Distribution Models

By Entrepreneur Staff

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Distribution Models Definition:

The manner in which goods move from the manufacturer to the outlet where the consumer purchases them; in some marketplaces, it's a very complex channel, including distributors, wholesaler, jobbers and brokers.

When deciding how to distribute your product, use the traditional distribution model as a starting point. The conventional distribution model has three levels: the producer, the wholesaler and the retailer. This is a time-tested system with many well-established members at all levels.

The conventional distribution model, however, calls for all parties in the channel to protect their own best interests. Thus, retailers are pitted against wholesalers, and wholesalers try to best producers. This web of conflicting interests sometimes works to the detriment of the entire system. For instance, a producer may try to bypass the wholesaler and go straight to retailers, prompting the wholesaler to retaliate by dropping the producer's products.

The primary alternative distribution channel is direct distribution. This is the model Dell, Avon and many other successful companies use. It calls for you to sell and deliver your product yourself, using your own salespeople and warehouses. Going direct can cut significant costs from the system because you don't have to provide a profit for intermediaries such as wholesalers and retailers. But slicing two steps from the traditional distribution channel tends to alienate wholesalers and retailers. Before you decide to go direct, make sure you don't need these other channels of distribution--because if you decide to use them later, they may not be available to you.

There are many ways to modify traditional distribution. For instance, as in the above example, a producer could use a two-level distribution framework by selling direct to retailers and cutting out only the wholesalers. A retailer could do the same thing by going directly to manufacturers--this is one of the strategies Wal-Mart has used so effectively. Look around at the many ways your competitors and people in other industries set up their distribution channels. One of these models may well be right, with some modification, for you.

Often, your choice of a distribution plan will be dictated--or at least strongly influenced--by various factors relating to your product, your customers and the way they'll use it. For instance, if your product--or the new one on which you hope to build your growth plan--is perishable, then the need to provide refrigerated storage and transport will significantly restrict your choices of distribution methods. Size is another issue. If your product takes up a lot of display space, this consideration will weigh heavily when you're selecting ways to transport and display it. That's why automotive dealerships are usually located outside central business and shopping districts, where costs for display space for cars and trucks would eat up profits.

Another concern when it comes to selecting a distribution method is the way the product is purchased by consumers. For instance, clothing shoppers usually want to try garments on before purchasing them. So your means of distribution is going to have to include a nearby fitting room, like the ones found in department stores. Many products are best sold with the help of a live demonstration, so if yours is one of those products, your distribution plan will have to include some way of conducting these demonstrations. Multilevel network marketing plans, for instance, often include excellent opportunities to demonstrate products in front of live audiences. If your product is often bought on impulse, then it will be better off distributed in a manner that will display it in a high-traffic area such as in the checkout line at a grocery store.

The characteristics of your customers may also dictate distribution. If customers buy your product frequently, there'll be more outlets for its distribution. Videotape rental stores outnumber swimming pool contractors, for example, because people may rent several videos a week but only build a new pool every few years. The distance the customer is willing to travel to purchase your product or service is another key consideration. If you have a one-of-a-kind item in short supply and high demand, you may be wise to limit distribution to your own location. This will give you ultimate control over costs and pricing because highly motivated customers will be willing to travel to you to get what they want.

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