The avenues to the consumer is known as the distribution channel, and since there are many ways of reaching the customer, distribution channel analysis is critical to your success.
The choice of channel influences the price you can charge, and, consequently, the profit margins that you may enjoy.
Three questions should be asked to provide you with a basis for your distribution Channel decision:
- How can my product reach the consumer?
- How much do the players in each distribution channel profit?
- Who holds the power in each available distribution channel?
How can my Product reach the consumer?
Your product will dictate how far removed you are from the customer, and this adds an extra dynamic to the marketing mix, I will discuss this later.
If you are a manufacturer of goods, you could have any combination of distribution channels for example:
- Direct to the consumer manufacturer – consumer.
- Through a wholesaler – manufacturer – wholesaler – consumer.
- Through a chain of middlemen such as wholesaler – retailer – consumer.
You could be the wholesaler or retailer in this scenario and then you will slot in to the supply chain, or you could fit in between existing channels and this is where most service companies fit.
you might have a transportation business then you could slot into the distribution channel like this:
- Manufacturer – your transportation – consumer – think DHL or food delivery services.
- Manufacturer – your transportation – wholesaler/retailer. etc.
Or maybe you offer a merchandising service then you will be responsible for ensuring that the products are displayed on the shelves in the wholesale and or retail outlets.
Commonly used channel intermediaries to the consumer are:
• Sales Representatives
• Sales Forces
How much do the players in each distribution channel profit?
Everyone who touches your product takes a cut, this is called margin, and plays a huge part in pricing, this is also the difference between selling price and retail price.
lets say that you manufacture Nike shoes, but you do not sell directly to the end user, because you do not have a sales force or marketing team etc.
This is how the product distribution channel could look like:
Raw materials needed to produce the shoes – transportation company to get raw materials to your business – Your manufacturing business – transportation company to move finished product to wholesaler – Outside Sales and Merchandising team to ensure that stock is on the floor and that there are no out of stocks – transportation company to get bulk products into the retail stores – Outside Sales & Merchandising Company – End User.
Between the dude that produced the raw materials there was margin added x9 and there could be a few more steps to take into consideration.
To compensate for the smaller margins that you might make as the manufacturer you might decide to sell your products directly to the consumer via E-Commerce for example and use DHL as the sole cog in your distribution channel.
Raw Materials – transportation ( DHL) – Your Plant – E-Commerce – DHL – End consumer.
You have cut out the middleman and can take a bigger cut of the profits, plus using only one distribution partner you could negotiate better rates.
You now have to do your own marketing either by outsourcing and give up some margin, or hire in-house and incur extra costs.
As you can see the distribution channel is a critical component of your business and if not planned correctly could bankrupt you or increase your margin’s considerably and directly influence the next question.
Who holds the power in each distribution channel available?
This depends on your product or service, in the good old days the producer held all the cards, then it shifted to manufacturers and then to retailers.
Thanks to the internet, e-commerce and direct distribution channels the power has shifted again to …
Logistics and Transportation
The key to making more profit is selling more goods, therefore the quicker you can get the product to the end user the more product you can sell.
If any bot builder is reading this, while everybody always builds bots for the restaurants, you would have better success in building bots that will streamline the delivery end of the business.
As Domino’s Pizza CEO J. Patrick Doyle put it, “Domino’s had to understand that it was not in the pizza-making business, but rather in the pizza-delivery business, in order to turn a profit.”
For example, two companies decide to enter the bot building for restaurant business, the one decides that they are going to index every restaurants menu and make it easy for the consumer to find what they want to eat.
As more people start using their bot, they add the ability for consumers to write reviews about their experiences, making the bot even more useful to the end user, this is when they decide to monetize the bot, by offering restaurants space on the bot.
more end users + more suppliers ( restaurants) allowed them to offer a delivery service using the bot as the interface between user and restaurant.
Profits skyrocketed since they have the all the power in the distribution channel, they had so much power that they didn’t even have to deliver themselves, relying instead on the restaurants to do the deliveries.
The second company decided that since in the restaurant industry supply and end user is never the real issue, seeing how anybody that makes food is a supplier, while any hungry person is the consumer.
The real issue is attracting consumers to specific restaurants, and that using temporary discount coupons does not build loyalty, the only way that they could compete with company A is if their bot offered a superior experience and function.
The decided to take on Company A in the last mile delivery component of their business.
They understood that for food delivery, just like for any other transaction business, the look and feel of app or bot is in fact superficial.
What customers really care about are faster delivery and lower prices.
By offering faster delivery times, they attracted more users, and that allowed them to sign up more suppliers and get more drivers and save even more time.
The above is based on a true story between Company A – Zomato and Company B – Swiggy , based in India
So you are probably wondering how did faster delivery time allow a smaller company to take on a giant in the industry?
Every minute a restaurant spends fulfilling a Swiggy order is a minute unavailable to a Zomato order. Zomato customers wait longer for their food as a result, making them more likely to jump to Swiggy.