What Is a Distribution Channel?

A distribution channel is the network of businesses or intermediaries through which a good or service passes until it reaches the final buyer or the end consumer. Distribution channels can include wholesalers, retailers, distributors, and even the internet.

Distribution channels are part of the downstream process, answering the question "How do we get our product to the consumer?" This is in contrast to the upstream process, also known as the supply chain, which answers the question "Who are our suppliers?"

Understanding Distribution Channels

A distribution channel is a path by which all goods and services travel to arrive at the intended consumer. Distribution channels can be short or long, and depend on the number of intermediaries required to deliver a product or service.

Increasing the number of ways a consumer can find a good can increase sales but it can also create a complex system that sometimes makes distribution management difficult. Longer distribution channels can also mean less profit for each intermediary along the way.

Components of a Distribution Channel

• Producer: Producers combine labor and capital to create goods and services for consumers. • Agent: Agents commonly act on behalf of the producer to accept payments and transfer the title of the goods and services as it moves through distribution. • Wholesaler: A person or company that sells large quantities of goods, often at low prices, to retailers. • Retailer: A person or business that sells goods to the public in small quantities for immediate use or consumption. • End Consumer: A person who buys a product or service.

Types of Distribution Channels

Direct

A direct channel allows the consumer to make purchases from the manufacturer. This direct, or short channel, may mean lower costs for consumers because they are buying directly from the manufacturer.

Indirect

An indirect channel allows the consumer to buy the goods from a wholesaler or retailer. Indirect channels are typical for goods that are sold in traditional brick-and-mortar stores.

Hybrid

Hybrid distribution channels use both direct channels and indirect channels. A product or service manufacturer may use both a retailer to distribute a product or service and may also make sales directly with the consumer.

Distribution Channel Levels

Level 0

This is a direct-to-consumer model where the producer sells its product directly to the end consumer. Amazon, which uses its platform to sell Kindles to its customers, is an example of a direct model. This is the shortest distribution channel possible, cutting out both the wholesaler and the retailer.

Level 1

A producer sells directly to a retailer who sells the product to the end consumer. This level includes only one intermediary. HP or Dell are large enough to sell their computer products directly to reputable retailers such as Best Buy.

Level 2

Including two intermediaries, this level is one of the longest because it includes the producer, wholesaler, retailer, and consumer. In the wine and adult beverage industry, a winery cannot sell directly to a retailer. It operates in a multi-tiered system, meaning the law requires the winery to first sell its product to a wholesaler who then sells to a retailer. The retailer then sells the product to the end consumer.

Level 3

This level may add the jobber, this level adds the role of the individual who may assemble products from a variety of producers, stores them, sells them to retailers, and acts as a middle-man for wholesalers and retailers.

Distribution Channels in the Digital Era

Digital technology has transformed the way businesses, especially small businesses use direct channels of distribution. With increasing consumer demand for online shopping and easy-to-use eCommerce tools, direct selling means more success for businesses. Rather than having to rely on relationships with retailers to sell their products, software and artificial intelligence (AI) sales technology allows companies to manage sales, and automatically achieve high customer relationship management (CRM). Online advertising through social networks and search engines targets specific areas or demographics and social media networks are increasingly considered the industry standard and changing marketing strategies. 

If a company continues to use indirect channels of distribution, digital technology also allows them to manage relationships with wholesale and retail partners more efficiently.

Choosing the Right Distribution Channel

Not all distribution channels work for all products, so companies need to choose the right one. The channel should align with the firm's overall mission and strategic vision including its sales goals.

The method of distribution should add value to the consumer. Do consumers want to speak to a salesperson? Will they want to handle the product before they make a purchase? Or do they want to purchase it online with no hassles? Answering these questions can help companies determine which channel they choose. Secondly, the company should consider how quickly it wants its product(s) to reach the buyer. Certain products are best served by a direct distribution channel such as meat or produce, while others may benefit from an indirect channel. If a company chooses multiple distribution channels, such as selling products online and through a retailer, the channels should not conflict with one another. Companies should strategize so one channel doesn't overpower the other.

The Bottom Line

A distribution channel is the network of businesses or intermediaries through which a good or service passes until it reaches the end consumer. Distribution channels can contain many levels or intermediaries, such as wholesalers or retailers, as products move from manufacturer to consumer. The introduction of eCommerce platforms has streamlined distribution enabling producers to sell directly to consumers.