At first, let’s identify the definition of distribution channels. In general, distribution channels
refer to the methods of getting products and services to the consumer. For example, a food
factory can sell its products to customers through the supermarkets. It’s one kind of
distribution channels. While the factory can also sell its products to small groceries. It’s
another way to deliver the products to customers.
Therefore, obviously, the distribution channel analysis is very important because the channel
you choose often impacts the price you can charge and therefore influence your profits.
1.0
So here is a problem. How do we do a distribution channel analysis? How to make distribution
decisions?
Generally, there are three questions can help making distribution decisions:
1. How can my product reach the consumer?
2. How do the players in each distribution channel profit?
3. Who has the power in the channels?
Next, let me briefly explain the first one How can my product reach the consumer?.
There are mainly two ways to reach the consumers: direct link, or through the channel
intermediaries. For direct link, this channel puts providers in close contact with sales, returns,
pricing and consumer tastes. The providers can use mail orders, internet direct orders, and so
on to contact with consumers without any intermediary. 2.5
Another way is through the channel intermediaries, such as wholesalers, distributors, sales
representatives, sales forces, and retailers. In this way, the distance between the manufacturer
and the consumers is widened.
Then let’s talk about the profit. How do the players in the distribution channel profit?
Everyone in the distribution chain will take a cut. And this cut is called their margin.
Participants in the distribution chain are said to ‘take margin’ from the manufacturer. And all
channel participants calculate their cut as a markup on selling price.
Selling price does not mean retail price, but rather the price at which one intermediary sells
to the next one in the chain. Retail price is what the consumer pays. 3.5
For example, a car manufacturer sells a car to the intermediary A for 10,000 dollars. And then
the intermediary A takes a cut 1,000 dollars sell to the intermediary B. Next B sets a markup
1,000 dollars and sells to the customers. Then, the customer must pay 12,000 dollars for the
car rather than the 10,000 dollars at the beginning. To sum up, in this case, the selling price is
10,000. The margin for A and B is 1,000, respectively. And the retail price for customer is
12,000 dollars.