Distribution channel definition
/What is a Distribution Channel?
A distribution channel describes the series of intermediary businesses used to deliver goods and services from the supplier to the final customer. The simplest form of distribution channel is a direct one, where the supplier sells directly to the final customer. An indirect channel can involve a number of intermediaries; each one buys the goods or services from a business earlier in the distribution channel, raises the price somewhat to incorporate its own costs and profit margin, and then sells it to the next entity in the channel. For example, a watchmaker sells its wares to a distributor for a geographic region; the distributor then marks up the watch prices and sells them to retailers within its region. The retailers markup the prices again and sell them to the final customer. This is an example of a three-tier distribution system.
The Two-Step Distribution Model
Under the two-step distribution model, the supplier sells straight to retailers, skipping the use of a wholesaler. Retailers then sell direct to end customers, which is where the name comes from - one step to the retailer, and the second step to the customer. Since wholesalers are eliminated from the model, the supplier can usually retain a larger share of the profits. Another outcome is that less inventory is tied up in the distribution system.
Advantages of Multiple Distribution Channels
A business may choose to employ multiple distribution channels. There are several good reasons for doing so, which are as follows:
Increased market share. The company can increase its total market share by making its products available to customers through every means possible. This allows it to access an array of customers that it might not have been able to reach through a single channel.
Broader customer awareness. By accessing multiple distribution channels, more customers will become aware of the company’s products. This can result in higher overall sales, as the new customers begin to go out of their way to purchase the company’s products.
Revenue diversification. By selling through multiple distribution channels, a business can achieve more stable revenue. For example, when there is a downturn in one channel, having a dozen other distribution channels will keep revenues from dipping too much.
Increased customer convenience. Being able to access company products through many different channels makes the purchasing experience easier for customers, who may thereby become more loyal to the company’s products.
Improved competitive advantage. By filling certain distribution channels with its products, a company is in a better position to grab market share from its competitors.
More targeted marketing opportunities. Some distribution channels have different customer demographics, which allows a company to use different marketing techniques to access the customers in each channel. This can result in enhanced sales and more loyalty across different demographic blocks of the customer base.
In short, it can be highly beneficial to a business to sell through a number of distribution channels. Doing so can increase its sales, customer loyalty, and competitive advantage, while also reducing its risk of sales declines if one distribution channel fails.