What is a Distribution Channel?

A distribution channel (also called a marketing channel) is the path or route decided by the
company to deliver its good or service to the customers. The route can be as short as a direct
interaction between the company and the customer or can include several interconnected
intermediaries like wholesalers, distributors, retailers, etc.

Hence, a distribution channel can also be referred to as a set of interdependent intermediaries that
help make a product available to the end customer.

Functions of Distribution Channels

In order to understand the importance of distribution channels, businesses need to understand
that it doesn’t just bridge the gap between the producer of a product and its user.

 Distribution channels provide time, place, and ownership utility. They make the product
available when, where, and in which quantities the customer wants. But other than these
transactional functions, marketing channels are also responsible to carry out the
following functions:
 Logistics and Physical Distribution: Marketing channels are responsible for assembly,
storage, sorting, and transportation of goods from manufacturers to customers.
 Facilitation: Channels of distribution even provide pre-sale and post-purchase services
like financing, maintenance, information dissemination and channel coordination.
 Creating Efficiencies: This is done in two ways: bulk breaking and creating
assortments. Wholesalers and retailers purchase large quantities of goods from
manufacturers but break the bulk by selling few at a time to many other channels or
customers. They also offer different types of products at a single place which is a huge
benefit to customers as they don’t have to visit different retailers for different products.
 Sharing Risks: Since most of the channels buy the products beforehand, they also share
the risk with the manufacturers and do everything possible to sell it.
 Marketing: Distribution channels are also called marketing channels because they are
among the core touch points where many marketing strategies are executed. They are in
direct contact with the end customers and help the manufacturers in propagating the
brand message and product benefits and other benefits to the customers.

Types of Distribution Channels

Channels of distribution can be divided into the direct channel and the indirect channels. Indirect
channels can further be divided into one-level, two-level, and three-level channels based on the
number of intermediaries between manufacturers and customers.

Direct Channel or Zero-level Channel (Manufacturer to Customer)

Direct selling is one of the oldest forms of selling products. It doesn’t involve the inclusion of an
intermediary and the manufacturer gets in direct contact with the customer at the point of sale.
Some examples of direct channels are peddling, brand retail stores, taking orders on the
company’s website, etc.  Direct channels are usually used by manufacturers selling perishable
goods, expensive goods, and whose target audience is geographically concentrated. For example,
bakers, jewellers, etc.

Indirect Channels (Selling Through Intermediaries)

When a manufacturer involves a middleman/intermediary to sell its product to the end customer,
it is said to be using an indirect channel. Indirect channels can be classified into three types:

 One-level Channel (Manufacturer to Retailer to Customer): Retailers buy the product

from the manufacturer and then sell it to the customers. One level channel of distribution
works best for manufacturers dealing in shopping goods like clothes, shoes, furniture,
toys, etc.
 Two-Level Channel (Manufacturer to Wholesaler to Retailer to
Customer): Wholesalers buy the bulk from the manufacturers, breaks it down into small
packages and sells them to retailers who eventually sell it to the end customers. Goods
which are durable, standardised and somewhat inexpensive and whose target audience
isn’t limited to a confined area use two-level channel of distribution.
 Three-Level Channel (Manufacturer to Agent to Wholesaler to Retailer to
Customer):

Three level channel of distribution involves an agent besides the wholesaler and retailer
who assists in selling goods. These agents come handy when goods need to move quickly
into the market soon after the order is placed. They are given the duty to handle the
product distribution of a specified area or district in return of a certain percentage
commission. The agents can be categorised into super stockists and carrying and
forwarding agents. Both these agents keep the stock on behalf of the company. Super
stockists buy the stock from manufacturers and sell them to wholesalers and retailers of
their area. Whereas, carrying and forwarding agents work on a commission basis and
provide their warehouses and shipment expertise for order processing and last mile
deliveries. Manufacturers opt for three-level marketing channel when the userbase is
spread all over the country and the demand of the product is very high.

Factors Determining the Choice of Distribution Channels

 Selection of the perfect marketing channel is tough. It is among those few strategic
decisions which either make or break a company.
 Even though direct selling eliminates the intermediary expenses and gives more control
in the hands of the manufacturer, it adds up to the internal workload and raises the
fulfilment costs. Hence these four factors should be considered before deciding whether
to opt for the direct or indirect distribution channel.

Market Characteristics
 This includes the number of customers, their geographical location, buying habits, tastes
and capacity and frequency of purchase, etc.
 Direct channels suit businesses whose target audience lives in a geographically confined
area, who require direct contact with the manufacturer and are not that frequent in
repeating purchases.
 In cases of customers being geographically dispersed or residing in a different country,
manufacturers are suggested to use indirect channels.
  The buying patterns of the customers also affect the choice of distribution channels. If
customers expect to buy all their necessaries in one place, selling through retailers who
use product assortment is preferred. If delivery time is not an issue, if the demand isn’t
that high, the size of orders is large or if there’s a concern of piracy among the customers,
direct channels are suited.
 If the customer belongs to the consumer market, longer channels may be used whereas
shorter channels are used if he belongs to the industrial market.
 Understanding consumer behaviour is essential for deciding the most effective marketing
channel for the business.

Short Channels Long Channels

The offering is targeted to consumers and non-
The offering is targeted to business users.
business users.
The customers are geographically
The customers are geographically dispersed.
concentrated.
Customers require extensive technical Customers don’t require extensive technical
knowledge. knowledge.
Regular servicing is required for the offering Regular servicing is not required for the offering
to operate. to operate.
The order quantity is small.
The order quantity is large.

Product Characteristics

Product cost, technicality, perishability and whether they are standardised or custom-made play a
major role in selecting the channel of distribution for them.

Perishable goods like fruits, vegetables and dairy products can’t afford to use longer channels as
they may perish during their transit. Manufacturers of these goods often opt for direct or single
level channels of distribution. Whereas, non-perishable goods like soaps, toothpaste, etc. require
longer channels as they need to reach customers who reside in areas which are geographically
diverse.

If the nature of the product is more technical and the customer may require direct contact with
the manufacturer, direct channels are used. Whereas, if the product is fairly easy to use and direct
contact makes no difference to the number of sales, longer channels are used.

The per unit value of the product also decides whether the product is sold through a direct
channel or through an indirect channel. If the unit value is high like in the case of jewellery,
direct or short channels are used, whereas products like detergents whose unit value is low use
longer channels of distribution.

Long Channels
Short Channels
Product is perishable. Product is durable.
 Long Channels
Short Channels
Product is complex. Product is standardised.
Product is expensive. Product is inexpensive.

Competition Characteristics

The choice of the marketing channel is also affected by the channel selected by the competitors
in the market. Usually, the firms tend to use a similar channel as used by the competitors. But
some firms, to stand out and appeal to the consumer, use a different distribution channel than the
competitors. For example, when all the smartphones were selling in the retail market, some
companies partnered with Amazon and used the scarcity principle to launch their smartphone as
Amazon exclusive.

Short Channels Long Channels

The competitor uses the direct channels and
The competitor uses the indirect channels and the
the manufacturer is satisfied with its
manufacturer is satisfied with its performance.
performance.
The competitor uses the direct channel and the
The competitor uses indirect channels and the
manufacturer thinks choosing indirect or long
manufacturer thinks choosing short channels
channels would be more beneficial
would be more beneficial.

Company Characteristics

Financial strength, management expertise, and the desire for control act as important factors
while deciding the route the product will take before being available to the end user.

A company having a large amount of funds and good management expertise (people who have
sufficient knowledge and expertise of distribution) can create the distribution channels of its own
but a company with low financial stability and management expertise has to rely on third-party
distributors.

The companies who want to have tight control over the distribution prefer direct channels.
Whereas, those companies to whom such control doesn’t matter or those who are just interested
in the sales of their products prefer indirect channels.

Short Channels Long Channels

Company believes that it’s important to Company believes that channel control isn’t
control the channels. important.
Company has a broad product line. Company has a narrow product line.
Company has adequate resources to perform Company lacks adequate resources to perform
 Short Channels Long Channels

channel functions. channel functions.

Who is a Middleman?
A middleman plays the role of an intermediary in a distribution or transaction chain who
facilitates interaction between the involved parties. Middlemen specialize in performing crucial
activities involved in the purchase and sale of goods in their flow from producers to the ultimate
buyers. They typically do not produce anything but possess extensive knowledge of the market,
thereby charging a commission or a fee for their services.

 A middleman plays the role of an intermediary in a distribution or transaction chain who

facilitates interaction between the involved parties.
 Middlemen can be classified into two categories, namely, merchants and agents. While
merchants buy and re-sell their goods, agents specialize in negotiations of selling or
buying transactions.
 They provide manufacturers with valuable market feedback and let them concentrate on
production by providing the ancillary services of warehousing, distribution, advertising,
insurance, finance, etc. They make goods and services easily available to consumers in
the desired quantity.

Types of Middlemen

Middlemen can be classified into two categories, namely merchants and agents.

1. Merchants

Merchants, such as wholesalers and retailers, buy and re-sell their goods. They take ownership of
inventory and bear the expense of storing and distributing the product. They make money by
selling the goods at a higher price than its cost to them. The difference is called the “markup.”

Merchant middlemen range from a shopkeeper to a large multinational corporation with

international operations. Larger middlemen may focus on a core competency, such as delivery,
advertising, warehousing, or a particular market segment.

 
2. Agents

Agents, such as brokers or real estate agents, specialize in negotiations involved in transactions.
They do not take ownership of what they are selling. Instead, they make money by charging a
commission or a fee for facilitating a transaction.

For example, brokers act as intermediaries between investors and the securities exchange. They
provide trading services, investment advice, and solutions to their clients and charge a brokerage
fee in return.

Functions of Middlemen

Middlemen perform the following functions in a marketplace:

1. They provide valuable information and feedback to producers about consumer behavior,
changing tastes and fashions, upcoming rival businesses, etc.
2. They enable manufacturers to concentrate on the primary function of production by
handling the ancillary functions of warehousing, distribution, advertising, insurance, etc.
They promote the goods to the consumers on behalf of the producers.
3. Middlemen like banks and other financial institutions render financial services to
manufacturers.
4. They make the goods and services available to consumers at the right place, at the right
time, and in the right quantity.
 5. Buyers and sellers are often unwilling to assume the market risk for fear of a possible
loss. It is the middlemen in the process chain who assume the risks of theft, perish ability,
and other potential hazards.

Importance of Middlemen

Intermediaries are important players in every market. Both consumers and producers stand to
benefit from their services. In addition to constantly matching the supply and demand in the
market, middlemen provide valuable feedback to the producers about their market offering. By
specializing in functions such as banking, warehousing, transportation, underwriting, etc., they
bring the economic benefits of specialization and division of labor to the market.

Buyers gain access to the right quantities of goods and services close to their homes through the
intermediary channels. They benefit from other services of middlemen, such as advertising and
delivery.

What is wholesale?

A wholesaler is a person or company who sells products in bulk to various outlets or retailers for
onward sale, either directly or through a middleman. Wholesalers are able to sell their products
for a lower price as they are selling in bulk, which reduces the handling time and costs involved.

They usually provide large quantities of goods, but can take on orders for smaller quantities as
well. The wholesaler may also be the manufacturer or producer of the product, but they don’t
have to be.

What is retail?

A retailer is a person or a company who sells products directly to their customers for a profit.
The retailer may be the manufacturer of the product, or may acquire relevant products from a
distributor or a wholesaler. The products they sell will be at a higher price than they would be
from a wholesaler, due to markups.

Being a wholesaler gives you access to a diverse range of outlets and allows you to reach a
large customer base. Offering your product as wholesale allows a larger audience access to
your wares, therefore you are able to grow your business quickly.

This can drive interest for your product and can make you attractive to retail stores who can see
that there is a solid audience for your goods and are more likely to want to stock your product.

Types of Retail outlets

 Department Stores

A department store is a set-up which offers wide range of products to the end-users under
one roof. In a department store, the consumers can get almost all the products they aspire
to shop at one place only. Department stores provide a wide range of options to the
consumers and thus fulfill all their shopping needs.
 Merchandise:
Electronic Appliances
Apparels
Jewellery
Toiletries
Cosmetics
Footwear
Sportswear
Toys
Books
CDs, DVDs

Examples - Shoppers Stop, Pantaloon

 Discount Stores

Discount stores also offer a huge range of products to the end-users but at a discounted
rate. The discount stores generally offer a limited range and the quality in certain cases
might be a little inferior as compared to the department stores.

Wal-Mart currently operates more than 1300 discount stores in United States. In India
Vishal Mega Mart comes under discount store.

Merchandise:
Almost same as department store but at a cheaper price.

 Supermarket

A retail store which generally sells food products and household items, properly placed
and arranged in specific departments is called a supermarket. A supermarket is an
advanced form of the small grocery stores and caters to the household needs of the
consumer. The various food products (meat, vegetables, dairy products, juices etc) are all
properly displayed at their respective departments to catch the attention of the customers
and for them to pick any merchandise depending on their choice and need.

Merchandise:
Bakery products
Cereals
Meat Products, Fish products
Breads
Medicines
Vegetables
Fruits
Soft drinks
Frozen Food
Canned Juices
 Warehouse Stores

A retail format which sells limited stock in bulk at a discounted rate is called as
warehouse store. Warehouse stores do not bother much about the interiors of the store
and the products are not properly displayed.

 Mom and Pop Store (also called Kirana Store in India)

Mom and Pop stores are the small stores run by individuals in the nearby locality to cater
to daily needs of the consumers staying in the vicinity. They offer selected items and are
not at all organized. The size of the store would not be very big and depends on the land
available to the owner. They wouldn’t offer high-end products.

Merchandise:
Eggs
Bread
Stationery
Toys
Cigarettes
Cereals
Pulses
Medicines

 Speciality Stores

As the name suggests, Speciality store would specialize in a particular product and would
not sell anything else apart from the specific range.Speciality stores sell only selective
items of one particular brand to the consumers and primarily focus on high customer
satisfaction.

Example -You will find only Reebok merchandise at Reebok store and nothing else, thus
making it a speciality store. You can never find Adidas shoes at a Reebok outlet.

 Malls

Many retail stores operating at one place form a mall. A mall would consist of several
retail outlets each selling their own merchandise but at a common platform.

 E Tailers

Now a days the customers have the option of shopping while sitting at their homes. They
can place their order through internet, pay with the help of debit or credit cards and the
products are delivered at their homes only. However, there are chances that the products
ordered might not reach in the same condition as they were ordered. This kind of
shopping is convenient for those who have a hectic schedule and are reluctant to go to
retail outlets. In this kind of shopping; the transportation charges are borne by the
consumer itself.

Example - EBAY, Rediff Shopping, Amazon

  Dollar Stores

Dollar stores offer selected products at extremely low rates but here the prices are fixed.

Example - 99 Store would offer all its merchandise at Rs 99 only. No further bargaining
is entertained. However the quality of the product is always in doubt at the discount
stores.

What Is Electronic Retailing (E-tailing)?

Electronic retailing (E-tailing) is the sale of goods and services through the internet. E-tailing can
include business-to-business (B2B) and business-to-consumer (B2C) sales of products and
services.

E-tailing requires companies to tailor their business models to capture internet sales, which can
include building out distribution channels such as warehouses, internet webpages, and product
shipping centers.

Notably, strong distribution channels are critical to electronic retailing as these are the avenues
that move the product to the customer.

 Electronic retailing is the sale of goods and services through the internet.
 E-tailing can include business-to-business (B2B) and business-to-consumer (B2C) sales
of products and services.
 Amazon.com (AMZN) is by far the largest online retailer providing consumer products
and subscriptions through its website.
 Many traditional brick-and-mortar stores are investing in e-tailing through their websites.

PHYSICAL DISTRIBUTION
Physical distribution is the set of activities concerned with efficient movement of finished goods
from the end of the production operation to the consumer. Physical distribution takes place
within numerous wholesaling and retailing distribution channels, and includes such important
decision areas as customer service, inventory control, materials handling, protective packaging,
order procession, transportation, warehouse site selection, and warehousing. Physical distribution
is part of a larger process called "distribution," which includes wholesale and retail marketing, as
well the physical movement of products.

The Types of Physical Distributions

 Supplying Distribution. Supplying distribution is when businesses transport materials

from supply to stock. ...
 Carriers. ...
 Intermodal Transportation. ...
 Cargo Planes. ...
 Sales and Distribution.