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Direct Sales vs Channel Sales: Pros, Cons, and Balance
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.
Breaking Down The Sales Process: Pros & Cons
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) and cross-sell (selling different products or services to existing clients) that will require different tactics.
Now let’s look into the pros and cons of channel sales and direct sales.
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 by 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.
Here are some of the pros and cons of a channel sales:
- 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.
- Effective scaling – if you have an established channel 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.
- Partner discounts – 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.
Channel Sales: Questions to Consider
- 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.
- 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.
- 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.
- 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.
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.
Let’s look at some of the pros and cons of a direct sales team:
- Full control of the sales process – you have the control to evolve your sales process and manage the pipeline without the interference of external parties.
- 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.
- No channel discounts – selling directly means that you don’t have to share the revenues with a re-seller 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
- High Cost – developing and managing a sales team is expensive. Just like any other group or division a sales team comes with a 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 barrier for entering 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 re-sellers who have an established presence on the local market.
Direct Sales: Questions to Consider
- 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.
- 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.
- 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.
- 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.