- Choosing the right distribution channel is a very delicate decision. And now we know why. Let's spend a few minutes and learn about the different types of channels and how each is formed.

When we talk about consumer products, we can pick from one of the following four options-- direct marketing channels. These comprise producers selling products directly to consumers. The advantage of this type of channel is the producer can establish a direct relationship with clients, own their data, and manage their experience. However, this comes at the expense of higher costs and organizational difficulties.

Tesla is a great example of a company that sells directly to end users. To buy a Model S, you can simply order it on their website. This means cutting the middle man's margin. The price for the end customer is not increased due to dealers commissions. Producers can involve retailers who will sell to final customers.

So for example, Walmart buys many products directly from producers. The company can do that because its trade volumes are enormous, and it can reach out directly to producers.

The third channel we have involves a producer, a wholesaler, a retailer, and final customers. This is a valid option for producers who sell their products to thousands of retailers and cannot manage the relationship with each of them. The retailers in this channel will be smaller shops or retail chains that do not have significant trade volumes and need the services of a wholesaler who buys from producers.

And finally, the fourth channel is the one involving agents. It is useful for new products that need a stronger push. Agents can leverage their connections and strong sales skills, communicating with wholesalers and retailers and convincing them to try selling the new product.

These are the four types of channels we can have when selling consumer products. What about industrial products?

The picture we see here is very similar, isn't it? There is a slight difference in some channels used here. The direct channel is much heavier, as it accounts for over 50% of sales. This occurs because industrial goods are very expensive and have a high degree of customization. And it makes sense to have direct contact with the customer.

Business clients prefer having direct contact with their supplier, even if it means a more expensive service. Their main concern is risks. Therefore, they are unwilling to lose valuable time when implementing a solution.

The other three channels are similar to the ones we saw for consumer products. We can have a distributor or an agent who serves as a link between producers and business clients, or have both a distributor and an agent.

The relationship between producers and distributors will have three main dimensions-- logistics, financials, and information. Things are easier to agree about on the technical side of logistic issues. The producer company will ship its products to distributors, who will deliver them to final customers. And if something goes wrong, clients will return the product to the distributors, who will send it back to the producers. These procedures are easy to standardize and should be the point of lowest resistance in the relationship between producers and distributors.

Things become different when money comes in play. Negotiations about discounts, pricing for the end customer, and payment terms are an ongoing topic that becomes very difficult in most producer distributor relationships. The easier it is for distributors to replace the firm's products with the ones offered by competitors, the greater the leverage they will have at negotiations.

The last aspect we mentioned is information. One of the bigger drawbacks of working with a distributor is they have all your client information. And what is worse, in some situations, they might refuse to share it with you, as they consider it their own asset.

Every firm wants to know more about its customers. And what if someone else owns that information? Well, obviously, that's a problem. In an ideal world, the relationship between producers and distributors would be flawless. Both parties will value each other, will be determined to share profits in a fair way, and will work together in the long run.

The truth is, however, we live in the real world. And producer distributor relationships are rather complex and require willingness for concessions on both sides.