20.

5 CHANNELS OF DISTRIBUTION
You are aware that while a manufacturer of a product is located at one place, its consumers
are located at innumerable places spread all over the country or the world. The manufacturer

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has to ensure the availability of his goods to the consumers at convenient points for their
purchase. He may do so directly or, as stated earlier, through a chain of middlemen like
distributors, wholesalers and retailers. The path or route adopted by him for the purpose
is known as channel of distribution. A channel of distribution thus, refers to the pathway Notes
used by the manufacturer for transfer of the ownership of goods and its physical transfer to
the consumers and the user/buyers (industrial buyers).
Stanton has also defined it as “A distribution channel consists of the set of people and firms
involved in the transfer of title to a product as the product moves from producer to ultimate
consumer or business user”. Basically it refers to the vital links connecting the manufacturers
and producers and the ultimate consumers/users. It includes both the producer and the
end user and also the middlemen/agents engaged in the process of transfer of title of
goods.
Primarily a channel of distribution performs the following functions:
(a) It helps in establishing a regular contact with the customers and provides them the
necessary information relating to the goods.
(b) It provides the facility for inspection of goods by the consumers at convenient points
to make their choice.
(c) It facilitates the transfer of ownership as well as the delivery of goods.
(d) It helps in financing by giving credit facility.
(e) It assists the provision of after sales services, if necessary.
(f) It assumes all risks connected with the carrying out the distribution function.

TYPES OF CHANNELS OF DISTRIBUTION

Generally we do not buy goods directly from the producers. The producers/manufacturers
usually use services of one or more middlemen to supply their goods to the consumers.
But sometimes, they do have direct contact with the customers with no middlemen in
between them. This is true more for industrial goods where the customers are highly
knowledgeable and their individual purchases are large. The various channels used for
distribution of consumer goods can be described as follows:

(a) Zero stage channel of distribution

M C
Manufacturer Consumers

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Zero stage distribution channel exists where there is direct sale of goods by the producer
to the consumer. This direct contact with the consumer can be made through door-to-
door salesmen, own retail outlets or even through direct mail. Also in case of perishable
Notes products and certain technical household products, door-to-door sale is an easier
way of convincing consumer to make a purchase. Eureka Forbes, for example, sells
its water purifiers directly through their own sales staff.
(b) One stage channel of distribution

M R C
Manufacturer Retailer Consumer

In this case, there is one middleman i.e., the retailer. The manufacturers sell their goods
to retailers who in turn sell it to the consumers. This type of distribution channel is
preferred by manufacturers of consumer durables like refrigerator, air conditioner,
washing machine, etc. where individual purchase involves large amount. It is also used
for distribution through large scale retailers such as departmental stores (Big Bazaar,
Spensors) and super markets.
(c) Two stage channel of distribution

M W R C
Manufacturer Wholesaler Retailer Consumer

This is the most commonly used channel of distribution for the sale of consumer goods.
In this case, there are two middlemen used, namely, wholesaler and retailer. This is
applicable to products where markets are spread over a large area, value of individual
purchase is small and the frequency of purchase is high.
(d) Three stage channel of distribution

M A W R C
Manu-
facturers Agents Wholesalers Retailers Consumers

When the number of wholesalers used is large and they are scattered throughout the
country, the manufacturers often use the services of mercantile agents who act as a
link between the producer and the wholesaler. They are also known as distributors.
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 20.6 FACTORS AFFECTING THE CHOICE OF DISTRIBUTION CHANNEL
Choice of an appropriate distribution channel is very important as the pricing as well as promotion strategy
are dependent upon the distribution channel selected. Not only that, the route which the product follows in
its journey from the manufacturer to the consumer also involves certain costs. This in turn, affects not only
the price of the product but also the profits. Choice of inappropriate channels of distribution may result in
lesser profits for the manufacturer and higher price from the consumer. Hence, the manufacturer has to be
careful while finalising the channel of distribution to be used. He should pay attention to the following
factors while making his choice.

(b) Nature of Market: There are many aspects of market which determine the choice of channel of
distribution. Say for example, where the number of buyers is limited, they are concentrated at few
locations and their individual purchases are large as is the case with industrial buyers, direct sale may be
the most preferred choice. But in case where number of buyers is large with small individual
purchase and they are scattered, then need may arise for use of middlemen.

(b) Nature of Product: Nature of the product considerably affects the choice of channel of distribution. In
case the product is of technical nature involving a good amount of pre-sale and after sale services, the
sale is generally done through retailers without involving the wholesalers. But in most of the
consumer goods having small value, bought frequently in small quantities, a long channel involving
agents, wholesalers and retailers is used as the goods need to be stored at convenient locations. Items
like toiletries, groceries, etc. fall in this category. As against this in case of items like industrial
machinery, having large value and involving specialised technical service and long negotiation period,
direct sale is preferred.

(c) Nature of the Company: A firm having enough financial resources can afford to its own a distribution
force and retail outlet, both. But most business firms prefer not to create their own distribution channel
and concentrate on manufacturing. The firms who wish to control the distribution network prefer a
shorter channel.

(d) Middlemen Consideration: If right kind of middlemen having the necessary experience, contacts,
financial strength and integrity are available, their use is preferred as they can ensure success of newly
introduced products. Cost factors also have to be kept in view as all middlemen add their own
margin of profit to the price of the products. But from experience it is learnt that where the volume of
sales are adequate, the use of middlemen is often found economical and less cumbersome as against direct
sale.

What Is a Distribution Strategy?

A distribution strategy is a method of disseminating goods or services to end-users. Implementing the

most efficient distribution method for your business is key to obtaining revenue and retaining customer
loyalty. Some companies opt to use multiple distribution methods to adhere to different consumer bases. For
example, if you’re selling a leather futon and want to cater to people ages 60 and above, you might choose to
directly sell products via catalog. For a younger customer base, you might decide to indirectly sell products
by working with a retailer such as Walmart.

At its core, distribution strategy should be based on your ideal customer — how does the average
client buy goods? How could you, as a producer, make the purchasing process easier? Is it an extensive
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purchase where buying the item directly from the manufacturer could be worth the potential hassle, or is it a
routine item where the customer would rather receive the product quickly and on-demand through a retailer?
The role that an item will play in a client’s life and the type of purchase decision associated with a product
are important aspects to consider when determining a strategy.

What Are the Different Types of Distribution Strategies?

As mentioned above, the two main types of distribution strategies are direct and indirect. There are also more
nuanced types of distribution that fall into these categories — intensive, selective and exclusive distribution.
But what exactly do these methods entail? Let’s examine some of the factors that go into each of these
cutting edge distribution strategies so you can determine which practice is best for your primary customer
base.
Direct Distribution
Direct distribution is a strategy where manufacturers directly sell and send products to consumers. There are
a few different ways to implement this method. Some organizations may opt to take a more modern approach
and use an e-commerce website where users can make a purchase online. This is an effective option for
companies with a client base that’s moderately knowledgeable about technology, requests a specific solution
to meet needs or is devoted to a particular brand.
Another direct distribution method is through catalogs or phone orders. This option may target an older
customer base or users in specific industries that are attuned to placing orders this way.
One important factor to consider when implementing a direct distribution strategy is the amount of
investment required. For example, manufacturers will need to add warehouses, vehicles and delivery staff to
their portfolio to effectively distribute goods on their own.
Indirect Distribution
The term “middleman” often gets a bad reputation, but in the case of distribution, these organizations can be
helpful in getting goods to consumers. Indirect distribution strategies involve intermediaries that assist in the
logistics and placement of products so that they reach customers swiftly and in an optimal location based on
consumer habits and preferences.
We will discuss the different types of intermediaries and their specific benefits later in this article, but
business needs, targeted clients and type of product are typically behind the reasoning for using this strategy.
Low commitment or routine purchases are often something that customers grab absentmindedly in a
department store without any specific brand loyalty. A tube of toothpaste is a good example of a routine
purchase. For these types of products, an indirect distribution method that places a large number of items in
multiple retail locations may be a company’s best bet.
Intensive Distribution
Products are put into as many retail locations as possible with the intensive distribution strategy. For
example, gum is a product that typically uses this strategy. You can find gum at gas stations, grocery stores,
in vending machines and at retail locations like Target. This method hinges on making a large number of
goods available in multiple locations. These items don’t typically necessitate an involved purchase decision
where the customer does research before making a purchase. Rather, these items are routine purchases that
involve very minimal effort to sell.
Exclusive Distribution
When manufacturers opt for exclusive distribution, they make a deal with a retailer to sell a product through
that specific storefront only. Businesses may also sell goods directly through their own branded stores, which
is another example of exclusive distribution. For example, customers can’t buy a Lamborghini at any location
— they need to go to a Lamborghini dealership to purchase new luxury vehicles.
An example of an exclusive distribution deal where a manufacturer and a retailer teamed up is the previous
agreement that Apple had with AT&T in distributing iPhones. This agreement caused people to forgo their
phone plans with other companies so they could get their hands on this exclusive product. This distribution
strategy works especially well for highly coveted, exclusive items.
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Selective Distribution
Selective distribution is a middle-ground option between intensive and exclusive distribution. With this
strategy, products are distributed in more than one location, but not as many as with an intensive distribution
strategy. For example, clothing from different brands may be offered selectively. A brand like Gucci may
choose to distribute its items to its own stores in addition to a few selected department stores rather than
placing its products in a range of locations such as Walmart or Target. This can help craft an implicit high-
end brand message while also increasing the opportunity for shoppers to purchase one of its products.
What Are Some Technologies that Aid in Distribution?
As technology becomes smarter, more and more solutions arise to streamline the distribution process. One of
the main ways to optimize the distribution workflow is to employ a distribution software. Whether you’re a
manufacturer conducting your own distribution or a distributor looking to improve operations, a software
solution can be a beneficial option. Here are some of the new technologies included in distribution software
that can positively influence your business.
Automation
Automation capabilities can increase the speed at which work is completed and free up employee time. This
ability is offered for various tasks, and specific functionality differs based on the distribution software vendor
that you go with. An example of how this might look in practice is through the automatic assignment of items
to a vehicle based on where the other materials in that vehicle are going and its planned route.
Internet of Things (IoT)
The internet of things is especially helpful in increasing productivity in the distribution process. Many
distribution systems include RFID tracking that enables users to scan items and track their locations
geographically and within the workflow. This helps users visualize the movement of inventory in real time.
Cloud-Based System
The proliferation of cloud-based distribution software enables users to access solutions anytime and
anywhere. This is especially helpful in the distribution industry where employees may need to look at data
not just when they’re seated at their desks, but also when they’re working hands-on in a distribution center.
This option enables flexibility and accessibility.

What Are Some Common Distribution Software Features?

Distribution software contains many different features to aid in the distribution process. Here’s a quick
overview of some of the commonly included features in these programs.

Sales Order Management

Sales order management functionality often includes the ability to input orders and then transmit them to
manufacturing so that items can be produced to meet customer needs. Some programs enable this process to
occur automatically and can receive customer information from different touchpoints.
CRM
CRM tools can assist users in looking at customer information in real time to see historical purchasing
information, products that are currently being waited on and payment method. This can improve the customer
experience along with keeping distributors knowledgeable of varied customer expectations.
Inventory Management
Inventory management features include the ability for employees to look at capacity, shortages and on-hand
stock. This assists with planning and review of demand processes. Some distribution programs can use
inventory information and demand planning to automatically reorder materials needed to meet anticipated
needs.
E-Commerce
E-commerce features assist companies in developing an online shopping platform to manage and coordinate
sales with customers. These tools often contain support for web analytics so that organizations can track the
products that clients are most interested in along with other relevant data points.
Logistics Management
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These features enable transportation management and route planning. This may include selecting which
items should be shipped together for the most efficient shipping process along with helping delivery drivers
optimize their driving hours

How Do I Select the Right Distribution Strategy for my Business?

Selecting the correct distribution strategy for your business depends on factors such as the type of item you
are creating, your customer base, warehouse capabilities and logistics support. Now let’s go in depth on each
of these factors:
Item Type
Depending on the type of purchase decision that customers make when deciding to buy a produced item, the
recommended distribution method may be different. There are three types of purchase decisions: routine,
limited and extensive. A routine purchase is something that customers spend relatively little time selecting
and is generally low priced, such as hand soap or paper towels. With these items, an extensive distribution
strategy might work best as customers aren’t necessarily devoted to specific brands and expect products to be
accessible at various locations. For these products, a high number of available items can lead to higher sales.
Limited purchase decisions are a sort of middle-ground between routine and extensive purchases. These
items are generally moderately priced and more time may be spent selecting an item than with a routine
purchase. Some examples of limited purchase products are clothing and small appliances like toasters.
Customers put some thought into the purchase of these items due to price and usability, but not as much
effort as they would with an extensive purchase item like a house or car. A selective or intensive distribution
strategy may be suitable for these items.
The final type of purchase decision is extensive. This includes big-ticket items such as houses, cars and
college educations. Generally, as the cost of an item goes up, the intensity of the purchase decision increases
as well. An exclusive distribution strategy could work well for these items because it adds to the customer
belief that an item should be more expensive. It may also be more lucrative to have fewer of these costly
products available due to the high production price of each item.
Customer Base
We already touched on how targeted customer demographics can inform distribution strategy. However, to
get more detailed about which distribution strategies most effectively apply to different customers, we need
to drill down to some of the ways companies use indirect and direct distribution.
Some of the methods of direct distribution include e-commerce, direct mail and manufacturer-run storefronts.
You might remember the days where corporations sent catalogs of their items directly to customers, and you
had to call the company to place an order. Nowadays, distribution through direct mail is less common due to
technological advances, but some companies that have a user base that is used to purchasing goods in this
manner may continue to opt for this distribution method.
E-commerce is a distribution channel that is rapidly increasing in popularity. A Shopify report predicts that
global e-commerce sales will reach $4.8 trillion by 2021. This distribution channel has a relatively low
barrier to entry for companies, and many consumers are familiar with web-based technology, making it a
win-win. This method also eases the process of purchasing a product because consumers don’t have to leave
their houses to buy items; they just need an internet connection and their credit card information.
Storefronts are closing all over the country, yet some businesses continue to distribute in this manner. One of
the benefits of this distribution channel is that customers can easily purchase related goods because items are
curated in a brick-and-mortar location. Additionally, consumers can look at and feel products in person,
which is especially beneficial when the price of a good and the intensity of a purchase decision increases.
Warehouse Capabilities and Logistics
Whether your company uses a direct or indirect distribution strategy depends on whether you are willing or
able to invest in aspects such as a transportation fleet, shipping personnel and a warehouse for storing goods.
This isn’t something that a manufacturer should enter into blindly — acquiring these necessary factors
involves a considerable upfront investment.
Your business will need to weigh the pros and cons of conducting your own distribution versus using an
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intermediary when deciding on a distribution method.

What Are Some of the Different Distribution Channels?

For companies that do opt to go with an indirect distribution method, there are a variety of ways to get
products into the hands of customers. Here are some of the intermediaries that businesses use to fulfill
distribution strategies.
Wholesaler
The role of a wholesaler is to source products in bulk from manufacturers and then sell them to retailers.
They usually seek to obtain items for a relatively low cost so that they can mark them up and gain profit
when selling them to retailers, who then further mark up item cost to make their own revenue. Wholesalers
generally have their own warehouses and a catalog of purchased items that retailers can select from when
making purchasing decisions. Many wholesalers also require retailers to buy a set amount of product,
meaning that goods are obtained in bulk.
Retailer
With the indirect distribution strategy, retailers are the final step in the distribution channel before customers
purchase an item. Retailers can buy goods either directly from a manufacturer or from a wholesaler. Retailers
typically purchase products at a low price that is then marked up to gain a profit. Retailers aren’t always
storefronts — they can also operate through the phone, online and even via catalog. With the proliferation of
the internet, many retailers decide to manage an e-commerce website instead of a brick and mortar store to
make sales.
Franchisor
Franchising is an entirely different way of distributing products. You’re likely familiar with the idea of
franchising — your local McDonald’s restaurant may be owned by a franchisor who is licensed by the
McDonald’s corporation to sell goods in the company’s name. A 2016 study from FRANdata and the IFA
found 732,800 franchises operating in the United States. These individually owned businesses can use
company branding to gain sales and, in exchange, pay a flat fee and ongoing royalties to enter an agreement.
Organizations and manufacturers with brand recognition benefit from this strategy by gaining revenue
without having to manage the granular day-to-day tasks associated with a brick and mortar shop.
Distributor
The role of a distributor is to obtain and transport items from manufacturers to retailers or other endpoint
locations. The benefit of using a dedicated distributor is that manufacturers don’t have to deal with the
logistics of transport or the cost of maintaining shipping staff and materials. Distributors may also be able to
package diverse goods into one entity for sale to a retailer. For example, your company may produce
television remotes, while a different organization creates batteries. By packaging these items together, the
distributor can create a more attractive, comprehensive product and improve the likelihood of a sale.
Brokers and Agents
Make way for agents. They handle the logistics of the sales. Agents handle contracts, marketing, and pulling
together specialized shipments. A part of their job is customer relationship management. On behalf of
manufacturers, they take ownership of products through the distribution process. They represent the producer
in the sales process.

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