commerce website or at their own retail store is employing a direct channel of distribution. Products go directly to the buyer with no intermediaries or intervening partners between them.
- An indirect channel of distribution is one where companies work with one or more distribution partners or intermediaries to bring products and services to customers.
There are numerous types of intermediaries:
- Value-added retailers (VARs) add features to a product to improve it and then sell the new product directly to retail customers.
- Consultants may not directly profit from the sale of products or services, but they can be powerful intermediaries all the same, influencing clients to buy.
- System Integrators (SIs) help unite different components of a product or system together, making sure they are functioning together properly before passing them to the customer.
- Managed Service Providers (MSPs) allow businesses to outsource their technology management by delivering IT and e-management services across a network to multiple enterprises.
- Original Equipment Manufacturers (OEMs) are the original producers of parts that come together to make up a full product under a different name. For example, a power cord producer that sells their cords to a computer company for integration into their products.
- Wholesalers sell products in bulk but at lower prices, typically to retailers.
- Distributors extend the reach of, and handle the logistics for, products going to wholesalers and retailers.
- Retailers sell products directly to consumers in smaller quantities.
Benefits of this approach: More profit goes directly to the company from the consumer.
The drawbacks: Companies using direct channels of distribution must heavily invest in sales teams and consumer marketing infrastructure, rather than relying on partners. It’s also much more difficult to achieve a wide reach geographically or across various market segments without the help of intermediaries.
The length of the channel of distribution depends on the number of intermediaries.
A short distribution channel could be: Company > VAR > Customer.
A long distribution channel could be: Company > Distributor > Wholesaler > Retailer > Customer.
All of these intermediary partners serve as a connection between a company and its customers. Intermediaries often aren’t occupied with manufacturing, for example, so they can devote themselves to marketing and sales. A manufacturer of dog leashes would have to create a huge sales department in order to have the same geographical reach as Pets at Home, for instance, and would not have the ability to pair its products with a wide range of complementary products, such as dog beds and food, and services like dog grooming.
Digital technology has altered the concept of distribution on many levels. First of all, customers can now access media content products like movies, music, television shows, books and audiobooks, magazines, and newspapers in seconds via digital distribution.
More generally, the impact of the digital revolution on traditional channels of distribution in the sale of all products and services has been two-fold:
Digital technology has made it much easier for companies - especially for small businesses - to use direct channels of distribution effectively.Digital eCommerce tools, along with the ever-increasing prevalence of online consumer purchases, have made direct selling far more appealing and successful for businesses.
- Even when a company uses indirect channels of distribution, digital technology allows them to manage relationships with these partners, as well as decisions on the overarching distribution strategy much more effectively and precisely. With enterprise software, companies can use customer data gathered from a variety of touchpoints in the customer journey to effectively manage not only relationships with customers, but also with intermediaries within channels of distribution.
For instance, a small manufacturer of beauty products can find affordable eCommerce website templates and tools such as PayPal for handling payments, rather than having to rely on relationships with retailers to sell their products. Using software like Salesforce Einstein, AI sales technology allows companies to effectively manage sales, and automatically achieve high-quality CRM. A smaller sales team is released from predictable tasks based on customer data that software can perform to nurture the kind of meaningful relationships with customers that only humans can achieve.
Marketing and advertising have also changed - now, inbound marketing using content and social selling using social media networks are increasingly considered the industry standard. PwC’s Total Retail Survey 2017 states that 39% of respondents say their main inspiration for purchases comes from social networks. And online advertising through social networks and search engines makes it easy to target specific areas or demographics at a very reasonable cost.
Small businesses don’t necessarily have to break the bank to create compelling marketing and sales strategies that reach customers or rely on intermediaries, such as nationwide retailers. They just have to be digitally savvy, know how to connect with influencers, and create an audience for their products and services.
First of all, one size of distribution channel does not necessarily fit all of your products. You may have different approaches within your company. So, how do you know which distribution channel is the best for your product or service?
- Look at the product itself. Does it need to reach the customer quickly? Does it need to be bundled with other products in order to be useful or attractive? If you’re selling fresh vegetables from a small farm, your best distribution channel might be direct, selling at a local farmers’ market. If you’re selling a specific piece of computer hardware, you might be better off working with a VAR or major retailer of computer products that complement your product.
- Consider your sales goals. Are you trying to target a very specific, international population of enthusiasts, such as gamers? Then maybe a direct channel of distribution via the Internet geared towards connecting with influencers in the community focused on your type of video games may work better than using a wholesaler and their retail partners. But there might already be a retailer that has created a meaningful relationship with that community and has expertise in this area - in which case, an indirect distribution channel might be a better bet. Are you trying to achieve the widest possible audience for your product? Then, perhaps the bigger wholesalers and retailers are the perfect intermediaries within an indirect distribution channel.
Mastering distribution channels is about more than isolated choices - you need to develop a distribution strategy and monitor its effectiveness through analytics and KPIs (Key Performance Indicators) in order to make sound decisions.
Here are some tips for an effective distribution strategy:
- Think about the needs of your customers. How do they access your products and services? Are there customers you’re not reaching that you might be able to reach through a different distribution channel? Imagine the process of finding and purchasing your product from their perspective. Base your decisions on sound data and CRM!
- Beware of channel conflict if you choose to use multiple distribution channels for the same product. This occurs when your efforts, say, in direct selling via eCommerce, get in the way of the same customers purchasing your product or service through an intermediary like a retailer. Otherwise known as disintermediating, or kicking distribution partners out of the distribution channel, this can be avoided if you strategise about the customer groups you are likely to reach through different distribution channels, focusing on market segmentation.
- Include your distribution channel partners in your company’s marketing strategy. Channel marketing is a strategy that directs marketing efforts not just to end consumers, but also to distribution partners. After all, intermediaries aren’t just a means to an end: they’re B2B customers! Just as with end users, marketing to B2B buyers is also increasingly a social, content-based game.