Direct vs. Indirect Distribution Channel: An Overview
A distribution channel is a chain of businesses or intermediaries (such as manufacturers, warehouses, shipping centers, retailers, and the internet) through which goods and services pass until they reach the end consumer.Channels are broken into direct and indirect forms.
A direct distribution channel allows consumers to buy and receive goods directly from the manufacturer. An indirect channel moves products from the manufacturer through various intermediaries for delivery to the consumer.
Both distribution channels have advantages and disadvantages for a business. Those involved in a company's management and corporate governance must determine the better option.
Key Takeaways
- Direct distribution is a direct-to-consumer approach where the manufacturer controls all aspects of distribution.
- Indirect distribution involves third parties, like warehouses, wholesalers, and retailers.
- Direct distribution gives companies more control over the whole process.
- Indirect distribution may allow companies to focus on their core business while outsourcing distribution to an expert.
- A manufacturer is responsible for different costs, depending on which channel it uses.
Direct Distribution
A direct distribution channel is organized and managed by a company that sells directly to consumers. In such a case, the company keeps all aspects of delivery in-house (instead of using vendors) and is solely responsible for ensuring that customers receive their purchases successfully.
Direct channels require more work and can be more expensive to set up. In fact, they may require significant capital investment. Warehouses, logistics systems, trucks, and delivery staff must be put into place. However, once that's done, the direct channel is likely to be shorter, less involved and less costly than an indirect channel.
By managing all aspects of the distribution channel, manufacturers retain more control over how goods are delivered. They can cut out inefficiencies, add new services, and set prices.
Tip
A direct channel between a company and its customers may be a smart way to build and secure customer relationships.
Indirect Distribution
An indirect distribution channel involves intermediaries that perform a company's distribution functions. Indirect distribution frees the manufacturer from certain startup costs and responsibilities that can cut into the time it needs to spend on running the business.
Plus, with the right vendor relationships, an indirect distribution channel can be much simpler to manage than a direct distribution channel. It can give a company welcome support and distribution expertise that the company may not have.
However, indirect distribution can also add new layers of cost and bureaucracy which can increase costs to the consumer, slow down delivery, and take control out of the manufacturer's hands.
The costs of having vendors involved in an indirect distribution channel may translate to higher product costs for consumers.
Key Differences
As mentioned, a direct distribution channel moves a company's products directly to consumers from the company. An indirect channel outsources the distribution of those products to different intermediaries that are responsible for delivery.
One goal of any company with customers is to deliver products in the most efficient and effective way for the customer and the company. Keep in mind that the distribution channel ideally should add value for customers and support a company's goals for sales.
| Here's a summary of key differences between direct and indirect distribution channels | ||
|---|---|---|
| Direct Channel | Indirect Channel | |
| Control | Company maintains ultimate control over (and responsibility for) distribution | Company has less distribution control and depends on others |
| Cost | Greater initial costs but efficiencies may develop over time and lower them | Sharing costs can lessen financial impact; good vendor relationships may lead to more savings |
| Relationships | Company has direct connection with customers, which can support brand loyalty | Company depends on intermediaries for good customer interaction (which can backfire if vendors have problems) |
| Logistics | Company is responsible for all aspects of distribution | Others handle distribution of products |
| Core Focus | May be difficult with distribution responsibilities | Easier to maintain since distribution is handled by others |
| Delivery Time | Potentially more streamlined due to direct route | May take longer, depending on situations with vendors |
| Brand | Company can control the customer experience and build brand awareness | Distribution problems might adversely affect relationships and view of company |
| Profit | Keep more profit | Share profit with others |
Does Amazon Use a Direct or Indirect Channel of Distribution?
Amazon uses both distribution channels. It uses a direct distribution channel when it sells products to consumers directly. The indirect channel comes into play when consumers on Amazon's site buy products from independent retailers and those retailers must fulfill deliveries.
Which Companies Use Direct Distribution?
Some of the companies that use direct distribution include Amway, Apple, Avon, Bowflex, Charles Schwab, L.L. Bean, Mary Kay, Peloton, and Walmart. To lower costs and gain more exposure, L.L. Bean and Peloton also use indirect distribution.
What Distribution Channel Is Best for a Business?
You'll have to consider various factors to make the choice of direct distribution channel vs. indirect distribution channel. For instance, the costs of each distribution channel, costs you may have to pass on to customers, the channel that might encourage greater sales and repeat sales, the speed at which your products can be delivered, and how fast your competitors make their deliveries. You should also consider the amount of control over customer relationships that you feel you should keep or give up.
