Direct or indirect? Pros and Cons

Direct model; Pros and Cons

Everyone are fully aware that entering in a new market being direct will give you immediate advantages thanks to the direct interaction with your customers and the strict control of the performance of your products.

A direct model will help you to:

• Have a deep market footprint and the possibility to know your customer habits. 

• Be different from the competition that might have chosen an indirect model.   

• Provide faster feedback to your customers. 

• Promptly react on Product performance and address recovery actions.

• Deliver, maybe, your product faster to consumers.

• Increase your profits with a third-party.

• Build relationships with your customers.

• Increase forecast accuracy.

Most of the above positive outcomes could also have a negative drawback. In fact, in example, to provide a faster feedback or to increase the velocity to deliver goods to your customer you might need to invest in assets, such as trucks, hire drivers and increase your warehouse. If your investment won’t be enough to differentiate you company brand from the local distributor of your competitor, you would have failed your market access creating disillusion to your customer that will take years to be changed in a positive customer perception.

One of the biggest cons of the direct model is related to the receivables. Your company will be under pressure in specific countries where payment term agreement is not fulfilled in the expected timeline.

Indirect model; Pros and Cons.

`Especially when the investment to put on a table is too high compare to a projected ROI the multinational company could easily identify the Indirect as the preferred business model.

Indirect distribution will allow the multinational to:

• Share logistic cost (freight, custom, warehouse).

• Benefit from your third-party’s experience, infrastructure and salesforce.

• Make it easier for customers to find your products.

• Avoid the complexity of managing the local market access and logistics hustle.

• Save cost in human resources.

• Receive payment faster from your local partner compare to what you will get from the local end users.

The main challenge with the traditional indirect distribution is the distance this model puts between you and your customers. In some case and with some distributor behave this could lead to an increase of time for your product to reach the end user. In the indirect model is also difficult to establish and maintain the loyalty to your brand firstly by the end users and secondly by your local partner itself.

This business model will not be able to provide you a clear insight of what is happening on the ground, in some cases you will not realize that the margin your local partner is having are higher than the expected or in some cases agrred.

Deciding to embrace the indirect business model, the multinational company must clearly define all the specific agreement on roles and responsibilities, training and customer support and yearly target with the local partner and be sure to have the appropriate monitoring system/team in place to avoid, once the partnership is in progress to leave alone in the monitoring process the account manager.

THERE IS ALWAYS A THIRD WAY ….AND A FOURTH ONE.

A traditional distributor company’s main goal is to build its business, not the multinational one. A local vendor tries to agree with different multinational companies working in the same sector to show how it would be easier for the administration of an end user to deal with one entity instead of multiple suppliers.

In theory, suppliers would benefit equally, however in the real practice this is not happening. As a result of the distance created between multinationals and their product, end users will build loyalty with the distributor brand rather than the multinational. This situation will lead in a local environment where if the market will be satisfied by the supply, by the product quality, training program etc. the local distributor will receive the credit. Instead when things will go wrong there won’t be any doubt in market regarding who will need to be blamed, this will be the supplier. Suppliers have another disadvantage. Distributors control product pricing, which means they can lower prices to hurt a supplier’s direct-to-retailer approach. This handcuffs a supplier’s growth, especially if a distributor goes out of business or decides to stop selling a supplier’s product. To react or better to proactively avoid this situation ensuring a more profitable business a supplier needs to diversify its sales approach.

Diversification is not a new investment strategy. Financial planners have long preached that asset diversification is one of the top investing rules. This approach protects your assets, works to avoid catastrophic losses, and expands your wealth.

Diversifying from the traditional supplier-distributor relationships into a direct-into-distributor relationship, where the Multinational control directly the sales force hired through the local distributor will drastically builds loyalty of the end users, sales team with your company, ensuring an improved price control and finally allowing the multinational company to drive the brand messaging in the market. Moreover, this can prevent a major business impact if a distributor company decides to eliminate your product, reduce their volume of orders, or in extreme cases, goes out of business.

In-Ex Sales Team

In case you are already in the market and you want to change the business model from traditional distributor model to a direct-into-distributor one would desirable to start with a brand new partner. Changing the model after years of traditional model will be a pain. It will take time and will need a full commitment on the strategy from the local partner as well as many efforts on change management activities at the local distributor management level. Even if in this new model the multinational companies will take over most of the cost that before were under the distributor P&L. with this new model embracement, often the simple evidence of the drastic reduction of the gross profit of the local vendor for a specific product line will lead to a potential conflict that most of the time is linked to a previous lack of transparency between the parties, which most probably is also the main reason both parties, ore more exactly one of them, decided to change the business model. Both parties in this way decided to embrace the new business model to delay a potential separation, which after one or two years will be become inevitable. So let’s start this different approach with a new partner.

In this new model is also essential to approach another entity different from the distributor that will need to hire your team. This will avoid situation where the sales team, hired through the distributor will be used as “human shields” in case of conflict. In the short term this could be seen as an additional workload especially in the finance, human resources or compliance department but will definitely pay off in a long term relationship with the local distributor that will be transformed in a local importer/warehouse, cash collector and office infrastructure supplier.

The In-Ex Sales team could be represented by a full team hired by the third party agency as well as to ensure a better management of cost by the presence of independent sales reps better known as local agent usually paid on commission. To move in this last direction, you need to be sure your products are high-cost products to ensure the focus of your local agent that will always spend its effort in what will bring it most.

DOT 2 DOT

Another way of business model is represented by the introduction in your structure of a new player such as DOT 2 DOT.

DOT 2 DOT client is the multinational company, and closely work with it to ensure the yearly objectives are meet. On the other hand, DOT 2 DOT is also a client, a client of the local distributor.

The presence of DOT 2 DOT will allow the two magnetic poles to be attracted rather than repelled ensuring the both parties are aiming to the common goal of growing the business, with transparency in a cost effective manner.

Adopting DOT 2 DOT will lead to the following benefits:

• Increased trust between manufacturer and distributors.

• Manage your distributor saving the cost of hiring a direct account manager/regional manager.

• Reducing your cost, optimizing your FTE and increasing your VAT claim (when applicable).

• Having complete control of your marketing, messaging, and pricing structure.

• No waste of time in recruiting, hiring, and managing high-turnover sales staff.

• Increasing your focus in other core business/markets.

• Outsource distributor management to expert ensuring a business knowhow continuity rather than changing account managers from time to time.

While using an outsource distributor management company might initially create a schism with a distributor, when a strategy is crafted in collaboration it can ultimately scale sales for both parties.

To know more please contact us at info@d2dnet.com