As an entrepreneur, you need a plan for how you’re going to get your products into the hands of your customers. Although you can handle distribution yourself, you can also find partners through an indirect distribution model. This removes some of the hassle of selling directly, but it comes with its own set of costs and challenges.
Small business owners should understand their options to decide which distribution approach is best. Learn more about how indirect distribution works as well as some of the indirect distribution strategies you can consider implementing.
What is indirect distribution?
Indirect distribution involves partnering with retailers and wholesalers to distribute products or services to an end consumer.
In an indirect distribution model, companies use intermediaries to perform tasks like marketing, selling, storing, and shipping items to customers.
In contrast to companies that use a direct distribution strategy (selling products to consumers directly), companies with indirect sales channels handle only certain aspects of the process and share responsibilities and revenue with distributors.
Indirect distribution strategies and their advantages
You can consider a single indirect distribution channel or mix and match several channels for various stages of a product’s journey to customers. Typical indirect channels include:
Independent sales representatives
Independent sales reps are experienced sales professionals hired on a contract basis to sell products to customers on a company’s behalf. Unlike a direct sales strategy, which requires handling sales within a company, independent sales reps offer the opportunity to build a comprehensive sales process without needing to hire an in-housesales force. Independent sales reps typically work on commission and use their existing network of qualified leads to increase sales for their clients.
Retailers
This indirect distribution channel involves a manufacturer or merchant partnering with a retailer to sell products to consumers. Retailers can purchase products to sell to their customer base in a brick-and-mortar store or an online ecommerce store.
For example, a company manufacturing kitchen gadgets could partner with local retailers or larger retail chains like Target or Walmart to reach new customers.
Wholesalers
A wholesaler is a company that buys large quantities of goods and resells them to retailers. Wholesale suppliers are business-to-business (B2B) companies that act as intermediaries between companies making products and companies selling those products. For example, a manufacturer of clothing could partner with a wholesaler willing to purchase apparel in bulk and sell to its network of retailers.
Franchises
Another indirect distribution channel is the franchise business model. Franchising is when a franchisor licenses its established brand to individuals and groups. These groups, or franchisees, pay a fee and/or ongoing royalties to operate the store.
Franchisors provide franchisees with training, tools, and marketing materials, offering entrepreneurs the opportunity to open their own businesses with built-in brand equity. For companies with a valuable brand, franchising can become a useful indirect distribution channel for bringing their products or services to customers.
Choosing between direct and indirect distribution
Here are the factors to consider when choosing which distribution channels are best for your company:
Upfront costs
The costs of starting your own business quickly add up. Setting up your own direct distribution channel can require more upfront investment than using indirect distribution channels. For example, it’s expensive to hire a sales staff, rent storage space, set up a warehouse management system (WMS), and oversee the entire picking, packing, and shipping process.
For entrepreneurs who want to focus on product development and brand identity without worrying about how to distribute to consumers, an indirect distribution channel can be a cost-effectivestrategy, bypassing the need for developing an expensive order fulfillment system.
Level of control
Selling directly to customers and managing the entire distribution process can give you more control over the customer experience. Merchants using direct channels can manage customer relationships by overseeing the entire process from sales through distribution and post-purchase customer service. Companies using an indirect strategy need to ensure that any third-party vendors they use are reliable and trustworthy.
Revenue sharing
Merchants using indirect distribution channels typically share their revenue with partners who help deliver products or services to customers. For example, an ecommerce merchant selling directly may earn a wider profit margin than one using independent sales reps who earn a commission on every sale.
Logistics
Indirect distribution channels offer entrepreneurs the opportunity to sell and distribute goods and services without managing the complex logistics of order fulfillment. Indirect distribution partners offer systems and additional resources that can quickly let companies start distributing without all the work and investment needed to set up distribution operations from scratch.
Market size
Indirect distribution channels can help merchants and manufacturers reach a wider market because partners like independent sales reps and retailers already have prospects, leads, and customers.
For example, an ecommerce merchant selling tech accessories could work with a popular retailer to reach a social media following of prospective customers. By working with other businesses for distribution, ecommerce merchants can expand their customer base to new markets.
Indirect channel FAQ
What is an example of an indirect channel?
An example of an indirect channel would be a wholesaler that makes bulk purchases from a manufacturer and then resells them to a network of retailers.
What is the difference between a direct and indirect channel?
Although direct channels require more upfront investment, they can offer more control and higher profit margins than indirect channels. Indirect channels, in contrast, might limit profit margins, but they have the potential to increase your market reach.
What types of businesses use indirect channels?
A wide variety of businesses use indirect channels to reach new and existing customers, including ecommerce companies selling clothing, kitchen gadgets, and tech accessories. On the other hand, direct channels may work better for high-end brands, complex items, or perishable products.
