Did you know that most companies don't sell products on their own or use intermediaries? These are the merchants who buy and resell the company's products to the end consumers. Intermediaries are also an important link in a company's distribution channel. To learn more about the role of intermediaries and how companies distribute their products, let's dive in and learn about distribution decisions.
Distribution Decisions Definition
There are two main processes in supply chain management: downstream and upstream. The upstream process sources materials for production, while the downstream process focuses on bringing the product to consumers. Distribution decisions belong to the downstream process.
Distribution decisions refer to all decisions that ensure the efficient delivery of goods and services to the end user.
We often think of distribution as delivering physical products such as clothes, vegetables, and bakeries, but distribution also impacts services (e.g. consulting, dry cleaning) and digital content (e.g. streaming music, TV programs). While online distribution brings companies the opportunity to reach more people, it faces many same issues as offline distribution—for example, choosing the right product for sales or converting prospects into buyers.
One major distribution decision is choosing distribution channels.
Distribution channels are paths that a product goes through, from the manufacturer to the end-user.
Main distribution channels include wholesalers, retailers, brokers, and delivery companies. The purpose of distribution channels is to ensure the timely arrival of goods and prevent delayed sales. Distribution channel decisions refer to selecting distribution types, levels, and strategies.
Distribution is also one of the four marketing mix elements. As a result, it can significantly impact a product's positioning, pricing, and promotion:
- Impact on positioning: Products distributed in a few outlets enjoy a more luxurious image compared to those sold in multiple outlets.
- Impact on pricing: Commission paid to middlemen can affect the price of the goods. Also, local goods may be less expensive than foreign goods as they have a shorter distribution channel.
- Impact on promotion: Without wholesalers and distributors, businesses must market and deliver the products themselves, which could consume a lot of resources. On the other hand, outsourcing tasks to a third-party distributor allows the firm to reach a wider market with less effort.
International distribution decisions
International distribution decisions are one of the strategic decisions made by global companies. The decisions include choices of products to sell overseas, the difficulty in delivery, and the degree of control the company wants to have over the selling process.
There are three ways to distribute your products in the foreign market:
- Set up international departments: The company directly enters a market and takes full control over distribution. For example, Amazon set up fulfillment centers all over the world to pick, pack, and ship products to customers.
- Partner with distributors: This strategy involves getting export companies to sell your products overseas so that you don't have to worry about shipping and complex procedures. This is the easiest and fastest way to extend your product reach. For example, motorsport startup Formula E uses Deutsche Post DHL to transport race cars, batteries, charging units, and media equipment to urban areas around the world.
- Sell your products online: This strategy involves using the internet to sell your product over the world. However, you may still need to partner with local distributors for shipping. For example, eCommerce stores sell clothes, technology, and most consumer goods.
Types of distribution decisions
There are four types of distribution decisions:
Direct selling
In direct selling, the product goes directly from the producer to the customers.
An example is a local bakery that sells bread directly to people in the neighborhood.
It's hard for companies with a direct channel to scale quickly as a producer is the sole distributor. However, the perks are that they can offer faster delivery service and don't have to pay commissions for intermediaries.
A commission is a fee for a service. It is often calculated as a percentage of the total cost.
Indirect selling
In indirect distribution channels, products are delivered by intermediaries. These intermediaries can be wholesalers, retailers, or brokers.
An example is a chocolate maker distributing chocolates in grocery stores.
The indirect distribution offers a wider customer reach while saving the producer a lot of time and effort in distribution. However, manufacturers will have less control over the selling process and must split pay commissions to intermediaries.
Dual distribution
Dual distribution is the combined strategy of direct selling and selling through intermediaries to maximize product reach.
An example is M&M chocolate which can be purchased at both M&M's own stores and retailers like supermarkets, department stores, gas stations, etc.
Reverse channel distribution
Reverse channel distribution is the channel where products flow from consumers back to retailers and manufacturers.
Examples of reverse channels include containers (e.g. bottles, wine glasses) being returned to the store after use, and faulty products being recalled (withdrawn from the market).
Distribution Channel Decisions
Distribution channels can be split into 4 levels:
Distribution: Zero-level channel
A direct distribution channel is called the zero-level channel. Goods are delivered directly to the customers, without intermediaries. Some examples include selling in brand stores and taking orders through the hotline or the company's website. This strategy works well for perishable goods or expensive goods where the consumer point is close to the manufacturers.
One-level, two-level, and three-level channels are indirect channels. In these channels, goods travel from manufacturer to consumer through one or many levels of intermediary:
Distribution: One-level channel
Retailers buy goods from the manufacturer and sell them to the customers. The one-level channel is often used for products such as clothing, toys, furniture, etc.
Distribution: Two-level channel
Wholesalers buy the products in bulk from the manufacturer, and sell smaller batches to the retailer who later markets them to the end-user. The two-level channel applies to durable, inexpensive goods.
Distribution: Three-level channel
Companies make use of three-level channels when there's high demand for a product throughout the country. Agents are split into stockist agents, and carrying and forwarding agents. Stockist agents keep stock on behalf of the company and sell them to wholesalers in the area. Caring and forwarding agents only provide the warehouse and shipping expertise for the order process and they work on a commission basis.
Distribution Decisions Strategy
Depending on the level of penetration, are three main strategies to distribute a product in the market:
Intensive distribution
The intensive distribution channel is used for distributing common consumer goods.
Intensive distribution is when companies distribute their products through a large number of outlets.
Intensive distribution works well for mass production and cheap-cost products such as milk, meat, clothes, or cosmetics. With this strategy, the company tries to cover as big a market as possible.
An example is Heineken beer being sold in supermarkets, restaurants, and pubs.
Selective distribution
The distribution of higher-value goods is often handled in selective channels.
Selective distribution is when companies select a few outlets to distribute their products.
The selective outlets are chosen for their reputation and are responsible for marketing the product to the customers. The strategy is suited for specialized products such as technology or fashion.
Sony TVs and Zara are brands that adopt the selective distribution method.
Exclusive distribution
Very high-end products are distributed in exclusive channels.
Exclusive distribution is when companies reserve the distribution to one store chain.
Products for exclusive distribution are often expensive and target middle- or high-income customers. The producers are also well-established brands in the market.
AT&T is the sole distributor of iPhones to the end customer. Gucci and Lamborghini also reserve exclusive distribution to one distributor.
| Intensive distribution | Selective distribution | Exclusive distribution |
Product prices & quality | $ | $$ | $$$ |
Number of outlets | As many outlets as possible | One or few stores in each country | Reserved for only one store chain |
Examples | Milk, chocolate, cosmetics, clothes | Sony phones | Apple phones, Gucci handbags, Lamborghini cars |
Table 1 - Intensive, Selective, and Exclusive Distribution
Factors affecting distribution decisions
Factors influencing distribution decisions can be grouped based on the product, market, customer, manufacturer, and middlemen (intermediaries).
The nature and type of product that influence distribution decisions include:
- Price: High-priced producers have fewer buyers and thus require fewer but more exclusive middlemen. Low-priced producers, on the other hand, would require many middlemen to reach a large number of customers.
- Product weight: Heavier products should be sold directly to reduce handling costs, e.g. coal, cement, etc.
- Level of standardization: A standardized product has a universal demand and may need as many middlemen as possible to access the large customer base. More customized products are likely to be sold directly by the manufacturer.
- Perishability: Perishable goods like bakeries are often sold through direct channels.
- Extra services; If the product comes with an after-sale service (e.g. installation), the channel will be shorter.
Based on the type of market, different distributions decisions may be made:
- Market size: The larger the market, the longer the distribution channel for distributing it.
- Type of customers: Business customers often buy directly from manufacturers whereas common customers tend to acquire products from middlemen.
- Buyer location: When the customer group is widely dispersed, distribution through wholesalers and retailers may come in handy.
The type of customers may also impact how a product is distributed:
- Customer size: The larger the customer size, the more locations they occupy. This requires more middlemen to distribute the product.
- Quantity: A customer who buys a large quantity of product tends to deal directly with a manufacturer.
The size and position of the manufacturer are other factors influencing the middle choice:
- Production size: A large manufacturer may open his own outlets to distribute the products whereas a smaller manufacturer may seek distributions through retailers and wholesalers.
- Financial position: Firms with good financial backing can seek high-value customers themselves without relying on middlemen.
- Distribution control: If a firm likes to control its own distribution, you may prefer to sell directly to the customers or use a short distribution channel.
Finally, the middle's cost and effect on sales should be considered when determining distributing channels:
- Cost: If the commission is high, the company should consider using fewer middlemen.
- Effect on sales: The company should closely examine its financial report to see if the middlemen are positively contributing the sales and acquiring its customers. If the financial performance through indirect distribution channels is poor, then it might be better to reduce middlemen.
This is quite a long post, but we hope you've learned something new about distribution decisions and channels in the business. Before you go, why not take our quiz to test your knowledge of distribution?
Distribution Decisions - Key takeaways
- Distribution channels are paths that a product goes through, from the manufacturer to the end user. Examples include wholesalers, retailers, brokers, and delivery companies.
International distribution decisions consider the product to sell overseas, the level of difficulty in delivering the product, and the extent to which the company wants to control the selling process.
Four types of distribution are direct selling, selling through intermediaries, dual distribution, and reverse distribution.
There are four levels of distribution: zero-level (direct channel), and two, three, and four-level (indirect channel).
Distribution strategies can be split into intensive distribution, selective distribution, and exclusive distribution.
The nature and type of product, market, customer, company and middlemen should all be considered when making distribution decisions.
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