What Is the Direct Distribution Model? (With Advantages)
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The main goals of many businesses are often to maximize their profit and widen their reach among consumers. To achieve these, they employ various strategies to market and distribute their products. Learning about distribution models may be helpful if you're considering a career in supply chain management or logistics. In this article, we define what a direct distribution model is, describe the differences between a direct and indirect distribution model, and discuss its advantages.
What is direct distribution?
Direct distribution or direct-to-consumer approach is a supply chain strategy that pertains to the sale and transfer of a product directly from the manufacturer to the consumer. This business model rarely involves the use of intermediaries. The company directly sells its products, processes orders, and makes sure that the consumers receive the items they purchased. In this system, companies usually deliver goods to customers more quickly than businesses that use middlemen, such as wholesalers and retailers.
In utilizing this business model, the company uses its own logistics network and transport vehicles to deliver the product to customers. This often requires initial investments in a warehouse, logistics system, delivery trucks, and delivery personnel. They usually manage all distribution channels, which may include manufacturing, shipping, online, and retail. Many companies that use this model conduct their business online by setting up an e-commerce website where consumers can place an order. They process these orders and deliver the items straight to the customers' shipping addresses.
Difference between direct and indirect distribution
Before comparing these models, it's necessary to define indirect distribution. This model, which many refer to as wholesale distribution, is a strategy that makes use of intermediaries to distribute their products. The goods pass through a series of external sales channels before arriving at the customer's delivery address. The manufacturer or producer may sell their products to a wholesaler or retailer, which is where consumers make their purchase.
In this business model, the third-party or intermediary usually handles all product distribution functions and interacts with the consumers on behalf of the company. This business model often frees the manufacturing company from startup investments because a different organization handles all logistical concerns and sometimes even marketing. It's important to understand the distinction between direct and indirect distribution to help business owners decide which to adopt. Here are several areas where these two models differ:
Number of parties in the transaction
With the direct model, the seller or manufacturer and the consumer are the only parties involved in a transaction. In an indirect distribution model, there is the participation of wholesalers or retailers, and possibly a third-party logistics company. The indirect model typically involves more people because intermediaries are essential to complete the transaction between the manufacturer and customer.
The direct model often provides the company that uses it with more control over sales processes. As they manage all the stages, from marketing and selling to delivery, they're also responsible for identifying areas that need improvement and implementing necessary changes. For the indirect model, there's less control over the distribution process because the organization that employs this strategy typically relies on third-party logistics companies to do the delivery for them.
Companies often invest in a startup supply chain system when adopting the direct model of distribution. Handling the manufacturing up to delivery usually means they make use of more resources. These may comprise raw materials, packaging items, and logistical systems that include inventory software and delivery vehicles. To compare, companies using the indirect model often focus on only one stage of the business process, that is, the production part, which may require fewer resources.
The direct-to-consumer model of distribution often gives businesses the opportunity to interact with their consumers. They may work closely with consumers to get their feedback and suggestions to provide better customer service. Companies using the indirect distribution model may not enjoy the freedom and flexibility to customize their services according to client preferences because of their lack of involvement in the delivery process. This model often gives companies less control over client feedback and experience.
Advantages of using the direct model of distribution
Many companies choose the direct model because of its numerous benefits. These include more control over the sales process and more opportunities to interact with their target market. Other advantages this model offers are:
Allows better management of customer feedback
Companies may obtain direct feedback from their consumers. Typically, this is doable because they control the entire business process and interact with their clients directly. This means the company hears consumers' suggestions and may act on these immediately, resulting in an effective feedback management program. This may improve the consumers' trust and confidence in the brand and result in an increase in the company's customer base.
Provides a competitive advantage
This distribution model typically allows the selling of products online or directly from retail shops. The products may not compete with similar items because they're not on display on shelves with competing brands and may be available only in select stores. This strategy helps highlight a company's products, which may make it easier for a potential customer to decide to purchase it.
This model can also enable companies to access market data. To help with their marketing strategy, companies collect valuable customer information that can improve their understanding of their target market's demographics and buying habits. This enables them to create an effective strategy that focuses on their target group of consumers, which may lead to an increase in their sales.
Enables faster delivery
The direct model of distribution often gives companies the power to expedite transactions and deliveries. Complete control of the whole distribution channel enables them to offer faster shipments to customers. This may result in an increase in sales because many consumers prefer their purchases to reach them within a short period. The fast transaction process and shipping can also help the company address complaints about their products more efficiently because they can facilitate the quick replacement of items that don't meet the customers' expectations.
Promotes customer loyalty
In a direct-to-consumer approach, companies often connect and communicate more with their clients. This is one of the advantages of this business model because it enables relationship building and establishing rapport with consumers. In this setup, the company typically uses direct communication channels to respond to customer queries, offer promotional discounts, introduce new products, and customize prices for large and loyal clients.
Because of the effective feedback communication system, companies can create more engaging promos and customized sales experiences. It also allows them to develop effective marketing strategies that help them keep existing customers and attract new ones. This setup may enable the company to establish genuine relationships with their clients, which may result in an increase in trust and loyalty.
Companies usually enjoy a monopoly on profits in this business model. As they control the distribution channels, they don't share or divide their profits with middlemen or distributors. In an indirect model, there may be layers of retailers and vendors involved, which may result in an increase in the price of their products. By adopting a direct model, businesses can avoid high markups and costs that may result in fewer sales and generate more profit instead.
Gives control over marketing strategy
Companies often plan and execute their marketing strategy in this mode of distribution. In an indirect distribution model, the representatives of the distributor or outlet promote the products and it's possible that a different messaging, sometimes less positive, may come across to the consumers. The direct-to-consumer approach can overcome this hurdle by enabling companies to do hands-on marketing so they can use more specialized, controlled, and unique promotions and product messaging.
Related: A Guide to Marketing as a Career
Encourages better product pricing
This business model typically provides companies the freedom to be more flexible in pricing. They may give discounts and offer special prices to loyal customers because they may not pay for the extra costs related to an indirect distribution model. This strategy may encourage companies to create better pricing models and proposals because of the removal of third-party channels. They may offer more competitive prices, which are lower than those of indirect distributors. This is often an effective marketing strategy that attracts more customers.
Provides opportunities for expansion
Companies usually invest in a startup distribution system when adopting the direct model. This means that they may invest in a warehouse, logistics system, and transport vehicles at the early stages of the business. This is an advantage because it can help them standardize their processes from the beginning. Eventually, they can implement expansion plans more easily because there's already a system in place. It may also be easier for them to introduce new products to consumers because of the direct communication channels that the direct model provides.
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