Channels of Distribution
Entrepreneurship 1
4.08A
Objective A: Explain the importance of channels of distribution
I. Channels of Distribution
A. The paths, or routes, that goods and services take from the producer to the
ultimate consumer or industrial user.
B. No physical paths
C. Business or people who perform a variety of functions to enable products to be:
1. In the right places
2. At the right times
D. Begin with producer and end with ultimate consumer or industrial user.
1. Producer – makes or provides goods and services
 Appliances manufacturers
 Farmers
 Health-care professionals
2. Ultimate consumer – anyone who personally uses a good or service to
satisfy his/her own wants
3. Industrial user – business that buys materials, services, or goods that will
be used to make other goods or used in the operation of the company
E. Channels also end when changes are made to the form of the good.
II. Channel Participants
A. Intermediaries
1. Operate between producer and consumer or user to help in movement of
goods/services
2. Also known as middlemen
3. Types of middle men:
 Retailers
 Businesses that buy consumer goods and sell them to the ultimate
consumers.
 Perform functions such as buying, selling, promoting, storing, and
pricing goods.
 May also provide customer services such as credit, installation,
and repair. Examples: McDonald’s, Macy’s, and Neighborhood
gas station.
 Wholesalers
 Businesses that buy goods from producers or agents and sell
them to retailers
 Buy a variety of goods from many producers and sell groups of
related products to retailers.

Important functions include packaging, transporting and storing,
extending credit to retailers, and providing promotional and
consulting services.
 Agents
 Businesses or individuals that assist in the sale and/or promotion
of goods and services.
 Do not take title to products – never actually own them
 Instead, sell and promote a producer’s goods/services
 Usually handle a limited number of noncompeting products.
III. Channels of Distribution: A Closer Look
A. Primary objective of producers in distributing goods/services – have products:
1. In the right places
2. At the right times
3. At the least cost
B. In some cases, this means selling directly to ultimate consumers/industrial
users.
C. In other cases, this means using intermediaries.
D. Regardless of distribution method, functions involved remain the same – buying,
selling pricing, financing, etc.
E. Selling Directly:
1. Producer performs all necessary functions and incurs all costs.
2. Producer earns any and all income.
F. Using intermediaries:
1. Costs can be passed on to other channel members.
2. Producers’ profits could decrease since income must be shared.
3. Producers’ income might be higher if the intermediaries are able to sell more
than the producers can sell on their own.
G. Not realistic for producers and consumers/industrial users to deal with each
other directly all the time.
H. Not practical for retailers to deal directly with producers all the time.
I. Through agents/wholesalers, retailers reduce number of contracts with
producers.
IV. How Intermediaries Help in Channels of Distribution
A. Buy big and sell small
1. Buy large quantities of goods from producers
2. Sell smaller quantities to other intermediaries or consumers
3. By placing large orders with producers, are able to reduce the per-unit cost
for goods, allowing them to make a profit and/or pass some of the savings along
to consumers.
B. Develop an assortment of goods.
1. Most producers produce more than any consumer will purchase at one time.
2. Intermediaries collect goods from a variety of producers and divide them into
quantities/assortments consumers want.
3. Consumers are then able to obtain the desired amounts/types of goods.
C. Transport and store goods
1. Enable goods to be on hand when consumer/industrial users are ready to buy
them rather than only when they are produced.
D. Perform other functions:
 Provide market information to producers
 Promote sale of goods/services
 Extend credit
 Service sales
 Provide management services
o Plan inventories and store layouts
o Help to train employees
Objective B: Describe types of channels of distribution.
I. Types of Distribution
A. Direct distribution – straight from the producer to the ultimate consumer or
industrial user.
B. Indirect distribution – involves intermediaries
II. Channels of Distribution for Consumer Goods
A. Producer to consumer
1. Direct distribution
2. Simplest of all channels
3. Can take place:
 Where the good is produced – a pumpkin farm, for examples
 In warehouses or outlets owned by producer
 Through producers’ catalogs or online sites
4. Producer maintains tight quality control
5. Producer retains all distribution costs
B. Producer to retailer to consumer
1. Used when it is not possible for producer to reach a large number of
consumers on a direct basis.
2. Retailers provide wide distribution of products at lower costs than
producers can.
3. Most retailers who deal directly with producers buy in large quantities due
to:
 The size of their businesses
 The great demand for products
C. Producer to wholesaler to retailer to consumer
1. Most common channel of distribution for consumer goods.
2. Used because:
 May producers cannot offer small shipments.
 So, they require buyers to place large orders for goods.
 However, most retailers cannot buy the large quantities required.
 Producers use wholesalers to sell to smaller retailers.
3. Wholesalers:
 Buy large quantities from producers
 Divide them into smaller units for sale to retailers.

Provide retailers with a variety of products from which to choose
D. Producer to agent to retailer to consumer
1. Used by producers who do not want to sell their goods but are
prepared to handle other marketing functions.
2. They contract with an agent to sell goods to retailers.
3. Agent brings buyer and seller together.
4. Once sales are made, producer processes goods to retailers.
5. Frequently used by producers to reach large retailers
E. Producer to agent to wholesaler to retailer to consumer
1. Used to reach small retailers
2. Producers contract with agents to sell goods to wholesalers.
3. Wholesalers buy large quantities and sell smaller amounts to many
small retailers.
III. Channels of Distribution for Industrial goods
A. Separate from channels for consumer goods, but similar
B. Producer to industrial user
1. Direct distribution
2. Most common channel for industrial goods since producers often provide
specialized services
C. Producer to industrial distributor to user
1. Industrial distributors – similar to wholesalers for consumer goods
 Buy large quantities of goods/raw materials from producers
 Sell small quantities to industrial users
 Unlike wholesalers, tend to specialize in selling a limited number of
products
 Frequently carry small, standardized parts and operating supplies that
industrial users need on a continuous basis.
 By having supplies on hand, are able to help industrial users obtain
goods faster than from producers.
D. Producer to agent to user
1. Producers without sales forces contract with agents to promote/sell goods
to industrial users.
2. Shipment is direct from producer to industrial user since agent does not
take title to goods.
3. Frequently used for industrial goods with unit prices high enough to
justify selling directly to industrial users.
E. Producer to agent to industrial distributor to user
1. Used when a good’s unit cost is not high enough to justify selling directly to
industrial users.
2. Industrial distributor buys large quantities of a good from an agent and
sells smaller quantities to industrial users.
3. Often used by small producers of items such as building supplies
IV. Channels for Services
A. Services:
1. Intangible activities performed by other people for money.
2. Productive acts that satisfy economic wants
3. Usually consumed when they are produced
4. Most follow a direct channel of distribution
B. Agents can assist with the distribution of services.
Examples:
 Travel agents
 Insurance agents
 Stock brokers