Expanding Your Small Business’s Distribution Channels

What is a distribution channel?

At its most basic level, a distribution channel is the means of getting the product to the customer. It is part of a business’s marketing strategy and includes the product, promotion and price. [Learn more about channel management.]

Distribution channels are part of the downstream process, as opposed to the upstream components (the supply chain). A distribution channel can be short or long and simple or complex, depending on whether it leads directly from the company to the consumer or has several intermediaries.

Intermediaries are other companies, such as retailers or distributors, that sell products to consumers on a company’s behalf. The number of parties involved in the channel can affect the ultimate price to the consumer and/or the profit to the seller.

What is included in a distribution channel?

Distribution channels can include the producer, wholesaler, retailer and consumer. Only the producer and consumer are required, though, as a producer can sell directly to a consumer with no intermediary in a short, direct distribution channel. For example, this is the case if you sell your product in a small storefront that you run yourself or via a mail-order business.

It is important for the distribution channel to be the right one for the product or for the customer to have options to suit their needs. For example, if a consumer is likely to want to see and feel the product before buying it, a retail intermediary is probably necessary as opposed to a strictly online purchasing opportunity. If the item is sold in bulk and frequently reordered, thus requiring tremendous storage capacity, an indirect distribution channel, such as a wholesaler, may be a better approach. However, a small, simple item that requires no explanation or inspection prior to purchase might be sold cost-effectively online. [Related article: Is Wholesale Over? The Death of the Middleman]

Why should you expand your distribution channels?

Expanding your distribution channels can be an effective way to increase — and protect — your business.

“Adding distribution channels is similar to diversifying your investment portfolio, and it’s essential to regularly assess these channels to ensure they are performing as expected,” said Keith Anderson, marketing director at Retail Control Systems.

Some advantages of broader distribution channels include:

• Bigger profits: Selling to more customers can raise revenue, cut per-unit costs and boost your business’s bottom line. “For example, if you are a brick-and-mortar [retailer] and expand your products online, you are expanding your reach and gaining new customers … [while] creating buying options for your core customers,” explained Melanie Kelly, vice president of marketing and client partnerships at Pivot Energy.
• Less risk: “If you only rely on one or a few channels, you are only giving yourself one avenue to sell your product,” Kelly said. “Diversifying can help you alleviate any business risk if your primary channel fails.”
• Brand building: Making products available in more locations raises consumer awareness of your offerings and expands your brand.
• Increased productivity: Expanding your distribution channels allows you to find new partners that can help improve business productivity. These partners can share some of your responsibilities, thereby reducing your workload and streamlining your company’s processes.
• Cost savings: While additional distribution channels will drive up product prices, they also have cost-saving benefits, as advertising and marketing responsibilities are not solely dependent on one company. Instead, the responsibility is put on the distributor to promote its products. 
• Better customer service: Working with reliable partners and expanding distribution channels can improve a business’s customer service since it leaves more resources for providing prompt, local support to customers.

Challenges in expanding distribution channels

While expanding your distribution channels can provide significant opportunity for growth, it doesn’t come without its challenges, including:

• Understanding your new target market: Before expanding, you should know exactly what problem you are solving for your customer, as well as how to position your offerings as a solution. “As [you] enter a new market, take the time to understand the environment and the challenges [you] can address,” Anderson said.
• Managing costs: Although expanding your distribution channels can save you money down the line, any expansion will come with increased upfront costs. “You’ll need to balance the upfront costs of new technology, partnerships and training with the long-term benefits,” emphasized Kevin Kerns, CEO and president of Hangar A.
• Establishing your new operations: In addition to the cost of your expansions, you’ll also need to consider the time and effort to set up your new processes, from inventory management to logistics to technology.
• Adhering to regulatory requirements: If your expanded distribution channels include different regions — particularly when crossing borders, Kerns noted — you’ll need to learn each market’s regulations to avoid surprises.
• Getting employee buy-in: Any business change requires buy-in and cooperation from your team. “Creating a change management plan for a new system is imperative for success,” Kelly added.

Types of distribution channels

The right distribution channel for your business’s needs will depend on several factors, including the products or services you’re selling and your customers’ preferences. Here are some distribution channels to consider.

Retail

Take advantage of the marketing and advertising power of existing retailers by selling your product through them. Depending on your product, the best option for this type of distribution channel may be specialty stores or department stores so consumers can see and test the product in person before they buy it. [Learn more retail marketing strategies for your store]

Wholesale

If you manufacture your own products, wholesalers may be an ideal choice to broaden your product base. There are advantages of this distribution method: Wholesalers buy in bulk, which increases your bottom line and reduces your storage needs, and they often have transportation networks in place, which relieves you of the cost and hassles of moving your products.

Sales reps

Consider building a sales team to widen your reach. Sales reps can reach out to consumers and businesses directly, conducting outreach on behalf of a business. By choosing reps who work independently, you can avoid the costs associated with opening additional offices in targeted areas.

Direct marketing

Marketing directly to customers can open up your products and services to local, regional, national or even global audiences. You can use common tools, such as flyers, brochures and postcards, to open up direct mail channels, or you can try to get your product placed in a big-name catalog.

Telemarketing

Opening up a telemarketing distribution channel can give you access to consumers nationwide without the expense of opening retail locations. Telemarketing requires trained staff, however, which can raise costs.

Internet

E-commerce is a rapidly growing channel, with countless businesses selling online through well-known marketplaces and up-and-coming comparison-shopping sites. E-commerce allows businesses to sell to consumers globally and offer products that brick-and-mortar stores may not have the capacity to sell. [Read more about how to develop a solid e-commerce marketing strategy.]

International

International markets can offer high profit margins and big growth. However, they often come with significant cultural barriers and bureaucratic hassles. Consider the following tips if you use international distribution channels:

• Customize your strategy: The best channels for your company depend on your market, your product and what your competitors are doing.
• Start small: Learn one channel before you move to the next. Sometimes the best solution is to find ways to make your existing channels more efficient, rather than investing in new channels.
• Automate: More channels mean more administrative details to juggle, so ease the load and financial burden by automating processes as much as possible.
• Consider cultural issues: For example, China and India are high-growth markets, but they also come with cultural differences that could present obstacles.

Big-box retailers have pros and cons. Chains, such as Walmart, Target and Best Buy, can be your ticket to the big time, but they’re also notorious for playing hardball with vendors. They’ll look for any chance to penalize you for mistakes, such as an incomplete bill of lading or an inaccurate Universal Product Code.

Deciding when to invest in a new channel

Rather than investing in new channels, some companies — particularly those that have been operating for less than a year — may benefit from strengthening their existing distribution channels. Evaluate how your current channels are operating and make sure they are being managed in the most efficient way before you invest in a new channel. If you haven’t utilized your original distribution channel to its fullest potential, it’s best to avoid investing in a new one. If not, you might spend more than necessary on an underperforming channel, spread your resources too thin and fail to reach all relevant audiences. 

After you use your existing distribution channel to its full capacity, consider your next additional distribution channel and evaluate the financial risks associated with its implementation. This process can require some trial and error and should be done only when a company has been operating steadily and is financially stable for an extended period (no less than six months but ideally over one year). 

Not every distribution channel will be beneficial to your business, so it’s important to choose the optimal channel for your target market’s demographics, interests and shopping habits. For example, a high-value brand does not belong in a supermarket. Similarly, if your product image includes a high level of personal service, online sales is not the right channel for your company.

Consider various channels in any number of combinations to find the ideal mix of distribution points, depending on your products and customers. You can also offer some of your products via one channel while reserving others for a different selling method.

“We never think there is a bad time to explore opportunities for channel expansion,” said Anderson. “However, timing the implementation and investment can be challenging and depends on the unique variables associated with your business.”

To determine whether now is the right time for an expansion, Kerns recommends paying attention to a few key signals from both your business and your customers. “Are your customers asking for faster delivery or better visibility into their shipments? Are you seeing opportunities in untapped markets? Just as important, do you have the technology and partnerships in place to support the move?” Kerns posited. “If you’re checking those boxes, it’s time to make a move.”

Best practices for expanding distribution channels

If you’re ready to expand your business’s distribution channels, follow these tips to set yourself up for success:

• Know where you stand: “Take a hard look at your current distribution setup,” Kerns advised. “Where are the bottlenecks? What’s working well? Data is your best friend here.”
• Do your research: Take the time to understand your audience and how they shop, as well as your competitors’ offerings and the channels they use. Before launching any expansion, Anderson’s team looks for gaps they can fill by reworking products or services for customers in adjacent markets. “Iterating on current product offerings can be more efficient than launching new concepts,” Anderson added.
• Consider a pilot program: If you’re concerned about costs or viability, start small. “A pilot would enable you to be cost-savvy and gain insights to implement a more robust plan in the future,” Kelly explained.
• Keep your customers in mind: While profitability is important, don’t lose sight of your customers’ needs. “Expansion shouldn’t complicate things for your customers,” emphasized Kerns. “Focus on making their experience even better.”

Danielle Fallon-O’Leary and Miranda Fraraccio contributed to this article.