So you’ve sold a product or service. Congratulations! Sales are key to revenue and happy employees. However, you will only gain repeat customers if you effectively deliver a product and ensure that users can receive item information easily. This is done by using a distribution strategy (while effectively leveraging distribution software) that aligns with your business needs.
There are two main distribution strategies: direct and indirect. In this article, we will explore the intricacies related to both of these methods, how to choose the best strategy for your business, and some ways to improve the selection and distribution processes.
What Is a Distribution Strategy?
A distribution strategy is a method of disseminating goods or services to end-users. Implementing the most efficient distribution method for your business is key to obtaining revenue and retaining customer loyalty. Some companies opt to use multiple distribution methods to adhere to different consumer bases. For example, if you’re selling a leather futon and want to cater to people ages 60 and above, you might choose to directly sell products via catalog. For a younger customer base, you might decide to indirectly sell products by working with a retailer such as Walmart.
At its core, distribution strategy should be based on your ideal customer — how does the average client buy goods? How could you, as a producer, make the purchasing process easier? Is it an extensive purchase where buying the item directly from the manufacturer could be worth the potential hassle, or is it a routine item where the customer would rather receive the product quickly and on-demand through a retailer? The role that an item will play in a client’s life and the type of purchase decision associated with a product are important aspects to consider when determining a strategy.
What Are the Different Types of Distribution Strategies?
As mentioned above, the two main types of distribution strategies are direct and indirect. There are also more nuanced types of distribution that fall into these categories — intensive, selective and exclusive distribution. But what exactly do these methods entail? Let’s examine some of the factors that go into each of these cutting edge distribution strategies so you can determine which practice is best for your primary customer base.
Direct distribution is a strategy where manufacturers directly sell and send products to consumers. There are a few different ways to implement this method. Some organizations may opt to take a more modern approach and use an e-commerce website where users can make a purchase online. This is an effective option for companies with a client base that’s moderately knowledgeable about technology, requests a specific solution to meet needs or is devoted to a particular brand.
Another direct distribution method is through catalogs or phone orders. This option may target an older customer base or users in specific industries that are attuned to placing orders this way.
One important factor to consider when implementing a direct distribution strategy is the amount of investment required. For example, manufacturers will need to add warehouses, vehicles and delivery staff to their portfolio to effectively distribute goods on their own.
The term “middleman” often gets a bad reputation, but in the case of distribution, these organizations can be helpful in getting goods to consumers. Indirect distribution strategies involve intermediaries that assist in the logistics and placement of products so that they reach customers swiftly and in an optimal location based on consumer habits and preferences.
We will discuss the different types of intermediaries and their specific benefits later in this article, but business needs, targeted clients and type of product are typically behind the reasoning for using this strategy. Low commitment or routine purchases are often something that customers grab absentmindedly in a department store without any specific brand loyalty. A tube of toothpaste is a good example of a routine purchase. For these types of products, an indirect distribution method that places a large number of items in multiple retail locations may be a company’s best bet.
Products are put into as many retail locations as possible with the intensive distribution strategy. For example, gum is a product that typically uses this strategy. You can find gum at gas stations, grocery stores, in vending machines and at retail locations like Target. This method hinges on making a large number of goods available in multiple locations. These items don’t typically necessitate an involved purchase decision where the customer does research before making a purchase. Rather, these items are routine purchases that involve very minimal effort to sell.
When manufacturers opt for exclusive distribution, they make a deal with a retailer to sell a product through that specific storefront only. Businesses may also sell goods directly through their own branded stores, which is another example of exclusive distribution. For example, customers can’t buy a Lamborghini at any location — they need to go to a Lamborghini dealership to purchase new luxury vehicles.
An example of an exclusive distribution deal where a manufacturer and a retailer teamed up is the previous agreement that Apple had with AT&T in distributing iPhones. This agreement caused people to forgo their phone plans with other companies so they could get their hands on this exclusive product. This distribution strategy works especially well for highly coveted, exclusive items.
Selective distribution is a middle-ground option between intensive and exclusive distribution. With this strategy, products are distributed in more than one location, but not as many as with an intensive distribution strategy. For example, clothing from different brands may be offered selectively. A brand like Gucci may choose to distribute its items to its own stores in addition to a few selected department stores rather than placing its products in a range of locations such as Walmart or Target. This can help craft an implicit high-end brand message while also increasing the opportunity for shoppers to purchase one of its products.
What Are Some of the Different Distribution Channels?
For companies that do opt to go with an indirect distribution method, there are a variety of ways to get products into the hands of customers. Here are some of the intermediaries that businesses use to fulfill distribution strategies.
The role of a wholesaler is to source products in bulk from manufacturers and then sell them to retailers. They usually seek to obtain items for a relatively low cost so that they can mark them up and gain profit when selling them to retailers, who then further mark up item cost to make their own revenue. Wholesalers generally have their own warehouses and a catalog of purchased items that retailers can select from when making purchasing decisions. Many wholesalers also require retailers to buy a set amount of product, meaning that goods are obtained in bulk.
With the indirect distribution strategy, retailers are the final step in the distribution channel before customers purchase an item. Retailers can buy goods either directly from a manufacturer or from a wholesaler. Retailers typically purchase products at a low price that is then marked up to gain a profit. Retailers aren’t always storefronts — they can also operate through the phone, online and even via catalog. With the proliferation of the internet, many retailers decide to manage an e-commerce website instead of a brick and mortar store to make sales.
Franchising is an entirely different way of distributing products. You’re likely familiar with the idea of franchising — your local McDonald’s restaurant may be owned by a franchisor who is licensed by the McDonald’s corporation to sell goods in the company’s name. A 2016 study from FRANdata and the IFA found 732,800 franchises operating in the United States. These individually owned businesses can use company branding to gain sales and, in exchange, pay a flat fee and ongoing royalties to enter an agreement.
Organizations and manufacturers with brand recognition benefit from this strategy by gaining revenue without having to manage the granular day-to-day tasks associated with a brick and mortar shop.
The role of a distributor is to obtain and transport items from manufacturers to retailers or other endpoint locations. The benefit of using a dedicated distributor is that manufacturers don’t have to deal with the logistics of transport or the cost of maintaining shipping staff and materials. Distributors may also be able to package diverse goods into one entity for sale to a retailer. For example, your company may produce television remotes, while a different organization creates batteries. By packaging these items together, the distributor can create a more attractive, comprehensive product and improve the likelihood of a sale.
How Do I Select the Right Distribution Strategy for my Business?
Selecting the correct distribution strategy for your business depends on factors such as the type of item you are creating, your customer base, warehouse capabilities and logistics support. Now let’s go in depth on each of these factors:
Depending on the type of purchase decision that customers make when deciding to buy a produced item, the recommended distribution method may be different. There are three types of purchase decisions: routine, limited and extensive. A routine purchase is something that customers spend relatively little time selecting and is generally low priced, such as hand soap or paper towels. With these items, an extensive distribution strategy might work best as customers aren’t necessarily devoted to specific brands and expect products to be accessible at various locations. For these products, a high number of available items can lead to higher sales.
Limited purchase decisions are a sort of middle-ground between routine and extensive purchases. These items are generally moderately priced and more time may be spent selecting an item than with a routine purchase. Some examples of limited purchase products are clothing and small appliances like toasters. Customers put some thought into the purchase of these items due to price and usability, but not as much effort as they would with an extensive purchase item like a house or car. A selective or intensive distribution strategy may be suitable for these items.
The final type of purchase decision is extensive. This includes big-ticket items such as houses, cars and college educations. Generally, as the cost of an item goes up, the intensity of the purchase decision increases as well. An exclusive distribution strategy could work well for these items because it adds to the customer belief that an item should be more expensive. It may also be more lucrative to have fewer of these costly products available due to the high production price of each item.
We already touched on how targeted customer demographics can inform distribution strategy. However, to get more detailed about which distribution strategies most effectively apply to different customers, we need to drill down to some of the ways companies use indirect and direct distribution.
Some of the methods of direct distribution include e-commerce, direct mail and manufacturer-run storefronts. You might remember the days where corporations sent catalogs of their items directly to customers, and you had to call the company to place an order. Nowadays, distribution through direct mail is less common due to technological advances, but some companies that have a user base that is used to purchasing goods in this manner may continue to opt for this distribution method.
E-commerce is a distribution channel that is rapidly increasing in popularity. A Shopify report predicts that global e-commerce sales will reach $4.8 trillion by 2021. This distribution channel has a relatively low barrier to entry for companies, and many consumers are familiar with web-based technology, making it a win-win. This method also eases the process of purchasing a product because consumers don’t have to leave their houses to buy items; they just need an internet connection and their credit card information.
Storefronts are closing all over the country, yet some businesses continue to distribute in this manner. One of the benefits of this distribution channel is that customers can easily purchase related goods because items are curated in a brick-and-mortar location. Additionally, consumers can look at and feel products in person, which is especially beneficial when the price of a good and the intensity of a purchase decision increases.
Warehouse Capabilities and Logistics
Whether your company uses a direct or indirect distribution strategy depends on whether you are willing or able to invest in aspects such as a transportation fleet, shipping personnel and a warehouse for storing goods. This isn’t something that a manufacturer should enter into blindly — acquiring these necessary factors involves a considerable upfront investment.
Your business will need to weigh the pros and cons of conducting your own distribution versus using an intermediary when deciding on a distribution method.
What Are Some Technologies that Aid in Distribution?
As technology becomes smarter, more and more solutions arise to streamline the distribution process. One of the main ways to optimize the distribution workflow is to employ a distribution software. Whether you’re a manufacturer conducting your own distribution or a distributor looking to improve operations, a software solution can be a beneficial option. Here are some of the new technologies included in distribution software that can positively influence your business.
Automation capabilities can increase the speed at which work is completed and free up employee time. This ability is offered for various tasks, and specific functionality differs based on the distribution software vendor that you go with. An example of how this might look in practice is through the automatic assignment of items to a vehicle based on where the other materials in that vehicle are going and its planned route.
Internet of Things (IoT)
The internet of things is especially helpful in increasing productivity in the distribution process. Many distribution systems include RFID tracking that enables users to scan items and track their locations geographically and within the workflow. This helps users visualize the movement of inventory in real time.
The proliferation of cloud-based distribution software enables users to access solutions anytime and anywhere. This is especially helpful in the distribution industry where employees may need to look at data not just when they’re seated at their desks, but also when they’re working hands-on in a distribution center. This option enables flexibility and accessibility.
What Are Some Common Distribution Software Features?
Distribution software contains many different features to aid in the distribution process. Here’s a quick overview of some of the commonly included features in these programs.
Sales Order Management
Sales order management functionality often includes the ability to input orders and then transmit them to manufacturing so that items can be produced to meet customer needs. Some programs enable this process to occur automatically and can receive customer information from different touchpoints.
CRM tools can assist users in looking at customer information in real time to see historical purchasing information, products that are currently being waited on and payment method. This can improve the customer experience along with keeping distributors knowledgeable of varied customer expectations.
Inventory management features include the ability for employees to look at capacity, shortages and on-hand stock. This assists with planning and review of demand processes. Some distribution programs can use inventory information and demand planning to automatically reorder materials needed to meet anticipated needs.
E-commerce features assist companies in developing an online shopping platform to manage and coordinate sales with customers. These tools often contain support for web analytics so that organizations can track the products that clients are most interested in along with other relevant data points.
These features enable transportation management and route planning. This may include selecting which items should be shipped together for the most efficient shipping process along with helping delivery drivers optimize their driving hours.
Creating an effective distribution strategy is a multi-faceted process. There are five different distribution strategies to pick from, and the best one for your business depends on factors such as ideal demographic, item type and current logistical setup. Because there are so many moving parts associated with distribution, many companies opt to use an indirect distribution strategy or to purchase distribution software to streamline the process. Whatever method your business chooses, it’s essential to make sure that customer need and purchase decision level are accounted for, as these factors will help determine the optimal distribution strategy.