What is Distribution Channel?


By: Site Engineer, Staff

full bio

A distribution channel is a chain of businesses or intermediaries through which a good or service passes from the producer (manufacturer) until it reaches the end consumer (user). This is also known as a Marketing Channel or Marketing Distribution Channel.

This channel comprises producers, consumers, and middlemen that serve as selling agents between the manufacturers and consumers.

Types of Middlemen

Most consumer goods are sold by manufacturers through middlemen to the final consumers except in the industrial goods market.

There are many types of these marketing intermediaries performing a variety of functions and are referred to by different names depending on the type of functions they perform.

Middlemen can be classified into two broad categories:

1. Merchant Middlemen

These types of middlemen bear the risks involved in the marketing of these goods. They own the goods they handle. They buy the goods and take possession of them.

Profits or losses from the sale of the goods accrue to them. The two main ones are wholesalers and retailers.

2. Agent Middlemen

These types of middlemen receive commissions for the functions that they perform. They do not take title to the goods and services they handle. They perform specialized marketing functions for those that own the goods.

They are known by the special marketing functions that they perform within the channel of distribution. They may perform these specialized marketing functions for producers, wholesalers, retailers or users of the goods.

They are usually more commonly found in the industrial sector of the economy than in the consumer goods market.

The main types of agent middlemen include the followings:

(a)       Brokers

They specialize in specific commodities and provide their principals with established contacts for the sale of their products. Their main function is to bring buyers and sellers together for a commission.

A broker is expected to have wide knowledge on the source of supply and the prospective buyers within a given field and to negotiate the most favorable terms of trade obtainable by the principal (who may be the buyer or seller whoever hires his services for a commission).

They perform valuable services for negotiating sales for specialized items and seasonal products that do not require constant distribution.

(b)       Selling Agents

These agents are usually chosen to represent a manufacturer fully in a given target market. The agent takes control of the marketing of all the producers’ products in the market.

He often serves as the marketing department for the producer. He is not restricted by territory and may even extend financial assistance to the producer. He is usually financially strong and he decides on which items to carry.

They are usually used by new producers or producers that are financially weak. They are also used when new markets are to be cultivated by a manufacturer.

(b)       Manufacturers’ Agents or Representatives

These types of agents are representatives that are authorized by the manufacturers to sell all or some parts of their products in clearly defined territories. The agent is usually paid a commission on the total amount sold. He is usually smaller and financially weaker than the manufacturer.

The producer usually decides on who handles his product, the price to charge consumers, and the terms of sales of his products. Manufacturers agents employed where a producer has a good product but may wish to enter a new market but has not got enough facilities to do this. It may also be employed where the manufacturer may wish to use the experience of the distributor in a market.

(c)       Commission Merchants

They take physical possession of the items of trade. They deal usually with agricultural and forestry materials that need to be stored and transported from the point of production to the market.

They supply storage and transportation facilities for the items they handle. They also negotiate the terms of trade but are paid on a commission basis depending on the amount received from the items sold. They do not take title to the goods they handle.

Types of Channels

There are many different alternative channel structures opened to a producer by which he can get his goods to the consumers or users.

Channel 1:    Manufacturers –> Consumers

This shows direct sales of the goods by the manufacturers to the consumers. Most farmers sell some food items like yams directly to consumers. There are no intermediaries. This is also used for custom-made goods and fore service products.

Channel 2:    Manufacturers –> Retailers –> Consumers

This shows producers selling through retailers to the consumers. This is the most used method for distributing luxury items. This method is used especially for the sale of specialized items where constricts are negotiated between manufacturers and retailers engaged in exclusive distribution rights. It is also used where producers own their retail outlets.

Channel 3:    Manufacturers –> Wholesalers –> Retailers Consumers

In a given trading territory most manufacturers sell their goods through wholesalers who sell through retailers to consumers. This is the traditional method of selling most shopping goods. Typical products distributed I also include those with middlemen brand names. It is the most-used channel for distributing consumer goods.

Channel 4:    Manufacturers –> Agents or Brokers –> Wholesalers –> Retailers –> Consumers

This is where manufacturers sell through agents or brokers to wholesalers who then sell to retailers and finally to consumers. This is the channel that is mostly used for the sale of convenience items or by small manufacturers that have no marketing departments. The agents bring buyers and sellers together. The products are usually intensively distributed.

Channel 5:    Manufacturers –> Agents or Brokers –> Big or Foreign Wholesalers –> Smaller or Local Wholesalers –> Retails –> Consumers

In very many developing countries, this channel is usually employed to sell foreign-made goods. This is where manufacturers sell through agents to wholesalers. The big foreign companies serve as big wholesalers.

They sell to smaller wholesalers which operate in the cities. These local wholesalers may also sell to smaller wholesalers from the villages who then sell to retailers before the items finally reach the consumers.

This is the typical channel for distributing durable consumer goods in most developing economies where goods, especially imported items, pass through many categories of middlemen before they reach the final consumers.

Of course, this method of distributing goods makes the prices of the final items very high. This is because the goods had to pass through many hands with each middleman adding his margin to the cost of the goods as they pass from one hand to the other.

Alternative Marketing Channel Structures for Distributing Industrial Goods

Channel Path 1:      Producers –> Users

This is usually the most commonly used form of distributing industrial products. There is a direct link between the producers and users of industrial goods. The characteristics of industrial goods make them amenable to this form of distribution.

Industrial products are usually in their raw forms and are therefore mostly perishable. They are mostly bulky and the markets for the goods are usually concentrated. Users also buy in large bulks so direct purchases are often preferred.

Channel Path 2:      Producers –> Industrial Distributors –> Users

When the number of industrial good users increases, the direct distribution may not be effective. Some middlemen may, therefore, have to be sued. In these cases, industrial distributors are employed. This method usually resorts to exports of raw materials from developing economies to the industrial centers of the world. It may also be used for distributing equipment, tools, and accessories.

Channel Path 3:      Producers –> Agents –> Users

If the producers of industrial products require special information or services, agents may be employed. Sometimes the industrial producer may also want to enter into a new market or may need the expertise of someone. In such cases, agents are employed for the distribution of such products.

Channel 4:    Producers –> Agents –> Industrial Distributors –> Users

For the distribution of operating supplies, semi-processed components and parts, the producer may have to sell through agents and the industrial distributors to the industrial users. These are employed for standardized items that are produced in bulk and the markets for them cover wide areas.

Functions of Middlemen

The merchant middlemen are referred to as pure marketing organization. The agent middlemen only perform the auxiliary functions allocated to them by their clients.

They perform all the marketing activities discussed below.

(a)       Concentrating, Sorting, Allocating, and Assisting: Without the middlemen each user has to find the different producers and negotiate terms of sales with them. The middleman concentrates the producers’ items in one place for consumers to go to inspect and to select those items they want to use for the satisfaction of their requirements. These functions afford people with the opportunities of smaller and frequent purchases at convenient periods.

(b)       Selling: Middlemen help in creating awareness for the products they sell and in stimulating demand for them. They sometimes sell some brand of products in their names. They help small and some financially weak producers to promote their products. They often employ their salesmen and engage in advertising the products they deal with.

(c)       Channel of Communication: Middlemen operate between producers, that are located in industrial production estates far wide, and the numerous consumers that are located in cities and towns. They are the business organizations closest to the consumers. They know more about consumers’ needs and wants and how to satisfy them than the manufacturers. They, therefore, inform consumers about goods available and the pricing and business strategies of manufacturers. They also inform the manufacturers about what goods should be produced and how to market them.

(d)       Buying: Merchant middlemen are buyers. They compile lists of all manufacturers and producers of the product items their deal in and they know their terms of trade. They carry out the actual purchases with their own money. They, therefore, bear all the business risks surrounding the sale of each of the product items they handle.

(e)       Transportation: Middlemen provide their transport to move the items they buy and they sometimes will deliver directly to the homes and factories of users and buyers.

(f)        Financing: Middlemen buy their goods in bulk and pay in time. They, therefore, help manufacturers to finance their productions. They also grant credit to consumers by allowing them to buy and to pay later.

(h)       Storage: To concentrate the items traded, the middlemen have big warehouses or rent some public warehouses to store them. Some of the merchant middlemen build large retail outlets to be able to store and display their wares. This function aids the selection of items by customers and provides the convenience of buying for them. Middlemen relief manufacturers by providing space for their manufactured items. This allows the manufacturers to concentrate on their production functions.

(h)       Other Functions: Middlemen carry out market research on their own in their business areas. They also can re-bag some items for resale and store some items in their warehouses till they mature.


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