Direct Exporting - What Are The Advantages and Disadvantages

In the globally interconnected world of today, the exporting industry is the industry of the future. In January 2022, US exports of industrial supplies and materials hit a record level high.¹

Direct exports mean your business has full control over its product, as well as direct contact with the foreign buyer, and are a very useful method of exportation for building a long-term international market share. 

In this article, the pros and cons of direct and indirect exporting will be compared and contrasted, as well as giving you advice on which one is best suited for your business.

Having access to local bank account details, a fair exchange rate, as well as being able to manage multi-currency cash flows all from a single business account makes exporting a much simpler, cost-effective process.

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Table of Contents
What is direct exporting? Advantages and disadvantages of direct exporting Advantages of direct exporting Disadvantages of direct exporting What is indirect exporting? Advantages and disadvantages of indirect exporting Advantages of indirect exporting Disadvantages of indirect exporting Would your business benefit more from indirect or direct exporting?

What is direct exporting?

Direct exporting refers to when businesses export their product directly to the customer in a foreign market.

Direct exporting cuts out the middleman - namely, the intermediary between your business and the international market. 

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That being said, direct exporters may still export to intermediaries in the foreign market, such as wholesalers, retailers and distributors. 

The point is that the business exports to an intermediary in the foreign market, rather than selling to an intermediary in their home market - so the export is still deemed direct.

A direct exporting example is that of a US manufacturer who sells their products directly to end-consumers in the Philippines, like that of a Direct-to-Consumer (D2C) business.

Advantages and disadvantages of direct exporting

Direct exporting offers a range of benefits for your business, as well as a few drawbacks. Here’s a quick summary. 

Advantages of direct exporting	Disadvantages of direct exporting
Increased profit Increased control Better communication with your customers	Increased workload Limited market knowledge

Let’s explore these advantages and disadvantages in more depth.

Advantages of direct exporting

There are some major advantages of direct exporting.

1. Increased profit

Direct exporting cuts out the third party between you and your foreign customers. 

This means that there is no intermediary to take a commission during the export process. 

This reduces your business’s costs, resulting in the potential for increased profit. 

Similarly, direct exports allow you to develop a long term market share abroad, which will lead to increased sales and thus profit in the long run.

Offering your customers convenient payment solutions can also increase your profit as well as boost trust and user experience. Get local account details and allow your overseas customers to pay you in their own currency with the Wise Business account.

2. Increased control

The lack of an intermediary between your business and the international market means that you can control exactly how the product is marketed and distributed abroad. 

This gives you increased control over your brand image, as well as allowing you to forge deals and relationships with foreign businesses that align with your own aims. 

3. Better communication with your customers

Direct exporting allows you not only to leverage the brand image you desire, but also allows you to receive direct feedback from your customers. 

This gives your business increased market information, allowing it to adapt accordingly and grow.

This increased knowledge also allows you to make better decisions and become more efficient in serving your foreign customer base, ultimately leading to greater growth.

Disadvantages of direct exporting

Despite its advantages, direct exporting has some disadvantages which may present a challenge for your business.

1. Increased workload

Cutting out the intermediary between you and the international market means taking responsibility for all of their work. 

The logistical planning involved in export shipping is time-consuming and complex. 

Moreover, mistakes in the exporting process can lead to significant, unnecessary costs for your business. 

While direct exporting may come with the benefit of potential profit increases, it also demands that you spend increased time and resources, and thus finances, on the organization of the exportation process.

2. Limited market knowledge

Breaking into a foreign market as a new direct exportation business can be tough.

Significant market research needs to be conducted, and marketing strategies and campaigns need to follow. Similarly, an understanding of local prices and competitors is needed. 

In addition, cultural differences and language barriers must also be overcome. 

All of this requires time, financial investment and product localization that would be handled normally by the intermediary. 

Without this market knowledge, your success as a direct exporter will be limited.

3. Increased costs

The increased workload associated with the logistics of export organization as well as foreign market research will require an increase in staff. 

This will result in increased costs, as more salaries and employee packages will need to be paid. 

These increased costs represent an increase in financial risk for direct exporters.

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What is indirect exporting?

Indirect exporting is when you sell your product to a third party in your home market, who then exports it to the customer in the foreign market.

It is thus the job of the intermediary to handle all the logistical elements of the exportation process. 

An indirect exporting example would be that of a US manufacturer that sells its products to a US retailer, who then exports their products to a foreign market. 

Advantages and disadvantages of indirect exporting

Indirect exporting has some big advantages over direct exporting - but these too come with their own disadvantages. Here’s a quick overview.

Advantages of indirect exporting	Disadvantages of indirect exporting
Easiest market entry strategy Decreased financial risk Increased market coverage	Lower profit margins No customer contact Lack of control

Let’s dive deeper into the pros and cons of indirect exports.

Advantages of indirect exporting

Here are the main advantages of indirect exports.

1. Convenient market entry strategy

If your business is looking to break into the international market, then indirect exporting is an attractive way of doing so. 

The intermediary handles all the complex tasks, in which your business likely lacks the expertise in, from logistical planning and organization of exports to knowledge of the foreign market. 

This makes for a smooth and easy transition into the exporting business, with little extra investment required in staff and other resources. 

Similarly, this allows your business to focus on its core areas of specialization, allowing for increased productivity, making it more competitive.

2. Decreased financial risk

As the intermediary handles all the complex tasks involved in the export process, this means you have less investments to make in staffing and other areas. 

This means you save on these additional costs, thereby decreasing the financial risk that comes with moving into the exporting industry. 

This can be particularly appealing for small businesses with limited financial resources.

3. Increased market coverage

Using an intermediary with good knowledge of the foreign market gives your business the potential to reach a wider range of buyers.

An intermediary has experience in the international market, as well as a name there. This can lead to increased market coverage and thus sales.

Disadvantages of indirect exporting

For all its ease and decreased risk, indirect exports come with some noteworthy disadvantages, which may conflict with your business objectives.

1. Lower profit margins

As an indirect exporter, a part of your revenue will always be needed to pay the intermediary.

This means that, on average, your profit will be lower than if you were to use direct exporting.

On the other hand - if your business can’t manage the costs involved in direct exportation (such as growth in staff), then indirect exporting may actually be the more profitable option - in particular for small businesses.

2. No customer contact

Your intermediary is likely to be the point of contact for your foreign end-customers. 

This means that you won’t receive direct feedback relating to your product. 

In the long run, this could lead to a lack of innovation and development, which could cost your business sales and thus growth.

3. Lack of control

Depending on your business model, it can be that your intermediary is responsible for much of the foreign marketing process.

This means that your intermediary, rather than your business itself, controls the image of your brand in the international market.

If the interests between your business and your intermediary conflict, then this could prove problematic for your product, either costing your business sales or taking it down an unwanted route.

Would your business benefit more from indirect or direct exporting?

Weighing up the pros and cons of direct vs indirect exporting is a necessary first step in selecting the best option for your business. 

Deciding which one is best for your operations is dependent on the type of business you run, as well as partly on the size of it. 

That being said, direct exporting and indirect exporting can be utilized by businesses of all sizes.

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For small businesses with little toleration for financial risk, indirect exports are a great way of expanding your customer base with minimal extra risk.

Similarly, for businesses looking to simply increase sales in the short run, indirect exporting provides a cost-effective, easy method of doing so.

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On the other hand, direct exports are the better option for your business if your marketing campaign and specific brand image are essential to your unique selling point. 

Direct exporting gives your business control of its reputation on the international stage. Service-based businesses, for example, need control over their reputation and image in order to market their services. 

Additionally, direct exporting allows your company to increase its profit margins in the long-run through developing a long-term market share. 

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Overall, indirect and direct exporting both have their advantages and disadvantages. Deciding which is more suitable for your business is a matter of prioritizing your business aims. 

Read more about exporting: Advantages and disadvantages of exporting How to start an import-export business

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Sources:

1. Census.gov - US International Trade Data

All sources checked 25 March 2022