A distribution channel is the network of individuals and organizations involved in getting a product or service from the producer to the customer. Distribution channels are also known as marketing channels or marketing distribution channels.
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Direct vs. indirect distribution channel
The two primary channels are direct and indirect, but there are different subchannels within those categories. With the direct channel, the vendor of a product or service sells directly to the customer. The vendor may maintain its own sales force to close deals with clients or sell its products or services through an e-commerce website. The direct channel approach requires vendors to take on the expense of hiring and training a sales team or building and hosting an e-commerce operation.
The indirect channel, in contrast, offloads sales activities to individuals and organizations known as intermediaries. Examples of intermediaries include value-added resellers (VARs), consultants, systems integrators (SIs), managed service providers (MSPs), original equipment manufacturers (OEMs), independent software vendors (ISVs), wholesalers and distributors.
Examples of distribution channels
Each type of intermediary represents a channel, with its own distinct characteristics. VARs, for example, are often local companies that sell horizontal (accounting) or vertical (manufacturing) IT solutions to the businesses in their geographic region. SIs may be large, national companies that work on highly complex, multivendor IT projects. Consultants may not resell solutions at all but rather influence sales through product recommendations to customers. A vendor develops a channel strategy, also known as a distribution channel strategy, to determine what types of intermediaries to target and how to optimize partner relationships to increase sales and improve distribution.
Types of distribution channels
Indirect channels may be configured in different ways. Single-tier distribution is a channel design in which vendors develop direct relationships with channel partners that sell to the end customer. In the two-tier distribution model, the vendor sells to distributors, which provide products to channel partners, such as VARs and SIs, which, in turn, package solutions for the end customer. Two-tier distribution helps smaller channel partners that would have difficulty establishing direct sales relationships with large IT vendors.
Understanding multichannel distribution
A product vendor may decide to employ more than one channel when selling its product, an approach referred to as multichannel distribution. For example, a vendor may decide to deploy a direct sales force to sell to large enterprise accounts, establish a VAR channel to sell to small and medium-sized businesses and use physical retail stores or e-commerce sites to sell to consumers. This distribution channel model has the potential to uncover more sales opportunities but can also result in channel conflict. A VAR, for instance, might believe a vendor's direct channel sales force or e-commerce site is disintermediating indirect channels.
The importance of distribution channels
The various channels of distribution play a critical role in a vendor's go-to-market strategy. If successfully executed, any distribution channel model -- whether focused entirely on one mode, such as direct sales, or embracing multiple outlets, such as multichannel distribution -- can open or expand markets, generate sales and grow a vendor's top line.
Beyond boosting revenue, distribution channels can also broaden the portfolio of products and services available to end customers. VAR, SI and MSP channel partners, for instance, often provide consulting, technology implementation services and post-sales support. They may also incorporate a vendor's product into an integrated IT solution.