A distribution channel is a chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. It can include wholesalers, retailers, distributors and even the Internet itself. Channels are broken into direct and indirect forms, with a “direct” channel allowing the consumer to buy the good from the manufacturer, and an “indirect” channel allowing the consumer to buy the good from a wholesaler or retailer.
Three Types of Distribution Channels
While a distribution channel can sometimes seem endless, there are three main types of channels, all of which include a combination of a producer, wholesaler, retailer and end consumer.
- The first channel is the longest in that it includes all four, from producer to the end consumer. The wine and adult beverage industry is a perfect example of this long distribution channel. In this industry, thanks to laws born out of prohibition, a winery cannot sell directly to a retailer. It operates in what is known as the three-tier system, meaning the winery is required by law to first sell its product to a wholesaler, who then sells to a retailer. The retailer, in turn, sells the product to the end consumer.
- The second channel is one where the producer sells directly to a retailer, who then sells the producer’s product to the end consumer. This means the second channel contains only one intermediary. Dell, for example, is large enough where it can sell its products directly to reputable retailers such as Best Buy.
- The third and final channel is a direct to consumer model where the producer sells its product directly to the end consumer. Amazon, using its own platform to sell Kindles to its customers, is an example of a direct model, which is the shortest distribution channel possible.
Direct vs. indirect distribution channel
The two primary channels are direct and indirect, but there are different sub-channels within those categories. With the direct channel, the vendor of a product or service sells directly to the customer. The vendor may maintain its own sales force to close deals with clients or sell its products or services through an e-commerce website. The direct channel approach requires vendors to take on the expense of hiring and training a sales team or building and hosting an e-commerce operation.
The indirect channel, in contrast, offloads sales activities to individuals and organizations known as intermediaries. Examples of intermediaries include value-added resellers (VARs), consultants, systems integrators (SIs), managed service providers (MSPs), original equipment manufacturers (OEMs), independent software vendors (ISVs), wholesalers and distributors.
Examples of distribution channels
Each type of intermediary represents a channel, with its own distinct characteristics. VARs, for example, are often local companies that sell horizontal (accounting) or vertical (manufacturing) IT solutions to the businesses in their geographic region. SIs may be large, national companies that work on highly complex, multi vendor IT projects. Consultants may not resell solutions at all but rather influence sales through product recommendations to customers. A vendor develops a channel strategy, also known as a distribution channel strategy, to determine what types of intermediaries to target and how to optimize partner relationships to increase sales and improve distribution.
Types of distribution channels
Indirect channels may be configured in different ways. Single-tier distribution is a channel design in which vendors develop direct relationships with channel partners that sell to the end customer. In the two-tier distribution model, the vendor sells to distributors, which provide products to channel partners, such as VARs and SIs, which, in turn, package solutions for the end customer. Two-tier distribution helps smaller channel partners that would have difficulty establishing direct sales relationships with large IT vendors.
Figure: Channel of distribution