4 Types of Distribution Channels in Marketing
Manufacturers originally bear the responsibility to create the perfect marketing mix for their production.
To create the product so that it responds to the customer needs and expectations. To carefully manage the price so that it is affordable enough but prestigious enough to buy that product. To communicate to their customer base when they have new solutions.
And to place the product. To distribute it to end customers.
Based on the scope, the type, and the diversity of your business, you will be faced with the need to delegate some of those responsibilities to third parties. Based on the time, cost and know-how it requires, distribution is usually the first one to go.
This article will outline 3 classic distribution channels that might be a good fit for your organization and will argue there is a 4th, all-winner strategy you might want to employ in your business plan.
Keep on reading to learn why.
WHAT IS THE ROLE OF DISTRIBUTION IN A COMPANY?
Manufacturers have the ultimate interest to bring their production to the market and most manufacturers would be involved in the process as intermediaries.
Manufactures create a distribution path, a distribution chain or a distribution channel to get the product out of the factory, onto the physical location, put the price tag on it and on the shelf, ready for the customer reach for it.
The links in those chains are intermediaries. They could be companies or individuals who act as wholesalers, retailers, brokers or other, that ultimately push the product closer to the customer, each at their price and with their added value.
The distribution channels do not just affect the price – they influence other marketing decisions. A distribution decision could give the product a unique position in the market.
The same brand may use different distribution channels based on pricing. For example, while middle-range priced products are shipped to mass merchandisers, high-end products will only be offered to specialized stores through distributers.
The decision will also be influenced by how knowledgeable, how motivated, how available their partners would be to build a customer relationship and to recommend their product.
Product development may also be held up depending on whether or not the established distribution channels will handle the new product or a new strategy would have to be developed.
HOW DO DISTRIBUTION CHANNELS WORK?
The distribution channel or actor may be involved in various ways, to a various extend, at various stages, on a various price, in delivering the product from the manufacturer to the customer.
The role of the distribution channel involves several functions that can each be performed by one or multiple intermediaries.
Distribution channels are intended to limit the number of the transactions goods have to go through on their way towards its final destination.
Wholesalers and retailers break bulk. Which means they order large quantities of products from the manufacturer and then sell single products to the end customers.
Channel intermediaries create assortments, which means that they will source different products and allow the customer a larger choice.
A main task of distribution channels is to have high efficiency. Transportation and storage, which is another task of distribution channels, are to be used at maximum capacity at minimum cost. Wholesalers and retailers will move the goods from one location to another to store until there is demand for the product.
Intermediaries will usually offer more added value on the product, for example facilitate returns, offer customer support, etc.
A common added value for all distribution channels is they all share the risk with the manufacturer. That is why manufacturers have vested interest to sell in bulk, in large quantities, while retailers have a vested interest to carefully asses if a particular product will be sold.
Distribution channel members handle communication with end customer, including being partially responsible for advertising.
Distribution channels are responsible to create a two-sided connection from the manufacturer to the customer. We usually focus on one direction of that relationship – getting the product from the factory to the customer basket.
However, the distribution channel returns profits, products for repair and customer feedback back to the manufacturer. The selected distribution channel member’s policies regarding any of those three functions, should influence a manufacturers decision whether or not they use them in theirs channel.
The amount and role of distribution channel members determines the level of the distribution channel. Philip Kotler came up with the definition of the zero-level distribution channel where one manufacturer sells directly to the customers.
If the manufacturer uses a distributer to get the customer, that would be a one-level channel. And if that distributer sells to a retailer, that would be a two-level distribution channel.
3 TRADITIONAL TYPES OF DISTRIBUTION CHANNELS IN MARKETING
As we already established, the distribution channel influences multiple other marketing decisions – the price, the product development, employee management, organizational structure etc.
This article aims to give you examples of successful strategies with different distribution channels, as well as traps to look out for when you choose one or the other.
Continue reading on if you feel like you need to create, change or improve upon your distribution strategy. We hope you find it helpful.
Type 1. Direct sales
Direct sales are a good distribution model for selling any sort of product that is in the middle price range, it is not purchased every day, and has long shelf-life. Stationery, air purifiers, or jewelry to name a few.
Direct distribution would mean that the manufacturer finds a way to directly communicate to customers without using any market intermediaries and will deliver the goods themselves.
Internet and E-commerce has really popularized direct distribution, however, we find E-commerce is very specific and therefore we have allocated a special place for E-commerce at the bottom of this article.
The most important aspect of direct distribution marketing is communication to the end customer. You need to make sure you are sending the right message.
Here are 10 strategies to encourage in direct sales:
- Features. As soon as you establish contact with a potential customer, they will want to assess if your product can be useful to them. The basis of your conversation needs to center around the features of your product and its purpose. If the features do not match the customer’s needs they will not be interested.
- Advantages. If you have captured the customer’s attention, after listing the features you will be in a place to defend your product against the competition. What makes your product unique?
- Benefits. Give your customers the logic between using your product and finding a solution to their needs. Tell them how it will save them time, how it will make them money, or how it will resolve their organization issues.
- Intimacy. Establish a personal connection with the user. At this point of the conversation you have grabbed their attention, but you have not necessarily closed the deal. Spend the time to convince them you have their best interest in mind – go off topic if you have to.
- Reciprocity. Do the customer a favor. Fish for the kind of favor they would respond to – free samples, discounts or affiliation code. Create the feeling the favor is exclusive. Whenever a customer feels you have done them a favor, that creates the need to return it. They will feel obliged to do you a favor and this subconscious feeling will create an imbalance in the situation they would like to rectify.
- Reasoning. Studies have proved giving multiple reasons, even if they are obvious reasons will tip the scales in your favor. Never run out of reasons. Do not just assume the customer can come up with the logic themselves. In other words – do not be afraid to state the obvious.
- Q&A. Learn more about the customer – when and how they use their training shoes. Tell them how you believe they should be used. Tell them you are not just selling them shoes. You are selling them a pathway to a healthy and beautiful body. Then ask for your favor back and close the deal.
- Disclaimer. Close the deal by reminding the customer once again they will have a choice. They can buy the item now but then they would have to approve of it upon delivery, or return it to the delivery person. And even then they can return their item in a 30-day period. And even then within the next 60 days they can still get a replacement or store credit. They still have a choice.
- Small steps. When you are getting one ‘No’ after another, the customer might be unwilling to establish a new connection. Put your foot in the door. Ask just for a meeting. Start a relationship and work on from there.
- Affiliate. For whatever reason the customer is not willing to take your offer. Establish a good connection and ask for recommendation. Do they know anyone who might be happy to use your service? Ask them for a contact.
Type 2. Brokers and distributers
If a manufacturer choses to work with agents and brokers, they decide to directly delegate part of their tasks to those Intermediaries. They act as an extension of the producer in the sense they represent them before the end customer.
Let us get the food industry for example.
Before contracting a broker, the food manufacturer would have to offer the stores the production themselves.
And that is usually the case with smaller vendors. However, as the business expands, they would look for alternatives for shipping their produce to the store.
That would be done by a broker to handle the sales, or a distributer, who would take care to ship the goods to shops in various locations.
Advantages of introducing a broker to a distribution channel
If the manufacturer contracts a broker, they would sign a contract and said broker would be responsible for the offerings to the shops. Brokers are normally not responsible for the shipping itself. The broker is mainly responsible to close the sale.
A broker would have a portfolio of manufacturers they work with in a particular geographic area. They have key retailers they work with and their incentive is to completely satisfy the needs of those retailers.
Brokers will be very selective about the portfolio they assemble. They will not offer a manufacturer as a part of their line to a retailer unless they are sure the retailer will list their items. Therefore they usually have quick access to retailers and have well established relationships with them.
The sales costs for vendors would be fixed. And for their taxes they will offer additional services such as invoicing, inventory control, sales reports and others.
Disadvantages of introducing a broker to a distribution channel
Brokers work for a high fee of the invoiced price of the total production – around 5% – 10%.
At the same time, they will not take responsibility over the shipping of the produce.
Brokers do not have a great incentive to get to know a product or introduce it as a new line to a retailer. Their services normally do not include promotion.
If sales of one of the products of the manufacturer slow down, an entire line may be dropped from the broker’s portfolio and be substituted by another, more lucrative line.
The vendor will still be responsible for the logistics, the returns, the invoicing.
Advantages of introducing a distributer to a distribution channel
A store will normally work with several distributers and several dozen independent manufacturers. A distributer will directly buy the produce from the vendor and resell it to a retailer for direct distribution at a 20% – 30% margin, with which they purchase, ship and invoice the goods.
The distributer will work directly with the retailer, they will service their needs they will manage the inventory themselves and they will more often introduce new products since they are incentivized to sell off what they have purchased. They handle returns and product recalls.
Disadvantages of introducing a distributer to a distribution channel
Since distributers do shipping and inventory management, they will have an incentive to defend a particular brand in front of the store, however, they will have a limited time for it.
The manufacturer must ensure the distributer they work with knows their product well and they can increase awareness for it at the retailer in the small amount of time they have allocated to stock, ask questions, answer them and take orders.
Distributers take on the risk of underselling and It is therefore very costly for them if a product is not performing well. Maybe a line is not selling for reasons that have nothing to do with the manufacturer – pricing, shelf placement, location of the store etc.
Still, the distributer can and will drop a line and will not pick it back up.
Type 3. Wholesalers/Retailers
Working with wholesalers and retailers is usually a preferred distribution chain link because wholesalers and retailers do purchase the product from the manufacturer and therefore they take on the risk if the products do not sell well.
Working with resellers works perfectly for digital products.
Here are several strategies on how to create and maintain the relationship with your resellers:
- Create a base. In additions to traditional wholesalers and retailers, companies may benefit from asking big buyers if they want to become resellers for the brand. Give them an offer they cannot refuse.
- Your relationship must be profitable for both sides. Take interest to know how well your resellers are doing and what is their opinion for the connection between their success and the products you are offering.
- Communication is key. Make sure the your tasks and strategies are completely complemented by your reseller’s efforts and workflow. Do not allow everyday business issues to stop you from making sure the products reach the customer smoothly.
- Build a relationship. Regardless of the scope or the profitability of the reseller, find time to make them feel included, to become a part of your company culture. Build trust and loyalty.
- Allow your resellers to know your product. Resellers are often with the mindset they are in the business of sales, not consultation. Prepare short, easy to comprehend presentations or handouts they can absorb or redistribute to their customers.
- Gather feedback. Resellers and manufacturers have a common goal. To get more product out to the market. Gathering and processing feedback for the manufacturer may improve the brand perception, the development process and customer loyalty.
E-COMMERCE CHANGES THE GAME OF DISTRIBUTION
E-commerce completely changes the game of distribution for several reasons.
- An e-commerce company, depending on their business model may see themselves as the manufacturer, a wholesaler, or a retailer. Those roles have become more fluid.
- E-commerce in general immediately makes products available for a large customer base and therefore less intermediaries are needed. Storage locations needs are limited, too.
- With predictive and prescriptive analysis of big data, e-commerce makes it possible that inventory management and shipment are predicted in advance and optimized.
Employee management and productivity
E-commerce is the most efficient distribution channel available for a business. It decreases dramatically the need to use multiple storage locations, multiple distributers and brokers to connect you to retailers to sell your product line.
A company would need the least amount of employees and intermediaries to operate their business if they sell online.
E-commerce digitalizes inventory management, storage and shipment, direct sales. While a business with classic distribution channels may struggle with the need to accumulate know-how, connection and contacts, an e-commerce business can safely operate with IT-educated personnel only.
All aspects of trade are digitalized – inventory registers are substituted by integrated databases, direct sales are substituted by online marketing, product assessment is substituted by user-generated feedback and rating.
In a classic distribution structure, a manufacturer would create an N amount of product. Three of its resellers will buy X, Y and Z amounts and sell out different amounts of those to their customers.
Distributer A will take away another 20% of the total produce and distributer B will get 35%.
At this point not a single customer has done 1 purchase of the product and the connection between sales and product success is lost for the vendor.
The resellers and the distributers will need a T amount of time to offer the product, encourage sales, sell out and report back to the manufacturer. Or order more product.
This clogged distribution channel creates issues, when it comes to gathering customer feedback, assessing demand for a product, managing returns and recalls of compromised product.
E-commerce allows for 1-location storage, shipment tracking for the customer, assessing popularity of a product, stocking large amounts for high-demand periods and more.
Classic distribution channels count on different strategies for pushing a product. In the food industry, a supermarket will stock the items they sell with larger margins at eye level. The cheaper products will be dumped at the bottom of the shelf.
In specialty stores, consultants would have to be incentivized to push a product via offering them a percentage fee or other stimulus.
Now, on the internet, the customer can easily find whatever they are looking for via searches by keywords, filters by pricing, size, purpose, etc.
And not just that, cross-selling on the Internet can be automated where a customer will be offered to buy the printer with the ink, the table with the table cloth, the Christmas tree with the ornaments.
In addition to lower costs and the easier management, the best thing about e-commerce is, without any doubt, the personalized interactive advertising.
Interactive advertising shortens the purchase process significantly.
Traditionally, the user would have to identify they need the product, they need to make the time and would need to find the location where the category of the product is offered, and then count on the consultant to have the time and patience to listen to his or her needs and offer the correct item.
Then they need to have the right color (or size or something else) in stock.
Interactive advertisements may offer the product to the customer even before they have identified the need themselves.
If the customer is regular user in blogs about sports, they might be advertised training shoes. If they were interested in content about healthy food, they will be shown bio foods items. If they were interested in advice how to take care of a baby kitten, they will be offered cat food. Before even doing one search for those items.
Once the ad grabs the user attention and they click on it, they will immediately be redirected to the money page and the purchase will be available at one click.
Even if they click away, the browser will remember their preference and remind them they can purchase the product at any time.
Do that a sufficient amount of times and your ads become a gallery of products you are interested even before you know you needed them.
Interactive advertisement beats the most efficient sales force.
The decision you will take about your distribution channel will affect your pricing, your products, your relationships with your intermediaries and your customers.
Make sure you take your time and carefully think over your strategy in advance.
Only delegate when you are comfortable that a third party will do the job better at a lower ultimate cost.
Always consider E-commerce as a distribution channel. It can easily be diversified, it is the most profitable, and it can be used in addition too your other distribution efforts.
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