What is a Distribution Channel?
The distribution channel is the path that a product or service takes in order to be sent from the manufacturer to the customer. If the customer bought the product or service straight from the manufacturer the distribution channel is a short one. If it includes a supplier, distributor, and retailer the distribution channel can be much longer. In general the longer the distribution channel from manufacturer to customer, the less profit the manufacturer will make as each intermediary or vendor charges for their services.
Functions of Distribution Channels
Distribution channels are important to businesses as they allow for the smooth delivery of goods or services to a customer. If a business does not source the best collection of businesses for this purpose, it can lead to unhappy customers and an inadequate provision of services. Creating an efficient process from warehouse to customer can make a huge difference in how customers view your business.
For example, if a business sources goods from a subpar manufacturer customer will receive unsatisfactory products. Or if a wholesaler is unreliable when delivering goods, customers will not receive their products on time.
Shorter distribution channels have fewer businesses involved in the process of delivery of goods meaning that there is more risk involved for the companies if products are not sold or delivered as promised. Therefore some businesses choose a longer distribution channel where less profit is made so that the risk and responsibility are lesser on each individual business.
Distribution Channel Strategy
A distribution channel strategy is normally designed by a retailer, or the business selling goods to a customer. This is so that they can source the product they aim to sell, they can reduce costs while making a nice profit themselves, and find the best way to deliver the product to the customer in the shortest time frame possible. This process will take some time to research suppliers, etc, and collect all the right information.
When a retailer is selling more than one type of product they may even require more than one distribution channel strategy where each business is different for them all. For instance, a shoe retailer may choose to start selling t-shirts online. As shoe manufacturers are different to t-shirt manufacturers the retailer has to find a t-shirt manufacturer or wholesaler to buy from. The wholesaler might not provide delivery but they are based in a different location to the shoe manufacturer so the retailer must then find a delivery option that makes sense to them.
Having many distribution channel strategies can become confusing and inefficient. That is why it is important to constantly improve relationships with businesses involved in this process and also to identify ways to improve efficiencies in the process.
How Many Types of Distribution Channels Are There?
There are three main types of distribution models or channels that a business can fall into. It depends on the number of vendors used to distribute goods which model a business falls into.
- The first type of distribution channel is where the manufacturer sells straight to the customer. This channel is the shortest, most direct one. The manufacturer makes the most profit from the sale in this scenario as he does not have to share profits with other vendors.
- The next channel is an indirect one, where an additional vendor is added between the manufacturer and the customer, like perhaps a retailer. Now the retailer will buy stock off a manufacturer and that retailer will sell the stock to the customer. A good example of this would be a supermarket which stocks many different types of goods which they have bought from the manufacturer, ready for the customer to buy and bring home.
- The final channel or type of product distribution model is one where there is more than one vendor or intermediary. This could include a wholesaler, a producer, or even another retailer. A great example would be dropshipping, where manufacturers sell their products to a supplier who advertises their stock on marketplaces like AliExpress where a merchant opts to put the product on their website to sell to the customer. This distribution model can be a long one. The manufacturer makes less profit as more vendors get involved.
There are pros and cons to all three distribution models from the perspective of the different parties involved but the most important thing is to ensure that operations run smoothly and the customer is at the center of the whole scenario.