If you’re a startup that manufactures goods, you’ll need to think about how you’ll get them to your customers. There are two different types of sales channels—direct sales and channel sales.
Choosing the right channel can help you reach your target customers more efficiently, thereby maximizing profits.
Which is better for startups?
That depends on a whole host of factors. They include which evolutionary stage your company is in, the nature of your product offerings and whether you're selling in a limited geographic area or all over the world.
Among other things, we’ll go over these three points in this article:
- The benefits and disadvantages of channel and direct sales
- Some caveats about channel sales
- The types of channel sales
Let’s get started!
What are direct sales?
Direct sales circumvent the middleman because the company sells directly to consumers. A few examples of this are in-person demos and direct online sales.
This is the strategy used by Apple, as you can buy what they sell either on their website or in their stores. Some salespeople also refer to the direct sales channel as the zero-level channel of distribution.
Manufacturers with perishable or expensive goods or an audience hyper-concentrated in a tiny geographical area are the types of companies that use this distribution channel.
Types of direct sales
Party plan sale
This involves having a sales rep invite a group of prospective customers to a meeting. The representative will talk about the product at this event.
There will be a product demonstration. After the demonstration concludes, the rep takes orders.
With single-level sales, a rep contacts people individually. They talk to potential buyers face-to-face as they attempt to persuade them to purchase the product.
Benefits of direct sales
One of the benefits of direct sales is that the entire lifecycle of the product (from manufacturing to the final sale) is handled in-house. This gives a company more control over the entire process of getting a product to market.
You’ll also get better feedback from customers because the people creating the products are in contact with buyers. This gives you more usable information about your customer base and allows you to better identify problems earlier in the product roll-out process.
This helps cut costs because the later in a product lifecycle you make changes, the more those changes cost. Changing your sales process is also more straightforward with a direct sales model. Because all the selling is handled internally, it's easier for businesses to communicate changes in the process to sales staff.
Direct sales mean that the company gets all the sales revenue instead of sharing it with a third-party vendor.
The downside of direct sales
While direct sales might be attractive because they give companies total control over the product life cycle, one of the downsides is cost. Direct sales can be much more expensive, as businesses need to build a sales infrastructure.
This means taking care of distribution and shipping. It also means maintaining a brick-and-mortar store or website where customers can purchase the product. A company must also hire and train a salesforce. Sales teams are challenging to scale and require intensive effort in recruiting, training, and onboarding new sales reps.
All of this requires significant up-front expenses. Entering a brand-new market with a direct sales team means a new company, a new office, and all the trappings. It's expensive compared to entering new markets through partnerships with local businesses that specialize in product distribution.
Founders need to keep in mind that they’ll need to do this every time they expand. As the company grows along with these costs, switching to a channel sales model might make sense.
What are channel sales?
With a channel sales strategy, you'll partner with third-party entities to snag a bigger market for your product. Therefore, you can think of them as indirect sales.
An example of a company that uses channel sales is Coca-Cola. There’s no way to buy a Coke from a company’s website. Instead, you’ll need to purchase one through a third-party vendor such as a vending machine or grocery store.
Value-added providers, resellers, distributors, and other types of channel partners enable you to have a wider reach for your business. This gets your offerings in front of the eyeballs of more buyers. It’s also an exceedingly cost-effective way of penetrating new markets as you don’t have to pay the expense of maintaining local operations.
Channel sales benefits
Instead, you’ll spend a little time finding the right partners, so they can sell your goods for you. Doing this frees you up to focus on other aspects of your business. The channel sales model takes the responsibility of selling out of your team's hands so they can focus on other work, like increasing the quality of goods and services or growing revenue.
Because you’ve already established partner relationships, it becomes so much easier to distribute new products. A network of local partners helps you establish a foothold in a new market with a relatively low investment. You don’t need to set up new companies, advertise locally, or hire new people.
A few caveats about channel sales
Make sure any potential partner is an excellent fit for your business. Gather all the information you can about them before you sign a contract.
It might be helpful if you came up with an "ideal partner profile" containing all the attributes you want in a sales partner. Make sure the partners you select meet all the requirements.
Here are some of the attributes you might want to add to your list:
- Loyal customer base
- Experts in your target market
- Wide marketing reach
- Considerable distribution expertise
As the partnership progresses, continually evaluate the costs of maintaining it. Sometimes the relationship becomes a high maintenance one with little value to you. In that case, discontinuing the partnership might be the best course of action.
The downside of channel sales
One of the biggest headaches with channel sales is the loss of control. You won't have as much say over how a third party sells your products. A channel manager could help lessen this risk, but that’s another person you’ll have to add to your payroll.
Another problem is you won’t see 100% of the profits like you would if you were operating under a direct sales model. Depending on the partnership type and the value it provides, you’ll need to share between 20 and 50% of your revenues.
Why direct sales are good for startups
Direct sales are often the best sales model for small startups because you'll enjoy greater personal interaction with customers. It allows you to answer customer questions and address their concerns more directly than using the channel sales model.
By collecting this invaluable feedback, you’re able to discover and correct problems early in the product development process without incurring the wrath of dissatisfied customers. Customer service is one of the most significant components of brand loyalty. Direct sales let you control your marketing message better, resulting in greater customer satisfaction.
When channel sales are better
Say your startup has offices in many different cities. In that case, a channel sales model is preferable because it might not be practical to open sales offices in all these locations. That’s why so many larger companies opt for the channel sales model.
A channel sales strategy is better for businesses selling complicated products that often require a great deal of troubleshooting. This way, an experienced vendor can distribute your products. At the same time, your customer support team can focus on questions concerning installation and repair.
Types of channel sales
In this channel, the product moves from the manufacturer to the retailer, who then sells it to the customer.
In a two-level channel, products move from the manufacturer to the wholesaler, who sells them to a retailer. The retailer then sells to consumers. Inexpensive products are best sold using a two-level channel of distribution.
A sales agent is added to a three-level channel. An agent becomes critical to the process when goods need to move quickly after an order is placed. This is when demand for a product is high, and the customers aren’t in a single geographic area.
If you’re using more than one sales channel simultaneously to get a product to a customer, you’re using a dual distribution model.
When dual distribution channels make sense
You don't have to choose one channel over another. For example, Apple uses direct sales to sell its computers and laptops. However, it uses a channel sales strategy for other products, such as its Beats by Dre headphones.
Most people know you can sell more widgets by utilizing a cross-selling strategy. This happens when you sell an additional product to an existing customer. For example, you use channel sales partners to sell cameras.
However, you've decided that the distribution costs of having partners sell camera accessories are way too high. So, you choose to use a direct sales strategy for camera accessories such as cases and lenses. This is an example of cross-selling.
Finding the right recruiting agency for your startup
Finding the right channel or mix of them will take time, perseverance, and a willingness to experiment. One market might demand that you use one approach, while with another, it’s better to use a different channel. It also depends on which evolutionary stage your startup is in.
Finding the right recruiting agency for your startup is much easier. That would be Hunt Club. Our unbeatable combination of leading-edge proprietary technology, keen expertise, and extensive networks of professionals gives you the top-tier talent you need to maintain your competitive edge.
Call us today!