A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.
Hybrid (direct to consumers + digital marketing growth strategy)
In the case of Amazon, the company is among the most robust tech brands today, and it follows a hybrid strategy, where hundreds of millions of users go straight to the Amazon brand through its website and apps. On the other hand, Amazon also relies on digital distribution to enhance its visibility. For instance, Google search is also a great contributor to traffic for Amazon and many other digital channels.
Hybrid (direct to consumers + subsidized by mobile carriers)
Apple relies both on its stores and on third-party carriers who enhance the distribution of Apple devices across the world. For instance, when it comes to the iPhone, for example, in 2021, Apple’s net sales through its direct and indirect distribution channels accounted for 36% and 64%. The direct channel (Apple’s owned stores) it’s critical to guarantee brand awareness, control over the distribution, customer support & service provisioning. The indirect channel is essential to enhancing the sales of expensive devices like the iPhone. For instance, a good chunk of iPhone sales is subsidized by phone carriers players, who amortize the cost of the phone into the plan, thus enabling more people to afford an expensive smartphone, like the iPhone.
Facebook is a tech player that primarily relies on direct digital distribution. In fact, over the years, the company has managed to first keep a strong brand for its main product (Facebook). After that, Facebook acquired Instagram, WhatsApp, and Oculus. These powerful brands enabled Facebook to get a direct relationship with users. However, it’s worth highlighting that Facebook (Meta) does not own the platform through which users get to the brand (the Apple Store and Google Play). Users can download and experience the brand’s products are owned by Apple and Google, respectively). Thus, its ability to distribute the product is highly reliant on the ability of the company to keep its brand strong.
Google (now called Alphabet) is a great example of digital vertical integration. The company follows each step of the data supply chain, from data harvesting to data repackaging and its exchange within Google’s proprietary advertising marketplaces. On the desktop side, Google owns the Chrome browser, the Google search engine, and the advertising platforms (AdSense, Google Ads, and YouTube Ads) to monetize the data. On the mobile side, Google owns the Android operating system, the Google Play Store, and the Google AdMob advertising platform. In this segment, Google also produced smartphone devices, and it’s now revamping its AR glass business segment.
Luxottica is an excellent example of physical vertical integration and complete control over its distribution strategy. The company not only manufactures most eyeglasses frames and lenses but also distributes them across its owned stores and its wholesale distribution.
Tesla sells its cars directly from its online stores, distributing them directly to customers. The company also owns Tesla physical stores worldwide, where customers can buy cars directly from them. The company has been spending a substantial effort in building its own stores to bypass classic car distributors, which has been a rule of thumb for a long time.
Why a distribution channel strategy matters
Often companies undervalue distribution channels as they think that a good product or service will automatically create its distribution.
While this might happen, it is more of a utopia than a reality.
Distribution needs to be created, at times with sheer force combined with strategic planning and a deep understanding of customers’ needs or desire generation.
A traditional distribution strategy looks at the classic 4 Ps (product, promotion, price, and placement).
Those are the key ingredients to growing the revenues of a business, quickly and sustainably. Thus, a distribution strategy starts from:
Understanding the wants of their customers.
Leveraging insights to create a better purchasing experience.
Developing new products and services that customers will want to buy.
Creating go-to-market strategies that reach the proper customer target.
Generating demand for a set of products and services offered.
Without an appropriate strategy for distribution, it is hard to have a successful and sustainable business model.
Types of distribution channels
At a higher level, distribution channels can be broken down into direct channels and indirect channels.
This primarily depends on how long is the chain between who makes the product and the final consumer.
The number of steps it takes will make the distribution channel direct or indirect.
Let’s visualize a distribution chain to understand the difference between direct and indirect strategy:
Where in a direct distribution strategy a producer can access the consumer, in an indirect distribution strategy, the producer will meet its consumer demands via third-parties wholesalers or retailers.
Thus, a direct approach makes the value chain shorter and at the same time allows more control by the producer on how the final customer experiences the product or service offered.
At the same time, a direct-to-consumer strategy is quite expensive and not always effective enough to allow proper distribution.
Therefore, companies often use a mixture of direct and indirect distribution strategies, which determine their marketing mix.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
Between the direct-to-consumer and entirely indirect distribution strategy (where the producer sells to a wholesaler), there are several indirect variations based on how many steps it takes to reach the final consumer and how long is the value chain.
For instance, in the scenarios in which a producer sells to a wholesaler, the wholesaler sells to retailers, who reach the final consumers.
However, in some other cases, the distribution channels might be shorter.
Think of the Costco business model, where the company purchases a selected variety of goods in bulk from producers.
Costco makes most of its money from selling merchandise products at low cost, yet in bulk, through its warehouses, which act as stores, and a small, yet much higher margin chunk of revenue comes from its memberships. For instance, in 2022, Costco made almost $227 billion in revenue, of which $5.84 billion came from membership revenue.
Yet instead of reselling that to retailers, Costco itself acts as a retailer by leveraging its membership-based business model and selling those items in bulk quantity directly to consumers, who appreciate the convenience of its prices together with the selection of high-quality products.
Case study: Apple’s direct and indirect distribution mix
In other cases yet, the distribution channels strategy might be even shorter. Take the example of the Apple business model, where the company sells part of its products via its retail stores.
That creates a unique experience for Apple‘s consumers and makes the value chain shorter but it also leverages an indirect strategy to make those same products (usually quite expensive) more accessible to mass consumers.
In 2021, most of Apple’s sales (64%) came from indirect channels (comprising third-party cellular networks, wholesalers/retailers, and resellers). These channels are critical for sales amplification, scale, and subsidies (to enable the iPhone to be purchased by a larger number of people). While the direct channel represented 36% of the total revenues. Stores are critical for customer experience, to enable to provide the service business, and for branding at scale.
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.
It is easy to confuse and mix up the definition of distribution channels with the supply chain even though the distribution channels and strategies might sometimes cross with the supply chain.
The distribution strategy concerns primarily with bringing the product in front of customers, especially customers that are willing and ready to buy it.
Therefore, in some cases, bringing a product in front of the right people might be a matter for the supply chain.
For instance, in the Luxottica business model, vertical integration means the ability to control the full customer experience and to choose also the location of the retail stores.
Thus, this is a case in which supply chain management also becomes a distribution strategy. That is why, other players, in the same space, try to enter by using, initially, an opposite strategy.
That of owning only part of the supply chain.
Warby Parker is a prescription and sunglasses retail company, which focuses on vertical integration to enhance the customer experience by owning the optical laboratories where lenses are developed, and by owning both physical and online stores to enable customers to choose from a variety of products. Warby Parker leverages programs like the Home-Try-On program and the “Buy a Pair, Give a Pair” to lower long-term customer acquisition costs and incentivize recurring purchases and referrals from existing customers.
It is critical to maintain a clear difference between supply chain and distribution channel strategy.
While the supply chain comprises all the planning, manufacturing, and logistics activities that make the product go from the purchase of raw materials to transformation into a final product that might get delivered to the final customer (Zara business model leverages supply chain management as a distribution strategy).
In short, where supply chain management concerns itself with integrating supply and demand, a distribution strategy involves itself primarily in the demand chain.
To have a deep understanding of the difference between the supply chain and distribution strategy it is important to consider three main aspects.
Case study: Tesla and Google, from physical to digital integration
Tesla is vertically integrated. Therefore, the company runs and operates the Tesla’s plants where cars are manufactured and the Gigafactory which produces the battery packs and stationary storage systems for its electric vehicles, which are sold via direct channels like the Tesla online store and the Tesla physical stores.In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through consumers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.
Supply chain vs. demand chain
Where a supply chain seeks efficiencies that can, for instance, reduce the cost of purchasing raw materials, integrate several parts of the supply chain, or at creating better logistics.
Distribution channels and strategies look more at creating demand for a product or service by leveraging several strategies.
Nike leverages both a wholesale and direct distribution strategy. Indeed, while still in 2022, most sales come from wholesale distribution, in reality, since 2020, Nike has been ramping up its direct distribution through its NIKE stores and e-commerce platform (SNKRS).
Internal vs. external
A supply chain relates to all the aspects that begin with sourcing raw materials, production processes, inventory management, and all the other processes that bring a product or service in front of the final customer.
On the other hand, a distribution strategy primarily concerns the demand chain. Therefore, the difference is primarily internal vs. external.
The supply chain affects costs and how to reduce them via efficiencies.
Distribution channels and strategies look at how to grow the demand. Thus, increasing revenues for the business.
This distinction is not absolute. As in some cases when a core competence of a company is its supply chain management, then that also becomes a distribution strategy, just like in the Amazon business model case study.
Amazon has a diversified business model. In 2022 Amazon posted over $514 billion in revenues, while it posted a net loss of over $2.7 billion. Online stores contributed almost 43% of Amazon revenues. The remaining was generated by Third-party Seller Services, and Physical Stores. While Amazon AWS, Subscription Services, and Advertising revenues play a significant role within Amazon as fast-growing segments.
Via efficient inventory management, Amazon can keep large facilities where most tasks are automated.
This allows Amazon to host third-party inventories of sellers that are part of the Amazon network.
That in turn, makes Amazon stores more interesting for final customers as they can find more products they need, they can get them faster, and purchase them in a bundle.
In this case, the Amazon supply chain strategy in part crosses with its distribution strategy.
Process-centric vs. customer-centric
Where the supply chain is often process-centric.
In short, it wants to improve efficiency, reduce steps among several parts of the chain, and make the process as smooth as possible. Distribution channels and strategies focus on the customer.
Where is the customer? How do we get more of them? Is that a matter of price? Value or product?
A distribution strategy is obsessed with customers.
Once again, this is a rough distinction as, in some cases, companies have a customer-centric approach at any company level.
That’s what Jeff Bezos means when he says that successful companies need to stay in “Day One.“
Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start with the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.
Why you need to understand the demand chain
Demand chain management is a complex endeavor that involves the relations among suppliers and customers and how those interested in growing the demand for the product or service.
At the core, it is about designing a business model that allows the organization to meet customer needs and create desire and demand with an existing supply chain.
Thus, the demand chain is the value chain from your customers’ perspective.
This implies synergies between the supply chain and distribution and marketing to design a business model that delivers the most suited value proposition and generates higher revenues for the business.
The Value Proposition Canvas, part of the Business Model Canvas, is a tool used to ensure a product or service is positioned around customer values and needs.
It is almost like demand chain management allows supply chain management to look outside the company’s boundaries and understand the market.
Therefore, demand management will primarily understand, generate, and stimulate customer demand and align the supply chain processes with that.
The company has to guarantee enough margins and the proper condition to third-parties distributors to allow them to run sustainable operations.
Align the incentives between the company, the distributors, and consumers.
Train and educate distributors so that they can offer the best customer experience.
Create alignment between distributors to avoid fragmented pricing, placement, and promotion strategy.
Understand what products or services might allow the organization to grow its reach.
B2B, B2C, and distribution channels
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C levels. And those marketplaces connect two core players or more.
A distribution strategy and therefore, the distribution channels involved will change based on the target customer.
Indeed, selling to a business clientele is not the same thing as selling to consumers.
This implies different capabilities and distribution strategies.
For instance, a B2B (business-to-business) distribution strategy might be shorter, as you can directly reach the businesses that will act as intermediaries between you and the final consumer.
Think of the case of a company selling software as a service (so-called SaaS). If that software is complex and requires a certain degree of expertise, it will be better suited to be sold via other agencies and third parties, which in turn will have access to the consumer business.
This will imply a distribution strategy focused on acquiring the proper sales force to manage the more complex clients.
On the other hand, if a company sells an app for the iPhone which doesn’t require any particular expertise from the final user.
The company will have direct access to its consumers and will use marketing channels which don’t necessarily require a complex salesforce.
The more you move from consumers to enterprise clients, the more you’ll need a sales force able to manage complex sales. As a rule of thumb, a more expensive product, in B2B or Enterprise, will require an organizational structure around sales. An inexpensive product to be offered to consumers will leverage marketing.
B2B2C distribution strategy
A B2B2C is a particular kind of business model where a company rather than accessing the consumer market directly it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. Therefore, the company offering the service might gain direct access to consumers over time. This kind of model can help build a robust B2B as the foundation of the consumer market. While it makes it less scalable in the short term, if well-executed, it can scale.
Another form of distribution strategy is a B2B2C, where a brand can leverage existing pipelines to access the market.
In this case, the B2B2C strategy to work has to enable the brand to be known by a larger customer base or audience while it leverages existing players with an established distribution platform.
That is how you can structure your company’s strategy around a B2B2C business model.
Traditional distribution channels vs. digital distribution channels
A digital channel is a marketing channel, part of a distribution strategy, helping an organization reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, and email marketing. And some paid channels comprise SEM, SMM, and display advertising.
Over time, to build a sustainable digital strategy, you need to move from third-party to owned distribution, as explained below:
As consumer behaviors had swiftly changed in the last decades, more and more people purchase via the internet, and they feel more and more comfortable buying expensive items on the web.
For instance, Tesla allows you to order a $65K car directly on its site.
Therefore, digital distribution strategies are critical for any business, also one that has always operated offline.
The bullseye framework is a simple method that enables you to prioritize the marketing channels that will make your company gain traction. The main logic of the bullseye framework is to find the marketing channels that work and prioritize them.
Understanding whether distribution management is a matter of sales or marketing is superfluous as it might make us switch the focus from what’s important.
However, it makes sense to draw some lines as this allows proper attribution of responsibility and accountability across the departments of an organization.
Thus, distribution management is typically seen as a marketing function. Yet, once again it depends on the kind of organization you’re running.
Imagine the case of a company that sells to wholesalers or retailers; this means most of the contracts might be managed by salespeople, as they require an understanding of deal terms, relationships, and partnerships in place.
In that case, your salesforce will be able to give you insights that can help you improve the distribution strategy.
In the opposite scenario, where the company sells a product directly to consumers, most of the processes might be automated. Thus, most of the insights will be in the hands of the marketing department.
How do you assess the right mix for your distribution strategy?
Distribution is one of the key elements to build a viable business model. Indeed, Distribution enables a product to be available to a potential customer base; it can be direct or indirect, and it can leverage several channels for growth. Finding the right distribution mix also means balancing between owned and non-owned channels.
When building up a distribution strategy, it’s important to balance speed and control.
And to leverage those channels that can give momentum to the business.
Yet also, in the long-term prioritize those channels that make the company viable and its business model solid.
Key takeaways and why distribution is your most important asset
At any time, businesses can leverage open and closed strategies to enhance and create ecosystems that enable the business to thrive.
In short, companies like Google, Amazon, GitHub, Uber, Airbnb, Twitter, Facebook, LinkedIn and many others that we discussed in this blog while growing managed to create parallel ecosystems of developers, publishers, small businesses, entrepreneurs, and users that are really the base and foundation for those companies business model success.
In short, the turnover those companies make is just the tip of the iceberg of an ecosystem, which is often hard to control.
The Internet, enabled ways for these organizations to involve thousands of publishers, developers, and users, where an organization, generating profits, built a strong distribution platform, thus making it compelling to other key players to participate in the growth of the ecosystem.
At the center of those open, and uncontrollable ecosystems, there is a strong distribution network, controlled by the organization in charge of the platform, that is able to monetize the ecosystem.
Thus, the distribution network is, in many cases, among the most valuable assets a company has in the long run.
Even if that’s expensive to develop, a distribution network is always worth it, because that is how you build a business you can control and a platform where you make the rules of the game.
To finish this up, how can you plan an entry strategy based on the distribution context in which we’re operating?
What is distribution
Distribution is a process of enabling a product or service to be easily accessible to the critical customer and consumer who needs that kind of product and service. Usually, distribution channels can be direct or indirect depending on the distribution strategy adopted by an organization to grow its profits.
What is direct distribution?
In a direct distribution model, a company can get its products directly into the hands of consumers without passing through an intermediary. Think of the case of a company like Apple, which sells its iPhones directly through its owned store thus reaching its key customers.
What is indirect distribution?
In an indirect distribution model, a company can get its products into the hands of the final customers, only passing through an intermediary. Think of the case of a company that manufactures a product that then gets sold by a third-party retailer. Thus the company can’t reach its customers directly.
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
