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9 Min. Read

What Are Channel Sales? A Complete Guide

What Are Channel Sales? A Complete Guide

Using a channel sales strategy is an effective approach to increasing profits. But how do you know where to start?

It’s a simple question first-time business owners or startups have to ask themselves. If you’re selling a product, how do you get it in front of the right audience? Not only that, but how do you make sure you don’t overspend? Even though it can seem like a simple question, the answer can be harder to get to.

The most common ways are through a direct sales or channel sales strategy. But still, how do you know which strategy will work best for you and your business goals? Do you have to go with one over the other or can you combine the best of both?

Here’s a closer look into how a channel sales model works and how you can use it to help your business grow.

Here’s What We’ll Cover:

What Are Channel Sales?

The Four Channels of Distribution 

Pros and Cons of Using Channel Sales

Key Takeaways 

What Are Channel Sales?

When you use a channel sales strategy, it consists of using third parties to help sell your products or services. Third parties can include distributors, referral partners or even value-added resellers. While channel sales can increase revenue, it requires a high level of consistency. 

For this strategy to work effectively, working closely with your partners is crucial. This is to make sure the right plan and overall strategy is being executed properly. It’s not quite as simple as just handing over your product or service and letting a partner do their thing. 

Providing your partners with the right tools and training is an important first step to ensure consistency. It’s not always easy letting someone else take control. There can be risks involved, such as a partner not representing your brand in the right way. This can lead to confusion and even loss of customers.

Benefits of Using a Channel Sales Model

  • Added Trust. Partnering with someone who has already established themselves in the market can add to your credibility. This helps boost your ability to establish brand recognition and brand loyalty. From a consumer's point of view, seeing a company they already know partner with another company shows that there is a high level of trust. You will immediately be seen as having a credible product. 
  • More Efficiency. Everything always comes back to efficiency and how you can maximize the time you spend on something to get the best possible return. Hiring and training a group of new employees or a direct sales team is time-consuming. Going with a potential partner who already has expertise will let you avoid unnecessary spending. 
  • Ability to Test and Experiment. It might seem like a no-brainer, but how do you actually know your customers will love your product? Leveraging channel sales partners can create more flexibility to test out what works and what doesn't. You can experiment with a different audience, test new products or even see which marketing campaign offers the best results.

What’s the Difference Compared to Direct Sales?

If a channel sales strategy is using third parties to help sell your products or services, a direct sales strategy is doing it yourself. For a direct sales strategy to work you need to have an in-house sales team. And the sales team needs to understand every single detail of your product or service.

With a direct sales strategy, you and your team are fully in control of the sales process from beginning to end. You are in direct communication with your customers and you have to implement any feedback you receive. By refining your product and the processes that go with it, sales become more consistent.

The Four Channels of Distribution 

When it comes to a channel strategy, distribution can vary depending on how you want to get your product to your customer. Distribution options fall into four distinct channels depending on your needs.

1. Direct Distribution

A direct distribution channel is sometimes known as zero-level distribution. This is where manufacturers sell a product directly to the consumer. And in this case, the seller doesn’t have to be in a fixed location. 

A prime example of this is internet distribution or face-to-face demonstrations. The product gets presented, its use gets demonstrated and then it’s sold directly to the customer. A direct sales model can be a good way to go if you have a targeted audience that’s in a specific geographic area.

2. Using Intermediaries 

When you use an intermediary they act as the middleman to sell your product. It can be further broken down into one-level, two-level and three-level channels.

  • One-level: Commonly used by companies who sell things like clothes, toys or furniture. Your product goes from manufacturer to retailer, who then sells it to the customer. This is a good strategy to use if you want to reach more customers and increase profit. 
  • Two-level: This channel sends your product from a manufacturer to a wholesaler, who then sells it to a retailer. From there, the retailer sells your product to the customer. Essentially, the wholesaler will buy your product in bulk, then break it down into individual packaging and sell it to the retailer.
  • Three-level: This is where everyone's involved before customers receive the product. The sales agent, manufacturer, wholesaler and retailer all play a role in the sales process. Sales agents can be an important factor as they can help speed up the process if there’s a demand for your product. 

3. Dual Distribution 

In this case, the manufacturer or wholesaler uses more than one distinct sales channel. For example, they can use a combination of a brick-and-mortar showroom and online platform to sell to customers in your target market. 

This can be a good strategy to take if you want to maximize your reach and sell your product or service in more than one place.

4. Reverse Channels

If you look at the above channels and how they work, they follow a similar path from start to finish to move and sell your product. They start with the manufacturer making the product and end with the customer receiving the product.

A reverse channel throws all of that out the window. Technological advancements now allow you to reuse products that have reached the end of their life cycle to create a new product.

Someone would buy a product based on a determination that they can then resell it in a different way. A good example is taking recycled plastic and turning it into bracelets or necklaces. The person that takes that recycled product and resells it becomes known as the beneficiary of the sale.

Pros and Cons of Using Channel Sales

The Pros

  • Scaling. By adding one or more channel partners you’re able to scale your sales efforts more effectively. One person can manage multiple different partners that would normally require an entire sales team. 
  • Opportunities to Expand. When you leverage a third party that has already established themselves in the market it will immediately put you ahead. There's a lower initial investment and you don’t need to hire more people or test different advertising streams to see what works and what doesn’t. 
  • Reach New Customers. Similar to the above, when you use a third party that’s already established you gain access to new potential customers. These customers may not have been reachable without the partnership. The result is a significantly lower cost to enter a new market and tap into a new customer base. 
  • Lower Sales and Marketing Costs. You don’t have to spend considerable amounts to market your product or test out new sales strategies. Your partner will do a lot of it for you.
  • Increased Efficiency: When you have a product you want to get to market, you want to get it there in the most efficient way possible. This reduces costs and allows you to focus on other areas of your business or product needs. One person can manage multiple partnerships instead of having a sales team do it. 

The Cons

  • Less Control. Using third parties means that you pass on the control of the sales process to them. Depending on your strategy or what’s outlined in the partnership contract, you might not have any say in the sales process. This can be a difficult situation to be in because you aren’t able to influence the outcome in any way.
  • Unpredictable Revenue. When you don’t have control over the sales process, it’s tough to predict any potential revenue. Plus, your partners will take a portion of the sales. Some third parties might not necessarily open every opportunity for your product. They could do some for themselves. 
  • Tougher to Manage. A little like having less control over the sales process, it’s also tougher to manage the specifics of your strategy. You don’t have to just worry about internal approval for changes. And having to potentially work with more than one partner to make any changes to messaging or add a new product can be much more difficult.

Key Takeaways 

Both direct sales and channel sales are proven strategies used by a broad range of businesses around the world. Understanding what’s best for your product or service is one of the most important questions to ask when deciding which approach to take. And you get a better sense of distribution costs, buying triggers and overall sales operations. 

Other questions to consider when weighing a channel sales strategy:

  • What stage of the lifecycle is your product in? Is it brand new or have you established a level of credibility already?
  • Are you a smaller company that can benefit from new partnerships? Or do you have the capacity to bring your own sales team on board?
  • Where are you located? If you have more than one location, does it make sense to hire new sales reps or benefit from a third party?
  • What are your immediate revenue needs? Do you have the time to set up a partner channel or do you need to increase sales profits now?

No one has a better understanding of your needs than you do. If you decide that a channel sales approach is the right strategy, it’s important not to just pick a random partner. Find a partner that has experience with products or services that complement yours and who can provide the skills and resources to sell.

Read more of our small business guides on our resource hub.