Direct and Indirect Distribution - Explained
What are Direct and Indirect Distribution?
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What is Direct Distribution?
Direct distribution is the sale and transfer of a product directly from us as a producer to our customer or the consumer. In this case, we have no intermediaries (or what we sometimes refer to as middlemen). For example, we're not going to use a wholesaler or a retailer to move our product to the customer. We're going to take care of all of that ourselves.
Another aspect of direct distribution is that it allows us as a producer to have more control over the price that the final consumer pays - as well as how the product is promoted. Think about if we put our product on the shelf in a retail outlet. Because the customer is going to interact with some person or representative of that outlet - that person may promote our product well or may say less positive things. That's out of our control. If we use intermediaries with direct distribution we don't have to worry about that.
The other aspect or another aspect of direct distribution is that sometimes without those retailers or wholesalers we can collect more of the margin on our products. In other words, we can make more money for each item that we produce by not using these intermediaries.
One last aspect of direct distribution, which is maybe not so positive, is that by selling direct to consumers our product may be less available to those consumers. In other words, getting our product may be less convenient for the customer and that's not such a positive thing.
What is Indirect Distribution?
Indirect distribution is just the sale and transfer of product from producer to wholesaler and or retailer and then to the consumer. In other words, we're using what we call intermediaries between us as the producer and our final customer or the final consumer.
Indirect distribution allows us as a producer to reach more customers because we don't have to have stores or ship directly to each individual customer who wants to buy our product. That can also help us to share the cost of our inventory. If we sell product to the retailer, it's sitting on that shelf ready for somebody to buy, but we've already collected money on it. So, the retailer then is bearing the cost of that inventory.
Another aspect of indirect distribution is that it may cut into our margin as a producer. Now this is obviously not a positive thing. But, if we want stores around the country to carry our product, they're going to have to make some money in the process. So in order for us to keep our price low, we may have to take less profit margin per unit or per item that we produce. In line with that is if we want to protect that margin or we want to keep our margin high, we may have to charge a higher price in order to use indirect distribution.
The key here though is that with those negatives there's also the positive of making the product available to the more available to the customer. So these are the pros and cons of indirect distribution.