Under what circumstances should a company engage in direct distribution and indirect distribution?

1. Career Development
2. Difference Between Direct vs. Indirect Distribution Channels

By Indeed Editorial Team

Published July 10, 2022

When deciding how to get products to customers, businesses may decide between direct and indirect channels. These two methods have some key differences that may affect revenue, costs and customer satisfaction. Learning about the differences between indirect and direct distribution may help you decide which is the right choice for your team. In this article, we discuss the main differences between these two concepts and provide some tips for deciding between them.

Direct vs. indirect distribution channels

To discuss direct vs. indirect distribution channels, we can first define each. A direct distribution channel is a method of distributing a product or service to customers. In other words, it's where you sell the product or service directly to a customer. For example, selling a music album online directly to listeners is considered as distributing through a direct distribution channel.

An indirect distribution channel is one that involves people or firms that are not involved in creating or selling the products or services being distributed. For example, using a logistics company as an intermediary to provide services such as hosting and shipping products for the shopper can be distributing through an indirect distribution channel. Here are some differences between direct and indirect distribution channels:

Control

In direct distribution, the company producing the products or services has all control over the distribution channels. The company can control the prices, marketing strategies and distribution of its products more specifically. For example, a company that makes tools and sells them online to customers can set the exact price they want customers to pay for their tools through this website.

In indirect distribution, the company that produces the products or service may have only some or no control of the total price because the company that's helping sell the product has its own prices for the services they're providing to the company, such as packaging, shipping or customer service. They are all set independently of one another, so the company may not be able to directly control the prices customers may or even forecast them accurately. In some cases, companies can negotiate with indirect distributors to set a certain price for customers or set a limit on minimum profit margins.

Related: Different Distribution Strategies and Their Benefits

Customer relationships

Distributing products through direct channels provides great opportunities for establishing long-term customer relationships. By working with customers directly to ship, distribute and sell the product, companies often build strong customer relationships. For example, a company that makes tools and sells them online to customers may be able to develop loyal customers by explaining the many purposes in which customers can use the tools and giving advice on what tool or products may best suit the customer's needs.

By contrast, when products are distributed by indirect channels, the company may not have as much time for interactions with its customers because it may focus its efforts on product development and marketing strategies. Companies can still focus on developing such relationships with indirect distribution by reaching out to customers directly once they receive products or conducting customer service operations in-house.

Related: Types of Distributors (And What to Consider When Choosing)

Costs

Direct distribution channels may be more expensive for a company to use because it may have to pay for shipping, delivery and many other costs associated with distribution. This is not always the case, as companies can scale their operations and reduce overhead costs enough to distribute products most cost-effectively through direct channels. For instance, a company may find they save money by only conducting direct-to-consumer sales through their website rather than shipping products to stores and dealing with intermediary costs.

Indirect distribution channels may have costs associated with paying such distributors a fee or percentage or sales. This can reduce the overall profitability of the company producing the products or services, but may end up being cheaper than distributing products directly. Many indirect distribution providers have the scale necessary to provide low prices for their services in comparison to traditional direct distribution.

Related: What Is Continuous Delivery? (With Principles and Benefits)

Logistics

In direct distribution, companies may manage logistics operations for all deliveries and shipments of sold products and returns. This can reduce their profit margins because they may need to hire more employees or create a new department and equipment to handle the distribution process. This may also allow the company to control such logistics and make them more efficient and cost-effective over time.

In indirect distribution, companies that are not involved in the distribution of products often already have logistics operations set up, so they can use them for indirect channel sales. This makes it much easier for the company that created the product or service to focus on other aspects of business, such as marketing and developing new products and services.

Related: Learn About 11 Shipping Companies in Canada

Delivery time

Using direct distribution, companies may be able to deliver products more quickly than when using indirect channels. This can be particularly important in situations where a product is needed quickly, such as with medical supplies or emergency equipment, such as fire extinguishers.

In some cases, companies that use direct channels may find they must ship products through longer and costlier routes because they do not have the infrastructure to support shorter deliveries on their own. For example, if a company produces tools and uses its website to offer them directly to customers, it may ship its tools through traditional mail providers because these companies have logistics networks that allow delivery of the tools directly to customers' doors. Many indirect distribution companies provide such tools.

Related: How to Calculate Manufacturing Cost in 5 Steps With Example

Brand

In direct distribution, companies may have more control over their brand. This can be important for companies that have spent a great deal of time and money on building a reputation and brand identity among customers. These companies likely want to directly control how they present themselves to customers because they want to maintain the image they've worked so hard to build.

In indirect distribution, companies may not be able to control how distributors present or represent their products or services, which can put them at risk of losing their brand identity among customers. Companies that use indirect channels often focus on building relationships with distributors and ensuring they represent the company's products in a way that's consistent with the company's goals.

Read more: Brand Objective Examples (With Definition and Steps)

Tips for deciding between direct vs. indirect distribution

Here are some tips to help you decide between these two types of distribution channels:

• Consider the type of products or services you sell. Some products or services may be better to sell directly to customers, while others may be better for indirect channels. For instance, many home sellers use real estate agents, as this is the preferred method for conducting such transactions, but you can also sell homes directly to buyers without using an agent if you prefer.

• Examine the physical location of the business. The location of a business, and the location in which you may ship products, may have a large effect on your ability to conduct direct distribution. If the costs associated with directly shipping products from your facility are high due to your location, you may consider indirect options.

• Analyze your competitors. When deciding between types of distribution, it can be helpful to consider the distribution channels that your competitors are using. If you want to sell products through a particular channel, you may want to consider whether they use this channel.

• Get quotes from distributors. Distributors can often provide quotes for how much it may cost and how long it might be to conduct distribution through their channel. It can be helpful to know the costs of different methods, whether they are direct or indirect, and their associated timescales.

• Consider the commodities you need. If you're only able to produce goods at a few locations and ship them as needed, you may find it more cost-effective to conduct indirect distribution. This may make it easier for the company selling such goods or services through indirect channels to establish relationships with customers and distributors across the industry.

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