Looking at the diagram above:

Channel 1 contains two stages between producer and consumer - a wholesaler and a retailer. A wholesaler typically buys and stores large quantities of several producers' goods and then breaks into bulk deliveries to supply retailers with smaller quantities. For small retailers with limited order quantities, the use of wholesalers makes economic sense.

Channel 2 contains one intermediary. In consumer markets, this is typically a retailer. The consumer electrical goods market in the UK is typical of this arrangement whereby producers such as Sony, Panasonic, Canon etc. sell their goods directly to large retailers such as Comet, Tesco and Amazon which then sell onto the final consumers.

Channel 3 is called a "direct-marketing" channel, since it has no intermediary levels. In this case the manufacturer sells directly to customers. An example of a direct marketing channel would be a factory outlet store. Many holiday companies also market direct to consumers, bypassing a traditional retail intermediary - the travel agent.

What is the best distribution channel for a product?

What factors should be taken into account in choosing the best distribution channel? Here is a summary:
Nature of the product

• Technical/complex? Complex products are often sold by specialist distributors or agents
• Customised? A direct distribution approach often works best for a product that the end consumer wants providing to a distinct specification
• Type of product – e.g. convenience, shopping, speciality
• Desired image for the product – if intermediaries are to be used, then it is essential that those chosen are suitable and relevant for the product.

The market

• Is it geographically spread?
• Does it involve selling overseas (see further below)
• The extent and nature of the competition – which distribution channels and intermediaries do competitors use?

The business

• Its size and scope – e.g. can it afford an in-house sales force?
• Its marketing objectives – revenue or profit maximisation?
• Does it have established distribution network or does it need to extend its distribution option
• How much control does it want over distribution? The longer the channel, the less control is available

Legal issues

• Are there limitations on sale?
• What are the risks if an intermediary sells the product to an inappropriate customer?