What is the direct channel of distribution?

One of the big questions entrepreneurs face when launching a new consumer product is how to get it to market. Basically, there are two distribution channels to choose from:

1.   Direct – The consumer buys the product from you online, in a store, at a trade show or by mail order.

2.   Indirect – The consumer buys your product from a wholesaler, retailer, dealership or some other intermediary.

Is your product better suited to direct or indirect distribution?

Your first job when choosing your best distribution option is to consider your product. For example, if the item is perishable, you may need to invest in refrigerated storage facilities and trucks to handle its distribution properly. If this is too costly, you might be better off distributing through a wholesaler who already has this equipment. You may want to invest in some market research to better understand your customers and your competitors’ approach to distribution.

If you are still on the fence after looking at your product and market data, your next step is to weigh the options against one another.

The pros and cons of direct distribution

There are several advantages to going direct, especially when you’re just beginning and your market is easily covered. By interacting with your customers directly, you retain a lot of control over your product and its performance.

Direct distribution allows you to:

• collect valuable data on customer buying habits
• distinguish yourself from the competition
• respond to product performance and customer feedback
• get your products to consumers faster
• avoid sharing profits with a third-party distributor
• build relationships with your customers

Despite the positives, direct distribution also has some potential drawbacks.

One of the biggest challenges is the sizeable costs that can come with direct distribution. For example, you may need to purchase trucks, hire drivers and rent storage space. You may also find it harder to reach potential customers without the network an established distributor provides.

The pros and cons of indirect distribution

Going through external sales channels has its own benefits. Indirect distribution allows you to:

• share shipping and storage costs
• make it easier for customers to find your products
• benefit from your third-party’s experience, infrastructure and salesforce
• avoid the complexity of managing distribution logistics

The main challenge with indirect distribution is the distance it puts between you and your customers. By adding an intermediary, you are also increasing the amount of time it takes for your product to reach the buyer.

It’s also harder to establish brand loyalty when you are not interacting directly with your customer. Still, it is a good way of bringing your product to market without burdening yourself with the start-up costs of establishing your own distribution channels.

If you decide to go the indirect route, it’s important to clearly define the terms of your agreement with your partner from the beginning. You should agree on roles and responsibilities, training and customer support, reporting and performance monitoring, among other issues.

Elisabeth Natter is a business owner and professional writer. She has done public relations work for several nonprofit organizations and currently creates content for clients of her suburban Philadelphia communications and IT solutions company. Her writing is often focused on small business issues and best practices for organizations. Her work has appeared in the business sections of chron.com, bizfluent and Happenings Media. She holds a Bachelor of Arts degree in journalism from Temple University.

We live in an age of convenience —a time when just about anything can be ordered online and delivered straight to your doorstep. As more consumers choose the convenience of online outlets over in-store retailers, manufacturers are flocking toward selling their products on an easy-to-use online platform. Aside from ditching the storefront, there are some important things to consider when moving your distribution channels to the internet. As reported by Statista, it is projected that worldwide e-commerce annual revenue will climb to $6.5 trillion.

While distribution channels have not largely changed over time, consumers’ demand for fast and convenient delivery has become the norm. Amazon.com and other online shopping outlets have become the choice for shoppers and therefore the necessity for companies to adapt to. Even the fresh food industry has been shaken by Amazon Fresh and meal distribution companies like Blue Apron.

Direct vs. Indirect Distribution Channels

There are two types of distribution channels: direct and indirect. As the names would imply, direct distribution is a direct sale between the manufacturer and the consumer, and indirect distribution is when a manufacturer utilizes a wholesaler or retailer to sell their products. There are pros and cons associated with either method, and deciding the right choice for a business heavily depends on the trends and preferences of the consumers.

Direct Distribution Pros and Cons

This relationship-driven model gives companies complete control of the overall consumer process. They control the consumer experience, the brand image as well as have the added benefit of direct interaction and relationship building with the consumer. This control also eliminates intermediaries, thus reducing outside fees like commissions, broker fees, and reduces allowances such as advertising and promotional expenses.

On the downside, with great control comes great responsibility — and risk. In a direct distribution setting, the company bears 100 percent of the financial risks. Selling directly to consumers requires impeccable documentation and tax records due to the increased likelihood of an audit. The startup cost for direct distribution will also be much higher depending on the necessity to purchase delivery trucks, equipment, warehouses, etc. This cost generally pays off down the road, but requires significant capital upfront.

When it comes to selling products online, it’s important that the customer’s shopping cart show instant, accurate sales tax calculations — which need to be monitored for current rates and taxation rules. Final prices must also consider individual state taxes and exemptions. For this reason, many direct distributors purchase technology to automate their operational and financial processes to reduce error and labor costs.

Indirect Distribution Pros and Cons

With indirect distribution, companies gain a significant competitive advantage. They gain access to an increased consumer base without the challenge of getting the customer through the door. This grants them more time to focus on their product, their customer base and increasing the range of their target consumer. The startup cost will be lower, and the relationship generally makes the process much simpler for the distributor. Additionally, since sales tax is only required to be paid once, selling to third-party distributors will likely lead to an exemption of sales tax under the resale exemption.

While having access to a third-party’s logistics and system planning has its benefits, utilizing a retailer or wholesaler has its price. Outside costs like commissions, broker fees and allowances can greatly affect the bottom line. There is also a constraint on the company’s freedom to set prices. Companies need to factor in these costs and ultimately weigh them with the benefits.

Choosing Between Indirect and Direct Distribution

Ultimately it relies on the wants and needs of the target consumer. As a whole, people currently favor online shopping over retail shopping. However, specialty items or luxury brands generally require a more interactive experience with hands-on assistance. On the other hand, online shopping allows for increased transparency, which is a huge factor for consumers looking to compare reviews or search for the lowest price. Even if the product is ultimately purchased through direct distribution, the chances of the consumer reading online reviews before purchase is not something to ignore.

Want to learn more about selecting the right distribution channel for your business? Visit our Manufacturing page where you can get more information on how we can help your business or read any of our related blog articles. If you still have questions about distribution channels contact us!

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