Distribution Channels: How the Product Reaches the Buyer

A distribution channel is the route a finished unit takes from the business selling it to the person using it, and the only test worth applying is how many independent parties stand in between. Anjani Stationers sells direct to 36 business buyers with nobody in between. Setu Bazaar reaches 50,000 people through 2,000 merchants it does not employ. Everything else about a channel follows from that one count.

Anjani Stationers Private LimitedAn Indian company form. Its shares are not offered to the public and the number of members it may have is capped by law., an invented printer, prints school registers, runs one printing unit and one delivery van in a single city, and sells on credit to 36 business buyers, all of them schools and institutions. Setu Bazaar, the second invented business, is an online marketplace on which 2,000 merchants sell to 50,000 people, and Setu Bazaar has met none of the 50,000. One of them has nobody in the middle and the other has somebody.

One thing has to be settled before the count is worth taking. The number of buyers at the far end of a route and the shape of the route itself are two separate facts. Push 36 buyers through Setu Bazaar's arrangement, or 50,000 through Anjani Stationers', and neither arrangement changes in any respect. The consequence follows: the route decides where the costs sit and when the money arrives, and the count of buyers decides neither.

What is a distribution channel, and what is the one test that describes it?

A distribution channel is the route out. The route begins at the business holding the finished thing, made or bought, and ends at the person using it, and along the way it names who handles the goods and who handles the money. A channel is not advertising, and it is not a campaign, a logo, a slogan or a reputation. Advertising and the rest are ways of making somebody want the thing. The channel is the arrangement by which they actually get it, and a business can be brilliant at one and hopeless at the other.

A channel is described by counting the independent parties between the seller and the buyer, and everything else about it follows from that count. Zero parties and the route is one shape. One or more and it is another shape entirely. The count is not a matter of judgement, it needs no data room to establish, and it can be asked of any business anywhere in the time it takes to say it out loud: when somebody buys this thing, whose hand does the money go into?

Take two farmers with the same crop. The first sets his brinjals out at his own gate and sells to whoever walks past, so the person eating them that night has handed money to the man who grew them. The second loads the same crop onto a tempo at four in the morning, hands it to a market trader, and goes home. Same crop, same field, same week. But the second farmer has never met one person who ate anything he grew, and there is a party standing between him and every one of them who takes a slice and sets the price. Nothing about the vegetable changed. The route did, and the route is the thing being measured.

The count has to be guarded against the mistake that gets made with it most often. The count takes in the parties in the middle and never the people at the end. A route with nobody in the middle can finish at four buyers or at forty thousand. A route with a party in the middle can do exactly the same. How wide a business reaches and what shape its route has are two different measurements taken with two different instruments, and an account that runs them together will read a wide business as a complicated one and a small one as a simple one, when neither follows.

Where do these two businesses sit on that count?

Anjani Stationers first. The business prints registers in one unit and loads them into one van. The van takes them to the buyer. There is no distributor, no wholesaler, no agent, no stockist and no shop. The school raises its order with Anjani Stationers, the goods arrive from Anjani Stationers, the invoice carries Anjani Stationers' name and the money, whenever it turns up, turns up at Anjani Stationers. Counting the independent parties standing in between gives zero.

Setu Bazaar second. The marketplace stands in front of 50,000 people and has never sold any one of them anything at all. Setu Bazaar holds 2,000 merchants, none of whom it employs, and the merchants sell to the 50,000. The people divided by the merchants give 25.00 buyers a merchant. Counting the independent parties standing in between gives one.

Zero parties in between against one is the whole difference, and every remaining question about the two routes is answered by that one count. Seven questions follow, and each adds one line to the card below, two columns wide, one column a business. One pair of businesses answering eight questions in the same order reads as two consistent columns rather than fourteen loose facts.

Direct vs Indirect Distribution: which of these two routes is which?

Direct distribution is a route with nobody in between. The goods and the money both pass between two parties only, the seller and the buyer. Indirect distribution is a route with at least one independent party standing inside it, taking the goods on one side and handing them over on the other, usually setting a price of its own in the process.

Now the confusion that catches almost everybody. Both of those routes have somebody doing the carrying. The test is not who carries the goods. The test is who the buyer deals with. Anjani Stationers' van has a driver in it, so there is unmistakably a person standing between the printing unit and the school gate. The driver sits inside the business, so the route is direct anyway. He is not a party to the sale. He cannot set a price, cannot refuse to carry an item, cannot decide to stock a rival's registers instead, and when a delivery is wrong the school does not ring him. The school's counterparty is Anjani Stationers.

Setu Bazaar's merchants are the other case, and every one of the tests comes out the other way. The merchants are outside the business. A merchant chooses what to list and what to charge, can stop trading tomorrow, and when an order goes wrong the buyer is dealing with that merchant. An employee in the middle is not an intermediary and an independent party in the middle is.

A bakery that drives its own bread to a hostel each morning is selling direct, even though a boy on a cycle carries it and the boy is the only human being anyone at the hostel ever sees. The same bakery leaving forty loaves with a corner shop is selling indirect, even though the bread has travelled no further and the wrapper is identical. The person eating the bread paid the shop instead of the bakery, and nothing else changed.

Indirect Distribution: what does a party in the middle actually do?

An independent party in the middle does three things. Two of them are obvious, and the third is the one that falls out of every short description, so all three are worth naming.

First, it reaches buyers the seller could not reach one at a time. Setu Bazaar holds 2,000 relationships. Through those 2,000 it stands in front of 50,000 people, at 25.00 buyers a merchant. Holding 50,000 relationships directly would be a different business with a different cost attached to it, and the marketplace does not hold them. The marketplace holds two thousand and reaches the rest through them.

Second, it takes a share of the money. Rs 5,00,00,00,000/- of goods crosses Setu Bazaar in the year, and that total is the marketplace's gross flowEverything the buyers spent, added together, before anybody's slice comes out of it. The total crosses the marketplace and belongs to whoever sold the item.. Setu Bazaar keeps 4.00 per cent of that, a take rateThe percentage a marketplace charges on each sale it carries. The marketplace sets it, and it does not change with who happened to sell the item. giving Rs 20,00,00,000/- of revenue. Read it the other way round and it says the thing the first reading hides: the great majority of what those 50,000 people spent never touched the marketplace at all. The rest stayed with the merchants selling the items, as their marginThe part of a sale price a party keeps for itself once it has paid for what it sold. Different parties on the same route each keep their own.. A marketplace carrying Rs 500 crore of goods is not a business with Rs 500 crore of anything.

Third, and this is the part nobody prices, it stands between the seller and what the seller knows about the buyer. Only the party meeting the buyer learns anything about the buyer. Setu Bazaar can see that an order happened, at what size, on what day. Everything else sits on the merchant's side of the counter and stays there: what the buyer went looking for and did not find, what the buyer asked about and was talked out of, why the buyer never came back. An indirect channel buys reach and pays for it in margin and in information, and the information is the part nobody prices.

Whether that trade is worth making is a separate question. No rule says a business ought to hold more parties in the middle or fewer. How to find one, what to pay one, or how to keep one interested belongs to running a business, and running a business is a different activity from reading one.

Offline Distribution: what does it mean for the sale to happen in a place?

An offline route is one where the sale and the handover both happen in a place. Somebody stands somewhere, the thing changes hands there, and the place is part of the arrangement rather than incidental to it. Anjani Stationers is offline from end to end. A printing unit, a delivery van, one city, and buyers that a van can reach and come back from inside a working day.

An offline route is limited by distance and by what a day of driving covers, so Anjani Stationers has a city and Setu Bazaar does not have one. Neither fact is a complaint about either business. Each fact is the shape of the constraint that business lives inside. The van does not go four hundred kilometres, so a school at that distance is not a difficult customer for Anjani Stationers but no customer at all, and nothing about the quality of the registers or the price on them changes that.

A milk seller with a cycle has a route measured in streets. A household three streets past the end of it may well want milk every morning and would happily pay for it. The household was never business, so it cannot be lost business. The household sits outside the route. Every offline arrangement has an edge like that somewhere, and the edge is drawn by time and distance rather than by demand.

The edge costs something and buys something. The cost is a standing establishment. The van, the driver and the printing unit are there whether the schools order or not. None of the three shrinks in a quiet spring and none can be stretched for free in a busy one, so a slow year does not make them cheaper. In exchange, Anjani Stationers stands in front of its buyer in person. Somebody from the business is at the school gate in the fortnight before term with the registers on the back seat. An eleven year arrangement like the Sunrise Public School group's grows out of that ground. A route that costs a fixed establishment gets a relationship back, and it is one route producing both, not two decisions taken separately.

Online vs Offline Distribution: what actually changes when the route moves to a screen?

Run the same pair past three questions and no others. Three is the whole of what separates the two arrangements. Where does the sale happen? How is the reach limited? Who does the physical work?

Where the sale happens changes, and changes completely. Anjani Stationers' sale happens in a place, at a gate, against a delivery note somebody signs. Setu Bazaar's happens on a screen. The limit on the reach changes too, in kind rather than in degree, and that change is the more interesting half. Anjani Stationers is bounded by distance. Setu Bazaar is bounded by how many merchants it holds, being 2,000, and distance does not enter the calculation at any point.

Who does the physical work does not change. Somebody still has to hold the item, pack it, and put it into a buyer's hands. Going online changes who performs the physical work and where the cost of it sits; it does not make the work stop happening. At Setu Bazaar the 2,000 merchants perform it. The work happens on their premises, in their hours, out of their margin. The marketplace does not do the work, so the work does not appear in the marketplace's accounts, and an absence from a set of accounts is a fact about where a cost sits rather than evidence that the cost evaporated.

At this point the temptation is to say that online is cheaper, or newer, or better. None of the three holds, and there is a concrete reason. Two routes with different shapes carry different costs in different places and hand them to different parties, and one of the two businesses here reaches 50,000 people and loses money doing it. Cheap is not a property that a route has.

Omnichannel: do either of these two businesses have it?

Omnichannel is not a count of routes but a claim about whether the routes share one record of the buyer. An arrangement is omnichannel when the same buyer, the same price and the same order history are recognised whichever route that buyer arrives by. The routes then behave as one arrangement rather than as several businesses trading under a single name.

Two routes that do not know about each other are two channels and not omnichannel, and adding a route is not the same as joining one. A business with a shop and a screen that cannot see each other's records has two channels and no more. A buyer who is a known regular on one of them walks into the other as a stranger, the price may differ between them, and something bought on one cannot be handed back at the other. Nothing about possessing two of them makes them one.

The plain answer for this pair: neither of the two businesses is omnichannel. Anjani Stationers has one route. Setu Bazaar has one route. Neither has a second route for a first one to be joined to. There is no screen bolted onto the printing unit and no shop opened for the marketplace.

The absence is the useful part. Most businesses have exactly one route, and the word gets used about them anyway, in a document that means only that somebody would like there to be more than one. When the word turns up, the question is not how many routes exist but whether they share a record, and where there is only one route the word is describing nothing at all.

Channel Conflict: which of the two carries it, and in which form?

Channel conflict is what happens when two routes compete for the same buyer and the seller is standing on both sides of the competition. Say at the outset what it is not. The word misleads: it is an arrangement and not a quarrel. Nobody has to be angry, nothing has to be breaking down, and it can run quietly for a decade and show up in nothing but a margin.

There are two forms and they are worth holding apart. The form between partners is several independent parties chasing the same buyers. Setu Bazaar's arrangement is precisely that form: 2,000 merchants, 50,000 people, and every merchant free to sell to any of them. When two merchants list the same item, one of them does not get the order. Setu Bazaar keeps its 4.00 per cent whichever of them wins it.

The form between a seller and its own partners is a business selling direct to the same buyer it also reaches through somebody else. Neither of the two businesses does that. Anjani Stationers has no partners to compete with in the first place, and Setu Bazaar does not sell to the 50,000 itself.

The honest consequence: a seller can collect from both sides of a competition it set up. The competition between the merchants is carried by the merchants. The competition shows up in their prices and in their hours, and not in Setu Bazaar's 4.00 per cent, the identical number before and after any merchant wins anything. The split is a fact about where a cost sits. Whether an arrangement ought to be built that way is a judgement about running a business rather than a fact about a route.

How Distribution Channels Affect Growth and Profitability: what does the route decide, and what does it not?

Three things, and each of them is a separate claim that has to stand on its own: how the business gets bigger, where its costs sit, and when its money turns up.

Growth: an indirect route adds parties and a direct route adds relationships

An indirect route grows by adding parties in the middle, and the multiplier is buyers a party. Setu Bazaar adds one merchant and stands in front of 25.00 more people on the published average. The number of relationships it has to hold goes up by one and not by twenty five. Two thousand merchants and 50,000 people is what that arithmetic looks like after it has been running a while.

A direct route grows one relationship at a time, and somebody inside the business has to hold every single one of them. Holding every relationship inside the business is why Anjani Stationers has 36 business buyers and not 3,600. The same fact is why its revenue has the shape it has. Of Rs 2,70,00,000/-, the Sunrise Public School group is Rs 81,00,000/-, being 30.00 per cent. The other 35 accounts share Rs 1,89,00,000/- between them and average Rs 5,40,000/- each. A direct route looks like that after eleven years, with one arrangement older and larger than everything around it.

The arithmetic stands as it is. Whether 30.00 per cent sitting in one buyer is a danger, what happens to the business if that buyer walks, and how anybody would go about weighing it, is a separate question with a procedure of its own, covered separately under customer concentration and dependence. The figure is a consequence of the route, and it carries no verdict.

Profitability: the route decides the shape of the cost base and not the sign of the result

Setu Bazaar's indirect route costs a share of every sale for as long as sales keep happening. There is no year in which the merchants have been paid for and stop needing to be paid. Anjani Stationers' direct route costs a van, a driver and a printing unit. The three are there whether the schools order or not and cost the same in a bad spring as in a good one. The two routes carry two different shapes of cost, and a shape is not a result.

Setu Bazaar's published year makes the point on its own. Rs 5,00,00,00,000/- of goods crosses the marketplace. Setu Bazaar keeps 4.00 per cent, so revenue is Rs 20,00,00,000/-. ContributionWhat one buyer leaves behind once the costs moving with that buyer have been taken off, before the fixed costs are touched. runs at Rs 2,000/- a buyer a year across 50,000 buyers, being Rs 10,00,00,000/-. The fixed base is Rs 12,50,00,000/-. Ten crore against twelve and a half crore leaves minus Rs 2,50,00,000/-. The business standing in front of 50,000 people, on much the wider of the two routes here, is the one losing money.

A channel decides where the costs sit and whether they move with volume, and it decides neither whether a business makes money nor how many buyers it has. That reads in both directions. An indirect route is not a diagnosis of anything. And a business whose margin is thin because a party in the middle takes a slice has shown where its money goes, and shown nothing whatever about whether there is any.

Timing: the route also decides when the money arrives

Here is the part nobody sees coming. The channel decides when the money arrives, and unlike the count of parties, the accounts answer this one without being asked.

Anjani Stationers' invoices state credit termsThe period an invoice allows a buyer before the money is due. The term is written into the agreement at the time of the sale. of sixty to ninety days. Sixty to ninety days is what was agreed: on a document, on both sides, in writing. The published collection periodThe average number of days the money owed actually took to turn up, worked out from the accounts after a year has closed. is 110.08 days for most of its buyers and 171.23 days for the Sunrise Public School group. Terms are what was agreed and days are what happened, and the gap between them belongs to the channel. Most of the book arrives more than twenty days past the outer edge of the term. The single largest buyer arrives more than eighty days past it.

Why is that a fact about the route rather than about the bookkeeping? Because selling direct into an institution means selling into that institution's own payment process. A school office has an approval, a signature, a committee that meets when it meets, and a calendar of its own that nobody outside it can see into. Anjani Stationers did not design that process, cannot inspect it and cannot speed it up by writing a different number on an invoice. The process came attached to the route on the day the route was chosen: a seller direct to institutions is paid at the speed of an institution.

Setu Bazaar has nothing of the kind to report. The money is collected the moment the sale happens. The agreement and the payment happen in the same second, so there is no term, no gap, and nothing at all to measure between them. Same country, same year, two routes. One of them carries a hundred and seventy day question and the other does not have the question in the first place.

What four questions describe any channel?

The card is a procedure once it is turned on its side. Four questions, asked in order, and at the end of them a route has been described well enough to say what it will do to a set of accounts. A lender asks them before deciding when money will come back and whether a season can be bridged. A business adding parties in the middle and a business adding relationships grow at different costs, so an analyst asks them before believing a growth number. An investor asks them before assuming that reach and revenue are the same shape. And a household running a small business asks them constantly without knowing they have names.

The fourth question is the one people forget, and it is the only one of the four that the accounts answer without being asked. Nobody publishes a count of the parties standing in their route. Almost everybody publishes enough for a collection period to be worked out, and a collection period sitting a long way from the stated terms says something about the route rather than something about the ledger. Four answers, and the channel is described.

What does the finished card say?

Eight lines, two columns, one pair of businesses, and every line answered for Anjani Stationers before Setu Bazaar. Read down the middle column and there is a direct, offline, single route with a standing establishment, no partners, and a payment process it inherited from its buyers. Read down the right and there is an indirect, online, single route with a slice out of every sale, a competition running between its own partners, and money that arrives at the same instant the sale does. Neither column is a verdict and the card carries no score. The card is a description precise enough for a third business to be laid alongside it and read in the same eight lines.