Distribution channels — how and where you reach your customers — are the lifeblood of any business. At their best, distribution channels can give you a competitive edge and give you insight into customer preferences and trends. At their worst, your distribution channels can be a source of never-ending frustration. For example, the owner of a small high-end bakery may find it difficult to grow his company by relying on local passers-by as his single source of business. By developing additional distribution channels through relationships with local caterers, grocery stores and hotels, the bakery’s growth prospects will become much more promising.
Whether you are launching a new product or running an established firm seeking additional distribution, choosing the right distribution channels is crucial for your business.
But how do you decide which of the wide variety of distribution channels available is right for your business? This article highlights and compares three major channel options, each with its own advantages and drawbacks. These are: direct sales, distributors and original equipment manufacturers (or OEMs for short). By understanding these three options, you can figure out which distribution channels are most likely to ensure success for your small business.
Direct distribution is the simplest and most intuitive distribution channel. Utilizing this channel, a company sells directly to its clients without any intermediary. This can be done through a direct sales force, the company website, a mail order catalog, online auctions and so forth. The benefits of this channel are clear: It is uncomplicated, it creates a direct link between the company and its customers, and it typically allows the company to generate a higher gross margin for its products, since it does not need to share the value it creates with anyone else (except for Uncle Sam, of course).
Nonetheless, the direct channel can have some major drawbacks, not the least of which is cost. Selling direct requires that the company develop a direct connection with its customers — think considerable marketing budgets, a substantial sales force, a comprehensive customer service infrastructure and so on.
Compared with direct sales, selling through distributors typically generates a lower gross margin due to the discount given to the distributor. In addition, your company may have to relinquish control of the price paid by the end user, accept diminished access to the customer (and hence risk losing touch with market trends and preferences) and in some cases even grant the distributor some form of exclusivity.
Offsetting these drawbacks are some major benefits. For one thing, an established distributor can give your company access to geographies and customer segments that would be virtually inaccessible for your company on its own. If you need proof of this simply walk into a Wal-Mart, a Target or another large retailer and see how many of the products offered are manufactured by little-known companies, many of them based overseas. Such companies would never be able to market their products in the U.S. without using a distributor.
The same would be true for a small New York–based business trying to sell in the Midwest or some other remote location. Distributors like these are also able to provide more accessible customer service and maintain your products in inventory, thus making them immediately available to the customer. Such customers may buy your products from a distributor, even though they would never consider buying from you directly.
The Original Equipment Manufacturer (OEM)
A product sold through an OEM channel, is essentially sold as part of a larger offering. For example, the manufacturer of a windshield wiper selling its products to one of the large automakers is selling its products to the end user via an OEM channel, i.e., the end user purchases the car, one component of which is the windshield wiper. OEMs frequently offer the dual temptation of large or recurring orders and guaranteed long-term sales. In fact, many (but by no means all) companies that rely primarily on OEM sales develop a close relationship with their OEM customers. Such companies rely upon the relative stability of their distribution channel to focus on product development, efficient manufacturing and so forth, while deemphasizing in-house marketing and sales efforts.
Ronen Vengosh is the director of market development at Alvarion, Inc., a wireless broadband equipment manufacturer, where he is responsible for evaluating and exploring new market opportunities. He can be reached at email@example.com.