The Theory of Distribution Channels
How you distribute your products affects sales, product choices, marketing strategies and even profitability. The pathways from your business to customers are called distribution channels. Understanding the theory behind creating and maintaining these distribution channels gives you some control over how you approach the marketplace and how quickly you can move products to customers. You also learn how to time your marketing so that you don't offer products that haven't arrived in customers' areas yet.
A distribution channel is the conduit from product to customer in its simplest form. However, the channel may be much longer than this. For example, a company may harvest raw materials and ship them to a manufacturer that ships to a wholesaler that ships to a retailer that delivers the product to the consumer. The theory of distribution channels states that each company in the channel must charge enough to pay expenses and leave a profit. Knowing where you are in the channel helps you understand your costs and your mark-up needs. If you are near the end of the channel, you will pay the most for a product, because it has been marked up on its way to you. If you're near the beginning, you may be expected to charge what are commonly called wholesale prices, because your buyers understand you incur less expense at the start of a channel.
There are no set prices along the distribution channel. Each company may charge what the market will bear. If prices are too high in the middle of a channel, buyers may disappear, because they know they can't mark up the product or materials enough to make a profit when they sell them. At any stage, a company may offer a discount to attract buyers. If a company in the middle of the channel offers a discount directly to consumers, the rest of the channel is cut out because it cannot compete.
Power gets unevenly distributed in a distribution channel. Whoever controls the supply is in the best position to dictate terms and prices. To counteract this, buyers farther down the channel often form associations so they can purchase as a group and receive equal treatment from suppliers. Such associations prevent companies farther up the channel from taking advantage.
If you are creating a distribution channel, you need to decide how many intermediaries you want. For example, some manufacturers sell directly to the public with no intermediaries. Other distribution approaches may involve numerous handlers along the way, thus driving up the final price charged to customers. Your determining factor in creating a distribution channel is the market price for your goods or services. If multiple intermediaries will cause the price to rise higher than customers will pay, your distribution channel must be whittled down.