A Guide to Different Types of Distribution Channels

Marketing needs a lot of effort and strategy, along with the potential availability of distributors and customers. Now, the manufacturer may decide to sell their product directly to their customer, or they may want to take the help of distributors to sell their product indirectly to their customer base. 

 

This is what distribution channels are all about. This article is mainly about the types of distribution channels, but it is also important to understand the concept of distribution channels before learning about the types.

 

 

What is a Distribution Channel?

 

The term 'distribution' refers to the process of distributing something to its intended recipients. A distribution channel is a network of businesses or intermediaries that a product or service passes through before reaching the final buyer or end consumer. 

 

Wholesalers, retailers, distributors, and even the internet are all possible distribution channels.

 

All marketing strategies that revolve around the product include distribution channels as a key component. They assist businesses in reaching out to their customers in order to increase revenue and brand awareness. This is why it is also called a marketing channel.

 

Now, distribution channels can be classified into direct and indirect channels. A direct channel allows customers to buy directly from the manufacturer, whereas an indirect channel allows customers to buy from a wholesaler or retailer. 

 

For goods sold in traditional brick-and-mortar stores, indirect channels are common, for example. Other types of distribution channels come under these channels. Let us move forward towards the classification.

 

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Types of Distribution Channels:

 

As discussed before, distribution channels mainly have direct and indirect channels. 

 

1. Direct Channels:

 

As the name suggests, direct channels do not have any middlemen. To sell their product, the manufacturer interacts directly with their customers. There are a variety of ways to do this, including opening retail stores, hiring salespeople to go door to door selling the product, or starting a mail-order business. 

 

• Opening Retail Shops:

 

Perishable and non-perishable goods producers sell their wares to customers by opening their own retail stores. Manufacturers can move goods quickly through retail stores and provide satisfactory service to customers, resulting in positive word-of-mouth. 

 

It also aids producers in researching market trends, buyer preferences, and personal style trends. This system allows for two-way communication and has a set price.

 

• Hiring salespeople:

 

These channels take the shortest route to the consumer. Certain goods, like industrial machinery, are directly sold to the consumers. Costly goods like computers and luxury automobiles are also directly sold. Some manufacturers open their own retail shops in many localities and sell goods directly to consumers. 

 

All these indicate that producers are now taking steps to approach the consumers directly. Though this is possible for some types of goods, the fact remains that the services of intermediaries, such as wholesalers and retailers, are often essential in the distribution of goods to consumers.

 

Some examples are e-businesses, direct mail-order houses, chain stores, and direct selling. 

 

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2. Indirect Channels:

 

Indirect selling occurs when a manufacturer uses one or more intermediaries to sell and distribute their product to customers. A distribution network transports goods from the point of production to the point of consumption. 

 

This is done because it is difficult to sell goods directly to customers when a producer produces goods on a large scale. As a result, middlemen enter the picture to ensure that goods are available to customers. Wholesalers and retailers may be included. As a result, when a large number of intermediaries are involved in the distribution process, we can call it an indirect channel of distribution.

 

Here are the four types of indirect channels:

 

• One-level channel:

 

Customers buy the product from the retailer, who then sells it to them. This distribution channel entails the use of a single intermediary to transfer goods from the manufacturer to the customer. This channel of distribution allows manufacturers to maintain control while reaching out to a large number of potential customers.

 

• Two-level channel:

 

The goods are transferred from the manufacturer to the customer via two intermediaries in this distribution channel. Wholesalers and retailers serve as a link between manufacturers and consumers in this scenario. 

 

This network allows the manufacturer to reach a large market. It is one of the most widely used distribution channels for consumer goods. Two-level distribution is used for goods that are durable, standardized, and relatively inexpensive, and whose target audience is not limited to a specific geographic area.

 

• Three-level channel:

 

Manufacturers use the services of agents or brokers to connect with wholesalers and retailers in this channel of distribution. Agents are appointed by manufacturers in major markets who connect them with wholesalers and retailers. 

 

These agents are useful when goods need to be delivered quickly after an order is placed. In exchange for a percentage commission, they are tasked with managing the product distribution of a specific area or district. Super stockists and carrying and forwarding agents are two types of agents. Both of these agents hold the company's stock in their names.

 

• Four level channel:

 

This is the longest distribution channel, as it involves four intermediaries. That is, before reaching the final customer, items transit through four intermediaries. This is especially common among agricultural producers, who produce crops, fruits, and vegetables. Despite the fact that some middlemen have been removed from the route as a result of national and state government intervention.

 

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3. Hybrid Channels:

 

The hybrid channel of distribution combines the direct and indirect distribution channels. The hybrid channel is defined as a manufacturer's utilization of more than one channel to reach the final consumer. This draws in more customers and allows for more sales.

 

Many businesses have recently relied on a single channel to sell to a single market or market niche. Several organizations have recently embraced multi-channel distribution systems, often known as hybrid marketing channels, as a result of the development of client segments and channel options. 

 

When a single company creates two or more marketing channels to address one or more consumer segments, this is known as multi-channel marketing. Hybrid channel systems have become increasingly popular in recent years.

 

Consumer segment 1 is served directly by the producer via direct-mail catalogs and telemarketing, while consumer segment 2 is served via retailers. It sells to business segment 1 indirectly through distributors and dealers, and to business segment 2 directly through its salesforce.

 

Companies dealing with vast and complicated markets can benefit from hybrid channels. With each additional channel, the company improves its sales and market coverage, as well as its ability to tailor its products and services to the unique needs of various consumer segments.

 

Hybrid channel systems, on the other hand, are more difficult to manage and produce conflict as numerous channels fight for clients and sales. For example, when IBM began selling low-cost products directly to customers via catalogs and telemarketing, many of its retail partners shouted "unfair competition" and threatened to eliminate the IBM line or give it less priority.

 

Methods of Distribution channels:

 

There are three various distribution options to choose from, each of which is concerned with who will be permitted to sell your products.

 

1. Exclusive Distribution:

 

Exclusive distribution entails middlemen delivering a company's items to certain retail locations. A sales agent is normally in charge of this. This means that buyers will only be able to purchase the items from select retail shops. When a manufacturer chooses exclusive distribution, they agree to sell a product exclusively through that retailer's storefront. 

 

Another example of exclusive distribution is when companies offer products directly through their own branded stores. Customers, for example, cannot buy a Lamborghini anywhere; they must go to a Lamborghini dealership to obtain new luxury vehicles.

 

This is a terrific technique not only for producers but also for the retail outlets or chain stores chosen, depending on the quality of the goods.

 

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2. Selection Distribution:

 

The corporation authorizes sales to a specified group of intermediaries who are responsible for selling things to final customers through selective distribution.

 

The reputation of the intermediaries, which has a direct impact on the company's performance, is a significant component in how successful this plan will be.

 

In this instance, the intermediary acts as a true adviser for the customer, answering questions and offering products that are suited for their needs. Selective distribution falls somewhere in the center of intensive and exclusive distribution. 

 

Products are dispersed in multiple locations with this technique, but not as many as with an intense distribution plan. Clothing from several companies, for example, might be offered selectively. Rather than placing its products in a variety of sites such as Walmart or Target, a company like Gucci may choose to distribute its things to its own stores as well as a few select department stores.

 

3. Intensive Distribution:

 

The company seeks to place their goods in as many sales locations as possible in extensive distribution.

 

This strategy involves the manufacturers themselves, sales teams, and commercial agents. They are in charge of getting things to retail locations.

 

Manufacturers of low-cost products with a high frequency of use typically adopt this distribution approach.

 

With the intensive distribution approach, products are distributed to as many retail outlets as possible. Gum, for example, is a product that frequently employs this method. Gum can be found in petrol stations, grocery stores, vending machines, and retail stores such as Target. This strategy is based on making a big number of products available in numerous locations. These things don't usually demand a lengthy purchase choice including extensive study by the consumer. Rather, these are everyday purchases that require very little work to sell.

 

4. Choosing a Channel of Distribution:

 

When choosing a distribution channel, keep in mind your company's brand, profitability, and the size of your product's operations. The selection of the appropriate distribution channel is critical to the success of your business and should be carefully evaluated. To begin, you need to know that a distribution channel reflects the interaction between a manufacturer and a customer. A strategic partnership with a retailer will have an impact on that relationship.

 

Factors that influence the selection of Distribution channels:

 

It's difficult to pick the best marketing channel. It's one of the few strategic decisions that can make or break a business.

 

Although direct selling saves money by eliminating middleman costs and putting more control in the hands of the maker, it increases internal workload and fulfillment costs. As a result, before determining whether to use a direct or indirect distribution route, these four variables should be examined.

 

• Product Specifications:

 

Cost, complexity, perishability, and whether the product is standard or custom-made all have a factor in determining the distribution route.

 

Perishable goods such as fruits, vegetables, and dairy products cannot afford to travel over longer distances since they may spoil. Manufacturers of these commodities frequently choose direct or single-level distribution methods. Non-perishable items, such as soaps and toothpaste, require longer distribution networks because they must reach customers in a wide geographic area.

 

Direct channels are employed when the nature of the product is more technical and the consumer may demand direct interaction with the manufacturer. Longer channels are used if the product is fairly simple to use and direct contact has no effect on the quantity of sales.

 

The product's per-unit value also determines whether the product is sold directly or indirectly.

 

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• Company Characteristics:

 

Financial strength, management expertise, and the desire for control all play a role in determining which path the product will follow before reaching the final consumer.

 

A company with a lot of money and good management expertise (people with enough knowledge and expertise in distribution) can build its own distribution channels, whereas a company with little money and management expertise must rely on third-party distributors.

 

Direct routes are preferred by companies who seek complete control over their distribution. Those companies who don't care about control or are only concerned in product sales, on the other hand, choose indirect channels.

 

• Competition Characteristics:

 

The marketing channel chosen by competitors in the market has an impact on the channel chosen by you. Typically, businesses will utilize a channel that is comparable to that of their competitors. 

 

However, some businesses choose a different distribution route than their competitors in order to stand out and appeal to customers. When all smartphones were selling in the retail sector, for example, some businesses teamed with Flipkart and leveraged the scarcity principle to launch their smartphones as Flipkart exclusives and sell them exclusively on Flipkart.

 

• Market Characteristics:

 

This contains information such as the number of customers, their geographic location, purchasing patterns, tastes, and capacity, as well as the frequency with which they purchase.

 

Direct channels are best for firms with a target audience that lives in a small geographic area, requires direct interaction with the manufacturer, and does not make regular purchases. Manufacturers are advised to employ indirect routes when their clients are geographically spread or live in a different country.

 

Customers' purchasing habits have an impact on distribution channel selection. Selling through shops that employ product assortments is ideal if clients anticipate getting all of their necessities in one place. Direct routes are appropriate if delivery time is not a concern, demand isn't high, order sizes are enormous, or clients are concerned about piracy.

 

Longer routes may be utilized if the client is in the consumer market, whereas shorter channels may be used if the customer is in the industrial industry.

 

Functions of Channel of Distribution:

 

The functions performed by distribution channels are split into three categories:

 

• Transactional Functions:

 

Transactional functions are functions that are related to a transaction, such as purchasing, selling, and risk-bearing. Producers sell their products to middlemen, who then sell them to customers. The title to products is transferred in this manner, and things move from producer to consumer. There will be no transaction if there is no buying and selling.

 

• Facilitating Functions: 

 

These include functions such as post-purchase service, maintenance, finance, information distribution, channel coordination, and so forth.

 

• Logistical Functions: 

 

Assembling, storage, sorting, grading, packaging, and transportation are all examples of logistical functions. This is to ensure that goods arrive at the proper moment on the market and can be sold to customers quickly.

 

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Bottom Line:

 

Developing a successful distribution plan is a multi-step procedure. Because distribution has so many moving pieces, many businesses choose to adopt an indirect distribution approach or acquire distribution software to simplify the process. Whatever approach your company employs, it's critical to account for client needs and buy decision level, since these criteria will aid in determining the best distribution plan.