Definition of Channel Sales (With List of Strategies)
By Indeed Editorial Team
Published November 7, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Businesses typically seek ways to acquire more sales leads and increase their power in the marketplace. Indirect sales, or channel sales, are one of the many solutions they can use to increase sales and revenue. Learning about indirect selling can help you explore viable sales strategies and prepare you for sales jobs in multiple industries. In this article, we define channel sales, compare it to direct sales, explain channel partners, highlight the most common types of channel partners, outline the pros and cons, examine various strategies, and review how to create a robust sales channel program.
What are channel sales?
A channel sales strategy is when a company employs the services of third-party partners to sell its products to consumers. The strategy allows companies to leverage the distribution network that these selected partners have already built to distribute their products. These partners take on different names depending on the kind of relationship they have with the parent company. Contrasting direct sales, it's a popular sales strategy among companies of all sizes. While employing the sales channel strategy can benefit a company, it can also present some drawbacks. Evaluating all elements of the strategy is essential.
Channel sales vs. direct sales
Indirect and direct sales employ contrasting operating models to get products to consumers. The major difference is the distance between the manufacturing company and the customer. While direct sales involve selling products directly to the customer, indirect sales distribute products to third-party organizations or individuals to sell to their customers.
What are channel partners?
Channel partners are companies that offer to sell, service, or distribute products on behalf of a manufacturing company. These companies usually offer a ready market for a company's product, typically because they've sold or are selling similar or complementary products. They work as an extension of the manufacturer to build a customer base and increase sales and may have different kinds of relationships with the parent company.
Most common types of channel partners
The following are the most common types of channel partners a company can use for its indirect sales strategy:
Resellers: These companies or individuals buy goods or services from the manufacturing company to sell them to the customer for a profit.
Affiliates: These individuals or organizations sell a company's product or service in exchange for a commission.
Distributors: These businesses purchase goods in bulk from the manufacturing company at a discount and sell them to retailers or consumers.
Independent retailers: These are standalone retail businesses with no more than four outlets.
Dealers: These are specialist retailers who trade in one specific type of product.
Agents: These individuals facilitate transactions between buyers and sellers for a percentage of the transaction.
Consultants: These can be individuals or firms that oversee a company's sales strategy and channels in exchange for a fee.
Benefits of using sales channels
Companies that choose the indirect sales strategy enjoy several advantages, including:
Lower sales and marketing costs
The indirect sales model costs a company less in overhead when you compare it to assembling an in-house sales team. Because the channel partner already has a business in operation, the company can avoid incurring new costs to reach the market. It also saves the manufacturing company logistics expenses.
Setting up a sales channel program requires careful and strategic planning. Once you've established procedures and the partnership is operational, you can easily scale up or down. This scalability is an advantage over direct selling, which requires costly and time-consuming recruitment processes to adapt to changes.
Choosing an already-established partner for goods can make it easier to access the market. Because you're leveraging the trust that the partner has built over time, the products are likely to meet with little or no resistance among customers. This process can save a lot of time and effort.
Working with channel partners can make for a more efficient sales process. With one channel manager, you can liaise with several channel partners and earn as much revenue as six salespeople at a much lower cost. The indirect sales approach offers you maximum value for your expenditure.
Using channel partners is a relatively cheap and fast way to access a new market. This accessibility makes trying new products, campaigns, and promotions easier and less risky than direct selling. With more certainty, parent companies are more likely to innovate.
Limitations of an indirect sales strategy
The following are factors to consider when you use the indirect sales model:
The indirect sales model offers manufacturers less control of the sales process, which may leave them vulnerable to their channel partners. The company cannot manage the sales process directly, even if it has chosen a partner who performs poorly in selling its products. This minimal control can make it challenging to predict revenue.
Companies that employ the indirect sales strategy share their profits with their partners. Depending on their value, some partners can earn between 20% and 50% of sales revenue. The company can lose some or all of what it saves in sales costs in profit sharing unless the partners develop the agreement carefully.
Channel partners typically restrict parent companies from accessing their customers. Where there's access, feedback still has to go through the partners, which can cause a delay in the process. Some comments may get lost or distorted when conveying it from the customer to the parent company.
When a company chooses to work with a channel partner, it opens its brand up to any reputation problems the partner might experience. Because it cannot control how its partners manage their reputation, the company might be vulnerable. Being careful in choosing partners with excellent reputations might reduce this risk.
Channel sales strategies
A company can use any of the following three main strategies to choose its partners, including:
This strategy focuses on expanding a company's customer base. It may involve partnering with a distributor with a vast geographical reach for expansion or an affiliate. Selecting partners with an established presence in your target market is essential to making this strategy work.
This strategy focuses on increasing delivery speed and customer support. It's ideal for companies that want to manage inventory faster and more efficiently. Resellers, independent retailers, or dealers are ideal partners here.
This strategy is ideal for companies with complementary products that want to increase the value of each product. With this partnership, both companies can offer their products as a bundle to customers, increasing their sales. Making such partnerships work requires thorough and strategic planning.
How to create a sales channel program
If you're considering establishing a sales channel program, you can take the following steps:
1. Find the right partners
The first step to building a successful partnership is determining what kind of partners the company needs to meet its sales targets. When doing this, consider the market the company is trying to access and other goals it's trying to achieve with the program. These variables can help generate a list of potential partners.
2. Connect with potential partners
The next step is to reach out to the ideal potential partners you identified. Arrange meetings with these partners to discuss mutual goals, what you can offer them, and what you expect to get in return. Also, use the opportunity to ask about possible challenges and similar existing partnerships.
3. Set goals for the partnership
Based on your previous discussion, outline goals for the new partnership. These goals set the parameters for determining the success of the partnership. Ensure your goals are specific, measurable, attainable, relevant, and time-bound.
4. Create a channel partner agreement
A partnership agreement is a written document that sets out the terms of the partnership based on previous communication between both parties. It outlines the objectives of the partnership, duties of both parties to the agreement, expectations, limits, and other relevant details. This agreement can help hold parties accountable.
5. Onboard your partners
Taking on a new partner is like hiring a new employee. After recruitment, you onboard them to familiarize them with brands and processes. The same applies to new partners, especially as they represent your brand.
6. Offer strategic incentives
Incentivizing your partners can give them a sense of belonging and encourage them to take ownership of your sales program. These incentives can be crucial to the success of the program. You can use wholesale discounts, rebates, and other benefits as incentives.
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