Distribution Channel Definition
A distribution channel is a network of intermediaries that facilitates product delivery from the manufacturer to the end consumer and transfers payments from the buyer to the producer. In other words, it is the route through which a product travels from the production end to the point of consumption.
Using a reliable distribution path lets manufacturers rest assured that their products and services would reach consumers easily. Aside from ensuring the movement of goods, it results in sales generation and brand awareness for businesses. Also known as a marketing channel, the network comprises producers, wholesalers, retailers, and consumers. It can be direct or indirect that can affect the product prices.
Table of contents
- A distribution channel is a network of distributors or intermediaries that ensures the delivery of products from manufacturers to end-users. It is also responsible for the transfer of payments made for purchases by customers to producers.
- It could be direct (manufacturer to consumer) without any middlemen or indirect, where intermediaries (wholesalers, retailers, distributors) are involved.
- The choice of the marketing channel depends on the cost of distributionCost Of DistributionDistribution cost is the total of all expenses incurred by the producer to make possible the delivery of the product from its location to the location of the end customer. involved, sales goals, business and product type, and targeted market.
- Its functions include supplying market information to the producer, financing its operations, promoting its products and services, maintaining product price stability, minimizing market risk, etc.
How Does Distribution Channel Work?
When a business manufactures a product or offers a service, it needs to market and deliver it to the customer. This movement of goods between the maker and the consumer takes place through a distribution or marketing channel. It is up to the manufacturers whether they want to deal with the consumers directly or they would like to include intermediaries to reach the end-users.
Some businesses do it directly without any middlemen by setting up their distribution units or retail stores. But others rely on indirect channels involving wholesalers and retailers (physical and digital), providing easier access for final consumers.
A distribution channel in marketing is crucial, given its ability to track product sales and maintain revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. flow. An efficient distribution strategy involves utilizing network resources and logistics to their full potential and at the lowest possible cost.
The decision of choosing the placement for products depends on various factors. It might be the cost of distribution, sales goals, product type, and the targeted market. While multiple channels make products easily accessible to consumers, it might increase their prices and affect the brand’s position in the market.
There are many other benefits of using a diversified marketing channel. A business can know about target customers’ presence, reach and acquire new customers, and gain customer loyalty. Therefore, manufacturers must be cautious when choosing a marketing channel to increase sales revenueSales RevenueSales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly or monthly as the case may be in the business entity's income statement/profit & loss account. while minimizing market riskMarket RiskMarket risk is the risk that an investor faces due to the decrease in the market value of a financial product that affects the whole market and is not limited to a particular economic commodity. It is often called systematic risk..
Distribution Channel Examples
Let us consider the distribution channels examples below for a deeper understanding of the concept:
Wendy, a novice businesswoman, has designed clothes and accessories for the ladies in town. After getting an overwhelming response from her friends and peers, she decided to open an apparel store.
She rented a place and paid an initial deposit of $5,000 and a monthly rent of $1,200. Wendy put a few of her products on display in the store. Many ladies showed up and expressed their interests in the collection, but they hardly bought anything. She waited for two months in a row but could sell only two or three pieces.
Thus, she decided to shut down her store after incurring a loss. Though the collection was attractive and unique, people could hardly trust Wendy as she was ultimately an unknown business owner. Her friend Mary asked her to showcase her products on an e-commerce website to see the market response.
She listed her products on an online retailer at a lenient rate. Consumers started liking and putting positive reviews about the unique hand-made apparel. It helped her gain the trust of consumers.
The e-commerce website here acted as an inexpensive marketing channel for Wendy.
Candice, an aspiring author, wanted to write a book on marketing after her extensive experience as a sales and marketing professional. However, she knew that her qualification does not match her area of expertise. The readers notice the author’s academic and professional background to decide whether they should buy his or her book.
Thus, she decided to drop the plan and began writing blogs on basic and advanced marketing topics. She promoted her pieces on every possible social media platform. To add to her promotional initiatives, she started a YouTube channel to explain the marketing concepts to beginners.
After gaining a huge fan base, she announced the launch of her book. As soon as the book launched, her regular social media followers bought it and recommended the same to others. Not only did she spend a little money, but she also received an overwhelming response.
In this case, social networking websites became the marketing channel for Candice.
Multiple healthcare units have come up with vaccines to fight the Coronavirus pandemic. However, the vaccine producers cannot reach the public directly or keep track of vaccinated and non-vaccinated people.
The vaccines are delivered to the state government via the federal government and then passed to multiple vaccination centers. A centralized database manages details of the people visiting these centers and getting vaccinated.
Here, drug companies require a network of intermediaries involving local governments and hospitals to track the vaccine procurement, delivery, and usage at every level.
Types of Distribution Channel
The distribution channel types can be direct and indirect.
#1 – Direct Channel
It is where manufacturers or producers directly deal with customers without having any middlemen involved. Businesses catering to the low volume of consumers and targeting a narrower marketplace consider this zero-level channel. Perishable and expensive goods producers, such as bakers, meat and milk producers, and jewelers, opt for this route.
The more common direct channels include door-to-door or mail order or production plant or chain store or e-commerce.
#2 – Indirect Channel
This marketing channel is suitable for businesses that cater to a broader range of customers and market segments. In this type of network, products travel from producers through different intermediaries until reaching the consumers. The intermediaries include wholesalers, retailers, and distributors.
Producers either trust large retailers to deliver their products to customers or connect with wholesalers to do the job. These wholesalers distribute products to multiple small retailers that make them available to consumers in their respective areas.
Based on the intermediaries involved, indirect channels can be:
- One-Level (Manufacturer to Retailer or Distributor to Customer), e.g., clothing and furniture stores.
- Two-Level (Manufacturer to Wholesaler to Retailer or Distributor to Customer), e.g., supermarket.
- Three-Level (Manufacturer to Distributor/Agent/Broker to Wholesaler to Retailer to Customer), e.g., dropshipping.
Functions Of Distribution Channel
In addition to facilitating the delivery of products or services to consumers, a distribution channel servers many other essential functions. These include:
- Assembling, storing, bulk breaking, and sorting of products
- Moving goods from warehouses to customers
- Managing payment flow pre-sales or post-purchases
- Providing market information to producers
- Promoting the brand and its benefits to end-customers
- Maintaining price stability by absorbing any price increase
- Sharing the market risk with manufacturers
- Getting a chance to promote themselves through the distribution of products
Frequently Asked Questions (FAQs)
Distribution channels are networks of intermediaries or middlemen that get the products from the production end, i.e., manufacturers, and deliver them to the point of consumption, i.e., consumers. These channels also ensure the transfer of payments from consumers to producers.
The four components that constitute a prime distribution network include – producers, wholesalers, retailers, and consumers. They make the products or services easily accessible to the customers and on time.
There are two types of distribution channels – direct (producer to consumer) and indirect, where intermediaries (wholesalers, retailers, distributors) are involved. The latter type can be further categorized into one-level (manufacturer to retailer or distributor to customer), two-level (manufacturer to wholesaler to retailer or distributor to customer), and three-level (manufacturer to distributor/agent/broker to wholesaler to retailer to customer).
This has been a guide to What is Distribution Channel and its definition. Here we discuss it works along with its types, examples & functions. You may also have a look at the following articles to learn more –