Indirect channel of distribution

From CEOpedia | Management online

An indirect channel of distribution is a complex network of organizations, such as wholesalers, distributors and retailers, that are involved in the transfer of products from the manufacturer to the end consumer. Indirect channels typically involve more intermediaries than direct channels, and the intermediaries may engage in a variety of activities, such as warehousing, advertising, and providing marketing support. Examples of these activities include:

  • Warehousing: Storing and managing inventory in a warehouse so that it is available for sale when needed.
  • Advertising: Promoting products through various media, such as television, radio, print, digital, and social media.
  • Providing marketing support: Offering services such as sales training, market research, and customer service to help promote products.

Indirect channels of distribution can help manufacturers reach a larger number of customers and expand their market reach. They can also help reduce costs by allowing manufacturers to outsource certain activities, such as warehousing and advertising, to intermediaries. In addition, indirect channels can provide manufacturers with valuable insights into customer preferences, trends, and competitive activity. In summary, indirect channels of distribution provide manufacturers with a way to reach more customers, reduce costs, and gain market insights.

Example of Indirect channel of distribution

An example of an indirect channel of distribution is a manufacturer of consumer electronics selling their products to a wholesaler, who in turn sells the products to a retailer. The retailer then sells the products to the consumer. In this example, the manufacturer, wholesaler, and retailer are all intermediaries in the indirect channel. The wholesaler may provide warehousing services to keep the products in stock, and both the wholesaler and retailer may provide advertising services to promote the products. This indirect channel of distribution allows the manufacturer to reach a larger number of customers and gain valuable insights into the market.

Formula of Indirect channel of distribution

The formula for indirect channel of distribution is the following: Manufacturer → Intermediary 1 → Intermediary 2 → Intermediary 3 → End Consumer. This formula shows the flow of products from the manufacturer to the end consumer, with multiple intermediaries involved in the process.

When to use Indirect channel of distribution

Indirect channels of distribution are most useful when a manufacturer is selling a product to a large, geographically dispersed market. By using intermediaries, manufacturers can reach more customers and cover more ground, allowing them to expand their presence and increase sales. In addition, indirect channels can be more cost-effective than direct channels, as they allow manufacturers to outsource certain activities to intermediaries.

Indirect channels of distribution can also be beneficial when a product requires specialized knowledge or skills to be sold effectively. For example, a manufacturer may outsource the sales and marketing of a complex product to a specialized distributor who has the necessary expertise and resources to market the product successfully.

Types of Indirect channel of distribution

There are three primary types of indirect channels of distribution: exclusive, selective, and intensive.

  • Exclusive: An exclusive channel involves a single intermediary who is the only representative for a particular product in a particular geographic area.
  • Selective: A selective channel involves multiple intermediaries in a given geographic area, with each intermediary representing a different product.
  • Intensive: An intensive channel involves multiple intermediaries in a given geographic area, each of whom represents the same product.

Indirect channels of distribution can be beneficial for manufacturers, as they allow them to reach a larger number of customers, reduce costs, and gain valuable insights into customer preferences and competitive activity. However, manufacturers should carefully consider which type of channel to use, as each type has unique advantages and disadvantages. In summary, indirect channels of distribution provide manufacturers with a way to reach more customers, reduce costs, and gain market insights, but the type of channel should be chosen carefully.

Steps of Indirect channel of distribution

The steps of an indirect channel of distribution typically involve:

  • Manufacturer: The first step in the indirect channel of distribution is the manufacturer. The manufacturer is responsible for producing the product and then selling it to a wholesaler.
  • Wholesaler: The wholesaler buys the product from the manufacturer and then sells it to retailers or other wholesalers.
  • Retailer: The retailer buys the product from the wholesaler and then sells it to the end consumer.

Advantages of Indirect channel of distribution

Indirect channels of distribution offer a number of advantages to manufacturers. These advantages include:

  • Increased market reach: By utilizing intermediaries, manufacturers can reach more potential customers, which can help them expand their market reach.
  • Cost savings: Utilizing intermediaries can help manufacturers reduce costs, such as warehousing and advertising costs.
  • Valuable market insights: Intermediaries can provide manufacturers with valuable insights into customer preferences, trends, and competitive activity.

Limitations of Indirect channel of distribution

Indirect channels of distribution can have certain drawbacks, such as higher costs and slower delivery times. For example, because there are more intermediaries involved in the process, the cost of goods may be higher for the end customer. Additionally, because there is often a lag between when the product is ordered and when it is received, delivery times may be longer than if the customer were to purchase directly from the manufacturer. Additionally, because many intermediaries are involved in the process, manufacturers may not have control over how their products are marketed or how customer service is provided. In summary, indirect channels of distribution can be costly and slow, and manufacturers may lack control over how their products are marketed and serviced.

Other approaches related to Indirect channel of distribution

  • Franchising: Allowing individual business owners to open and operate stores using their own resources while still benefiting from the brand recognition and support of the franchiser.
  • Licensing: Allowing third-party companies to produce products branded with the licenser’s name in exchange for a fee.
  • Outsourcing: Hiring external firms to perform certain activities, such as production, warehousing, and advertising, which can help reduce costs and increase efficiency.

Indirect channels of distribution provide manufacturers with a way to reach more customers, reduce costs, and gain market insights. They can also help manufacturers to expand their market reach by leveraging existing relationships with intermediaries, such as franchisers, licensers, and outsourcers. In addition, indirect channels can help manufacturers to gain access to valuable information, such as customer preferences and competitive activity, which can be used to improve their products and services. In summary, indirect channels of distribution offer manufacturers a range of benefits that can help them to increase their market reach and improve their products and services.


Indirect channel of distribution — recommended articles
Indirect marketing channel — Multi-channel distribution — Dual distribution — Distribution channel strategy — Market entry modes — Direct export — Tying arrangement — One-stop shop — Business format franchising

References

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