Growing a business

Channel sales vs. direct sales: Which is best for your small business?

If you’re a business owner who manufactures goods, you need to consider how you will sell them to the consumer. Broadly speaking, there are two different types of sales methods — direct sales and channel sales.

Direct sales occur when companies sell their goods to consumers without the use of a middleman. Channel sales, on the other hand, happen when companies rely on a third party to sell their goods.

Choosing the right channel strategy can help you reach your target customer base and maximize profits. In this article, we’ll compare the pros and cons of channel sales and direct sales.

By the end of the article, you should have a much clearer understanding of which strategy is right for your small business.

What are direct sales?

Have you ever heard the saying, “The shortest distance between two points is a straight line”? That saying applies to a direct sales strategy.

Again, direct sales circumvent a middleman. Apple is an example of a company that utilizes a direct sales strategy, as you generally buy products like their laptops in their stores or on the company website.

Benefits of direct sales

A direct sales model offers numerous advantages for businesses. Because the entire lifecycle of the product — from manufacturing to the final sale to the end-user — is handled in-house, there’s constant communication among the team.

Furthermore, there is a lot of feedback from the consumer. The people creating the products communicate regularly with those who purchase them. Not only do direct sales provide companies with valuable information about their client bases — they also allow businesses to find and identify issues because they hear complaints directly.

This can help cut costs. The later in a product lifecycle you make a change, the more the change costs.

Changing your sales process is also simpler under a direct sales model. Because all the selling is handled in-house, it’s easier for businesses to communicate developments and updates to the sales staff.

On the other hand, with a channel sales model, companies need to inform third-party vendors of changes as they occur.

Additionally, direct sales mean all the sales proceeds return to the company’s pockets as opposed to being divided between the business and a third-party vendor.

The downside of direct sales

While direct sales may be appealing because they give businesses complete control over the product life-cycle, there is a significant downside: cost. Direct sales can be expensive, as companies need to cover everything associated with the product.

They’ll need to arrange distribution and shipping costs. They’ll also need to maintain a physical store or online presence where consumers can buy the product. Additionally, businesses will need to hire and train an internal sales force.

All of this requires a hefty up-front cost. Furthermore, owners should keep in mind they’ll need to do this every time they expand the company — whether that means adding more goods to the product line or expanding into new cities. As a business grows, a channel sales model may be necessary.

What are channel sales?

Channel sales involve middlemen who sell and distribute products. In some ways, you could consider them “indirect sales” since you’re not selling them to the consumer directly.

An example of a company that uses partner sales is Coca-Cola. You can’t buy a Coke from the company’s website. Instead, you have to purchase the product through a third-party vendor like a grocery store, a vending machine, or another sales channel.

Benefits of using channel sales

If you’re a business owner focused on other parts of your company, a channel sales strategy could be beneficial. You won’t need to invest heavily in sales and distribution. Instead, you’ll need to find the right partners to distribute your product. Doing so will allow you to focus on other areas of your business, like product development or operations.

The channel sales model takes the burden of selling from your internal team and lets employees focus on other work.

Additionally, channel sales allow companies to expand their product and service lines more readily. Because the vendor or reseller is handling the sales process, the company doesn’t have to worry about building up or training an internal sales force to accommodate new customers.

Instead, the company can focus its attention on the quality of its goods and services and on growing revenue. Similarly, because you’ll already have partner relationships, it becomes much easier to distribute new products.

The downside of channel sales

Channel sales can be an attractive sales strategy, but you should consider the big picture first. One of the biggest problems associated with channel sales is a loss of control.

Businesses don’t have as much say over how a third-party displays or sells its products. A channel manager could help mitigate this risk, but you have to pay that person a wage, which will increase costs.

Businesses must work hard to control the price at which the third-party vendor sells the product. If a third-party vendor arbitrarily inflates a cost, it could impact the price strategy your team chose.

Another problem with channel sales is you won’t see 100% of the profits. When entering a partner program, you have to make concessions. In all likelihood, this will come in a monetary form. For instance, a potential partner may ask for a certain percentage of all goods sold in the store. So, in addition to shipping the products to the third-party vendor for sale, you also have to give up a cut of your profits.

Sales model by business type

While there are no hard and fast rules when it comes to choosing a sales model, some business types are better suited to a particular methodology than others.

Direct sales

The direct sales model is often a good fit for smaller businesses, as it allows for more personal interactions with customers.

For new and developing companies, direct sales will enable them to answer customer questions and address concerns. By gathering this vital feedback, you can catch and correct problems in the early stages and avoid losing unsatisfied clients down the line.

Customer service influences the brand loyalty of 96% of consumers , and direct sales allow small businesses to reach their target audience and control their marketing message. Additionally, direct sales may be best for perishable products that need to get into customers’ hands sooner and products with fewer buyers in the marketplace.

Channel sales

If your company has offices in multiple cities , a channel sales model may be ideal. After all, it may not be practical or productive to open sales departments in various locations. For this reason, large companies often opt to use the channel model with outside sales teams.

Additionally, channel sales may be ideal for companies selling complex products that require a great deal of troubleshooting.

Not only can an experienced vendor distribute your goods, but the sales team can provide a complete service solution to meet customers’ needs concerning installation and repair. Businesses can dedicate more funds to customer service than to sales operations.

Which sales strategy is best for business development?

There’s no clear-cut answer as to which sales strategy is best for business development. The answer depends on your company — its financial situation, the product you’re selling, and your target market, among other things.

You should weigh the pros and cons of each strategy to figure out which is the best fit for your new product.

Also, keep in mind you don’t necessarily have to choose one strategy exclusively over the other. Similarly, the approach varies by product. For instance, Apple primarily uses a direct sales strategy when selling its laptops and computers.

You are more likely to find these products on the company website or in one of its stores. However, the company uses a channel sales strategy for other products, like its Beats by Dre headphones. You can find these products in dozens of third-party stores and through online retailers.

Lastly, you can also drive customer success by implementing a cross-selling strategy. A cross-sell occurs when you sell an additional product to an existing customer. For instance, imagine you manufacture and sell cameras. You utilize channel sales partners to sell the cameras.

However, the distribution costs of getting camera accessories to partnering sales reps are too high. So, you elect to use a direct sales strategy for camera accessories, like cases and lenses.

In this case, you cross-sell. Any customer who wants additional accessories for their camera will need to visit your website, which helps push your direct sales strategy. This is a perfect example of how there is no clear-cut way to use sales cycles. You need to find the policy that works best for your company.

Grow your small business

As a small business owner, choosing the proper sales strategy will go a long way toward bringing in new customers and boosting profits.

While the direct sales model provides for more personal interaction with customers, it requires a great deal of time and effort on the behalf of the company. On the other hand, utilizing a channel sales model means sacrificing control in exchange for greater reach.

Ultimately, neither model is perfect, and business owners need to weigh the benefits and drawbacks before choosing. Once you’ve chosen your sales strategy, make sure you prepare your team for the sales success to come.

Prep your sales managers and team to coordinate how you’ll implement the strategy. Consider dedicating someone from your own sales team to handle channel management if you are going to be working with channel partners.

You should also ensure your marketing team and sales team are on the same page, and your sales strategy matches your marketing strategy. Also, make sure you prepare your finances to handle the influx of revenue. Taking the time to learn how to create a plan for growth will go a long way toward ensuring your business is ready to unleash a new selling strategy. Once you’re adequately prepared, you’ll see the profits start to roll in.

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