Distribution channels: definition, types, functions and examples

“The distribution channels, or ‘distribution chains,’ are the paths followed by a product from the producer to the consumer. They highlight the intermediaries that can exist between the producer and the final consumer.

Moreover, the same product can be distributed (that is, made available to the consumer) through different parallel channels. The set of channels used to market this product then forms the distribution circuit.

Distribution is one of the fundamental elements of the marketing mix: it is one of the 4Ps of the marketing plan (PRODUCT, PRICE, PLACE, PROMOTION).

The choice of one or more distribution channels must be consistent with the other elements of the marketing mix.

Types of distribution channels

Direct or indirect distribution channel:

An indirect distribution channel goes through one or more intermediaries.

A direct distribution channel lacks intermediaries: the producing company sells directly to its customers.

Short or long distribution channel:

A long distribution channel goes through several distributors or wholesalers before reaching the retailer and then the final customer.

A traditional distribution channel goes through a single wholesaler before reaching the retailer and then the final customer.

A short distribution channel has no intermediaries between the producer and the retailer who will sell directly to the final consumer.

In the end, distribution channels are primarily classified into three categories: direct, short, or long.

Types of intermediaries:

Among the various types of intermediaries, we find:

  • Distributors: they buy directly from the producer and take care of distributing products over a wide territory, for example, for export.
  • Wholesalers: they buy in bulk from the producer or distributor and sell to retailers.
  • Retailers: these are the shops, stores, or online businesses that sell directly to the final consumer.

Functions of distribution channels

Here are the functions of distribution channels:

Facilitate the exchange process

The exchange process is the mechanism that connects channel members and allows them to pool their resources and assess market risks. This is the most important function of a marketing channel to facilitate the exchange process between a company and an individual.

Since marketing is an exchange process between the buyer and the seller, channel members are considered exchange facilitators.

Gap reduction

Gaps can be of two types, quantity and assortment. Quantity gaps occur when customers are unable to purchase the exact quantity of the product they desire.

Assortment gaps occur when customers are unable to purchase the exact combination of goods and services they want.

Shopping malls reduce gaps by providing large quantities of products in bulk. Intermediaries maintain an optimal stock level to eliminate gaps.

Sorting

Companies produce different varieties of products for various reasons, such as for different uses, to target a larger market segment, due to increased resource utilization, etc.

Companies need to sort products so that their identification becomes easier and they can be delivered in a timely manner. Marketing channels help sort products.

Accumulation

Marketing channels accumulate goods in large quantities to protect against price and supply fluctuations. It also ensures uninterrupted supply to retailers or customers.

If customers cannot find a product in the market, they may turn to a competing brand. Stock is also accumulated to meet high demand during festivals and special occasions.

Allocation

Allocation is the process by which larger quantities of homogeneous products are broken down into smaller quantities. For example, manufacturers or producers sell their products in bulk to wholesalers, who in turn sell them in bulk to retailers.

Retailers ultimately sell these products in smaller quantities to customers. The allocation process is also known as “break-bulk”.

Assortment

In this process, the exact needs of customers are determined for a target group of customers. Traders try to match products for different consumers based on their tastes and preferences. The assortment of goods and services in supermarkets to meet the varied needs of customers is an example of assortment.

Assortment is also useful in today’s environment, as in many metro families, both members earn. They don’t have much time to spend on shopping. Therefore, they would like to go to a place where they can find a wide variety of household items.

Matching buyers and sellers

Channel members reach potential buyers and, in the same way, confirm product availability and negotiate with prospects. It is the task of the business agent and the retailer to interact with customers and address their objections.

Providing customer service

Products such as automobiles, televisions, computers, washing machines require after-sales services, and the channel member provides efficient service to customers to enhance credibility in the market.

Companies have their service centers that are coordinated by channel members, complaints are handled by retailers and distributors. Customer service typically includes installation, training, product maintenance, and other forms of services as per customer needs.

Horizontal marketing system

A horizontal marketing system is the method of sharing marketing resources between two or more unrelated businesses at the same level of operations. The purpose of this marketing system is to achieve common benefits.

This enables them to achieve economies of scale by selling more of the same product through geographical expansion and increases the control and bargaining power of organizations. This can result in problems related to lack of coordination and conflicts among members.

Vertical marketing system

The vertical marketing system is a process in which producers, wholesalers, and retailers jointly perform marketing activities. Vertical marketing systems are strongly developed to achieve maximum economic efficiency and market impact.

The fundamental goal behind the development of this system is to reduce the conflict that arises when independent channel businesses strive to pursue their individual objectives. For example, joint promotion of products by all channel members.

Overall, distribution channels help make the marketing process more efficient and effective by connecting producers to customers and providing a range of value-added services.

Choosing the right distribution channel

Each distribution type has its advantages and disadvantages:

Direct or short channels preserve the margin rate but require heavy marketing expenses (recruitment and management of sales force, sales administration, etc.).

Long distribution channels degrade the producer’s margin but can allow for higher volume sales. Long channels also help save part of the marketing costs. However, this type of channel requires training intermediaries to know how to sell the product to their own customers. Additionally, the producer will not have access to the details of retailers or final customers.

Here are the criteria to consider when choosing the right distribution channel:

  • Is the channel consistent with my target audience? Do consumers expect to find my products at this point of sale?
  • Is the channel consistent with my positioning?
  • Is the channel consistent with the volumes I am capable of producing?
  • Is the channel consistent with my pricing structure? (If my margin is comfortable, I can afford to sell in a long distribution circuit)
  • Is the channel consistent with the payment terms I can accept?
  • Is the channel consistent with my internal organization?

Examples of distribution channels

Here are some examples of distribution channels for fresh products:

  • Direct channel: on-farm sales, sales at markets
  • Short channel: sales in a cooperative of producers, or sales to supermarkets without intermediaries
  • Long channel: sales to purchasing centers, which then resell to supermarkets.

Conclusion

In summary, distribution channels are essential elements of the supply chain and the marketing process. The choice between direct or indirect channels, as well as effective management of logistics and storage, have a major impact on the success of a product in the market. By understanding the different options and functions of distribution channels, companies can optimize their marketing strategy to achieve their business objectives.”

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