The battle of channel sales vs direct sales has been a long-heralded debate, so I’m going to break down the pros and cons of each, as well as how to balance a combination of both for your sales strategy.
Finding the right mix between direct and indirect sales channels heavily depends on the product or service you are offering.
In this post, we’ll take a closer look at each sales channel and ask some questions which will hopefully help you decide if it’s the right channel for your business at this stage.
Table of Contents
- What Are Channel Sales?
- What Are Direct Sales?
- Channel Sales vs Direct Sales: What’s the Difference?
- Channel Sales: Pros and Cons
- Direct Sales: Pros and Cons
- What is a Sales Channel Strategy?
- How to Increase Channel Sales
- Channel Sales: Questions to Consider
- Direct Sales: Questions to Consider
- Final Takeaways
What Are Channel Sales?
Channel sales is the process of distributing a product to the market, typically by segmenting sales operations to focus on different selling vessels. For instance, a company might implement a channel sales strategy to sell a product via in-house sales teams, dealers, retailers, affiliates, or direct marketing.
Channel sales can include any type of third-party that offers your product or service to the end customer. Selling your product or service through a network of channel partners can provide great leverage to your business.
Re-sellers, distributors, value-added providers and other types of channel partners can provide a wide reach for your business and get your product or service in front of many prospective buyers.
It is also a very cost-effective way to enter new markets as it spares you the costs of maintaining a local operation.
Breaking Down the Sales Process
On a high level, there are two main sales channels: Direct and Indirect.
Within these main channels, you may have different revenue streams:
- New sales (acquiring new customers)
- Up-sell (selling more of the same type of products or services to existing customers)
- Cross-sell (selling different products or services to existing clients) that will require different tactics.
We’ll first cover indirect channel sales in this section, direct sales in the next section, and then go over the pros and cons of each.
The Four Channels of Distribution
In channel sales, the four channels of distribution vary depending on how the product moves from a manufacturer to the consumer. The fourth sales channel, however, introduces another party who is the beneficiary.
1. Direct Distribution Channel
Some salespeople also refer to the direct channel as the zero-level channel of distribution. It involves manufacturers selling a product to the consumers directly. Here, the seller doesn’t have a fixed location where they do retail selling.
In the modern-day, the direct channel is being utilized through internet distribution, party plan, and face to face demonstrations. Salespeople present, demonstrate the use of a product and sell it to the consumer directly.
Manufacturers with perishable goods are the ones who mainly utilize this sales channel. Those with expensive goods or an audience concentrated in a given geographical location also use direct distribution channels.
2. Selling Through Intermediaries
This is an indirect channel of distribution that involves a third party who is a middleman, selling a manufacturer’s product to the consumer.
The indirect channel is in three types: one-level channel, two-level channel, and three-level channel.
In these channels, the product moves from the manufacturer to the retailer, who finally sells it to the consumer. If you are a manufacturer who deals in shopping products such as clothes, toys, or furniture, one level channel will help you reach more customers, thereby increasing your profits.
This type of channel deals with products moving from a manufacturer to the wholesaler who sells them to a retailer. The retailer then sells the product to consumers.
A wholesaler will buy a product in bulk, repackage it into smaller packages and sell them to a retailer who then avails the goods to consumers. Inexpensive and durable products are best sold using a two-level channel of distribution.
When there is a manufacturer, sales agent, wholesaler, and a retailer involved before consumers get the products, this is the three-level channel in action.
The sales agent becomes important in the sales process when goods need to move fast after placing an order. This sales channel becomes necessary when the demand for a product or service is high, and the consumers are not in one geographical location.
3. Dual Distribution
Dual distribution involves manufacturers or wholesalers using more than one sales channel simultaneously to get a product to the consumer.
Here, the manufacturer or wholesaler has the power to open a showroom for selling a product while still using online platforms to get consumers. Other retailers will also be looking for consumers of the same product being sold in the showroom and on the internet.
Dual distribution is best used by computer manufacturers and wholesalers who sell computers in multiple shops, wholesale and retail, and online platforms.
4. Reverse Channels
In indirect channels and dual distribution, there is a flow in how the goods move. The manufacturer produces the goods, intermediaries for indirect and dual distribution channels, and the consumer.
For reverse channels, the sales process does not follow this order. This is because technology has revolutionized sales introducing resale and recycling of products.
A salesperson buys a product and comes up with ways of making more money through recycling a product, such as a water bottle to make a flower bed. The person recycling and reselling the product becomes the beneficiary of a sale.
What Are Direct Sales?
Direct sales is selling directly to consumers away from a static commercial or physical location. In today’s modern world of direct selling, deals can be closed via personal arrangements, in-person demos, and of course online direct sales.
A direct sales channel requires building and managing a sales team. The sales team needs to be close to your target markets so if you plan to sell in multiple markets you will likely need local sales teams which may add an additional cost and management overhead.
3 Types of Direct Sales
Direct selling involves distributors selling a product to the consumers directly. There are three types:
1. Party Plan Sale
Party plan sale involves having a sales rep or distributor invite a group of potential customers for a party or meeting. Here, the sales rep will talk about the product in sufficient detail.
There will be a demonstration of how the product works and its benefits. Supporting resources such as fliers giving more details will be handed to the party’s attendees. Once the sales rep has convinced the potential customers, he will take orders.
The trick here is engaging a group of people without explaining to each potential customer how a product works. More units of the product being sold will be bought in one meeting. You hit multiple birds with one stone as you have fun.
2. Single-Level Sale
In single-level sales, a sales representative contacts people individually. You will talk to the potential customers face to face as you persuade them to invest in the product you are offering.
When you have a product that you are selling from one door to the next, you practice single-level direct selling.
For every prospect you approach, you need to have a personalized direct sales approach to turn them into a customer.
3. Multi-Level Sale
For multi-level selling, a company will consider different sales reps and choose the one with highest qualifications. This sales representative will be responsible for selling products produced by the said company. In other cases, business partners will make the multi-level direct sales.
Online platforms are also useful in multi-level sales, where sales are made through product catalogs. Social networking mediums also come in handy in this type of direct selling.
Are Direct Sales a Pyramid Scheme?
Contrary to what some people may think, direct sales is not a pyramid scheme.
Let me explain.
There is a hierarchy in a pyramid scheme where the newest recruits are at the base of the pyramid, providing returns for those sitting at the top.
This scheme works by having people recruit others under them to earn instead of selling a product. This means that you need to recruit people under you without selling a product for you to make money.
For a pyramid scheme, recruiting more people is more important than engaging with consumers and selling a product.
On the other hand, direct sales require you to sell a product to the consumer for you to earn. You don’t need a static geographical position to sell the product, nor do you need a pyramid of sales reps under you.
A sales team is important in direct sales to help reach the target audience. The difference in the recruitment of sales reps for direct sales and pyramid schemes is that you engage the target market directly with a product for direct sales. Pyramid schemes promise revenue without selling products.
Channel Sales vs Direct Sales: What’s the Difference?
In channel sales, there is a third party involved in selling the product to the final consumer. The third-party may be a distributor hired by the company, a retailer, or a wholesaler. Direct sales, on the other hand, involves the manufacturer selling the product directly to the consumer.
The second difference is that the companies in channel sales don’t interact with the consumers while the sellers in direct sales interact with the consumers in the sales process.
A percentage of profits a seller gets in channel sales need to be shared with the third party while direct sellers enjoy the entire profit they make from sales.
Large businesses will profit more from channel sales, while smaller enterprises thrive with direct sales.
There are pros and cons to both channel sales and direct sales, as we’ll see below.
Channel Sales: Pros and Cons
Low sales, marketing and distribution cost:
The channel partner usually has an established presence, is known and trusted by local customers and already advertises their brand and the value it offers. Riding on all that, you can reach new customers at a very low initial cost and enter new regions and markets in a cost-effective way.
If you have an established channel sales model with the respective revenue sharing, co-marketing, incentives, and other plans, you can scale very effectively by adding more channel partners into that mix. One partner manager can manage multiple partnerships and that in effect will bring in revenue that would require an entire in-house sales team.
Low cost for expanding into new markets:
A network of local partners can help you establish a presence in a new region or market with a fairly low initial investment. You don’t need to incorporate and manage new companies, advertise locally, hire people in remote locations or manage new offices.
Less control over the sales process:
Selling through partners means that there’s an intermediary between you and the client. Depending on the model, your organization may not even be part of the sales process so you have little or no ability to influence the outcome of sales opportunities.
Less predictable revenues:
Partners won’t always share their full pipeline with you and even if they do it’s hard to predict revenues when you have no control over the sales process. To a degree, this can be offset by a larger pool of partners that have a larger total pipeline.
Depending on the type of partners and the value they provide you will need to share between 20% and 50% of your revenues with the partner that makes the sale.
Direct Sales: Pros and Cons
Full control of the sales process:
Direct line of feedback:
Since you are selling directly to customers, you get a direct line of feedback about what they like or don’t like in your product or service and you can iterate quickly.
Selling directly means that you don’t have to share the revenues with a reseller or channel partner.
Little or no dependency on external parties for revenue generation:
You control the sales process, pricing and all the components of the sales process.
Developing and managing a sales team is expensive. Just like any other group or division a sales team comes with management and administrative overhead on top of the payroll, bonuses and other expenses.
Difficult to scale:
Scaling a sales team requires recruiting, training and on-boarding of new sales reps.
High barriers of entry for new markets:
Entering a new market with a direct sales team means a new company, new office and everything that goes with it. It is a fairly expensive endeavor compared to entering a market through a network of local partners and resellers who have an established presence on the local market.
What is a Sales Channel Strategy?
A sales channel strategy is the process of engaging with third parties to build business partnerships to get a bigger market for a product. When you utilize a sales channel strategy in your business, more customers can get their hands on your product.
You have to do intensive research and plan accordingly to implement your sales channel strategy.
To do this, follow these steps:
Step 1: Assess your current sales process
The first thing you do is confirming that you are in the correct stage for sales channels. Be sure to reflect on whether the bandwidth you have is enough for sales channels. The goal is to get more customers buying your product, so make sure you don’t disrupt the current sales process you have before you move forward.
Step 2: Assess your sales partners
Double check with your partners to make sure they are a fit for your business. Get all the information you can about your potential sales partners before you engage in business with them. Here, you will need to come up with an ideal profile for partners. The profile will contain attributes that you desire in a sales partner. Ensure each partner you select meets all the requirements.
Step 3: Train and empower your partners to help you get more sales
Now that you have partners, empower them to perform in a manner that helps you get more sales. Tell a newly acquired third party what they stand to gain when they work with you.
This motivation will push them to work as hard as the direct sales team or even harder to reach more customers. Discounts, a share in the revenue, or referral commissions will motivate the partners. It would be best if you also empowered these partners through training about your product or service.
Step 4: Get a channel sales manager
Finally, hire a channel sales manager responsible for handling partner relations for the business’s smooth running. Every partner will get the attention they require to execute their duties effectively. The channel sales manager you bring on board will keep a close eye on performance and provide relevant resources.
How to Increase Channel Sales
Through the sales process, you will be providing resources that convey your message to your prospects and customers. The sales vessels you utilize will help you distribute the product to consumers in different locations.
Keep the lines of communication open in the sales process. In return, the sales reps will contact a bigger market, helping you deliver more products. You will consequently get more revenue.
Through sales, online platforms at your disposal will increase your profits. There are numerous people on the internet searching for products that help them solve problems. When you target these people, you utilize the online sales segment—the channel sales increase in return.
Channel Sales: Questions to Consider
Question 1: How do you help your partners make money?
There has to be a clear and direct answer to that because this is the foundation of a strong partnership. You could be enhancing their offering to their clients, could be adding diversity to their portfolio or something else that’s valuable on top of the discount they’ll get for every sale.
Question 2: How does the partner help you make money?
Here you should evaluate all costs of creating and maintaining this relationship along with the promise of revenues. Sometimes these relationships may be high maintenance and low value in which case selling directly or discontinuing the relationship may be the way to go.
Question 3: What benefits does the partner bring to the table?
Do they have a large and loyal customer base, are they perceived as local experts in your target market, do they have a wide marketing reach, etc.? Different partners will have a different mix of benefits but you should make a list of what you are looking for and check all that apply.
Question 4: How can we have a direct line to the customer?
Many partners are protective of their customers and would not allow you, your reps, or support engineers to talk directly with the end client. Having this direct line is extremely important as it helps you improve your offering and ensure that the partner delivers a valuable service.
Direct Sales: Questions to Consider
Question 1: Does our product or service require customization or enhancements for every client?
If additional services are typically required to fully utilize what you offer, then you likely need a channel of partners that provide these services locally.
Question 2: What is the estimated cost of sale internally and how does it compare to the partner discount we’d need to offer through a channel?
If the internal cost of sales is significantly higher than the channel discount (external cost of sale), then the profile of sales reps, pricing or something else in the mix needs to be revised.
Question 3: Do we have the resources to develop and manage an in-house sales team in all the markets we target?
If you’re a smaller company, you may not have the resources to build and manage an in-house sales team, especially if you target multiple markets.
Question 4: Do we have a direct line of customer feedback beyond sales?
This may be through customer support, customer meetings or other means as surveys alone won’t be enough to feel the pulse of what your clients need.
Finding the right sales channel or mix of channels often takes time and experimentation. Different markets may require a different approach for the same product or service offering. It’s also likely that some channels will be more or less effective at different stages of the evolution of your company.
When you’re a smaller organization you may need the reach of partners but as you evolve and expand your reach you may have the ability to reach your clients directly and optimize your sales and distribution costs.