Distribution Channel: Intro, Choosing a Channel, Intro to Distributors

A marketer must determine a distribution channel, ie the collection of processes and partners that move products from the manufacturer to consumer. These processes generally involve the following. 

• lead generation communication channels
• transactions (like billing and sales)
• logistics (like shipping, tracking, etc)
• financing
• post-sale support

The marketer may choose to either establish a direct B2C channel of distribution with consumers in which (s)he assumes responsibility for all of the processes. An example of this is the brick and mortar computer store owned and run by the computer's manufacturer, Apple. Dell's online store for selling computers was its direct B2C channel with customers. IBM's company-run technical sales force is a B2B version of this. Notice that, even if the contact is only online (and not physical) as in the cases of Dell and IBM, the distribution channel is still considered to be 'direct'.

Otherwise, the marketer may prefer to perform all these tasks through an indirect channel, ie via a distributor. Examples of indirect distribution include cases in which manufacturers sell products on the Amazon.com online storefront which includes doorstep delivery through the Fulfilment by Amazon (FBA) service.

DIRECT channels of distribution (strengths and weaknesses)

• Strengths
• Contact with the consumer. you can get fast feedback about what changing needs and concerns about your product
• You control the entire brand experience, thereby minimizing brand risk.
• The involved parties are very specifically invested in your product 
• You have a better profit margin
• Weaknesses
• You may have a smaller market coverage than otherwise
• You must generate all of your leads on your own
• Higher fixed costs (labor, storage facility, sales room, opportunity costs, etc)

INDIRECT channels of distribution (strengths and weaknesses)

• Strengths
• Larger market coverage. Distributors may reach new segments that you could not have otherwise
• Lower fixed costs 
• Weaknesses
• smaller margins
• distributor is less focused on your product
• You have little or no contact with customers. (Example: Manufacturers will not know their customers that use Amazon because Amazon does not share customer lists) 

Channel decision matrix (Which type of channel should you use?)

This section will illustrate how you can select appropriate distribution channels in 2 steps. 

Step 1 involves a detailed description of the product. This description should include its stage within the product life cycle and relevant features (competitive advantage, target market psychographics, price, etc).

Step 2 involves the decision matrix. Each row represents a distribution option while each column asks a question for that option. Answer questions with yes or no in each column for the respective distribution option. In the example below, the distribution channel options for which you have answered 'yes' to all the questions are probably good channel options. You may number them in order of use if that helps. For instance, this is a startup product which requires more market knowledge. Consequently, although there are several good options, some are more suitable in the immediate term.

Step 1: Product: cosmetics (soaps, creams, serums); handcrafted; natural ingredients; startup in a new local market; still doing research and development; mid- to high-range; for persons concerned with aging. 

Step 2: Distribution channel decision matrix

Channel options	Will target customers buy?	Fits product and brand position (like relative pricing and quality)?	Suitable for the organization? (image-wise)	Profit potential?
Direct distribution channel
One-on-one sale to friends & neighbors	yes	yes	no	no. not long term.
Shop at my home (residential area, 15 minutes from city center)	Maybe: Only those in the area.	Yes	yes	No. High opportunity costs. Inconvenient location may not generate good sales volumes. Too much advertising needed.
Internet: custom orders that are shipped to homes.  4	yes	yes	yes	yes
Indirect distribution channel
Elena, Popular farmer’s market retailer. May not require special shipping arrangements.   2	yes	yes: Since so busy & personal feedback not easy, best to go here after you know the market a little more.	yes	yes
Internet: custom orders that are shipped to retail outlets. 4
Art center	maybe	maybe	unsure	Unsure
Lian, Tiny one-person natural products boutique retailer of complementary products. In the heart of the city center and does not require special shipping arrangements  1	yes	yes: Lian is more likely able to get feedback for product improvement & suggestion for growth.	yes	Yes
High end supermarket  3	yes	yes: Go here after you have already established yourself with Elena and Lian.	yes	Yes

Conclusion: Direct channels to family and friends may be ideal for preliminary product development because this startup business needs feedback from a few customers to improve the product better before using larger less intimate distribution channels. After it is established, its first professional channel can be through Lian's tiny one-person natural products boutique retail outlet. Although in the city center, Lian has more direct and personal contact with her customers. 

At a later point, when product development is no longer an issue and the product is well liked in the smaller markets, use a distributor as a channel for expansion into other regions and even countries.

What are distributors

Distributors are middlemen in trade. Specifically, they buy products from manufacturers and then resell those products for profit to retailers (and sometimes consumers). Common features of distributors include the following. Most distributors provide strong manpower to fulfill the following functions.

They can warehouse your product

They work in 'large volumes' 

They can find retailer for your product. They already have an established customer base with many retailers.

They can handle logistics and will truck deliver your product to retailers. Consequently, they often offer a quicker route to the market than you would have been able to alone 

They may offer attractive  options for retailers like credit.

Distributors may demand roughly 25% to 30% of the producer's profit ...

Why use a distributor

• Market expansion (into an international location). In such a case, you will want to find a distributor that is local in that foreign country.
• You lack all of the in-house resources and capabilities to complete the tasks associated with having a direct channel of distribution.
• You wish to ease your work load. Some manufacturers do not mind taking the smaller cut if they know they only need to focus on making the product.
• Retailers force you to sell through distributors. This is a common requirement among online retailers. This is their preference because the distributor handles details that manufacturers may find challenging, like shipping and delivery.

Why NOT use a distributor

• if you have the resources, you can do all of the work yourself like delivery that is acceptable to the retailer. This is advisable if you would prefer to keep more profits. Major retailers will often buy directly from small manufacturers if the product and packaging are sufficiently interesting and your business is set up sufficiently well to produce consistently. Packaging is especially important to retailers because it drives sales.
• you produce small volumes. Before working with distributors, prepare your business to be able to increase production, sometimes very quickly. You may ruin the relationship if you are ill-prepared.

Motivate distribution channel partners
Consider the tactics that apply to your chosen distribution channel.

• Clear and consistent messaging based on your B2B unique value proposition
• Offer a fair opportunity for higher sales and profitability (example calculate wholesale prices that allow channel partner to meet profit margin objectives, bundling, etc)
• Offer promise of good current and future product line(s)
• Co-marketing (or collaborate marketing) opportunities. This involves 2 distribution partners from different distribution channels performing marketing mix roles for each other's products on their respective channels. Sometimes, this may involve promoting each other's products in a bundle.
• Offer superior customer experience and customer service
• attractive terms and conditions
• support and training
• personal attention for superior 
• Whenever possible, speak directly with and get contact details for buyers and their assistants, ie versus simply completing the application forms. The normal application forms do not allow you the chance to differentiate your offering very well and leaves your product subject to the whims of the person processing your application.
• Attend a 'vendor day', ie a day that a retailer allows potential manufacturers to meet the buyer.

CONTENT RELATED TO DISTRIBUTION CHANNELS

• See how to set profit margins when pricing for distributors, retailers and consumers