What Is a Distribution Channel?
An e-commerce distribution channel is a path through which goods and services flow from producers to consumers.
The primary purpose of a distribution channel is to make goods and services available to consumers most efficiently and effectively possible.
For example, suppose a manufacturer produces different types of chocolate products but doesn’t sell them directly to customers. In that case, he can work with distributors to get his product to the final customers. In this case, distributors can either be wholesalers, retailers, or both.
You might’ve seen people unloading goods at your local grocery store someday but never thought much of it, but that’s distribution in action.
What Are the Different Channels of Distribution?
There are two main channels: direct and indirect.
Direct channels involve selling products directly to consumers through brick-and-mortar stores or online.
Indirect channels involve selling products to intermediaries, such as wholesalers or retailers, who then sell the products to consumers.
Each type of channel has its advantages and disadvantages, and companies must carefully choose the best channel for their products.
So what are the advantages and disadvantages of each channel? Let’s take a look at that now.
Direct channel’s advantages
- Avoid Sharing Profits
One of the most significant advantages of direct channels is that you don’t have to give a dime to anyone.
Because you’re not relying on intermediaries, you get to keep 100% of the profit you get directly from your customer.
That’s why we see more and more companies encouraging customers to buy from them directly, not through intermediaries.
But direct channels have their disadvantages also, and they can be pretty major for some companies.
- Have Total Control Over Your Products
Some companies don’t want to sell to everyone; selling directly to your customers gives you control over where your products are sold.
You control who buys your products and from where precisely because you control the whole sales process from A to Z.
Companies like Rolex, for example, never sell their products through a 3rd party. They choose where they sell their products to always be associated with luxury.
- Build Relationships with your customers
Delivering directly to your customers can give you a highly competitive advantage: building a relationship with your customers.
If your customers know you and your brand and always buy from you directly, they’re more likely to be loyal to you.
Direct channel’s disadvantages
- It costs more to sell your products
Companies that use direct distribution channels must build up their sales and marketing teams to reach their customers.
Not having a partner handling sales and marketing could be challenging and sometimes not doable from a financial point of view.
If you look at Cocacola for an example of a giant multinational corporation, you’ll find them selling their products through intermediaries.
Although Cocacola has the sales and marketing team infrastructure, they know it makes financial sense to distribute directly and indirectly, or as you might call it, hybrid.
Indirect channel’s advantages
- Cost efficiency
Unsurprisingly, cost efficiency would be the first advantage in indirect selling. That’s why a lot of companies resort to it.
You don’t have to build your marketing or sales teams to sell your product because wholesalers and retailers will do that for you.
If you have the option to get someone else to run marketing and sales for your product without your paying them anything, wouldn’t you sell to them?
- Tap into existing customers’ databases
This is one of the most significant advantages when selling your products indirectly because you eliminate the need to build a customer base from the ground up.
Wholesalers and retailers have spent years, if not decades building up their brands and stores, they’re located everywhere, and people buy from them regularly.
They generate profits in the billions of dollars and invest them in marketing themselves even more.
So when you have the opportunity to sell your products through a retailer that has millions of visitors each day, why wouldn’t you?
- Sell your products faster
While delivering to your customers is an excellent way to build a relationship, it certainly won’t be the fastest way to get to them.
Selling your products through a distribution channel like a wholesaler or a retailer will speed up the selling of your products to your customers.
Because a customer would be able to just go in, grab your product, and get out faster than you can ever deliver it to them.
And some consumer goods rely on being sold as fast as possible, like consumables.
Indirect channel’s disadvantages
- Costs more
One of the main issues with indirect distribution channels has to be the inevitable increase in operations costs.
When you sell through a retailer or a wholesaler, you have to share a percentage of your overall revenue per product with the retailer or wholesaler.
And while that might not be an issue for most businesses, it’s a cost many companies pay.
- It can be a bit complex
Managing a supply chain is hard enough; imagine having to run a supply chain with hundreds of retailers and wholesalers.
The bigger the company and the more products it sells, the more it needs skilled people to manage that kind of relationship between all parties involved.
Types & Examples of Distribution Channels
There are two types of distribution channels that companies use to sell their products. Some common examples include:
System Integrators (SIs)
System integrators (SIs) are organizations that provide end-to-end solutions by combining products and services from multiple vendors.
SIs typically have expertise in a specific industry or domain, such as healthcare or finance.
They use this knowledge to help their clients select, implement, and integrate the best-suited technology for their needs.
In many cases, SIs also offer managed services, which means they take on responsibility for ongoing operations and maintenance of the system once it is up and running.
An example of a system integrator (SIs) is Deloitte.
Managed Service Providers (MSPs)
Managed service providers (MSPs) are third-party organizations that provide IT services and management on behalf of businesses.
MSPs typically offer a suite of services that can include everything from 24/7 monitoring and help desk support to data backup and disaster recovery.
Some MSPs offer more specialized services such as application development and web hosting.
Outsourcing IT functions to an MSP allows businesses to free up internal resources to focus on their core competencies.
In addition, MSPs can provide expertise and scale that may be difficult for businesses to achieve independently.
An Example of an MSP is Lenovo.
Value-added retailers (VARs)
Value-added retailers (VARs) are retail businesses that offer something extra to their customers. This could be in customer service, product knowledge, or even a unique shopping experience.
VARs typically charge a premium for their services, but their customers are willing to pay because they know they will receive added value.
VARs are often found in niche markets, where they can use their expertise to attract and retain customers.
Value-added resellers usually include technology service companies, auto dealerships, and furniture companies.
Original Equipment Manufacturers (OEMs)
An original equipment manufacturer (OEM) is a company that produces parts and equipment that may be used in another company’s end product.
For example, a company that makes automobile engines would be an OEM for a car manufacturer.
Many large companies have their in-house OEMs, while others outsource production to external companies.
An example of an OEM would be Apple.
A wholesaler is an intermediary that buys products from manufacturers and sells them to retailers.
Wholesalers typically sell products in bulk at a discounted price. This type of channel is often used when the manufacturer wants to reach a large number of retailers quickly and efficiently.
An example of a wholesaler is Walmart or even Amazon.
A retailer is an intermediary that sells products he doesn’t produce himself that he usually gets from a wholesaler or the manufacturer himself.
This channel is often used when the manufacturer does not have its retail outlets or when the product is not suitable for direct sale to consumers.
Retailers are also used to reach consumers in different geographic areas from the manufacturer.
An example of a retailer would be Best Buy.
Consultants are one type of indirect channel of distribution. They are professional advisers who provide expert advice to businesses in a particular area.
This could be in marketing, finance, human resources, or any other business area.
Consultants typically have a lot of experience and knowledge in their field and can offer valuable insights and advice to businesses.
An excellent example of a consulting firm is McKinsey.
Distributors are businesses that purchase products from manufacturers and then resell them to retailers or other companies.
The advantage of using distributors is that they can provide a wide range of services, including storage, transportation, and marketing support.
The disadvantage is that they can add significant costs to the product’s price.
An excellent example of a distributor would be Fastenal.