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THE
RE-EMERGENCE OF DIRECT DISTRIBUTION
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Marketing
Channel Strategy Consultants
USA - EUROPE - AUSTRALIA - BRAZIL - HONG KONG
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IF only suppliers
could reap the benefits and avoid the disadvantages of distributing directly
to customers …
Direct distribution is defined as a sale or transaction between a supplier
or manufacturer and its end user, without using an intermediary (i.e.
dealer, distributor, agent).
In the past, direct distribution has been limited to high value products
or services requiring specialist technical expertise. Today, however,
in an ever increasing number of industries, customers want to deal directly
with suppliers (i.e. insurance, financial services).
Developments in eCommerce and technology have reduced direct distribution
costs. As a result, companies have recognised that direct distribution
can give them more control over end user buying patterns. Many companies
that traditionally used intermediaries or indirect channels are now redirecting
their efforts to direct distribution with resultant strong product differentiation.
With growing consumerism, demand for customer convenience and increasingly
sophisticated technology, direct distribution is emerging as a highly
attractive marketing channel and one which can reach previously unexploited
market segments.
The
Driving Forces
Direct distribution has traditionally been driven by a company's employee
sales force. Although effected in different ways, direct distribution
is linked by the common thread of a seamless transaction between a
supplier and an end user, e.g. retailing via company owned outlets,
direct mail or telesales.
Today, direct distribution is driven by technology and its ability
to meet customer preferences. Interactive TV, the Internet and interactive
voice response systems are driving changes in direct marketing channels.
As customer preferences and needs change, suppliers are responding
by re-evaluating the value added by intermediaries in traditional
indirect marketing channels. Many companies distribute through multiple
marketing channels consisting of direct and indirect channels. Direct
distribution does not rule out external channels, but to be successful
it must be part of a structured marketing channel strategy.
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Advantages
In the past, direct distribution competed with intermediary channel
partners. Today, there is real potential to benefit customers, suppliers
and indirect channel partners. Advantages can be attained through:
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- A marketing
channel strategy for direct sales which targets customers wanting
direct relationships with suppliers, delivering optimum customer
convenience.
- A focused
resource allocation strategy which results in the provision of
optimum support to intermediaries (channel partners).
- Demand generation
tools that add support to channel partners.
- Directing
channel partners to customer segments they can best serve.
- Shorter feedback
cycles which produce more timely and accurate market information.
Where appropriate, database tools for complementary product sales
and referrals to channel partners should also be used.
- Swift response
to changing consumer needs.
- Better structured
channel partner programs, integrating suppliers' direct sales
tools to enhance channel partners' business growth.
- Systems which
lower the cost of doing business for both supplier and their channel
partners.
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Disadvantages
Direct distribution needs to be part of a focused marketing channel
strategy. Some potential problems: |
- Higher supplier
costs (i.e. direct distribution must carry all sales, distribution
and service functions).
- Costs of
a co-ordinated physical distribution/delivery network are carried
by the supplier, rather than its channel partners.
- High initial
investment in recruiting, training, equipment and systems, particularly
where sales volumes are high and average sale value low.
- The need
for an on-going human and capital resources program to satisfy
customer demand.
- The risk
of suppliers being forced into retailing when it has no skills
in that area.
- The risk
of channel conflict where suppliers distribute through multiple
channels.
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Key
Success Factors
In general, where intermediaries are used for distribution, the key success
factors for a direct marketing channel include:
Market Segmentation - Strategies must identify the target market segments
to be serviced directly. In addition, potential channel conflict can be
reduced by identifying those marketing channels where customers are unserviced
or under-serviced.
Consumerism - A well informed market empowers consumers with understanding
and confidence about products (or services), thus reducing or eliminating
the need for intermediaries to support those products (unless the products
or services are high value and in low volumes).
Demand - Customer demand to buy direct must be established.
Unbundled Product - Ideally, products should not be offered with, or as
part of, other products or services, thus making the entire transaction
flexible, simple and convenient to customers.
Brand - An established brand needs minimal brand building, so ideally
a product should be well positioned, reducing the need for comparative
evaluation at the point of sale.
Communication - Where direct and indirect channels are used, effective
channel communication with channel partners is vital to avoid conflict.
Conclusion
Direct distribution is increasing as consumers become more technologically
literate. In complex industries such as computers, intermediaries called
Value Added Resellers (VAR's) are frequently used because of the need
to customise computers with specialist programs. However, in other areas
where products are becoming commoditised, intermediaries add less value
and direct distribution is a viable option.
Companies need to consider the trade-offs involved in direct distribution
and be aware of the need to manage potential channel conflict. Carried
out successfully, a focused direct distribution strategy will help provide
strong, sustainable competitive advantage.
IF
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