Companies that manufacture products must ensure they eventually reach their final customers. These customers may be difficult to identify, hard to reach, or there may be so many with small transactions that the manufacturing company can’t handle them. On the other hand, the products may be complicated, require extensive support, or require special, informed promotion. Depending on these factors, a company may decide to use different distribution channels to funnel the products to their markets and serve their customers efficiently.

Distribution Channel Considerations

Businesses with products should ask many questions before determining a distribution program. Those questions include:

• How does the end-user like to purchase these types of products? Does the consumer want to touch and examine the product or is it a product that the target audience likes to buy online? 
• What, if any, are the local, regional, or national regulations regarding the product category’s distribution channels? 
• Does the customer need personalized service?
• Does the product itself need to be serviced?
• Does the product need to be installed?
• How is the product typically distributed and sold in your industry?

The distribution channel will have an impact on pricing. With indirect distribution, a product that goes from the manufacturer to a distributor before it goes to a retail outlet needs to be priced at wholesale so that both the distributor and retailer can mark up the price.

Market Influence

The goal of the manufacturer is to deliver maximum value to customers. Often the market structure makes it difficult for the manufacturer to service consumers directly. Instead, specialized intermediaries take over specific tasks. If there are few, large customers concentrated in one area, it makes sense for the manufacturer to serve them directly. If thousands of customers are spread around the country and order small quantities, the manufacturer may be better off focusing on production and leaving distribution to others.

Product Influence

A manufacturer that produces small quantities of high-value products can easily find the few customers required. A mass-market producer of millions of low-cost items requires a major effort to service customers and usually uses intermediaries. Products that require special expertise or quick delivery force manufacturers to sell directly or limit the number of intermediaries, while manufacturers can effectively sell standardized products and those with a long shelf life through wholesale channels. Manufacturers must balance costs and customer convenience while ensuring that marketing is accurate and customer support is adequate.

Manufacturer Influence

The manufacturer controls the distribution strategy but the decision on the most effective way to service customers is often determined by the company’s size, resources or capabilities. A small producer doesn’t have the resources to set up a huge distribution network and relies on wholesalers instead. Companies focused on product design and manufacturing often don’t have marketing expertise and leave that to retailers. If the manufacturer feels that the existing distribution channels serve his purpose, there is no reason to set up a parallel organization.

How to Develop a Distribution Channel Strategy

A distribution channel strategy enables you to sell to customers in geographical areas or market sectors that your direct sales team cannot reach. You can choose from several distribution channels, including wholesalers, retailers, distributors and the Internet. Each channel gives you different options for dealing with customers and prospects. However, to ensure that your distributors operate effectively on your behalf, your strategy must incorporate the right level of control and support.

Mindstone will assist in identifying the appropriate and optimal channels in the following cases:

• Reach – If your strategy is to grow your business regionally or nationally
• Cost – Although a distribution strategy gives you a ready-made platform for expansion, it’s important to compare the cost of dealing through indirect distribution channels with the cost of setting up your own network or direct sales operation. Without a distribution network, you will have to commit resources to order processing, stockholding, delivery, invoicing and customer service.
• Contribution – Your strategy should also take account of the potential contribution of each distribution channel. Concentrate on working with distributors that give you access to an additional customer base, with no additional direct sales and marketing costs.
• Support – Support and control are critical factors in your distribution strategy. Appointing a manager to work with distributors enables you to monitor their performance and identify their support needs.
• Customer Service – It’s important to identify the types of customers you wish to serve directly. Typically, these would be your largest customers or customers that demand levels of technical support beyond your partners’ capability.

Distribution strategy characteristics include the structure of the channel and the nature of the partners. Companies can gain a competitive advantage by creating shorter, low-cost channels or by selecting partners who fulfil their role more effectively than those used by competitors. On the other hand, manufacturers can concentrate on reducing production costs and feeding low-cost products into an existing channel network. The optimal distribution channel strategy uses only intermediaries that add value for the final customer, either by reducing costs or by delivering additional convenience, service or functions.