A distribution channel is the route a product takes until it reaches the consumer. Definitely a key ingredient when thinking about what is a business model. It’s important for startup businesses to get their distribution channels right so that their products can be sold. Also known as the downstream process, distribution is critical as it puts your products in the hands of customers.
In this article, I’m going to explain the different types of distribution channels available to you, focusing on their advantages and disadvantages. You will then be better placed deciding on the right distribution channels for your business.
Distribution Channels: Overview
Before choosing your distribution channels, there are some important concepts you need to learn:
- Two Way Process: Your distribution channels don’t just carry goods to customers, they also allow the flow of cash back to you the seller. A distribution channel that is only one way is usually useless and will only siphon finances and stock from your business.
- Varying Length: The length of a distribution channel will vary depending on the number of steps through which a product must pass before reaching customers. For example, you may supply your product to a retailer instead of selling directly to consumers.
- Complexity: The more complex a distribution channel is, the more oversight is required to ensure it runs smoothly. This is especially true when products change hands many times before reaching the public.
- Multiple Channels: Depending on your business strategy, the number of distribution channels at your disposal will vary. Most of the time, the more ways you have to get your products to customers, the more you will sell. However, sometimes multiple distribution can become so overwhelming that errors creep into each channel.
- Dilution: A rule of thumb is that the more steps there are to a distribution channel, the lower the profit margin. Each person or business that handles your product along the way will require a slice of the profits.
Two Categories of Distribution Channel
Although you’ll find many different distribution channels, all of them fall into one of two discrete categories. These are “direct” distribution and “indirect” distribution.
A direct distribution channel (also known as zero level channel) is when your business sells directly to the customer. For example, opening your own physical store, selling directly via your own website, door-to-door sales, or mail order. All of these require no third party intermediary.
Indirect distribution includes channels like selling your product through a wholesaler or retailer. There needs to be at least one third party intermediary for it to be considered indirect distribution. If your company is selling to a wholesaler who then sells to a retailer before your product reaches customers, this would involve two third party intermediaries.
As you can see, direct distribution gives you more control over how your products are sold and to whom. However, indirect distribution opens up your product to many more customers, which is why it’s better suited when you are hoping to ship large amounts of product.
Advantages of Direct Distribution Channels
Using a direct distribution channel for your product/service carries with it a number of advantages. These Include:
- Cutting out the cost of using third party distribution.
- Allows direct canvassing of customer buying habits which can be used to improve your product/service and sales pitch.
- Distinguishes you from the competition by having personable and impactful interactions with customers. As Inc.com puts it: You can “make the customer the hero”.
- Potentially gets products to customers a lot faster than other distribution channels.
- Helps to build relationships with customers that will last, especially when interacting with them face to face.
- Can make a customer feel that they are buying something that is rarer than mass produced items; something with cache, charm, or the feel of a hero product.
- Can also make customers feel that they are supporting a smaller business which makes them feel good about the purchase.
Disadvantages of Direct Distribution Channels
Despite the large number of advantages associated with a direct distribution channel, there are also disadvantages as well. These include:
- Paying for direct distribution can be costly in some instances if you have to pay for your own delivery trucks and storage space. Some third party indirect distribution channels like Amazon for example, will charge a minimum commission to sell products through their marketplace which may be preferential. Wholesalers will store the product for you as they sell to retailers.
- Direct distribution can be ineffective when dealing with large shipping numbers, especially when you’re delivering physical items. The man hours required to carry out shipping can be exorbitant.
- Direct distribution can also limit the amount of product you can deliver depending on the size of your business.
Advantages of Indirect Distribution Channels
Indirect distribution channels are a great fit for many businesses. They include a number of distinct advantages:
- Smaller shipping costs as these are shared across the distribution channel with third parties.
- If you are using a digital marketplace or physical retailer, then your products will be much easier to find, resulting in more sales and larger brand impact.
- Reduces the need to manage distribution, meaning you can focus more on your product and business strategy.
- Benefit from third party experience. They will know how to sell your product.
- You’ll also benefit from the infrastructure your distribution partners have in place, saving you the startup costs of setting up your own infrastructure.
- Many third parties will have a larger sales force which will improve your chances of selling units.
Disadvantages of Indirect Distribution Channels
Just like direct distribution, indirect distribution has its own disadvantages. These include:
- Putting distance between you and your customers.
- Customers may forge a positive bond with a third party distributor rather than with your brand, creating loyalty for the distributor and not for you.
- It’s easy to get lost in the background noise of other businesses using the same third party marketplace. Even at a wholesalers, a product can very easily be swallowed up by what’s on offer around it.
- Not being able to give customers a bespoke, high-quality and personal purchasing experience.
Learn More About Distribution Channels
If you would like to learn more about distribution channels and all aspects of making a successful business, check out The DealMakers Podcast. It’s a free resource exploring entrepreneurial successes and useful blueprints for both new and experienced business people