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Direct vs Indirect sales and distribution channels

Distribution channels play an important role in helping businesses operate efficiently.

Setting up distribution channels is especially critical for businesses operating internationally.

Many times businesses need to adopt a combination of various sales and distribution channels since a single channel might not prove sufficient to reach all its desired customer segments.

Companies employ various kinds of sales channels, which can mainly be classified into two categories.

They are direct sales channels or the ones owned by the firm and indirect sales channels or those operated by the intermediaries.

When a company uses a direct sales or distribution channel, it is reaching the customers directly.

These direct sales channels can include company operated stores, and company’s own websites and apps.

In case of an indirect sales or distribution channel, a company can partner with intermediaries including retailers, resellers and distributors or other third party vendors that will sell the goods to customers.

Both these channels have their own advantages and disadvantages.

In most cases, setting up own or direct sales channels can prove costly for a firm.

It may require the company to set up its own distribution channels including stores, warehouses, and logistics.

Several companies opt for a mix of both because both offer their own distinct advantages.

In the next sections we will discuss how the two channels operate and what are their advantages and disadvantages.

Direct sales and distribution channels:

The direct sales and distribution channels are the ones that are operated by the company itself.

A larger number of companies are now operating their own direct sales channels to reach their customers in local and international markets.

One important reason that more and more companies are opting for direct sales and distribution channels is that it is more profitable than the indirect sales channels.

In the case of indirect sales channels, you need to partner with third party vendors, distributors and resellers to reach your desired target customer segments in various geographic markets.

However, companies many times opt to open their own branded stores and establish their own transportation and delivery channels for reaching the customers in international markets.

In terms of branding and marketing too, establishing a direct distribution channel can be more profitable.

Company operated stores and digital sales channels can be great marketing channels too and help grow brand awareness and customer loyalty compared to resellers or distributors.

For example, in the retail industry, companies generally use direct sales and distribution channels.

Take the example of Walmart

It uses only direct sales channels for distribution and sales.

It had 11,443 stores operational worldwide in 2021.

Walmart has established a large global network of stores for sales and distribution.

It is the largest retailer in the world and manages its own logistics network, which includes a fleet of thousands of trucks.

The company has invested a vast sum in managing its own distribution network. 

In the longer term, it has allowed the company to enjoy economies of scale and manage a more efficient distribution channel that could have been possible through third party vendors and distributors or through 3PLs.

This has helped maintain higher control on its business operations and higher profitability.

In the other industries too, companies are reverting to establishing their own distribution channels for the sake of efficiency, customer satisfaction and for the benefits it offers in terms of marketing and branding.

Nike is a leading sports shoes and apparel brand that has grown its focus on its direct sales and distribution channels.

Its share of revenues the company generated from its direct to consumer (DTC) sales channels increased in recent years.

Apart from its branded stores, the company sells its products directly to consumers across the world through its own website and apps.

This has helped the company enjoy higher profit margins. 

However, its another major benefit can be illustrated in terms of marketing, Nike pulled its products from Amazon a few years ago. 

The main reason was branding

The proliferation of counterfeit products on Amazon forced Nike to take this strategic step.

There were several unauthorized sellers selling Nike products on Amazon.

The impact of such things is felt in terms of the loss of brand image.

Nike is a brand well known for marketing and product quality.

Counterfeit products can hurt brand image

However, the sales of Nike products by unauthorized resellers also hurts brand image, customer loyalty, and profit margins. 

So, Nike focused on strengthening its own distribution channels including its network of branded stores and the digital sales channels.

The company enjoyed solid growth in sales in 2021 as it increased its efforts to become more self reliant in terms of sales and distribution.

Its net sales grew to $44.54 billion in 2021 compared to $37.4 Billion in 2020.

Nike generated sales worth more than $16 Billion through direct to consumer sales and distribution channels.

Apart from the fashion and retail industries, in the technology industry too, companies have increased their focus on establishing direct sales and distribution channels for the sake of maximizing customer satisfaction and growing consumer loyalty.

Dell is known to be one of the leaders in this area.

Other PC brands too including HP are leveraging the power of direct to consumer sales and distribution channels for maximizing customer satisfaction and delivering a superior customer experience.

Leading technology brands including Apple and Microsoft are now increasingly focusing on developing their own distribution channels in the geographical markets outside the United States.

Apple stores are not just distribution channels but also important marketing channels that play a crucial role in maximizing customer satisfaction.

In recent years, Apple has continued to grow its penetration of significant geographical markets like India through its own digital stores.

Microsoft used its network of physical stores in the past for sales and distribution.

However, it closed its physical stores and instead operates only around 50 experience stores to maximize customer engagement.

The company now relies mainly on its digital stores for distribution and customer support.

Microsoft has also increased its focus on direct to consumer sales and distribution channels but it utilizes a mix of direct and indirect distribution channels to reach its customers worldwide.

You will see that the leading reason a larger number of businesses are reverting to the use of direct sales channels is the increased use of digital technology worldwide among customers and the increased level of competition industry wide across various sectors.

One critical advantage of having its own direct distribution channel is that the company has to rely less on external players for sales.

Apart from that, it is also beneficial in terms of marketing and branding.

Companies may find it a bit costly to establish their own distribution channels initially. 

In the longer term, it makes their task easier since it brings higher efficiency to business operations, reduces the time it takes the product to reach the customer’s doorsteps and increases profit margins.

Indirect sales and distribution channels:

Indirect sales and distribution channels are those channels where companies rely on external distributors and vendors for sales and distribution.

A company that relies fully on indirect sales and distribution networks uses external vendors, distributors and resellers for sales and distribution.

However, there are very few companies that rely only on external or indirect sales and distribution channels.

Sometimes companies may be forced to rely upon indirect distribution channels only because of the huge costs involved in developing their own distribution channels.

It requires establishing its own logistics network, store network and hiring staff for logistics and sales.

Due to these huge costs involved  a large number of companies still use indirect sales channels.

If a company is using indirect distribution channels, that does not mean the company is using a less efficient distribution network or it is losing money.

Even indirect sales channels can be cost efficient and profitable.

However, the firm will have less control on the distribution network when it relies upon external players.

Otherwise, a startup that relies on external vendors and distributors may find itself free from the tensions and complications of developing and managing its one distribution network.

Companies that are relying upon indirect sales channels will need to focus on developing great relationships with external vendors and distributors to achieve higher sales and customer satisfaction. 

Manufacturing and distribution are two very different areas of expertise and companies can sometimes find it difficult to manage both together since both require different resources and capabilities.

In such a case, it is easier and less costly to outsource distribution.

It relieves the company from a lot of headaches which can be a major advantage for a startup that is trying to acquire fast growth and grow its market share.

A few last words:

Compared to the indirect sales channels, the use of direct sales channels has increased in the twenty-first century as companies are trying to acquire higher control over their sales and distribution networks.

Several leading companies have grown their focus on managing their own distribution networks. Some of them like Walmart also acquired shipping companies to grow their competitive advantage.

However, this has not ended the relevance of distributors and resellers. 

In some geographic areas, the use of direct distribution channels might prove less profitable compared to the use of indirect distribution networks.

It is why most leading businesses are using both distribution channels to achieve highest operational efficiency and  grow their profitability.

Companies also sometimes develop their own distribution networks but use third party logistics providers to solve their logistics related problems.

Several times startups that do not have enough resources and capabilities rely on external distributors and vendors to achieve faster growth and expand market share.

Both the types of distribution networks offer their own advantages and disadvantages.

Based on the resources and capabilities owned by the company, its market share, growth rate and financial resources, it can be decided which channel would be more profitable in terms of sales and marketing.

While direct sales channels can drive profit margins higher, setting direct distribution networks is also very costly in the beginning and generally relying upon a mix of both instead of either is more profitable. 

Even the largest tech brands like Apple and Microsoft rely upon both direct and indirect sales channels.

A company trying to set up a direct distribution channel must first decide whether it has sufficient resources for developing and managing its own distribution network or if it can reduce its load by outsourcing distribution to external players.