For Australian SMEs deciding how to get their products to market, the question of direct sales versus channel distribution – using resellers, wholesalers, or other partners – often comes down to margins. There’s no single answer, as the ‘best’ approach depends heavily on your product, target market, and business maturity. However, we can analyse the typical margin dynamics to help you make an informed decision.
Generally, direct sales *can* offer higher gross margins. You capture the full retail price, minus your direct costs of sale (marketing, sales team, fulfilment). However, this is a simplified view. Achieving those margins requires significant investment in building your own sales and marketing capabilities. Many SMEs underestimate these costs, particularly customer acquisition costs which are rising across the board.
Channel distribution, while involving sharing revenue with partners, often reduces your overall cost to serve. Consider these key points:
- Leveraged Reach: Partners already have established customer relationships and sales infrastructure. This expands your market access faster and more cost-effectively than building it yourself.
- Reduced Marketing Spend: While you’ll need to support your channel with marketing materials and potentially co-marketing funds, it’s typically less than the cost of generating leads and sales directly.
- Volume Discounts & Efficiency: Channels often consolidate orders, leading to more efficient logistics and potentially lower shipping costs per unit.
- Specialised Expertise: Certain channels possess deep product knowledge or cater to niche markets, increasing conversion rates and reducing returns.
We’re seeing a trend towards hybrid models. Many successful SMEs start with direct sales to build brand awareness and gather customer insights. Then, they strategically introduce channel partners to expand reach and improve cost efficiency. This allows them to optimise margins over time. For example, a software company might sell directly to larger enterprises while using a network of IT service providers to reach smaller businesses.
Ultimately, a thorough financial modelling exercise is crucial. Map out the costs associated with both direct sales and channel distribution – including marketing, sales, fulfilment, and partner margins. This will reveal which approach delivers the most profitable outcome for your business. Don’t just focus on gross margin; consider net profit and long-term growth potential. We recommend starting with a detailed cost-to-serve analysis before committing to either strategy.
