What is a distribution channel?

A distribution channel is a group of businesses or middlemen that a good or service goes through before it gets to the final buyer or consumer. In other words, the method by which the customer receives the product after purchase typically involves intermediaries. Distribution channels can be direct or indirect, lengthy or short. 

A “direct” distribution channel is one in which the maker deals with the customer directly. When a product goes through an “indirect” distribution channel, it passes through multiple hands before it reaches the consumer. 

Indirect distribution channels often involve multiple parties between the manufacturer and the consumer, such as: 

  • Internet 
  • Consultant 
  • Retailer 
  • Dealer 
  • Catalog 
  • Manufacturer's representative
  • Wholesaler 

Possible middlemen range from a single person to an extensive network. Finally, there are pros and cons to each distribution method. While a multinational corporation may have the resources to implement a sophisticated distribution system, a startup ecommerce operator may be better at keeping things straightforward. 

Your company’s chosen distribution method will likely change as time progresses. As your business expands, you may decide that you no longer need to rely solely on direct channels and instead wish to focus on indirect ones. You don’t need to put yourself in a tough position in terms of distribution; many businesses use various channels.

Distribution Channel Graph

Distribution Channel Example:

Sarah, who is new to running her own business, has made clothes and accessories for the women in town. She decided to open a clothing store after getting a lot of support from her friends and peers.  

She rented a place; the first month's rent was $1,200, and the deposit was $5,000. Wendy showed off some of her products in the store. Many women came and said they were interested in the collection, but they didn't buy much. She waited for two months, but only two or three pieces were sold. 

She lost money on her store, so she decided to close it. Even though Wendy's collection was lovely and different, most people didn't trust her because she was an unknown business owner. Her friend Jessica asked her to put her products on an ecommerce website to see how the market would react. 

Sarah's ecommerce website was a cheap way to market her business.

Direct vs. Indirect Distribution Channels

Direct distribution channel 

A business that uses direct distribution sells to customers without going through any middlemen. This could be through direct mail, a product catalog, or an online store. Entrepreneurs who use their own websites to market and sell digital items like e-books, audio recordings, and online courses employ direct distribution. 

There are no middlemen for selling digital goods; they are sold straight from the producer to the end user. Direct-to-consumer distribution helps reduce expenses and has the potential to increase profitability. If the commodity in question is delivered online, the business owner’s only expense is the website’s setup and maintenance. Not having to order a new product or pay for delivery costs is a huge convenience. A direct channel is preferable in many respects, but it is no longer necessary for ecommerce success.  

You can also keep a closer eye on quality and customer service with direct distribution.

Indirect distribution channel

Indirect channels are a little more complicated and involve more third parties than direct channels. That isn't always bad, but it requires a little more planning.   For example, the industry that sells alcoholic drinks uses a multi-tier, indirect distribution channel. Distilleries and wineries sell their products to distributors, who then sell them to retailers, who then sell them to consumers. But wineries have to use indirect sales to get their wines into stores where people can buy them, but many wineries also sell directly to consumers. With both methods, wineries can reach a large number of people through indirect channels and a smaller number of people directly through their stores. 

Large businesses with more resources may find that indirect distribution channels are the most effective and profitable. For example, educating your customers online might not be the best way to go if you're selling a new kind of Cola product in a supermarket, which would help you get started quickly.

Distribution channel reflections 

There are many things to consider when deciding which distribution channels are best for your business. Remember that you can use both direct and indirect channels, depending on how many resources you have at your disposal. 

Before deciding on your first distribution channel, here are a few questions to consider:

  • How does the end user prefer to buy these kinds of products? Does the consumer want to touch and look at the product, or does the target audience prefer to buy it online? 
  • Does the customer need a service that is tailored to them? 
  • Can it be used without servicing? 
  • Does the product require installation?                                                              
  • In your industry, how is the product normally distributed and sold?

Distribution channels affect the price

What you charge for your product is determined in part by the method of distribution you select. In indirect sales, the manufacturer sells to a distributor, who then sells to a retailer. Therefore the product is priced at wholesale so that each party can make a profit. 

In many cases, the final price a customer pays for a product after going through multiple middlemen is the same as the price they would pay if they bought it directly from the manufacturer. The producer or creator can better secure their ties with retailers and make money from the goods by not offering a “direct to you” discount.

Looking for a tool to determine your product's price? Try out Profit Margin Calculator by PageFly.

You’ll almost always have to raise the price using indirect channels. If you go the direct route, you can often keep the price lower than if you go the indirect route. Depending on your product type, that extra cost may or may not hurt your bottom line. 

Customers who want to buy luxury items might not care as much about price as they do about how easy it is to get the item or how quickly they can get it. 

Even though the distribution channels affect your overall pricing structure, what really matters is that you choose a price point that your customers are comfortable buying at. Your company’s marketing strategy will greatly impact how you choose to distribute your products.