IF View - Issue NV-4

THE RE-EMERGENCE OF DIRECT DISTRIBUTION

Marketing Channel Strategy Consultants
USA - EUROPE - AUSTRALIA - BRAZIL - HONG KONG

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.
   

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:

  • 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.
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.

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.


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