How Does Distribution Affect the Price of Products?

In product distribution and order fulfillment, keeping internal costs down and product prices reasonable leads to higher profits and customer satisfaction. Utilizing distribution centers not only ensures a fluid availability of products with minimal back orders, but also establishes a pricing strategy for the different distribution channels. In terms of distribution, the greatest impact of production price comes from the distribution channel.

Channel Pricing

Using distribution channels as a factor in pricing is known as channel pricing. Channel pricing is fundamentally different than traditional pricing. Where traditional pricing is largely driven by the competitive marketplace, channel pricing considers that the value of a product or service depends on the customer’s entire experience including the interaction that the customer experiences with the distribution channel. If the supplier does not get its channel pricing right, it will never fully realize the value of its offering. To develop an effective distribution strategy in supply chain management, suppliers must establish price levels for various customer segments with multiple channels serving each segment.

How Different Channels of Distribution Affect Pricing

Retail Distribution

This common model usually works with a manufacturer using a distribution service to deliver products directly to the retailer. As each participant in this distribution channel plays a role in the distribution process and must make a profit, delivery is delayed to the end consumer and consumer costs increase.

Wholesalers

Manufacturers can also sell to wholesalers at discounted prices. Again, the wholesaler can use a distributor or other smaller wholesaler as an intermediary to deliver products in bulk to retailers or sell products to retailers or consumers. The scope of this relationship between the manufacturer and wholesaler can vary, causing significantly different prices related to product delivery times and prices. In the case of wholesalers who deal with end consumers, price on products are reduced for customers.

Distributors

Warehouse and distribution services act as a link in the distribution network chain of a product. Distributors may work with one manufacturer or represent a number of manufacturers and wholesalers. Distributors are most often used when retailers need to be consistently supplied with products because of high volume demands. In this case of high volumes, using a distributor saves money for the manufacturer.

Direct Sales

Manufacturers selling directly to consumers must also deliver those products. Using this distribution channel lends itself to higher priced products with lower sales volumes. If intermediaries such as wholesalers or distributors were used in this instance, products would carry higher holding costs because of the lower volume. While manufacturers using direct sales with low volumes can see greater profits, they also take on full responsibility for direct consumer communications and marketing, as well as increased cost of warehousing and inventory management.

Be sure to match your distribution method to your goals and resources. For example, a small company must work hard to focus limited resources and distribution options. Establishing a distribution management solution can be complex and creating an optimized process order flow across multiple channels requires particular industry insights. NewStream Enterprises, LLC has the expertise in transportation, warehousing, and inventory management to optimize your distribution network. That’s why we are inviting you to contact our supply-chain distribution team to start a conversation about your unique distribution needs.