Should startups build distribution channels or sell products directly?

Once a startup is ready to commercialize its product, you must determine how the product will reach its target customer. You can choose to sell directly or build distribution channels.

What is distribution?

Distribution (or place) refers to an organization, or set of organizations, that is involved in the process of making a product or service available for use or consumption by a consumer or business user. It is one of the four main elements of the marketing mix (the other three are product, pricing, and promotion).
Distribution is necessary for getting your company’s product into your customers’ hands. A smart distribution strategy is necessary for success and can be a source of competitive advantage. Dell and Amazon are examples of companies that benefited from a well-developed distribution strategy.
Distribution is about more than finding a channel to the customer. It is important to find a distribution channel that makes it convenient for the buyer to purchase and consume the product. Convenience is a customer-centric view of distribution and marketing.

Parts of the distribution channel

Product distribution relies on combining three different channels (which can be independent or joined):

• Sales channel
• Delivery channel
• Service channel

For each channel, you can choose either a direct (in-house) channel or a third-party indirect (outside) channel, or a combination of both. Many high-tech companies have an inside sales force and employ other distribution channels to reach different customer groups.

How to select a distribution channel

Selecting a distribution channel can directly impact a product’s success. There are five key factors to consider:

• Size of the market—includes the variety of customer profiles
• Cost of the distribution channel—absolute value cost, cost per customer, profitability of different channel options, fixed versus variable costs
• Type of product—standard (well-defined characteristics, sold in large quantities, ideal for external distributors) vs. non-standardized (involves customization, requires personal contact with users)
• Degree of control over distribution channel—open sharing with distribution channels vs. closed relationship, possibility of competition from distributor
• Flexibility of distribution channel—length of contract, time required to develop relationship

Solution vs. marketing complexity

When selecting a distribution channel, you want to ensure that you can develop and sustain relationships with customers (for example, economic buyers, technical buyers, end users). You need to reach these customers so they can purchase your products. Two key criteria can help you to focus your selection:

• Solution complexity: How difficult is the product to install, deploy, and use?
• Marketing complexity: How difficult is the product to source, buy, and support?

When selecting a distribution channel, the complexity of product and marketing should be proportional. If the product is relatively easy to use, then it should be relatively easy to buy (for example, selling books and DVDs online). Conversely, if the product is relatively complex to install, then it will be relatively difficult to support (for example, selling supply chain management software solutions through direct sales).
Problems occur when the marketing and the solution are not balanced:

• High marketing complexity + low solution complexity = high cost of distribution for low cost items (too expensive for customers or poor margins for vendor)
• High solution complexity + low marketing complexity = not enough distribution support for complex products (distribution channel suffers)

Push versus pull marketing

Before choosing a distribution channel, a company should determine how to balance push and pull marketing:

Push marketing

The distribution channel promotes and sells your product to consumers. This is common for products where brand loyalty is low—the consumer makes the choice to purchase the product in the store.

Pull marketing

The product is advertised and promoted directly to consumers, who then go to the distribution channel to purchase your product. This is common for products where brand loyalty is high—the consumer chooses to purchase the product before going to the store.
Choosing between push and pull marketing will affect other parts of your marketing strategy, including:

• Communications—marketing directly to consumers vs. marketing through distribution channels
• Pricing—costs associated with dealing with distribution channels vs. costs associated with sales channel
• Product design—distribution channels may influence packaging
• Commitment—requires long-term contracts with distribution channels

References:

Viardot, E. (2004). Successful Marketing Strategy for High Tech Firms. Boston: Artech House.
Wiefels, P. (2002). The Chasm Companion. New York: Harper Business.