Selective distribution is a retail strategy that involves making a product or group of products available only in certain markets. This is the opposite of open distribution, where a product line is distributed to as many markets as possible. There are several reasons for employing this approach, including the potential for limiting competition and minimizing distribution costs so that net profits are higher.
The selective distribution process focuses on identifying specific markets where a company’s products are highly likely to be favored by consumers in the area, while avoiding distribution to areas where there is less of a chance of gaining a significant market share. Often, this situation comes about because a number of similar products are already available through certain markets, and the level of competition is higher. By choosing to distribute goods through handpicked retailers within certain geographic regions, it is possible to avoid some of this competition, while still tapping into the demand for products of that type.
One approach that some businesses take is to contract with a limited number of retailers that will sell the products in their stores. For example, a company making a specific brand of cologne may choose to only allow their product to be sold at a few high-end department stores and withhold distribution to supermarkets, drugstores, and discount retailers. The idea is that, by focusing on consumers who are more likely to shop at one or more of the high-end stores, the product begins to be seen as somewhat prestigious and will command a higher price per unit.
Along with the selection of retailers, a company may choose to limit distribution of its products to specific geographical areas. This is sometimes the case where there is a strong demand for a given product, but very few opportunities to purchase the product locally. In this scenario, the manufacturer may identify specific retailers with stores in those geographical areas and make arrangements for those products to be carried on their shelves. The retailers benefit from being able to offer a product that is not widely available in the area, while the manufacturer stands to increase sales by having little to no competition from similar products within that area.
It is important to draw a distinction between exclusive distribution and selective distribution. An exclusive model would involve the identification of a single retailer to offer the product within a particular market and would also call for the retailer to not carry competing brands. This is not often the best approach for the manufacturer or the retailer, in that it limits options to reach consumers. A selective model does not prevent retailers from selling at least one similar product, and does not limit the manufacturer from working with other retailers in the area to carry the product line. Under normal circumstances, the selective approach is much more likely to maximize profits in a given market than the exclusive approach.