Every business has two major roles: production and distribution. Production involves coming up with a product and getting it ready for the market. You come up with a business idea, transform it into a product, and package it ready for customers. The next role is distribution. This involves getting the product from your business and delivering them to the target customers.
Different businesses apply different ways to take their product to the customers. Some businesses work on limiting the number of parties that participate in this process. Good to note is that a reduction in intermediaries means a higher profit margin.
Others have different models that incorporate several third parties. The distribution-based model is one of them. So, what does this business model entail?
What is the Distribution Based Business Model?
A distribution-based business model is an approach that incorporates several distribution channels in getting products from manufacturers to the consumers. This model is one of the oldest techniques that have been in use for decades. Businesses applying it seeks to ensure fast, efficient, and direct delivery of goods and services to the end-user.
This model is straightforward, as it is the predominant approach for many brands. However, distribution involves a number of activities in ensuring that the products reach a consumer. Some of the activities include warehousing, shipping and transportation, inventory management, and channel selection and management. All these are costly activities that impact a business.
By adopting the distribution-based model, businesses lower the distribution costs as intermediaries take charge of these activities. The intermediaries enhance distribution channels as they try to reach more customers. Hence, it is a good idea for a business with a growth objective.
How Does It Work?
The distribution-based model has three major players. The manufacturer is the first party in this model. The role of a manufacturer is to produce products or services. They are the resource owners, creators, and producers. Also, depending on their agreement with other parties, they can brand the products or leave intermediaries’ tasks. All products joining the distribution phase originate from the manufacturers.
Intermediaries are the next party. A company may involve a small or a wide range of intermediaries in its distribution processes. So, there can be single or multiple intermediaries involved in the distribution activities. Also, some companies can have zero intermediaries opting for direct distribution. Some will involve a single intermediary such as retailers or agents. Others will incorporate multiple intermediaries. For instance, a company can include suppliers, distributors, merchandisers, wholesalers, and retailers.
Accordingly, there are various types of distribution. The first type is the mass distribution that targets the mass market. In this distribution, manufacturers involve middlemen with superb appeal in the market.
The second option is selective distribution, where a company restricts the number of intermediaries in its distribution processes. The last type is exclusive distribution which involves only one intermediary in distributing a company’s products and services.
The last part is the consumer. They are the end-users of a product or service. They either know the manufacturer or have zero ideas about them. The consumers’ concerns are to get the right products at the right place.
Examples of Distribution Based Business Model
In the real sense, every business applies the distribution-based model. Each has a way of moving its products from its premises to the consumers. However, not every business involves intermediaries. For this reason, there are some notable examples of businesses that stick to this traditional model despite the rising number of new technology-powered approaches.
Some of the renowned brands using this model include Nestle, Coca-Cola, Johnson and Johnson, Unilever, Procter and Gamble (P&G), and many other multinational enterprises. These companies invest much in retaining effective distribution channels. They involve multiple intermediaries in ensuring target customers access their products without many hurdles.
Pros and Cons
Distribution is the heart of any complete sale. Even with the best products, having ineffective distribution channels will lead to failure. Nonetheless, adopting the distribution-based business model comes with its benefits and shortcomings. Here they are:
Pros
Boost sales
A business using this model enjoys increased sales. The multiple intermediaries enhance the company’s products reach. These intermediaries help the company to build a robust network that contributes to enhanced brand awareness and reputation. It is a good idea for businesses looking forward to building a brand and growing their market share.
Easy entry to new markets
Entering a new market is one of the major challenges for many businesses. You move into foreign territories where no one has an idea about your products or services. This means that it will take you some time to establish yourself.
Through using the distribution-based model, businesses can easily enter new markets. You distribute your products through established wholesalers and retailers. So, you will not struggle to create your name as the intermediaries will work on it.
Access to cheaper and professional distributors
Intermediaries take up the distribution activities. This aspect allows you to concentrate on the production processes. Also, you will have access to experts in the distribution lines who would be hard to recruit in your company. Hence, it lowers your distribution costs.
Cons
Low profit margin
No doubt, this model boosts your product reach and increases sales. However, this increase does not reflect on your profit margin. The extensive network comes with heightened profit sharing. Each intermediary gets part of the revenues. In the end, you end up with few returns despite recording high sales levels.
Little control over the distribution process
With multiple players in the distribution process, it becomes hard for you to control it. You do not have the power to determine how the middlemen market your products. This aspect can lead to conflict and impact your sales.
Conclusion
As you can see, the distribution-based business model enhances the movement of products from the producer to the consumer. It improves the speed and cost-efficiency of the distribution process.
As well, the approach enhances your sales and ease of entering new markets. Nonetheless, the involvement of many parties in the distribution path impacts your profit margins. You also lose control over the entire process.
