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Channels of Distribution

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What are channels of distribution?

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Definition of channels of distribution

Channels of distribution (or a distribution channel) are channels of businesses or intermediaries which a product or service travels through before reaching the final customer.

These channels often include:

  • wholesalers

  • distributors

  • retailers

  • online stores

Examples of channels of distribution

There are 3 main types of distribution channels.

Each type includes some sort of combination of manufacturer, wholesaler, retailer, and final paying customer.

The first type includes all 4 channels and is the longest.

A good example of this would be the alcoholic beverage industry, as manufacturers usually sell their product to a wholesaler, who in turn sell to a retail store. 

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The second excludes the wholesalers and goes straight to the retailer. Car dealerships are a good example of this type of channel. Dealerships will typically buy new cars straight from the manufacturer and then sell it directly to the paying customer.

The third and final type goes straight from the manufacturer to the paying customer. One of the best examples of this is Apple. You can buy Apple products directly from their retail stores.

What are some pros and cons of using channels of distribution?

Depending on your preferred channel of distribution, a manufacturer can offload a lot of products very quickly. However, they may not be getting the best prices.

In order to sell from the manufacturer directly to the customer, your brand name has to carry a lot of influence, and you will have a much bigger initial cost.

It is very important that you do your research and consider, all costs before making any sort of decision regarding channels of distribution. What works well for others may not be the best choice for you and your company.

What is a distribution chain?  

A distribution chain (or supply chain) is a continuous network between a business and the suppliers which distribute and produce a product for the end buyer.

This network can include a variety of entities, people, information, resources, and activities. In other words, the business distribution chain represents the necessary steps to get a service or a product from its original state to the client.

Optimizing your distribution chain is a great way to reduce costs and remain competitive players in your business niche.

Types of distribution channels

Businesses use three main distribution channels: direct, hybrid, and indirect.

They vary from each other, depending on the steps a product takes to reach the end consumer from the raw materials.

1. Direct: Manufacturer → Consumer

Direct channels of distribution involve just the manufacturer and the customer.

In this case, the producer sells the product directly to the clients through a website or a physical shop.

A good example is a farmer who would rather sell his products directly to his customers through a farm stand instead of selling produce wholesale to a market.

2. Indirect: Manufacturer → Wholesaler → Retailer → Consumer

This channel introduces a new type of intermediary: the wholesaler.

A wholesaler is a business that purchases products in bulk and sells them to retailers in bulk.

Since they benefit from economies of scale, they can profit by selling to various retailers at a slightly higher price than the manufacturer.

3. Hybrid: Manufacturer → Authorized retailer → Consumer

A hybrid channel of distribution is a mix of direct and indirect distribution channels.

Manufacturers partner with intermediaries like authorized retailers to sell products to consumers in hybrid channels. 

This has some pros and cons.

Manufacturers receive more help distributing their products, speeding up the process and increasing revenue, and consumers have a more convenient way to purchase products, increasing customer satisfaction.

The manufacturer also maintains control over customer contact and communication to keep an eye on messaging and brand reputation.

However, because the intermediary needs to profit, product prices need to be increased for customers.

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What are Channels of Distribution

General FAQ

What motivates channels of distribution to sell a product?
A few factors that can motivate a certain channel of distribution to sell a product are exclusivity for a certain product or brand, better prices, and good customer support.
What kind of channels of distribution do Saas companies use?
Some of the most commonly used channels of distribution for SaaS companies are SEO, customer referral programs, content and social media marketing, ads, and word of mouth.

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