Choosing a Distribution Channel: Direct vs Indirect Channels

Introduction

One question most tech companies often ask at the early stage is “how should we sell our products?” As an ISV organization, it is of great importance to decide if you want to sell directly or indirectly to customers. If you want to sell indirectly, you’d have to develop a channel partner program.

Note that choosing an ideal distribution channel starts by self-assessing and categorizing your products and services. After that, you can ascertain from the pros and cons of both channels which distribution channel best suits whatever product or service you deal with.

In this article, you’ll learn the difference, key aspects, factors affecting your choice, and how to pick the right distribution channel between direct and indirect channels.

What Are Direct Channels? 

As the name implies, a direct distribution channel involves direct sales between manufacturers and consumers. The advantage of selling directly is that you get more control over the customer process.

As such, you will be able to determine the end user’s experience as well as other added benefits of direct interaction with customers. 

On the downside, with great control of direct interaction with customers, comes great responsibility. Moreover, you bear the full financial risk when you use a direct distribution channel. Also, documentation and tax records need to be impeccable because of the likelihood of an audit.

For this reason, many organizations using direct channels of distribution purchase tech solutions from ISV operators to automate the process. This reduces error and labor cost.

What Are Indirect Channels? 

An indirect distribution channel utilizes wholesalers or retailers to sell products to their consumers.

In an ISV organization using indirect distribution channels, intermediaries can be Managed Security Service Providers (MSSP), Managed Service Providers (MSP), Systems Integrators (SIs), Value Added Resellers (VARs), or Solutions Providers (SPs).

An advantage of selling indirectly is that it enables you to grow your business exponentially. It’s because an indirect distribution channel gives you access to an increased consumer base.

As such, the startup cost for using indirect channels is considerably low, and the relationship makes the process much simpler. But this comes at a price: consumers will have to bear the high cost of products and services because of the intermediary fees.

Key Aspects: Direct vs Indirect Channels

With this short introduction to direct and indirect channels of distribution, let’s look at some key aspects between the two, next.

• Products or Services Flow 

In either channel of distribution, there is a unidirectional flow of products and services starting from the manufacturer and always ending at the consumer.

For direct distribution channels, the goods flow from manufacturer to consumer directly. But in the indirect distribution channel, the goods or services go from the manufacturer to intermediaries before the consumer.

• Intermediaries  

Intermediaries perform the function of transferring ownership titles and possession of goods and services from manufacturers to consumers. Intermediaries are only present in an indirect distribution channel.

• Price

The type of distribution channel you decide to use as a manufacturer affects the price your consumer will end up paying for your products or services.

Companies that use direct distribution channels have more control over the price of their products than those that use indirect distribution channels. 

Factors Affecting Choice of Distribution Channels 

While there are two primary channels of distribution, each channel has its limitations and advantages. Choosing which channel to use depends on some factors a company has to consider to make an appropriate choice.

• Market-Related Factors 

Since the channels of distribution operate in a market, market-related factors dictate the choice of distribution channels. These market-related factors could be the size of the market, the nature of consumers, or the location of buyers. 

• Product Factors 

The nature and type of products help in determining the choice of distribution channel. If the product requires a high level of skills provided by specialized experts in the company, having a middleman can affect the consumer experience. 

• Company Factors 

When choosing a distribution channel, a company has to look within itself. By doing so, the company will understand its weakness and strength—be it financial, reputation, or marketing policies. With this, the company will be able to decide on the best channel of distribution for itself. 

• Channel-Related Factors

Choosing a channel of distribution has to be appropriate from the viewpoint of any company. This includes the ability of the channel to effectively distribute goods and services over a wide area. The financial strength of the channel is another factor that affects a company’s choice.  

• Environmental Factors

Lastly, a company’s choice of channel distribution also depends on environmental factors. These environmental factors include the economic situation in the country, legal factors, and fiscal structure, among others.

Picking the Right Distribution Channel for Your Business

Choosing the right distribution channel depends mainly on your business type. As such, an ISV organization should answer the following questions to determine the best channel for any of their product: 

• Would consumers want to purchase the product online or at a store? If online, then you can take advantage of the direct distribution channel. If not, the indirect channels work equally well when it comes to instore purchases or large consumer bases.
• Does the consumer want to speak with a representative? If they do, it’s best to use a direct distribution channel. If not, go for an indirect channel.
• Do the consumers want to assess the product before making a purchase? If they do, it would be best to use a direct channel to control the user experience; if not, use an indirect channel.
• Is the product complex? If the software is complex to install, requiring a high level of service delivered by specialized experts in the company, then it’s probably best to stick with a direct distribution channel.

In summary, having both direct and indirect channels is a great way to expand market reach and grow revenue by leveraging partner networks. If you don't know how to get started, then you need a PRM like Kiflo to help you grow your consumer base.