Distributor Sales vs Direct Sales: Which Is Better for Startups?
Any startup or scaleup involved in the sale and manufacture of goods will face the question as to whether to trade directly with the public or use a distributor. The two are not necessarily exclusive but combining them can be complicated as a distributor might see a parallel direct sales channel as an infringement of its rights and a threat to its profitability. Especially in the early days, startups tend to opt for the direct route because their sales levels are manageable and it allows them to keep all the revenue generated instead of sharing a proportion with a distributor.
The experience of the life sciences sector is unlike that of most other industries. This is partly because some elements of the sector are heavily regulated, with the supply of many life sciences products restricted to accredited bodies and professionals. Prescription drugs are an obvious example of this. It would be impossible for a life sciences company to sell direct to customers anything that only doctors are authorised to prescribe.
However, the life sciences industry is far broader than that. It encompasses everything from pharmaceuticals and medical services to crop sciences and nutrition. In many areas, the opportunities presented by direct-to-customer sales (D2C) are not just a convenience for startups but they can be a solid source of revenue.
The Life Sciences Distribution Model
Routes to market have never received much attention as a form of competitive advantage in the life sciences and biotech industries, largely because while the value of a new medicine can run to billions of pounds, the margin on logistics is tiny in comparison. However, this is changing as patients are beginning to identify as consumers of healthcare, the prominence of biotechnology products is growing and healthcare funding is being severely stretched. For early stage European biotech companies who are trying to make the most of their venture capital seed funding, the distribution model is worth examining as a valuable contributor to their revenue.
According to a Deloitte report , direct sales can reduce the cost of distribution by up to 20% and deliver greater patient satisfaction but only 30% of pharmaceutical companies have adopted this model. That may have something to do with the structural complexities within large companies. For a startup, a flexible distribution model could be just the innovation needed both to accelerate access to the market and to maximise profit.
The Main Differences Between Distributor and Direct Sales
Neither route to market is without significant costs, even though for a startup, the direct route may be more cost-effective in the short term. What a distributor agreement does well is to remove the pressure of building a sales process by effectively outsourcing your sales operation. In the early days of a life sciences business, it is likely that all of your time will be consumed by research, development, testing and often the grinding process of obtaining regulatory authorisation. In these circumstances, there is something extremely attractive about having in place a distribution system managed by an external party into which you can feed new products as soon as they are ready for the market.
Of course, finding the right distributor is paramount. You need to find one that has a broad, loyal and stable customer base with a wide marketing reach and proven expertise in distribution. It is also important to ensure that they are experts in your target market because there is more to distribution than simply logistical machinery. Your products are not interchangeable commodities like beans or bread and your distributor needs to know the expectations and the language of your market. Even when you have found what seems to be the ideal partner, it’s important to keep the relationship under review because companies, markets and technology change. What works now might not be so effective in a year’s time.
If you do choose the distributor model, you must be prepared for a certain surrender of control. You are unlikely to have much of a say as to how the distributor sells your products so if that’s important to you, it will colour your decision. Remember, too, that you won’t receive 100% of the profits because in a distribution partnership you may have to share anything from 20% to 50% of the revenue received.
That last point about revenue is significant because any life sciences or biotech startup will want to maximise its earnings from the outset. Funding for such businesses is notoriously hard to secure partly because of the very long lead times involved in getting products to market and partly because the cost of research and product development is considerable. Investors might raise an eyebrow at the sight of significant income passing into the hands of a distributor.
Direct sales are good for generating feedback from healthcare customers. This is particularly helpful for startupswho can use it to make corrections and improvements to products and services. Any feedback through a distributor is likely to be more muffled and less explicit – if you receive any at all.
Another advantage of direct sales is supply chain visibility which aids effective management, allowing the collection and aggregation of orders, shipments and inventories. Digital analytics tools can streamline these processes and give the company predictive insights into how its product market is developing.
Is It One or the Other?
It’s virtually impossible to argue that one model is better than the other for a life sciences startup or scaleup. Much depends on the stage you have reached, your speed of growth, the precise nature of your products, your relationship with investors and many other variables. The temptation is to keep as much control as possible in the early days but it’s essential to know when a direct sales model might be hampering the growth that the broader reach of a distributor can provide.
Speak with our experts about whether your product is better suited to direct or indirect distribution. Book a consultation with ScaleX today to discuss your possibilities and the best route forward.