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What is a 'Distribution Channel'

A distribution channel is a chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. It can include wholesalers, retailers, distributors and even the internet itself. Channels are broken into direct and indirect forms, with a "direct" channel allowing the consumer to buy the good from the manufacturer, and an "indirect" channel allowing the consumer to buy the good from a wholesaler or retailer.

BREAKING DOWN 'Distribution Channel'

A distribution channel is the path by which all goods and services must travel to arrive at the intended consumer. Conversely, it is also used to describe the pathway that payments make from the end consumer to the original vendor. Distribution channels can be short or long, and depend on the amount of intermediaries required to deliver a product or service.

However, goods and services are sometimes passed to consumers through multiple channels, a combination of short and long. While increasing the number of ways in which a consumer can find a good can increase sales, it can also create a complex system that sometimes makes distribution management difficult. In addition, the longer the distribution channel, the less profit a manufacturer might get from a sale due to the fact each intermediary charges for its service.

Three Types of Distribution Channels

While a distribution channel can sometimes seem endless, there are three main types of channels, all of which include a combination of a producer, wholesaler, retailer and end consumer.

The first channel is the longest in that it includes all four, from producer to the end consumer. The wine and adult beverage industry is a perfect example of this long distribution channel. In this industry, thanks to laws born out of prohibition, a winery cannot sell directly to a retailer. It operates in what is known as the three-tier system, meaning the winery is required by law to first sell its product to a wholesaler, who then sells to a retailer. The retailer, in turn, sells the product to the end consumer.

The second channel is one where the producer sells directly to a retailer, who then sells the producer's product to the end consumer. This means the second channel contains only one intermediary. Dell, for example, is large enough where it can sell its products directly to reputable retailers such as Best Buy.

The third and final channel is a direct to consumer model where the producer sells its product directly to the end consumer. Amazon, using its own platform to sell Kindles to its customers, is an example of a direct model, which is the shortest distribution channel possible.

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