How a company's distribution channels work

Everything you need to know about the mechanisms used to get products to consumers

A company's distribution policies allow the product to be in the right place and time for purchasing by the consumer. Distribution channels play a central role in this respect, because they encapsulate the mechanisms used by companies to get their products from the producer to the end consumer.

The majority of products originating in the production line go through three phases before getting to the consumer: storage, physical distribution, and billing and collection. Consequently, we can differentiate between the two basic distribution channels according to characteristics of each one:

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  • Direct or own channel. In this case, the producing company sells directly to the customer without intermediaries. This channel is only appropriate when the information and customer service are so important that the producing company decides not to delegate them to others. Since there are no intermediaries, the producer is responsible for marketing the product.
  • Indirect or external channel. When the product is distributed by a different company from the producer. In this case, the distribution is in fact another business with its own specific planning, organization, and management.

The external distribution channels are formed by a series of people and institutions that allow the product to be transferred from the manufacturer to the producer: the intermediaries. The length of the channel expresses the number of intermediaries that contribute to the distribution process; for example, we can identify the following distribution channels of consumer goods:

  • From the producer or manufacturer to the retailers, and from the retailers to the consumers.
  • From the producer or manufacturer to the wholesalers, from the wholesalers to the retailers, and from the retailers to the consumers.
  • From the producer or manufacturer to the intermediaries, from the intermediaries to the wholesalers, from the wholesalers to the retailers, and from the retailers to the consumers.

The role of the intermediary usually carries negative connotations, since it provides a service that involves a cost and, therefore, increases the final price. However, intermediaries take on very important duties, such as the physical distribution of the product. They can accomplish this with fewer transactions than if it were done by the producing companies, since a wholesaler buys products from different companies and distributes them to different retailers.

Additionally, intermediaries undertake financing functions; if the wholesalers pay on the spot (for example, when the company offers them discounts), they allow the producer to recover the value of their product without having to wait until the end consumer has purchased it.

Definition of the distribution strategy and channels

When a company is deciding which channel is most suited to selling their products, it must answer a series of questions: What level of control does the company want over its products and the final price? Does it want to supply to a large market or does it prefer to specialize? Does it want a say in all promotional activities of the product? What are its financial means?, etc.

Depending on the number of retailers the company decides to use for its products, we can discuss three possible alternatives:

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1. Exclusive distribution strategy. This strategy entails selling the product in a certain area through a single intermediary. The distributor commits to not selling a competitor's products and to making a minimum number of sales. This strategy is usually applied to products that need a robust sales effort, including repair services, technical information, etc. For example, certain car manufacturers have only one dealer in an area.

2. Selective distribution strategy. This strategy is based on selecting a limited number of distributors. The company selects the best distributors according to the sector, the importance and prestige of the vendor, the minimum order they can place, etc. This strategy typically applies to expensive products, such as luxury vehicles, perfumes, footwear, etc.

3. Intensive distribution strategy. For this strategy, the manufacturer tries have its product sold in the largest number of points-of-sale possible. It typically applies to frequently-purchased goods. Coca-Cola is a good example of a company that uses this distribution strategy: the company wants us to find its product in the greatest number of stores possible.

Final considerations

Notwithstanding the above, we must take some small considerations into account, as the discussed distribution channels, while the most common, are not the only ones. Companies can use several combinations of these channels until finding the one that best suits the characteristics of their products.

Similarly, complexity is an important factor to consider, since the number of levels has a direct impact on the complexity of distribution and the control that the producer can exercise over it.

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