What are Channels of Distribution?
July 9, 2021 Max 4min read
Table of contents:-
- What Are Channels of Distribution?
- What Are the Functions of Distribution Channels?
- Channel of Distribution Diagram
- What Are the Types of Distribution Channels?
- Direct vs. Indirect Channels of Distribution
- What Are the Examples of Distribution Channels?
- What Are the Advantages and Disadvantages of Channels of Distribution?
What Are Channels of Distribution?
Channels of Distribution Definition
“Channels of distribution refer to the different businesses or intermediaries lined up in a chain. Through this pipeline, various goods and services of the company will pass before reaching the customer. These channels are retailers, distributors, wholesalers, and many more.”
Channels of distribution are also known as distribution channels.
The channels and pathways of business transmit a product or service through it before reaching the final user.
These channels often consist of distributors, wholesalers, retailers, online stores, and so on.
What Are the Functions of Distribution Channels?
Apart from the primary purpose of connecting manufacturers with consumers through products and services, the other functions of distribution channels include:
- Channels of distribution store, assemble and sort the products.
- They transfer the products from warehouses to consumers.
- Channels of distribution manage payment of both pre and post-sales.
- The manufacturers get more information about the market.
- Advertising the products and their brand to the customers.
- Channels of distribution also try to absorb the increase in prices of products and maintain stability.
- Both the producers and distributors mutually share the risk factor of the market.
- Promoting themselves via the sale of products.
Channels of Distribution Diagram
What Are the Types of Distribution Channels?
Channels of distribution are of three types. Each type of distribution consists of a mixture of the four tracks, namely wholesaler, retailer, manufacturer, and the final customer.
The first type consists of all four channels, and it is considered the longest among the three. For example, an alcoholic beverage manufacturer must first sell the product to a wholesaler who will later sell it to a retailer.
In the second type, you exclude the wholesaler. Hence, the product directly goes from the manufacturer to the retailer. For example, car dealerships typically buy cars from the manufacturer and sell them to the final customer.
The last stage is where the wholesaler, as well as the retailer, is excluded. For example, you can buy Apple products directly from the manufacturer’s retail stores.
Direct vs. Indirect Channels of Distribution
Direct distribution channels refer to the model of distribution where no other party apart from the manufacturers is involved in the distribution.
Producers directly distribute the products to the customers.
Businesses that opt for this type of distribution are the ones that have a significantly smaller group of customers. They also target a smaller market share.
A direct channel of distribution is beneficial for businesses that sell perishable goods such as milk and meat producers.
The channel of distribution used by these businesses are:
- Door to door services
- Chain stores
Indirect channels of distribution are helpful for a business that caters to vast audiences and captures a broader marketplace. In this type of distribution, products reach the customers via distributors. The products are taken from producers and contact intermediaries such as wholesalers and retailers to finally get to the consumers’ destination.
Companies give their products to the distributors, and these wholesalers or retailers then deliver the products to the small local retailers and shops. They then make the products available to the consumers.
There are three modes of distribution based on the number of included intermediaries.
The Level One
At this level, only one distributor is involved. This is the typical level where producer to retailer to the customer is the distribution chain—for example, clothing lines.
The Level Two
Level two includes producers, wholesalers, and retailers. The product distribution chain goes like this: Manufacturers to wholesalers to retailers to customers—for example, supermarkets.
The Level Three
In level three, the product goes from producers to agents/brokers to wholesalers, retailers, and customers, for example poultry industry.
What Are the Examples of Distribution Channels?
Various healthcare centers invented their vaccines on account of the pandemic. Manufacturers will not be able to distribute them to people directly. Hence the federal government passes these vaccines to the state government and then to local vaccination centers. The vaccines are distributed to the people, and the centers keep the record.
In this example, the companies who produce vaccines need distributors such as governments, hospitals, and vaccination centers, to track the usage and delivery at all levels.
What Are the Advantages and Disadvantages of Channels of Distribution?
Based on one’s preferred distribution channel, the manufacturer can unload many products very fast. However, they may not always be getting the best prices.
You need to sell with the third type of channel distribution, where your product goes directly from the manufacturer to the final customer. In such a case, your brand has to be established and influential, where your initial cost will be much more significant.
You need to consider all the costs and do your research before choosing your channel of distribution. What works well for other companies may not always suit your own. Thus, it is crucial to overview the feasibility of your business to choose the most effective channel of distribution for your business.
The channel of distribution starts from the company when the goods and services are rolled out and then given to the different intermediaries. Finally, the channels of distribution end with the customer or the buyer once the goods and services reach them.
There are various causes of conflict in distribution channels, such as incompatibility of goals amongst different partners, perception of market conditions, domination of companies over the channel partners, resistance to change, and communication issues, among others.
Buying products directly from the manufacturers is not a feasible option. Channels of distributors are great options for customers. It helps them to choose and buy different products at once. Channels of distributions partners can lower the prices of some products. They do this by cutting down the market transaction cost and benefitting from economies of scale.
Motivating factors for channels of distribution to sell a product are better prices, good customer care and support, exclusivity for the product or brand, and a unique selling point.