The flow followed by a good or service from production or manufacturing to the final consumer/buyer
Written byCFI Team
What is a Distribution Channel?
A distribution channel, in simple terms, is the flow that a good or service follows from production or manufacturing to the final consumer/buyer. Distribution channels vary but typically include a producer, a wholesaler, a retailer, and the end buyer/consumer. A distribution channel can also provide a sense of how money flows back from the buyers to the producer or original point of sale.
For manufacturers, it is very important to create a mix of distribution channels that allow for ease of availability for the consumer, i.e., a good marketing mix. Based on the diversity and scope of a manufacturing business or any other business that can be found in the distribution process, the respective business needs to settle on a channel or channels that allow for good sales generation and ease of access for consumers.
Summary
- A distribution channel, in simple terms, is the flow that a good or service follows from production or manufacturing to the final consumer/buyer.
- The link between producers and the end consumer is normally intermediaries, such as wholesalers, retailers, or brokers. The intermediaries can be natural persons or businesses.
- Distribution channels can be either direct or indirect. The indirect channels can be divided up into different levels – one-channel, two-channel, and three-channel.
Role of Distribution Channels in Business
The target for any business is to bring their product or service to the market and make it available for consumers by creating a distribution path or channel. The link between producers and the end consumer is normally intermediaries, such as wholesalers, retailers, or brokers. The intermediaries can be natural persons or businesses. Distribution channels affect the prices of goods and their positioning in their respective markets.
Distributions, ideally, should be set up in a way that limits the number of stops for the product or service before it reaches the end consumer. A distribution channel must be efficient and effective. It means that transportation and other logistical requirements need to be used at maximum capacity and at the lowest rates possible.
Types of Distribution Channels
Distribution channels can either be direct or indirect. The indirect channels can be divided up into different levels.
1. Direct distribution channels
The direct distribution channel does not make use of any intermediaries. The manufacturer or producer sells directly to the end consumer. The direct form of distribution is typically used by producers or manufacturers of niche and expensive goods and items that are perishable. An example is a baker.
2. Indirect distribution channels
The indirect distribution channel makes use of intermediaries in order to bring a product to market. The three types of indirect channels are:
One-level channel
The one-level channel entails a product coming from a producer to a retailer and then to the end buyer. The retailers buy the product from the manufacturer and sell it to the end buyers. The one-level channel is ideal for manufacturers of furniture, clothing items, toys, etc.
Two-level channel
The two-level channel follows the following process:
Wholesalers generally make bulk purchases, buy from the producer, and divide the goods into smaller packages to sell to retailers. The retailers then sell the goods to the end buyers. The two-level channel is suitable for more affordable and long-lasting goods with a larger target market.
Three-level channel
The three-level channel is similar to the two-level channel, except the goods flow from the producer to an agent and then to a wholesaler. Agents assist with selling the goods and getting the goods delivered to the market promptly.
The agents normally receive a commission and are allocated the task of product distribution in a particular area. The three-level channel is suitable for goods that are in high demand and with a target market that stretches across a country.
The Internet as the Modern-Day Distribution Channel
With e-commerce growing tremendously over the past couple of decades, manufacturers and producers are now able to use online marketplaces to sell their goods. The internet is also ideal for service providers. Examples of online market places are Amazon, AliExpress, eBay, and Alibaba. Other internet intermediaries can be delivery services, such as Uber.
Making the Right Choice
Distribution channels may vary depending on a particular manufacturer’s product type and their sales targets. It is why it is pivotal to choose the right distribution channel.
The following factors must be looked at into detail by a company in order to determine which distribution method would be ideal for it to maximize profit generation via sales, value addition, and consumer reach:
- Market characteristics
- Product characteristics
- Competitor characteristics
- Company characteristics
Related Readings
Thank you for reading CFI’s guide to Distribution Channel. To keep learning and advancing your career, the following resources will be helpful:
- Forward Integration
- Omni-Channel
- Vendor
- Marketing Strategy
- See all valuation resources
