The Complete Guide to Distribution Strategy
Learn more about distribution strategy
In short, a pricing and distribution strategy is your sales model. It outlines how and for how much you’ll sell your product. Plenty of institutions lump the two together, but at Pragmatic Institute, we see them as separate — albeit closely related — functions. You can read about Pragmatic’s take on strategic pricing. Here, we’ll focus on the distribution portion of your pricing and distribution strategy.
While many — maybe even most — companies think about their distribution strategy from the inside out, at Pragmatic, we’re big believers in the outside-in approach. Instead of approaching your distribution strategy by asking how you’ll sell your product (which is all about you), the outside-in approach asks you to determine which sales channels best align with your market’s buying preferences.
The outside-in approach to distribution asks:
- How does your market prefer to purchase your product?
- How does it prefer to receive your product?
- How does it prefer to use your product?
Why is distribution strategy important?Having a solid distribution strategy — one that uses the outside-in approach — is important for several reasons. When you understand how your market wishes to buy, receive and use your product and implement a distribution strategy to match, you’ll benefit in the form of more sales, reduced customer acquisition costs and higher customer satisfaction — and in turn, bigger profits.
In short, a pricing and distribution strategy is your sales model.
Different approaches to distribution strategy
Before you can build a distribution strategy, you first need to understand the various distribution types. You may decide to use one or multiple distribution types as part of your strategy. You’ll need to decide what the best mix is for your market, company and product.
Direct distribution means you sell your product directly to the market without an intermediary. In other words, your buyers directly interact with your sales team, company store or your website to purchase your product.
Indirect distribution is when you rely on partners to sell your product. Such partners could take on a variety of different formats — wholesalers, value-added resellers, retailers, etc. In other words, there’s a layer between you and the ultimate buyer of the product, and the buyer perceives your partner as their sales team, not you as the ultimate vendor.
Within the direct and indirect distribution models, there are also three distribution subtypes: intensive, exclusive and selective.
- Intensive distribution involves flooding the market with your product. The goal is to make it as accessible as possible to buyers. Think household products like Bounty paper towels and how there’s a Starbucks on every corner.
- Exclusive distribution limits the places and ways customers can purchase your product to mirror the perceived exclusivity of a brand. For example, you won’t find a Maserati dealership or Tiffany & Co. in every state.
- Selective distribution falls somewhere between the two, offering customers easier access but not so widespread that it doesn’t feel special. Brands like Ruth’s Chris Steak House and Coach fall into this category.
Examples of distribution strategies in practice
It’s important to note that each distribution type has value — one isn’t better than the other. Most often, companies use a mix of direct and indirect distribution methods to sell their products. Consider these real-world examples:
It used to be that you’d have to go to a computer store to purchase a literal copy of Microsoft Office off the shelf. Today, you can still do that at some retailers, or you can purchase the software directly from Microsoft’s website, in your device’s app store, on Amazon and through other sellers.
The B2B technology company Oracle also relies on direct and indirect distribution methods. Oracle has its robust salesforce that focuses on selling to enterprises. But it works with partners to sell to small- and medium-sized businesses. It’s more efficient for Oracle to operate that way; it lowers their cost burden for smaller sales.
With a brick-and-mortar location on every corner, you might think Starbucks’ distribution model is about as direct as possible. But that’s only a piece of the puzzle. Remember, Starbucks also sells its products directly to businesses and workplaces and indirectly through wholesalers and retailers, including grocery and convenience stores.
How to define your distribution strategy
It might be tempting to copy the distribution models of other companies and even competitors, but that would be a mistake. Don’t assume they’re doing everything exactly as they should be. Also, you may uncover distribution methods that your competitors aren’t using, which could be a real differentiator for you. Similarly, forget any distribution strategies you’ve relied on in the past for the purposes of this exercise. In fact, pretend you’re starting from the ground up without any preconceived notions about distribution. Here are the steps to defining your distribution strategy:
- Conduct research. If you remember Pragmatic’s outside-in approach to distribution strategy, it won’t come as a surprise that the first and most important step in the process is to listen to your market. Ask yourself, how does your market prefer to purchase, receive and use your product? To get these answers, you’ll need to do some research. Get out into the field and talk to several customers and non-customers that are representative of your market, similar to how you would for a win-loss analysis. Step into their shoes and really experience a day in the life of your potential buyer to find out how they would prefer to purchase your product.
A word to the wise: Don’t cut corners on this step or make generalizations after speaking with only a few potential buyers. It’s easy to assume that everyone wants to purchase products online nowadays, but that’s not always the case. Consider pharmaceutical reps. They still pound the pavement and visit doctor’s offices in person because that’s how doctors prefer to be sold to. They don’t have time to research all the new medications on the market. They need someone to come in over lunch and tell them what’s available. If a drug company were to suddenly cut out this distribution channel, they would certainly lose sales.
- Determine what’s possible. Next, you’ll need to cross-reference the list of distribution methods your market prefers with the ones your company has access to, can afford and finds feasible. After all, no matter what your market preferences, you’re not going to start selling alcohol directly from your website or deliver hot pizza nationwide from your mom-and-pop shop in Connecticut.
- Implement and evaluate. The final step is to set up your distribution channels and begin selling your product. You’ll want to keep a close eye on each method of distribution and monitor not only for logistical issues but also sales analytics. This will help inform your marketing strategies.
Revisiting your distribution strategy
Once you’ve established your distribution strategy, you’ll want to revisit and reevaluate it at regular intervals to ensure it’s still optimal for your company and product. Failing to update your distribution strategy in line with your market’s preferences could give your competitors an advantage. Just think about Blockbuster.
In its heyday, Blockbuster was the largest, most ubiquitous video rental company around. They had movie rentals down to a science. Then market preferences changed. Rather than going to the video store, customers wanted more convenient options that delivered the same product. Enter Netflix, offering essentially the same product — movie rentals. But Netflix delivered them to your mailbox. And then, later, they became a leader in streaming. What if Blockbuster had adopted the same distribution plan early on? Perhaps the saying might be “Blockbuster and chill.”
How to keep up with distribution strategy disruptions
To avoid becoming Blockbuster in the above example, the first step is awareness. Recognize when disruption occurs by conducting regular win-loss analyses and monitoring your competitive landscape. Then, act swiftly.
There are three main ways to deal with disruption by a competitor:
- Acquire the disruptor so you become the owner of the new distribution strategy.
- Partner with a company that has the knowledge, skills, technology, etc. to handle distribution for you in the new method.
- Build or develop the new distribution method internally, which is the slowest and riskiest option. Of course, if you have the resources, it might be worth it to maintain control over your distribution strategy.
To cannibalize or not to cannibalize
Oftentimes, businesses decide not to adopt new distribution strategies for fear of cannibalizing their own business. But as Pragmatic instructor Paul Young pointed out in our Distribution Strategy podcast, “Wouldn’t you rather cannibalize your own business than somebody else do it?”
He offered up the example of Barnes and Noble:
Barnes & Noble didn’t launch a website that could compete with Amazon until about three years after Amazon entered the online-book sales market. One of Barnes & Noble’s concerns was that they might cannibalize their in-store retail sales. They were so concerned with preserving a dying model of retail sales that they chose to let their competitor and their competitor’s new distribution strategy disrupt them instead of diverting their sales to a different distribution method of their own.
What they failed to realize was that they likely would have captured net new business with a shift in strategy. They could have captured most or even all of the sales they previously made through their stores and even captured some new buyers with the new distribution model.
Once you’ve established your distribution strategy, you’ll want to revisit and reevaluate it at regular intervals to ensure it’s still optimal for your company and product.