### Channel Economics in Indirect Sales When considering channel economics for indirect sales, such as through [[reseller|resellers]], the dynamics differ significantly from direct sales. In this model, the [[cost of goods sold (COGS)|cost of goods]] to manufacture the product remains constant, for example, $33. However, the [[selling costs]] are reduced because the [[sales force]] focuses on engaging with a smaller number of resellers rather than numerous end users. This shift results in a decrease in [[sales, general, and administrative (SG&A) costs]], which, along with [[research and development (R&D) costs]], drop from $20 to $15. Consequently, the total cost to get the product out the door is $48. Despite maintaining a list price of $100, the revenue to the sales channel is $90 after accounting for a typical 10% discount expected by end users. In this indirect sales model, resellers play a crucial role. They purchase the product at a lower price, say $70, and sell it to end users, earning a profit of $20 for their efforts in carrying, stocking, and reselling the product. The [[manufacturer]], on the other hand, earns a profit of $22. This scenario illustrates a key trade-off in using an indirect channel: while selling costs are lower, a significant portion of the profit is shared with external parties not part of the company. This trade-off must be carefully considered when deciding on the sales strategy, as it impacts the overall profitability and control over the sales process. ### Channel Economics in Original Equipment Manufacturing (OEM) In the context of [[original equipment manufacturer (OEM)|original equipment manufacturing (OEM)]], channel economics takes on a different perspective. Consider a laptop manufacturer like Apple or HP, where the laptop is sold through a computer reseller channel for $3000. Similar to other channels, end users expect a discount, and resellers earn a profit margin. However, the reseller purchases these laptops from a master distributor, adding another layer to the channel. The manufacturer’s cost of goods sold (COGS) includes manufacturing costs, components, and other expenses, alongside their sales, R&D, and administrative costs, ultimately leading to their profit. For a component supplier, such as a graphics chip manufacturer supplying to Apple or HP, the economics are different. The supplier's product becomes part of the laptop manufacturer’s COGS. If the supplier sells directly to the manufacturer, they avoid reseller costs but incur higher direct sales costs. The supplier’s profit margin is typically smaller compared to the laptop manufacturer, but the high volume of sales can result in substantial overall profits. This highlights the importance of understanding one's position within the [[supply chain]] and how it affects profitability and sales strategy. ### Strategic Considerations in Channel Selection Choosing between direct and indirect sales channels involves strategic considerations that impact a company's financial performance and market reach. Direct sales offer greater control over the sales process and customer relationships but come with higher selling costs. Indirect sales, through resellers, reduce these costs but require sharing profits with external partners. Companies must weigh these factors against their business objectives, market conditions, and competitive landscape to determine the most effective channel strategy. In OEM scenarios, the decision to sell directly or through intermediaries depends on the nature of the product and the target market. High-volume, low-margin components may benefit from direct sales to manufacturers, leveraging economies of scale. Conversely, complex products requiring extensive distribution networks might be better suited for indirect channels. Ultimately, understanding channel economics enables companies to optimize their sales strategies, enhance profitability, and achieve sustainable growth in competitive markets. Back to: [[How Will You Deliver Your Value?]]