Business Glossary

What are Distribution Channels?

This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.

What are distribution channels?

Goods and services often make their way through multiple companies, entities and intermediaries before making their way to the consumer. This network of entities is known as the distribution channel, which describes how goods and services make their way to customers and also the inverse process when payments are made from the customer to the original vendor.

Distribution channels may be described as long or short, depending on how many intermediaries are required to bring the product or service to the end customer. Sometimes goods make their way through multiple channels simultaneously using a combination of long and short channels. This enables businesses to cater to the broadest possible customer base.

A distribution channel may include wholesalers, distributors, individual retailers and selling online. Online distribution and ecommerce has made it easier for manufacturers to cut out the middleman and sell their goods directly to consumers.

Examples of distribution channels

Channels are made up of combinations of producers, wholesalers, retailers and end consumers. There are three types of channels, each of which will use a combination of the above in its distribution. Some go straight to the consumer, while others indirectly involve third parties.

The first type of channel is the longest as it requires a producer, wholesaler, retailer and consumer. For instance, in the wine, beer and spirits industry, producers rarely sell directly to the public. Instead, producers sell their product to wholesalers, who in turn sell to retailers, who then resell to consumers. This is a heavily regulated industry, and any company that wishes to sell alcohol to another company must register under the Liquor Control Reform Act 1998.

The second type foregoes the wholesaler with manufacturers selling directly to retailers. The consumer electronics industry is an excellent example of this.

The third type is the direct-to-consumer model, where companies manufacture their own products and sell them directly to the public. In Australia, companies like Huel are a good example of this, manufacturing their own merchandise and selling it directly to consumers online.

Businesses must be wary when using extended distribution channels as more links in the chain can become vulnerable to complications and disruptions. Longer channels can also potentially erode profit margins as more companies take their share of the profits on sold goods and services.

Distribution channels vs supply chains: What’s the difference?

After reading the definition of a distribution channel, it’s easy to use the term interchangeably with a supply chain. However, there is a distinct difference between a distribution channel and a supply chain.

Distribution channels: are part of the downstream process, i.e. getting your products to your customers.

Supply chains: are part of the upstream process, i.e. procuring your products or the components/ingredients to make your own.

Frequently asked questions about distribution channels

What is dual distribution?

Dual distribution is where a manufacturer or supplier sells goods or services to the consumers through two channels:

  1. Directly to the consumer alongside independent distributors like brick and mortar retailers.
  2. eCommerce stores.

How do I choose the right distribution channel?

Different distribution channels lend themselves to various products and business models, so it’s essential to choose the right one for your needs.

Your choice of a distribution channel should reflect your sales goals and your broader company mission. Do you want a sales force to be in charge of the customer experience? How quickly do your goods need to reach the customer? What kind of a margin can you expect from the products you sell? Can you afford to share that margin with other entities? While you may choose multiple distribution channels, you mustn’t prioritise one at the expense of the other.

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