Direct Sales or Channel Sales?

What’s the difference?

Direct sales reps work directly for you as employees.  You pay them a nominal salary plus benefits.  They report to a sales manager or vice president of sales.  Direct sales representatives are not contractors or “1099” employees.

Channel sales representatives work as “1099” independent contractors or as employees of another business that has agreed to sell your company’s product or service.  These businesses may be distributors, business partners, or manufacturer’s rep agencies.  Channel sales representatives are paid based on results – how much they sell.

What’s the best way to bring your products to market?

To answer this question, you need to consider four variables:  the cost to hire sales representatives, how much control you want or need over your sales force, the availability of technical sales expertise, and the complexity of your product and sale.

Cost to Hire Reps

Initially, it costs more to hire a direct sales representative than a channel rep. These costs include:  salary, benefits and expenses (travel, meals, hotel and entertainment).  Direct sales reps also require you to invest both time and money in training. New reps need to learn your product features and benefits, the market, competition and your corporate history or culture. During the training period, these reps produce minimal sales. Depending on the complexity of the product and the market, training direct sales reps can eat up valuable weeks or months.

Hiring channel sales reps, on the other hand, requires a much lower up-front investment than direct sales reps. These reps earn commissions as a percentage of the revenue they produce.  Their compensation is based solely on the results they deliver. They receive no salary or benefits from the companies they represent.  However, their commission rate is generally much higher in terms of percentage of revenue or gross profit than direct sales reps.  This higher rate compensates for the lack of salary and benefits and the increased risk assumed by the channel.

To sell your products effectively, channel reps may require training. However, during the training period, you typically do not pay them.

Control Over Sales Force

A direct sales force affords you more control. You may want to control the way sales reps present your products or services to the market and the message they deliver to your the customers and prospects.  You may want to control how frequently that message is delivered and to whom.  Often, you may want to control both the information flow to customers and prospects and the information flow from customers and prospects.  A wide variety of information comes from the market, including:  contact information, competitive information, product perception, product applications, product deficiencies, market trends and market shifts.  By controlling as many market variables as possible, you will be in the best position to anticipate and respond to market changes, both large and small.

With a direct sales force, you can exert strong influence over your sales representatives through policies, training, commissions, salary and bonuses,  Because you pay direct sales reps a base salary that is not tied to the level of sales, you can require the rep to perform certain tasks.  These tasks generally include customer service, data input to CRM systems, forecasting, marketing support and administrative work.  They may help you generate future sales or may be in the best interest of your company or customers.

You have less control over channel sales representatives.  Channel reps tend to work on tasks that generate near-term commissions, serve their own best interests or serve the interests of their employer.  At times, these tasks may be at odds with your interests.  Some channel reps may sell both your product and your competitor’s product. If the rep makes more commissions selling your competitor’s product, the rep will lead with your competitor’s product.

Availability of Technical Sales Expertise

There may be a limited number of sales reps with the knowledge or ability needed to sell your product in a market with many competitors.  Using channel reps from distributors or manufacturer’s reps may be the only “go to market” option available to you. Over time, as qualified reps are attracted to your industry and trained to sell your product, you may be able to transition to a direct sales force.  However, for some early stage businesses, this option may be too costly.

Complexity of Product and Sale

Direct sales teams are more successful at selling complex products or products with long sales cycles. These products require the training and patience that a company can provide to its own sales teams.  Selling a product early in its life cycle can involve a very long, complex sales cycle.  Customers do not yet fully understand these products and they demand that reps explain, quantify and prove the product’s benefits. These activities over a long sales cycle are better done by direct sales reps who do not rely on 100% commission for their compensation.

Channel networks are excellent candidates for selling mature products. Customers more readily understand and accept products in mature life cycle stages. Market demand is established, reducing the risk for channel reps selling your product.  These products can be complex in nature, such as personal computers, but they have become commodities or commodity-like.  At this point in the product life cycle, networks of capable, qualified channel sales reps have developed and can offer a company broad market reach, reliable customer support and rapid access to customers.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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