# Understanding Distribution Channels in Business: How They Function

> **Definition**
>
> A distribution channel is the network of businesses or intermediaries through which a good or service passes until it reaches the final consumer.

## What Is a Distribution Channel?

A distribution channel is the network intermediating goods from producers to end consumers. It involves [wholesalers](https://www.investopedia.com/terms/w/wholesaling.asp), [retailers](https://www.investopedia.com/articles/markets/122415/worlds-top-10-retailers-wmt-cost.asp), distributors, and digital platforms. In a direct distribution channel, the manufacturer sells directly to the consumer. Indirect distribution channels involve multiple intermediaries before the product ends up in the hands of the consumer.

### Key Takeaways

*   Distribution channels facilitate the movement of goods from producers to end consumers through various intermediaries like wholesalers, retailers, and agents.
*   Direct distribution channels allow producers to sell directly to consumers, while indirect channels involve intermediaries such as retailers and wholesalers.
*   Hybrid distribution channels combine both direct and indirect methods to reach consumers through multiple avenues.
*   The rise of digital technology has enabled businesses, particularly small ones, to easily engage with consumers directly through e-commerce platforms and streamlined digital marketing efforts.
*   Selecting the right distribution channel involves considering factors like consumer preferences, speed to market, and the potential value added by intermediaries.

![Distribution Channel](https://www.investopedia.com/thmb/Jy2ZVYc_xoonFkWwDAGUa_PgD5Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitiions_distribution-channel-e45fbc6f169846a1a2cada957ef5bfe2.png)

*— Jessica Olah / Investopedia*

## How Distribution Channels Operate: A Deeper Look

A distribution channel is a chain of businesses or intermediaries through which a good or service passes until it reaches the intended consumer. Distribution channels vary in length based on how many intermediaries are needed to deliver a product or service.

More consumer access points can boost sales but may complicate [distribution management](https://www.investopedia.com/terms/d/distribution-management.asp). Longer distribution channels often reduce profit for each intermediary.

## Key Players in Distribution Channels

**Producer**: Producers combine labor and capital to create goods and services for consumers.

**Agent**: Agents commonly act on behalf of the producer to accept payments and transfer the title of the goods and services as they move through distribution.

**Wholesaler**: A person or company that sells large quantities of goods, often at low prices, to retailers.

**Retailer**: A person or business that sells goods to the public in small quantities for immediate use or consumption.

**End Consumer**: A person who buys a product or service.

## Exploring Various Distribution Channel Models

### Direct

A direct channel allows the consumer to make purchases from the manufacturer. This direct (and short) channel may mean lower costs for consumers because they are buying directly from the manufacturer.

### Indirect

An indirect channel allows the consumer to buy the goods from a wholesaler or retailer. Indirect channels are typical for goods that are sold in traditional brick-and-mortar stores.

### Hybrid

Hybrid distribution channels use both direct channels and indirect channels. A product or service manufacturer may use a retailer to distribute a product or service, in addition to also making sales directly with the consumer.  
  

## Levels of Distribution Channels: From Direct to Complex

### Level 0

This is a [direct-to-consumer](https://www.investopedia.com/ask/answers/052115/what-difference-between-direct-and-indirect-distribution-channel.asp) model, where the producer sells its product directly to the end consumer. Amazon, which uses its sales platform to sell its Kindle product to customers, is an example of a Level 0 (direct) model. This is the shortest distribution channel possible, cutting out both the wholesaler and the retailer.

### Level 1

A producer sells directly to a retailer, who then sells the product to the end consumer. This level includes only one intermediary. For example, Hewlett-Packard and Dell are large enough to sell their computer products directly to retailers, including Best Buy.

### Level 2

Including two intermediaries, this level includes the producer, wholesaler, retailer, and consumer.

In the wine and adult beverage industry, a winery cannot sell directly to a retailer. A winery must utilize a multi-tiered system, like a Level 2 system; the law requires the winery to first sell its product to a [wholesaler](https://www.investopedia.com/terms/w/wholesale-trade.asp), who then sells to a retailer. The retailer then sells the product to the end consumer.

### Level 3

This level may add the role of the individual, sometimes referred to as a "jobber." A jobber is a small-scale wholesaler or middleman in the retail goods trade. This role may involve assembling products from a variety of producers, storing them, selling them to retailers, and acting as a middle-man for wholesalers and retailers.

### Note

A distribution channel can be part of a company's marketing strategy, which also includes the product, promotion, and price.

## Digital Transformation in Distribution Channels

Digital technology has changed how businesses, especially small ones, use direct distribution channels. Growing demand for online shopping and e-commerce tools makes direct selling more successful.

Instead of relying on retailers, companies use software and AI sales tech for effective [customer relationship management (CRM)](https://www.investopedia.com/terms/c/customer_relation_management.asp).

Online advertising targets specific demographics via social media and search engines, reshaping marketing strategies. 

If a company continues to use indirect channels of distribution, digital technology also allows it to manage relationships with wholesale and retail partners more efficiently.  

## How to Select the Best Distribution Channel for Your Business

Not all [distribution channels](https://www.investopedia.com/ask/answers/052115/what-difference-between-direct-and-indirect-distribution-channel.asp) work for all products, so companies need to choose the right one. The channel should align with the firm's overall mission and strategic vision—including its sales goals.

The method of distribution should add value to the consumer. Do consumers want to speak to a salesperson? Will they want to handle the product before they make a purchase? Or do they want to purchase it online with no hassles? Answering these questions can help companies determine which channel to choose.

Secondly, the company should consider how quickly it wants its product(s) to reach the buyer. Certain products are best served by a direct distribution channel, such as meat or produce, while others may benefit from an indirect channel.

If a company chooses multiple distribution channels, such as selling products online and through a retailer, the channels should not conflict with one another. Companies should strategize so one channel doesn't overpower the other.

## What Is a Distribution Channel and What Components Does It Have?

The term “distribution channel” refers to the methods used by a company to deliver its products or services to the end consumer. It often involves a network of intermediary businesses, including manufacturers, wholesalers, and retailers. Selecting and monitoring distribution channels is a key component of [managing supply chains](https://www.investopedia.com/terms/s/scm.asp).

## What Is the Difference Between Direct and Indirect Distribution Channels?

Direct distribution channels are those that allow the manufacturer or service provider to deal directly with its end customer. For example, a company that manufactures clothes and sells them directly to its customers using an e-commerce platform is utilizing a direct distribution channel. By contrast, if that same company relied on a network of wholesalers and retailers to sell its products, then it would be using an indirect distribution channel.

## How Is Placement Important in a Distribution Channel?

Placement is the way a company ensures its target market has access to its products or services in the location where they are most likely to look for that product or service. An effective distribution system ensures that products are placed in the right location as needed.

## The Bottom Line

The primary function of distribution channels is as networks that facilitate the movement of goods or services from producers to end consumers. The different types of distribution channels are direct, indirect, and hybrid. E-commerce platforms enable more direct distribution and efficient management of customer relationships and intermediary partnerships. They have revolutionized the way customers get the products they want or need. It's very important for companies to choose the distribution channel that aligns with its strategic goals and consumer value proposition. They must keep in mind consumer preferences, speed of delivery, and channel conflict potential when selecting multiple distribution strategies.  

> **Article Sources**
>
> 1.  Alcohol and Tobacco Tax Trade Bureau. "[Liquor Laws and Regulations for Retail Dealers](https://www.ttb.gov/laws-regulations-and-public-guidance/liquor-laws-regulations-retail-dealers)."