Defining an Indirect Distribution Channel
Navigating the world of distribution can be challenging, especially if you’re not familiar with it. On our last distribution blog, we talked about what a direct distribution channel is, and weighed the pros and cons of how your business would be affected. If you’d like to familiarize yourself first, you can find that blog here. This time around, I want to talk about indirect distribution channels. Don’t know what that is? We got you covered.
Starting Definitions
Before we go in-depth, a couple terms need to be defined:
Distribution: The process that a good or service takes to go from the producer to the end consumer. This process can be as simple as products going directly from a manufacturer to a consumer, or it can have multiple intermediaries involved.
Intermediary Channels: The “middleman” in the distribution process that helps to deliver a product from the manufacturer to the consumer. An intermediary channel can include a wholesaler, retailer, or agent. QQ Studio is a wholesaler that offers a low minimum order of bulk packaging for retailers and/or consumers to purchase.
Now that we’ve got these definitions out of the way, it’s time to figure out where you stand. Let’s say you have a delicious cookie recipe that you’re looking to turn into a business. In order to get your business off the ground, you have to decide where you’re getting materials from and how much of it you need. Based on the last blog, we’ve realized that taking the approach of going directly to a manufacturer isn’t quite up your alley just yet. So, where does that leave us? Keep reading to find out.
Breaking it Down
As you probably guessed, an indirect distribution channel is the opposite of a direct channel. Rather than a product going right from the manufacturer to the consumer, an indirect channel entails that you are going through intermediaries to reach your end consumer goal. There isn’t just one indirect channel to follow either. So, let’s go through the different avenues you can take when dealing with selective intermediaries.
One-Level: This involves the manufacturer going through a retailer, and then the consumer. Grocery stores or upper-level retailers that can cut out the wholesaler and buy large quantities from the manufacturer most commonly use this. These stores are then able to distribute to consumers. One-level indirect distribution would cost less because there is one less intermediary to pay for.
Two-Level: This process involves the transfer of goods from the manufacturer to the wholesaler, the wholesaler to the retailer, and the retailer to the consumer. This is a more practical option for small businesses looking to buy products because wholesalers will buy a large amount from the manufacturer, and then sell lesser quantities in bulk that the business can use.
The decision to take a one or two-level approach varies on a case-by-case basis. For example, if you are a retailer looking to sell milk, buying directly from a manufacturer at a farmers market is not the greatest idea. Rather, there would be multiple steps needed to get it pasteurized, broken down into a certain amount, and finally into the store. Other times, retailers might be able to buy goods directly from a source and sell them. In your case, you are not even in the position yet to receive products from the manufacturer or wholesaler. Due to the low demand for your cookies, you might view yourself as a low-level retailer or a consumer looking to sell to other consumers.
The Pros and Cons
There and advantages and disadvantages to using an indirect distribution channel, no matter which level you choose. The list below solely pertains to the end chain of the distribution that isn’t obligated to buy in bulk from the manufacturer at any point. Now, let’s check out some of the factors to consider before committing to one, shall we?
Pros:
- You don’t have to buy in a tremendous amount of bulk.
- Less responsibility to handle.
- You will save money by not having to spend on advertising.
Cons:
- You have to pay for the intermediary expense.
- You have less control over how you want to market and sell your product.
What You Need
If you are a brand new start-up business looking to get your product out there, you aren’t going to need a whole lot of inventory. Chances are, you will be looking to reach a few customers at a time. Instead of buying in bulk, your best option is to buy the necessary materials you need from a retailer and make your product in-house to start testing the market for your product. For example, you might want to buy 1 pound of flour at a time to see how long it lasts before you need more. Once you start to get a reasonable amount of customers, you’ll be able to gauge how much product you’ll be able to sell in a certain amount of time. By that point, you can buy a lesser amount in bulk from a wholesaler to make larger batches to sell to your consumers. As you gain demand, you will also have to decide on factors such as necessary equipment that will help produce your final product. That’s a topic for another blog though!
Overall
Hopefully, you were able to get a better understanding of what an indirect distribution channel is as a whole. Before making any decision, it’s important to evaluate what stage your business is at, and what options are available to you. We have other helpful business information as well. If you like this blog, check out our other blog on the feasibility of switching to biodegradable packaging.
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