What are distribution channels
A distribution channel and strategy outlines exactly how you plan to get your product/service to your customers and is a summary of a number of different factors.
As with any other strategic decision that you make for the future of your venture, the specifics of your distribution strategy should reflect
- the nature of your product or service,
- the nature of your business,
- and your overall business goals.
Consider, too, that while the decisions you make now should be made with an eye to the future, your distribution needs may change over the course of the life cycle of your product.
Your analysis of distribution channels begins with an understanding of your industry value chain.
In this article, we learned that a value chain is a set of linked value-creating activities that take your product from raw material to finished goods.
Your industry also has a value chain, and to formulate your distribution strategy, you need to understand where you are located in it.
Here is a generic industry value chain:
Let´s take a coffee shop as an example:
A national chain store and a local shop have the same buyer—they both sell directly to the consumer via their retail outlets.
However, the back end of their value chains may look very different.
Whereas the national chain might source their raw materials (coffee beans) directly from the producers (farmers), chances are the local shop will source the same materials through one or more wholesalers.
The final step in your distribution strategy is your sales channel, the specific method you will use to sell to your customer.
Obviously, your place in the industry value chain is an important factor in your sales channel.
Selling parts to a manufacturing firm is very different than selling coffee drinks to consumers.
There are many different ways to sell things, each requiring different levels of commitment and expertise.
Let’s take a look at some of the most common ones.
At first glance it may seem as though the best strategy is to access as many sales channels as possible.
The more channels, the more revenue opportunities, right?
That strategy may work for some business models, but for most startups, it is an untenable position.
Although more distribution channels may in fact equal more revenue opportunities, those opportunities should only be realized if they can be done so profitably.
Each channel has costs associated with it.
In most cases, the main cost will be the additional marketing and selling resources it will take to reach customers in each channel.
A common pitfall of new ventures could be described as a “build it and they will come” mentality, or the idea that your product or service is so attractive that simply introducing it into the marketplace will generate sales.
This never works! I also had to learn this the hard way.
It does not matter how cool, how sexy, or how tech-enabled your offering is—no one will purchase it unless they fully understand its features and benefits (and that’s what effective selling does).
Selling directly to your customer is a sales strategy that is appealing for many ventures and may seem straightforward on the surface.
- Who knows your product or service better than you do, and who will be more interested in making sales and thrilling your customers than you will?
Additionally, without middlemen, selling direct means capturing a higher margin on sales and having the highest level of control over the final price of your product or service.
Nevertheless, a direct sales channel does come with some challenges.
Selling Direct with a Sales Team
A dedicated sales team is a good way to tackle a product or service line with numerous components and/or target markets.
Specialized sales teams can target specific segments and will develop a mastery of the sales cycle for their areas of focus.
Dedicated sales teams also afford your organization the highest level of control over your…
- and marketing efforts,
…both in quality and frequency.
Sales teams require training, however, and it will take time for your salespeople to build the relationships needed to become effective in the target market.
Salespeople generally work on salary plus commission, so you’ll have to pay them while they develop their territory.
You can shorten the learning curve by hiring an experienced sales rep, but experienced salespeople are in high demand in most industries and command top dollar.
Direct Sales Online
Selling directly to customers with an e-commerce site powered by WordPress with the WooCommerce plugin, or with a dedicated e-commerce provider such as Shopify, is an increasingly popular sales method.
E-commerce sites can capture sales 24/7 without any direct monitoring.
Effective e-commerce sites still require support in the form of maintenance and customer service activities, and there are back-end distribution challenges such as inventory management and wholesaler relations (see below), but the low cost and the ability to scale quickly and sustainably have made online direct sales a staple of modern businesses.
The “build it and they will come” fallacy applies doubly to selling on the web.
Just putting up a website will not attract any traffic or generate any sales, no matter how cool your site is.
Using the web as a distribution channel necessitates a strong, pervasive, and well-thought-out online marketing presence.
Successful e-commerce entrepreneurs often find that they spend over half their time on marketing.
Direct Selling via Sales Agents and Manufacturers’
Reps any industries benefit from access to outsourced sales reps who function similarly to an internal sales team.
These sales reps specialize in a specific field or industry and have a designated territory.
They earn a commission when they make a sale.
Due to their specialization, they require little training, and often they already have a network of existing relationships within their territory.
However, your product or service will rarely be the only one that they sell.
It is in the best interest of these freelance sales agents to offer a range of products or services, and yours will compete with the agent’s other offerings.
This means you will need to provide competitive ways to incentivize these agents to give your offering preferential sales effort.
Instead of selling directly to customers, channel sales strategies employ third parties to sell indirectly.
Indirect sales strategies include one or more intermediaries between the producer and the customer.
Channel sales can be an effective way to reduce the costs associated with direct sales strategies.
Wholesale distribution is a great way to reach a wide market quickly and efficiently.
A wholesaler carries inventory from a manufacturer, which it then sells to retailers or resellers (as opposed to a dealer who buys from the manufacturer, then sells directly to the end-user).
Wholesalers already have relationships within the markets they serve and the sales expertise to move the inventory they purchase.
The speed, ability, and reach of an established wholesaler all serve to make up for the discount that will be required to allow the wholesaler to mark up your product to their own customers.
This markup eats into your own margins; electing to use a wholesale distribution channel often comes down to the tradeoff of accepting lower margins for the speed and volume that wholesalers can deliver.
Keep in mind that when you use a wholesaler, you are voluntarily removing yourself from direct contact with the end user.
When you sell to a wholesaler, they become your customer, and the retailer or reseller is the wholesaler’s customer.
Being that far removed from the end-user means that critical feedback may never make it back to you.
Another concern for new ventures that are looking to work with wholesalers is scale.
Wholesalers only make money when they purchase in volume.
A new venture may struggle to profitably deliver the volume wholesalers seek.
Dealers and Value-Added Retailers
Dealers purchase inventory directly from a manufacturer, then sell directly to the end-user.
Value-added retailers (VARs) often assemble different products or services from manufacturers into packages or bundles that reflect specific customer needs.
In both cases, unlike working with wholesalers, dealers and VARs work directly with the end-user.
They have a business imperative to pass along feedback and will often have strong existing relationships with their local customer base.
Unlike wholesalers, who serve as a single point of contact and make their money by purchasing and selling large volumes of inventory, dealers and value-added retailers require individual relationship building—each is a single entity.
While some VARs may rely on wholesalers, the majority will require their own relationship and will purchase small amounts of inventory at a time.
This issue of scale can mean that your products are at a higher risk of being discontinued.
If your product isn’t making the margin that a dealer or VAR expected, they will cut it out of their offering in search of a better solution.
VARs work with multiple manufacturers and service providers by necessity, making them part of a horizontal distribution strategy.
Some dealers are dedicated to a single brand (think automobile dealers) and are therefore more in line with a vertical distribution strategy.
Other dealers focus on a particular product or service—such as cell phones—and sell from a variety of manufacturers. These dealers are part of a more horizontal strategy.