Chain of businesses in the path of goods and services to end makes up a distribution channel. It includes manufacturer, shipping centers, warehouses, retailers etc. Direct and indirect distribution channels are two popular types of distribution channels.
This session makes a comparison between direct and indirect distribution strategy.
|Property||Direct distribution||Indirect distribution|
|Involvement of intermediaries||No intermediaries||Intermediaries are involved|
|Subtypes||No subtypes||One level channel, two level channel and three level channel|
|Ability to earn new customers||Less||More|
Cost Of Setting Up
In order to set up a direct distribution channel, the manufacturer has to set up warehouses, trucks, logistics systems, and delivery staff that will require significant capital investment. As indirect distribution channels rely on intermediaries, the initial cost of setting up the distribution channel is less than that of direct distribution channel.
Involvement Of Intermediaries
Direct distribution does not involve any intermediaries because the manufacturer gets in direct touch with the consumer. Brand retail stores, peddling etc are examples of direct distribution. In indirect distribution, manufacturers depend on middlemen or intermediaries to sell their products or services to the end customer.
Subtypes In Distribution Channels
Direct distribution involves no other entity other than the manufacturer and consumer, and hence doesn’t have any sub levels. On the other hand, indirect channels can be classified into three types.
- One-level channel
The distribution chain involves the manufacturer, retailer and distributor. In this type of distribution, retailers buy the products from the manufacturers and sell it to the end customers. This chain is ideal for manufacturers that deal with goods like clothes, shoes, furniture etc.
- Two level distribution channel
Two level distribution channel involves manufacturer, wholesaler, retailer and the end consumer. Wholesalers buy the stock in bulk from the manufacturers and divide the stock into smaller packets that are then sold to retailers. The retailers then sell the goods to the end customers.
- Three level channel
The distribution chain involves manufacturer, agent, wholesaler, retailer and consumer in order. Besides the wholesaler and retailer, the three level channel of distribution involves an agent to assist the manufacturer in the sale of goods. In return for a percentage of commission, the agents perform the duty of handling product distribution, especially when the gods have to be moved quickly after placing the order.
The agents can be classified into carrying agents and super stockists. Super stockists buy stock from the manufacturers and sell it to wholesalers and retailers whereas forwarding agents offer warehouse facilities and shipping expertise to facilitate the processing of orders and deliveries.
There is no denying that initial cost of setting up a direct distribution business is high as the manufacturer has to manage the expenses associated with setting up all the requirements. But once the process is over, the costs that follow is less.
On the other hand, indirect distribution strategy do not involve high initial cost unlike direct distribution but the overall costs associated the method is higher than that of direct distribution.
Direct distribution is the simplest of all distribution channels as the distribution channel involves merely two entities, the manufacturer and the end consumer. As indirect distribution channels involve middlemen like agents, wholesalers or retailers, the operations are not as simple as that of direct distribution.
The distribution strategy has to be selected according to the number of customers and the area they span across. If a business has to operate in a large geographical area with a high number of customers, a direct distribution strategy has less practicability. Indirect distribution channels will prove best in conditions like that.
In direct distribution, the manufacturer has to take care of the marketing costs whereas in indirect distribution, retailers will do the promotion and marketing activities for you, allowing you to focus more on other areas of business.
Ability To Earn New Customers
Businesses using direct distribution operate within a limited geographical area, and hence the customer base too will be form the limited area. But things are different with indirect distribution because it facilitates the expansion of the business across vast geographic regions making it quite easy for businesses to get new customers.
As the manufacturer has to handle all the tasks of selling the products and services, the whole tasks associated with the sale have to be handled by the manufacturer, in case of direct distribution. In indirect distribution, the distributors share the risk with the manufacturers and do everything in their power to sell the products at the earliest.
Control Over The Consumer Process
Direct distribution allows complete control over the overall consumer process including the consumer experience. The strategy has the added benefit of direct interaction by the business with the consumer as there are no intermediaries. Greater control means that the responsibility of businesses too will be more because they have to handle all the risks on their own.
With indirect distribution, intermediaries play a significant role in the distribution process and thus the businesses will not have the level of control over consumer process unlike in the case of direct distribution.
Involvement of the best distribution channel in business plan gives a major boost to businesses and helps them expand globally.