What Are Channels of Distribution?

Channels of distribution consist of distributors, wholesalers, retailers, direct sales agents and online networks. A manufacturer of a product or service utilizes distribution channels to sell or deliver to the end consumer. Both consumer and business marketing channels exist, with several commonly used structures that involve a variety of levels.

Most companies that produce goods and services do not sell directly to their end consumers. Typically, firms rely on other businesses and organizaations to get the product or service to its intended user. For example, a food manufacturer uses several retailers to display and sell its products. The retailer is considered to be an intermediary within the manufacturer's distribution channel.

The type of intermediaries that exist in channels of distribution include wholesalers and retailers, brokers, manufacturers' representatives, sales agents, transportation companies, independent warehouses, banks and advertising agencies. When intermediaries buy and assume responsibility for the manufacturer's merchandise, they are considered to be merchants. Agents are points of contact in the pipeline that seek out customers and may negotiate sales for the manufacturer.

A firm's management makes decisions regarding the specific channels of distribution that will be used for the company's products. In the early stages of the firm's development, a single strategy may be used, which will later branch into a hybrid channel. When a number of distribution strategies are combined, such as the use of an internet platform to ship products directly to consumers, in addition to retail stores, the manufacturer is employing a hybrid channel strategy. For example, the computer manufacturer Dell® employed this type of strategy when it began to distribute select models through the discount warehouse retailer Walmart®, while continuing to fulfill the majority of its product orders directly.

In channels of distribution aimed at reaching the consumer market, there are four popular structures that firms use to model their strategies. The first is considered to be a zero-level channel, with the firm selling directly to the end consumer. Many mail order companies and telemarketers are considered to be direct sellers.

A one-level channel is where the firm uses a retailer to distribute its product. The manufacturer does not use any other intermediaries to transfer the product from the company's facilities. Rather, the product is sold directly to the retailer. Most direct store delivery (DSD) manufacturers employ this strategy.

Two-level and three-level channels of distribution both involve the use of a wholesaler. The wholesaler purchases the product from the manufacturer and then in turn sells it to a retailer. In a three-level channel, there is an additional intermediary between the wholesaler and the retailer. A jobber purchases the manufacturer's product from a larger wholesaler and distributes it to smaller retail accounts.

In business marketing channels, the manufacturer either sells directly to an industrial customer or uses a combination of industrial distributors and internal sales representatives. Sometimes the manufacturer will use the company's sales branch to funnel product directly to the business customer. In another arrangement, a company sales representative will sell the product directly to a distributor, who in turn sells the product to the actual customer.