A distribution channel is a network of intermediaries or companies through which a specific or already established good or service gets to the end user. Channels are further broken down into direct and indirect types. Direct channels let the consumer purchase products directly from the producer, while an indirect channel passes the merchandise through other distribution channels to reach the end user.
While direct channels can be very lucrative for manufacturers, they are not the only distribution channels available.
The manufacturers need to determine whether or not there is a market for their goods in the downstream market as well. It is also necessary to consider the cost of these goods to ensure that the manufacturer is able to make a profit. This means that manufacturers need to do their research to determine the demand in the market before investing in any direct distribution channels.
For example, if they see a huge demand for a particular item in the immediate market, but there is no immediate plan to distribute this product in the downstream market due to high costs, then it would be more profitable to find indirect ways of getting the item to the consumer. Oftentimes this means purchasing products at a wholesale price and distributing them at a margin that is much lower than what the manufacturer would charge for the item.
Indirect distribution involves the retailer or wholesaler purchasing goods from a manufacturer and distributing them to retailers or customers.
This is often the cheapest way of distributing the goods because the manufacturer makes all of the upfront investment for the product and the retailer or wholesaler only has to cover the distribution expenses. Oftentimes wholesalers will pass on some of the profit they earn to retailers. This means that the retailer only has to pay for the items sold and does not have to factor in the wholesaler’s profit into the equation.
There are four different types of indirect distribution channels.
The most common is the closed loop system where intermediaries make purchases from the distributor and then turn around and deliver the products directly to the end user. In this case, there is a direct relationship between the manufacturer and the retailer. Another type is the open loop system where intermediaries make the sale from the distributor and deliver the goods directly to the customers.
One of the disadvantages of using this type of system is that it makes a loss of money for both the manufacturer and the distributor.
Sometimes the manufacturer may have to pass on part of the cost of the goods sold to the wholesaler or retailer. Sometimes the manufacturer may have to bear part of the cost of the distribution channel as well. Other times, the manufacturer may have to cover part of the distribution costs, but it will make more profit for the manufacturer in the long run.
In conclusion, indirect and direct channels have their own advantages and disadvantages, depending upon the nature of the product and the relationship between the distributors and retailers. It is important to determine the type of distribution channel that will work best for the type of product and the final consumer. It is also important to consider the amount of time and effort required to manage the distribution process.