What are distribution channels and which are the most appropriate for each type of company?
All companies need a route to get their products to the end consumer. This is known as a distribution channel.
However, this term encompasses different characteristics: means, suppliers, lengths, goals, each determined by the characteristics of the product.
Therefore, it is important for companies to design and implement a distribution channel strategy through which they can determine which channels are optimal for their business needs.
With this in mind, we took on the task of compiling in the following post an operational definition of what distribution channels are, a description of their different types, as well as the indispensable elements for an ideal strategic design.
What is a distribution channel?
In short, a distribution channel is a path that a good or service follows from the manufacturer all the way to the final consumer. Although they can vary from one to the other, generally speaking, a distribution channel includes a producer, a wholesaler, a retailer, and a consumer.
Also, a distribution channel can help to produce data an insights relevant both to the manufacturers and the clients themselves.
With the exponential growth of digital capacities in the entrepreneurial world, the distribution channel's offer has diversified. Let's check some go the different types available.
Types of distribution channels
There are two predominant categories or types of distribution channels: internal and external. Let's analyze their characteristics.
Direct distribution channel
This type of distribution channel is organized and managed by a company that sells its products or offers its services directly to the end consumer.
These companies are known for maintaining in-house control of all aspects of getting their product to the buyer's door, so their organization and infrastructure are equipped to ensure the fulfillment of their purchase orders.
As expected, direct distribution channels imply an extra workload and even the setting up of an exclusive business unit for their attention. In addition, since it requires warehousing, logistics systems, vehicles, and staff, extra investment is needed.
However, in exchange for this investment and optimal management, direct channels are shorter and more efficient, and in the long run, less costly than an indirect channel.
Speaking of which.
Indirect distribution channel
This channel consists of a network of middlemen who perform the distribution functions of a company. Those businesses that opt for this solution do so in order to save time and reduce the investment required to set up a direct channel.
Likewise, start-up companies often turn to these intermediaries to ensure that their delivery operations are in experienced hands, thus reducing the risk of bad practices that could jeopardize their reputation.
However, in the long-term —and even in the medium-term—, this may not be the best alternative, since over time and depending on the growth of the business, the cost, paperwork, and delivery times will increase.
Now that we have a more accurate idea of how distribution channels operate, let's see how to figure out which one is the most suitable for your company.
What is the right distribution channel for my product?
Now that we have a better idea of how distribution channels operate, let's look at some of the key elements for evaluating the optimal distribution channel.
It is essential to determine which type of channel best suits the target consumer of your product or service. To do this, you must be clear about their buying habits, the added values they are looking for, and even the channels through which they prefer to be informed.
Depending on who is interested in your business and your offer, you will have to establish some hypotheses that will allow you to design a strategy to reach them in the best way.
Okay, you know your potential customer. Now, what kind of relationship do you hope to establish with them?
Of course, it is a commercial relationship of buying and selling, but it will be very different if your company is looking to internationalize its offer to the general public (regardless of the stage your organization is in), or if you are targeting a very specific niche.
In the former case, you will need to have a network of contacts or a very solid infrastructure that will allow you to take your offer to different latitudes. In the latter case, you will have to evaluate whether a direct channel favors you because you know the niche in detail or whether it might be more convenient for you to partner with a distributor that has already built that relationship.
Either way, your sales goals will always be linked to the choice of your distribution channels.
Each product category has its own preferences for certain distribution channels.
For instance, if your product is some kind of perishable, your distribution channels need to be short and usually direct. So your company will most likely manage its own channel.
In contrast, if your product is a very specialized hardware component, you may want to look for a retailer who can provide you with market knowledge and exposure to your target buyer.
While these three elements are not the only ones you should consider, it is essential that you take them into account in order to make an informed decision on the design of your distribution strategy.
How to develop a distribution strategy?
Your company's needs, growth stage, technical capabilities, budget constraints, and business objectives; these are just a few of the elements you will need to consider in developing your distribution strategy.
Let's leave the details of these elements for a future post. In this post, where we address distribution channels, let's answer the following questions in order to have a roadmap for a successful distribution strategy.
1. How will your potential customers find you?
As we pointed out above, you need to know your potential customers; but, on top of that, you need to efficiently plan your demand. This means that you will need to analyze different channels, such as social networks, search engines or industry trends.
The goal is that the channel through which you decide to approach your potential customers demonstrates the ability to yield a certain number of sales.
Identifying your primary channels is a complementary exercise to optimizing your ads through which you build brand presence.
2. What is your scale and size?
From a common sense perspective, we might think that short distribution channels are better than long ones, mainly because successful businesses rarely intend to stay in the early stages.
However, a valid justification for why longer, indirect channels exist is because they bring expertise to a business without experience in logistics, fulfillment or sufficient staff to manage deliveries.
Asking yourself about the size of your business, but also about your scaling goals, allows you to be clear about the type of business relationships you should cultivate and pursue as you begin to grow.
Distribution networks are often made up of established businesses from which your company can benefit by entrusting them with complex processes that you are unlikely to be able to implement error-free in the short term.
3. What are your future business goals?
If your goal is to expand into new cities or markets, having a well-developed distribution strategy is an integral part of meeting your goals. Think about what would happen if during the launch of your product you do not have a retail partner to ensure exposure of your offer in key sectors.
Likewise, to create a brand presence in new markets, direct channels will be the best strategy to translate your positioning into sales and a great brand experience.