How to Develop a Distribution Channel Strategy

How to Develop a Distribution Channel Strategy

Before one can contemplate a distribution channel strategy, one must first understand what is a distribution channel. Distribution channels are the sequence of intermediaries that goods and services pass through until they reach the end-customer. In the contemporary global market place, distribution channels take many forms, from wholesalers and distributors to retailers and web-shops, and everything in between. These can be broken down into two essential categories; distributors such as retailers that take ownership of the goods along the path to the end-user, and representatives such as agents that do not take ownership but facilitate the movement of goods or services.

Essentially, a distribution channel strategy facilitates the sale of goods and services in sectors or geographical markets that a company’s sales team cannot operate in directly for any given reason. The strategy may avail of any of the channels described above with different channels offering advantages and disadvantages depending on the type of company and its requirements. Successful companies will allocate appropriate resources to the upkeep of their distribution channel strategies because, in order for the channel to operate effectively, the company must maintain and exercise an appropriate level of control, communication and support to incorporate their changing needs.

Active and sustained communication with the distribution channels also serves to promote the exchange of ideas across culturally diverse markets through the central company. This movement of ideas may inform advances, not only in distribution strategy, but also in the companies overall sales strategy.

To develop an effective distribution channel strategy, a company must consider 5 primary factors: scope, expense, contribution, support and customer service.

1.     Scope – The objective of any sales strategy is to grow the company. Identify the target market and all the players in it; distribution channels, competitors and suppliers of complimentary products. Decide on a structured set of criteria that the distribution channel must meet in order to provide the best fit for your company. For example, the channel must have revenue of 2-5 million euro, have operated in the market for 5 years and stock no competitive products.

2.     Expense – Confirm the cost of establishing an indirect distribution channel strategy in your target market and compare it with the costs of setting up a network or direct sales team there. A direct sales team will incur all the expenses associated with processing, warehousing, distribution, invoicing and after-care whilst a distributor may incur lower margins through discount pricing. These costs will vary depending on the nature of the market and the goods sold, compare and make the right choice for your business.

3.     Contribution – As mentioned above, sustained communication your distribution channels may encourage the exchange of ideas, which will contribute to the cultural and structural growth of your business. A more tangible aspect of distribution channel contribution will be access to additional customer base and market knowledge that will lower sales and marketing costs associated with initiating market research and advertising campaigns.

4.     Support– As mentioned above, the sustained support and control of the distribution channel strategy is quintessential to its success. Support may take the form of a dedicated manager tasked with monitoring the distribution channel, identifying needs and offering knowledge based assistance or direct funding of sales and marketing activities. The level of support offered will depend on how significant the contribution of that distributions channel to overall revenue or the potential growth of the distribution network through that channel.

5.     Customer Care – As with distribution channels, it is critical for companies to identify the target end-customers as part of their distribution channel strategy. Key accounts may need to be reached directly by the company to provide customer care or technical support beyond the capability of the distribution channel partner. In this instance, the channel may be responsible for larger scale customer care for the majority of customers, leaving the parent company with ample resources to look after the key accounts.