What Is a Distribution Channel? Types and Examples
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A distribution strategy can often be one of the last things that a new online business owner or entrepreneur thinks about.
Selecting the correct distribution channel is one of the most important decisions you’ll make. In terms of building your brand, it’s as key as choosing which products you want to sell.
But what is a distribution channel? If you aren’t familiar with them, or have no idea how to choose which one is best for you, we’re here to help you get familiar with what these channels have to offer.
What Is a Distribution Channel?
Simply put, a distribution channel is the chain of businesses that get a product from the maker to the final customer. For example, take pink flamingos that you put on your lawn. The distribution channel would include the factory that made them, the companies that shipped them to either a wholesaler and/or a retail or online shop, and the company that delivers the flamingoes to you so you can put them in the ground and make your outdoor space fabulous.
Most businesses have at least one distribution channel, but some have hundreds or even thousands – they’re a vital cog in the ecommerce machine.
Check out our guide on ecommerce best practices for additional tips.
Types of Distribution Channels
There are a variety of distribution channels depending on whether a business is selling goods or services, and what types. But the two main distribution channels we’ll talk about are direct and indirect.
Direct Distribution Channels
Direct distribution channels involve a manufacturer selling directly to the customer. The manufacturer won’t need a wholesaler or retailer and it’ll take care of its own marketing. Direct distribution is extremely popular in the US, making just over $44 billion over the last six years.
This channel requires more time to run, plus the ability to make, store and deliver your products. You’ll need to build your brand online with marketing. Additionally, you’ll need to run some sort of website, pop-up shop, or location to show off what your business has to offer.
Direct distribution channels bring:
- More direct feedback (and data) from your customer
- Higher profit margins (and/or you can offer lower prices)
- Better control over your supply chain
- Scalability with less effort
- Less competition
Direct distribution channels are particularly popular with small businesses, multi-level marketing businesses, and companies that sell locally.
Businesses that offer services like software prefer direct distribution too. Final Draft, which is the most popular screenwriting software, sells directly to customers. It doesn’t need a retailer or wholesaler because the customer downloads the product directly.
Advice from the Experts
Top Tip: If you want more information on direct distribution business, include the term “D2C” in your search. That’s shorthand for “direct-to-customer.”
Whittier Fruit Farm is another good example (as are many local farms and co-ops) – it sells delicious apples and all manner of produce directly to the customer at the farm, as well as roadside stands, delivery options, and oh wow we are totally heading down to get a tart apple pie as soon as this article is done because it looks delicious there.
Indirect Distribution Channels
An indirect distribution channel involves a manufacturer using an outside wholesaler, retailer, seller, and/or delivery process. Some manufacturers prefer to let others do all the heavy lifting, even if they only need part of the distribution process covered (like businesses who primarily sell to wholesalers).
This route is more flexible because of the options an indirect distribution channel gives. However, these third parties will have some control over the customer experience, so be prepared for that.
An indirect distribution channel brings these benefits:
- More time
- Costs can be substantially reduced
- Greater ease in scalability, whether permanent or seasonal
- Access to the third party’s market base
- Wider reach for your products
The reason businesses choose indirect channels varies. Some businesses might want to skip the logistical nightmare of storage, sales and delivery (like car and other large-scale product manufacturers).
This is the case with IKEA. Yes, IKEA! It might look like it uses a direct distribution channel because it owns the factories for building the components, then it sells directly to the consumer in its huge shops. But IKEA needs external companies to move the goods all around the world.
Some business owners use the indirect distribution model because they prefer to spend their energy on their products, development, and thought leadership and collaboration.
If a company pools their resources with others that share the same values, they can use the indirect channel to access a friendly market of customers. Goodee is renowned for stunning, unusual products from a collective of designers and brands who are passionate about bringing a sophisticated, eco-friendly lifestyle to people.
How to Choose a Distribution Channel for Your Online Business
Should you go for a direct or indirect distribution channel for your online business? It depends on the nature of your brand and how you like doing things as a business owner.
Some key things to think about when choosing a distribution channel for your online business:
- Is your product perishable? Do you have to get the product to the customer ASAP? Direct is probably best.
- Do you need a lot of storage, huge warehouses, etc.? Indirect might be more attractive because you share warehouse costs with other businesses.
- Is your product B2B (for another business)? Direct will be most likely the best option.
- Are you someone who likes to be in control and make the decisions? You’ll prefer a direct distribution channel.
- Would you prefer to use someone else’s market reach and customer base rather than spend time organically building your own? Indirect distribution is the way to go.
If you still aren’t sure, consider doing some pricing analysis on your products to find which distribution channel works best for your business.
How a Distribution Channel Impacts the Price of Your Products
Your distribution channel impacts the pricing structure of your products depending on what you sell and the logistics involved in distributing your products.
For instance, when there is a rise in general prices due to inflation and/or supply chain problems, it will impact you a lot more as a direct distributor because you’re responsible for the total cost.
If your business is larger than a one-person operation, your company might need to hire people for supply procurement, marketing, inventory management, delivery, and even returns. Labor costs will definitely impact your pricing.
If you go indirect, you might be able to spread the costs to a wholesaler or retailer, but the market could be larger. But if these businesses make mistakes in branding, quality control, or supply chain security, for example, it’ll impact your bottom line which will drive up your prices.
So, what is a distribution channel? You should hopefully be an expert by now! But let’s review what we’ve covered.
A distribution channel can help or hinder a business, and many new online business owners need to know what a channel of distribution is so they can make the best decision. The good news is you’ve got many options to choose from.
No matter the nature of your product or how much control you like to have in your business, you’ll find a distribution channel that will maximize your profits and make your business that much more enjoyable.
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