Swanson: Distribution channels key for expanding businesses

Published 10:26 am Wednesday, August 21, 2013

By Dean Swanson

SCORE District Director

One common goal of the business CEOs with whom I mentor is, “I want to increase my sales.” This leads me into the discussion of how you currently distribute your product or service. Or, what are your “distribution channels?” In short, how does your product or service get to the end user? Adding new distribution channels builds your brand, lessens your risk, exposes your product or service to more potential customers, and increases your profit potential. So today, let’s try to understand more about these options.

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If you are targeting a new type of customer, launching a new product or adding a new service, you need to reassess your distribution channels.

There are three primary distribution channels:

—Direct: This is where you sell directly to the end user of your product or service. This can be done through an in-house sales team, the Internet (where customers buy directly from your site), your own product catalogs (direct-mail sales) or a brick-and-mortar store.

—Indirect: This is where you sell to resellers, who sell ­the product to the end user. This can include:

—Wholesaler/distributor/dealer: This company buys products from a wide range of companies and resells them to other resellers or retailers.

—Value-added reseller: VARs provide custom solutions for customers, using products and services from many different companies.

— Consultant: Consultants might recommend your product or service to their customers, or might purchase it from you and resell to the customer.

—Retail: A retailer buys your product and resells it to end users via a store, website or catalog.

—Affiliates: Affiliates sell your product or service through their websites and receive a percentage of sales in return for facilitating the sale.

—Manufacturers’ representatives: This salesperson sells products from a range of different manufacturers to customers in a specific industry or region.

—Multichannel/hybrid: A multichannel or hybrid strategy uses more than one distribution channel. While this can increase sales, it can also cannibalize sales if you’re not careful. For instance, if customers can get your product or service more cheaply in one channel than in another, sales via the more costly channel will suffer.

As you plan for increasing your sales and evaluate your distribution channels, your customer needs are a primary driver of your choice of distribution channels. But also consider these factors:

—Competitors: Which channels do your competitors use?

—Geographic location: Does this channel reach the desired geographic location where your target customers are?

—SWOT: Do a SWOT analysis. What are the strengths, weaknesses, opportunities and threats associated with each distribution channel?

—Barriers to entry: What are the barriers to entry for each distribution channel? These could include cost, competitors, time to establish a foothold, etc.

—Cost: What is the cost of each distribution channel and how will this affect your cash flow? Can the cost be passed on to customers or must it be absorbed?

—Pricing/profit: How will using a particular channel affect your pricing, and how will that affect profit margins?

—Sales/marketing: What are the costs (both in money and time) of the sales and marketing efforts required for each channel?

—Channel conflicts: If your product is currently sold only in independent stores, expanding to a mass-market retailer like Walmart could create a conflict with the smaller stores. Weigh the benefits of a new channel against potential costs.

As you assess your distribution options, consider: What are my customers’ needs? How could my product or service meet those needs? Who is my ideal customer? How can I find more of them?