I've heard some version of this question many times.
CFOs and sales operations leaders are often perfectly comfortable allocating margin to the reseller that's actually selling to the end customer. They understand that the reseller found the opportunity, manages the customer relationship, provides services, and helps close the business.
But then they look one level up the channel at the Tier 1 distributor and ask:
"Why do I have to pay these guys 3%?"
Sometimes there's almost a physical aversion to it!
"Why can't we just sell directly to the reseller?"
You can.
The better question is whether you actually want to.
That 3% Buys More Than Order Processing
It's easy to look at distribution as a middleman sitting between you and the reseller, taking a few points of margin every time a product changes hands.
That's not really what you're paying for.
You're paying for an infrastructure that would otherwise need to exist inside your own company.
For a hardware manufacturer, that can start with capital and risk. The distributor purchases inventory from you, finances those purchases, extends credit to resellers, manages collections, and assumes meaningful credit exposure that would otherwise sit on your balance sheet.
Then there's inventory management. Someone has to warehouse the product, allocate it across hundreds of partners, fulfill orders, manage returns, handle stock rotations, administer price protection, and work through product transitions and end-of-life inventory.
Now consider the transactions themselves.
Would you rather process 500 individual reseller purchase orders, invoices, credit relationships, payments, and reporting feeds—or sell larger quantities through a handful of national distribution relationships?
That operational consolidation has real value.
You're Also Buying Access
This is the part that's often underestimated.
A good national distributor doesn't just have warehouses.
It has relationships with thousands of resellers, VARs, MSPs, systems integrators, and other technology partners.
Those relationships took years to build.
The distributor already has the contracts, credit facilities, ordering systems, sales contacts, partner programs, and infrastructure necessary to do business with them.
For manufacturers entering government markets, distribution can provide another important advantage: access to partners and pathways that participate in established SLED and federal procurement vehicles.
So when you sign with the right distributor, you're not starting your reseller network from zero.
You're plugging into an ecosystem that already exists.
Could You Build It Yourself?
Absolutely.
- You could establish credit relationships with hundreds of resellers.
- You could manage collections.
- You could build the systems required to process their orders and invoices.
- You could warehouse and fulfill your own inventory.
- You could build teams to handle returns, rotations, price protection, reporting, and product transitions.
- You could develop government procurement capabilities.
- And you could hire a channel organization to recruit and manage hundreds or thousands of reseller relationships.
But now we're no longer talking about saving 3%.
We're talking about building and funding much of what the distributor already provides.
And unlike distributor margin, many of those expenses become fixed costs whether your channel sells $5 million or $100 million.
Think of Distribution as a Variable Cost
That's why I don't think of distributor margin simply as "giving away 3%."
I think of it as converting infrastructure, working capital requirements, operational complexity, partner access, and risk into a variable cost that scales with channel revenue.
When sales are small, you pay less.
When sales grow, you pay more—but you're paying more because the channel is producing more revenue.
That's a very different economic proposition from building all of that infrastructure yourself and hoping the revenue eventually arrives.
So the next time someone asks:
"Why do we have to pay these guys 3%?"
The answer shouldn't be, "Because that's how the channel works."
The answer should be:
"Let's calculate what it would cost us to do everything they're doing ourselves."
That usually makes the 3% conversation a lot more interesting.
The exact economics vary by distributor, product category, volume and program structure. But for high-volume B2B hardware, a few points of front-end distributor margin is a reasonable baseline assumption.