After Product and Price, then follows sales in the marketing mix and how to develop a distribution policy. In the distribution policy, you have to decide HOW to bring your offer to the customer – either you use an intermediary or you sell directly to the customer.
In addition, the distribution policy is also about WHERE you offer your product everywhere and which distribution channels you use. The central question is where your target customers buy and which distribution channels are suitable for self-employment.
Distribution policy: direct distribution, intermediary or franchise?
Under the item “Distribution Policy” you explain in your business plan where and, if so, from whom your customer buys your offer. If you know the points of purchase of your customers (Point of Purchase or Point of Sale), it should be relatively easy for you to determine the distribution channels that are appropriate for your offer and develop a distribution policy.
As a first step, however, we advise you, within the scope of the distribution policy, that you first become aware of what kind of sales you want to use. The following basic sales channels in the distribution policy are conceivable when you develop a distribution policy:
Direct sales: direct customer contact
If you opt for direct sales as part of your distribution policy, you will have direct customer contact, as you sell your product to the end customer yourself. This form of distribution policy makes sense, especially for consulting-intensive products (e.g. capital goods), as the quality of advice is an important selling point.
In addition to capital goods, where the end customer is usually a company, direct sales can also make sense for distribution policy in the case of consumer goods. This is especially the case if you want to offer your product as cheaply as possible. The advantage of direct sales is the proximity to the customer and the possible cost savings, as you do not have to pay for intermediate trade. The disadvantage is that you do not have a large regional coverage when it comes to direct sales.
- Possible direct distribution channels to pursue this distribution policy are the classic retail sales, market stalls, the own online shop, mail order, doorstep shops, factory sales, etc.
Indirect sales: Using intermediaries
In contrast to direct sales, there are usually one or more intermediaries between you and the end customer. The intermediary is usually a wholesaler or retailer or a sales representative in whose assortment your offer is represented. Before the customer can be convinced of your offer, you must first get the intermediary to accept your product and thus often also to present it in the store. This can result in a significant Market entry barrier variant of the distribution policy that you should check when you develop a distribution policy.
Since you are not in direct contact with the customer, you should pay particular attention to the selection of suitable sales partners (reputation, cost and degree of distribution). You should also consider factors such as exclusive partnership vs. mass distribution or the design of the terms and conditions when determining the distribution policy. Thus, your pricing strategy should not be completely determined by a sales partner.
Especially for consumer goods with a large target group, this type of distribution channel is used in the definition of the distribution policy, since it is usually a comprehensive distribution and you use an existing distribution network for indirect distribution on an existing distribution network.
Other advantages are that you can use different sales partners and thus achieve a high range relatively quickly. The disadvantage is that you first have to convince the intermediary of your product, higher costs (partly listing fees or commission payments), lower sales price and no direct customer contact.
- Possible indirect distribution channels in the course of this distribution policy are wholesale and retail, specialist shops, online marketplaces or sales representatives.
Intermediate franchise: tied intermediaries
Although the franchise is also distributed through legally independent undertakings (Franchisee), however, there are significant differences in indirect distribution in this distribution policy.
Instead of a listing fee or commission payments, as is customary in indirect distribution, the franchisor receives a so-called franchise fee for the use of the franchise system.
The advantage of this distribution policy is that a distribution network can be set up relatively quickly under one’s own brand. However, the business model must be franchise-ready and enough franchisees must be found.
Building a franchise system takes a relatively long time (structuring) and money (legal framework conditions need to be created). Also, making the franchise system known is often not easy – you can try to attract franchisees via franchise portals, but often only for a fee.
Next step to develop a distribution policy
If you have opted for a basic distribution direction (i.e. direct sales or indirect distribution), the distribution policy is now about selecting the appropriate distribution channels.
Use the right distribution channels!
Their second task in the distribution policy is to determine the distribution channels. The central question is which distribution channels your product should be offered to your target customers. The following distribution channels are conceivable:
Online distribution channels in distribution policy
The Internet offers many new opportunities. As part of the distribution policy, consider whether you want to offer your product on the net. A clear and user-friendly online shop is an important prerequisite for this. Other online distribution channels, such as eBay or e-commerce distribution, are alternatives, but must be Your corporate strategy and core competencies.
Mail order in distribution policy
Something has gotten a bit old, but still a sales-heavy distribution channel is mail order. Especially for products that do not require advice, mail order is a means of choice in distribution policy. Nevertheless, caution is required in this distribution channel, as the business model is increasingly being replaced by the Internet.
Direct sales in distribution policy
You should choose the direct sales channel if you have particularly consulting-intensive and possibly complex offers. When it comes to direct sales, the location is usually not as important as it is for retail.
A special form of direct sales is warehouse sales, where you sell directly from stock. However, you should use other distribution channels in your distribution policy, as this distribution channel alone is usually not sufficient.
Retail trade in distribution policy
Retail is one of the most important distribution channels. Typically, you can reach a large number of potential customers through retail. However, you should also bear in mind that your product is presented directly next to competing offers – all the more important is a convincing marketing strategy. The retail distribution channel is not suitable for very consulting-intensive offers in the distribution policy.
Specialist trade in distribution policy
Products for which the customer wishes good advice are usually purchased in the specialist shop. Therefore, if you have a consulting-intensive offer, this distribution channel is suitable for the design of your distribution policy.
Wholesale trade in the distribution policy
If your business model is about really large volumes, you should think about the wholesale distribution channel. The volume of sales is usually much higher in wholesale trade than in retail or specialist retailers, but the margins for this distribution channel are often lower.
Commercial agents in distribution policy
Depending on the business model, sales via sales representatives make sense. However, you should be careful when selecting sales representatives and pay attention to the quality. Basically, with this distribution channel in distribution policy, you must remember that you have lower control mechanisms and a reputational risk. On the other hand, sales representatives are paid on a basis and can achieve a relatively rapid increase in sales.
Which distribution channels you choose within the scope of your distribution policy depends, among other things, on your corporate strategy, on the other “P’s” in the marketing mix and on your personal preference.
However, when you develop a distribution policy, remember that certain distribution channels directly incur costs. Many retailers or wholesalers charge a fee to include your product in the range. It is also important that you also pay attention to efficiency (i.e. compare costs and earnings) when selecting distribution channels and not only use one, but also not too many distribution channels. With only one distribution channel, the dependency is enormously high. If you select too many distribution channels as part of your distribution policy, this is usually not efficient and costly.
The goal is …
… that you develop a distribution policy clearly in your business plan. The aim is to make it clear to the reader of the business plan where your customer is buying and why you have chosen which distribution channels. Also try to explain where the advantages and disadvantages of your distribution policy lie.
After you develop a distribution policy and describe the distribution channels, you have to think about HOW you can positively influence the purchase decision of your target customers – because: just because your offer can be found on the shelves does not mean that that your customers know and buy your product.
After the chapter on distribution policy, describe how you can positively influence a purchase decision using the fourth “P” in the marketing mix, the Communication and advertising (English for promotion). In addition to the distribution policy, you will also find information about the other Marketing tools.
