When the manufacturer directly sells to the final consumer with the help of intermediaries it is called as?

Role of Distribution Channels in Business

The target for any business is to bring their product or service to the market and make it available for consumers by creating a distribution path or channel. The link between producers and the end consumer is normally intermediaries, such as wholesalers, retailers, or brokers. The intermediaries can be natural persons or businesses. Distribution channels affect the prices of goods and their positioning in their respective markets.

Distributions, ideally, should be set up in a way that limits the number of stops for the product or service before it reaches the end consumer. A distribution channel must be efficient and effective. It means that transportation and other logistical requirements need to be used at maximum capacity and at the lowest rates possible.

Types of Distribution Channels

Distribution channels can either be direct or indirect. The indirect channels can be divided up into different levels.

1. Direct distribution channels

The direct distribution channel does not make use of any intermediaries. The manufacturer or producer sells directly to the end consumer. The direct form of distribution is typically used by producers or manufacturers of niche and expensive goods and items that are perishable. An example is a baker.

2. Indirect distribution channels

The indirect distribution channel makes use of intermediaries in order to bring a product to market. The three types of indirect channels are:

One-level channel

The one-level channel entails a product coming from a producer to a retailer and then to the end buyer. The retailers buy the product from the manufacturer and sell it to the end buyers. The one-level channel is ideal for manufacturers of furniture, clothing items, toys, etc.

Two-level channel

The two-level channel follows the following process:

Wholesalers generally make bulk purchases, buy from the producer, and divide the goods into smaller packages to sell to retailers. The retailers then sell the goods to the end buyers. The two-level channel is suitable for more affordable and long-lasting goods with a larger target market.

Three-level channel

The three-level channel is similar to the two-level channel, except the goods flow from the producer to an agent and then to a wholesaler. Agents assist with selling the goods and getting the goods delivered to the market promptly.

The agents normally receive a commission and are allocated the task of product distribution in a particular area. The three-level channel is suitable for goods that are in high demand and with a target market that stretches across a country.

The Internet as the Modern-Day Distribution Channel

With e-commerce growing tremendously over the past couple of decades, manufacturers and producers are now able to use online marketplaces to sell their goods. The internet is also ideal for service providers. Examples of online market places are Amazon, AliExpress, eBay, and Alibaba. Other internet intermediaries can be delivery services, such as Uber.

Making the Right Choice

Distribution channels may vary depending on a particular manufacturer’s product type and their sales targets. It is why it is pivotal to choose the right distribution channel.

The following factors must be looked at into detail by a company in order to determine which distribution method would be ideal for it to maximize profit generation via sales, value addition, and consumer reach:

• Market characteristics
• Product characteristics
• Competitor characteristics
• Company characteristics

Related Readings

Thank you for reading CFI’s guide to Distribution Channel. To keep learning and advancing your career, the following resources will be helpful:

Marketing channels are the ways that goods and services are made available for use by the consumers. All goods go through channels of distribution, and your marketing will depend on the way your goods are distributed. The route that the product takes on its way from production to the consumer is important because a marketer must decide which route or channel is best for his particular product.

Manufacturer makes the goods and sells them to the consumer directly with no intermediary, such as a wholesaler, agent or retailer. Goods come from the manufacturer to the user without an intermediary or middleman. For example, a farmer may sell some produce directly to customers. For example, a bakery may sell cakes and pies directly to customers.

Purchases are made by the retailer from the manufacturer and then the retailer sells the merchandise to the consumer. This channel is used by manufacturers that specialize in producing shopping goods.

For example, clothes, shoes, furniture and fine china. This merchandise may not be needed immediately and the consumer may take her time and try on the items before making a buying decision. Manufacturers that specialize in producing shopping goods prefer this method of distribution.

Consumer’s can buy directly from the wholesaler. The wholesaler breaks down bulk packages for resale to the consumer. The wholesaler reduces some of the cost to the consumer such as service cost or sales force cost, which makes the purchase price cheaper for the consumer. For example, shopping at some of the warehouse clubs, the customer may have to buy a membership in order to buy directly from the wholesaler.

Distribution that involves more than one intermediary involves an agent called in to be the middleman and assist with the sale of the goods. An agent receives a commission from the producer. Agents are useful when goods need to move quickly into the market soon after the order is placed.

For example, a fishery makes a large catch of seafood; since fish is perishable it must be disposed of quickly. It is time consuming for the fishery to contact many wholesalers all over the country so he contacts an agent. The agent distributes the fish to the wholesalers. The wholesalers sell to retailers and then retailers sell to consumers.

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Channels of distribution (or a distribution channel) are channels of businesses or intermediaries which a product or service travels through before reaching the final customer.

These channels often include:

• wholesalers

• distributors

• retailers

• online stores

There are 3 main types of distribution channels.

Each type includes some sort of combination of manufacturer, wholesaler, retailer, and final paying customer.

The first type includes all 4 channels and is the longest.

A good example of this would be the alcoholic beverage industry, as manufacturers usually sell their product to a wholesaler, who in turn sell to a retail store. 

What motivates channels of distribution to sell a product?

A few factors that can motivate a certain channel of distribution to sell a product are exclusivity for a certain product or brand, better prices, and good customer support.

What kind of channels of distribution do Saas companies use?

Some of the most commonly used channels of distribution for SaaS companies are SEO, customer referral programs, content and social media marketing, ads, and word of mouth.