Distribution channel definition
/What is a Distribution Channel?
A distribution channel describes the series of intermediary businesses used to deliver goods and services from the supplier to the final customer. The simplest form of distribution channel is a direct one, where the supplier sells directly to the final customer. An indirect channel can involve a number of intermediaries; each one buys the goods or services from a business earlier in the distribution channel, raises the price somewhat to incorporate its own costs and profit margin, and then sells it to the next entity in the channel. For example, a watchmaker sells its wares to a distributor for a geographic region; the distributor then marks up the watch prices and sells them to retailers within its region. The retailers markup the prices again and sell them to the final customer. This is an example of a three-tier distribution system.
The Two-Step Distribution Model
Under the two-step distribution model, the supplier sells straight to retailers, skipping the use of a wholesaler. Retailers then sell direct to end customers, which is where the name comes from - one step to the retailer, and the second step to the customer. Since wholesalers are eliminated from the model, the supplier can usually retain a larger share of the profits. Another outcome is that less inventory is tied up in the distribution system.
Advantages of Multiple Distribution Channels
A supplier may choose to employ multiple sales channels. Doing so increases the probability that the supplier can increase its total market share by making its products available to customers through every means possible. In addition, adding a direct channel to existing indirect channels allows the supplier to retain more of the profit, since it does not have to share any profits with intermediaries. Another advantage of having a direct channel is that the supplier knows the identities of its customers, which is not the case when distributors and/or retailers are used.