How two-tier distribution works
In a two-tier model, the vendor sells to a distributor, the distributor sells to resellers, and the resellers sell to the end customer. The distributor is the first tier and the reseller the second.
The vendor deals with one distributor instead of hundreds of small resellers. The distributor manages the reseller accounts: onboarding, credit terms, ordering, invoicing and often first-line technical support. Resellers get one place to buy products from many vendors, on one invoice with one set of payment terms.
Why vendors use distributors
Distributors give a vendor reach into thousands of resellers and managed service providers it could never sign one by one. They also carry credit risk, since the distributor pays the vendor whether or not a reseller pays on time.
The trade-off is margin and visibility. Each tier keeps part of the price, and the vendor can lose sight of which reseller sold to which customer unless the distributor shares sales data. Clear deal registration and reporting rules help prevent channel conflict between resellers buying through the same distributor.
Distributor vs reseller vs MSP
- A distributor sells to resellers and rarely touches the end customer.
- A reseller or value-added reseller sells to the end customer, sometimes with services.
- An MSP runs the software for the customer as part of a managed service, often buying it through a distributor.
Example
A cybersecurity SaaS vendor with a list price of $10 per user per month signs a distribution agreement with a regional IT distributor. The distributor buys at 35% off list, or $6.50 per user, and sells to its resellers at 20% off, or $8.
One of those resellers, an MSP, adds the product to a 200-seat contract with Kestrel Foods at list price. Each month Kestrel pays the MSP $2,000, the MSP pays the distributor $1,600, and the distributor pays the vendor $1,300. The vendor handles one invoice from one distributor, however many resellers sell the product.