A distribution channel is basically a network of intermediaries or companies through which a product or service passes directly to the end user or the customer. Distribution channels consist of retailers, wholesalers, distributors, and the web. Distribution can be either direct or indirect. Direct distribution refers to the direct transfer of the product or service from the manufacturer or supplier to the end user or customer.
Direct Distribution: From Manufacturers To Retailer
An example of a direct distribution channel is when a manufacturer ships raw materials to a retailer. On the other hand, websites such as GoGoTShirt as an intermediate in the indirect distribution process whereby the manufacturers and retailers do not connect directly with the end-consumer. The manufacturer has an arrangement with the retailer whereby the retailer pays for the raw materials at a wholesale price and the manufacturer then sells the products to the end user or customer at a margin higher than the retail price. In this arrangement, the manufacturer ensures that the retailer makes a profit on each sale.
The advantages of direct distribution channels over indirect ones include the fact that there is no middleman involved. The process of manufacturing the product or providing the service directly eliminates any middlemen such as a wholesale distributor. Thus in the case of retailing goods, there is no middleman involved here. The other advantage of the direct distribution channels is that the manufacturer can ensure that the products are supplied to the end customers at the most cost effective rate thereby ensuring optimum profits for the business.
There are many disadvantages however for using the direct distribution channel. For starters, there is lack of brand equity as the products are sold to the general public. Another disadvantage is that the company does not have direct control over the supply of the goods to the end users. This means that the company may not be in a position to change the marketing strategy accordingly to increase sales.
In addition to this, the price level that the manufacturers have to pay for the goods sold in the indirect channels is generally much higher than the price level that they have to pay for the same goods sold in direct channels. Thus companies may have to incur additional operational and marketing costs to cater for the difference in the cost of selling the product to the indirect channel and the direct channel. Such costs include inventory charges, warehousing charges, payment processing fees, special material costs, etc.
Changing The Marketing Mix
The other disadvantage of using the distribution channels is that the marketing mix has to be altered as per the changes in consumer demand. This means that even if the product that you are planning to sell gets increased demand in your local market, you have to adjust the marketing mix so as to meet the new demand. Similarly, even if demand for the product increases at one place and decreases at another place, the distributors will have to adjust their pricing so as to make the goods available to the target group of consumers. Thus the overall impact of the marketing mix changes as the market conditions change.
Further, the distribution channels do not offer a very large Return on Investment (ROI). This means that the amount of money that is paid for marketing strategies or products does not cover the full cost of the distribution channels. Usually, it is only the manufacturer that pays for the marketing strategies and products but the retailers pay for the goods sold through the distribution channels. Thus the money spent on distribution costs has to be recouped from other sources such as the premium charged for the goods sold by the brand and the cost of building the distribution channel infrastructure. Moreover, even if the distribution channel profits from its investment in marketing strategies and distributing products, there is no guarantee that there will be a consistent increase in customer base.
Hence, the direct selling company cannot rely entirely on the distribution channels for its success. There needs to be an infusion of marketing strategies and product development to keep the sales up. Moreover, to make things worse, the recent competition between the direct selling network and the third party distribution channel has led to lower sales due to higher overheads and less sales opportunity. Thus, indirect selling proves to be more advantageous. In fact, the indirect seller enjoys some of the most competitive advantages in the market. They can control their prices at a better level and can attract customers from all across the country without having to face the risks posed by the distribution channels.