Two-tier distribution is a channel model where a vendor sells products to distributors, who then resell to a network of resellers, VARs, or MSPs that serve end customers. The flow is: vendor to distributor to reseller to customer. Each tier adds value and takes margin.
This model exists because managing thousands of small resellers directly is operationally expensive. Distributors aggregate demand, handle logistics, extend credit, and provide technical support to the reseller network. The vendor gets broad market coverage without the overhead of managing each reseller relationship individually.
Distributors add several forms of value. Credit and billing: they extend payment terms to resellers so the vendor does not carry accounts receivable risk across thousands of small partners. Logistics: they warehouse and ship physical products (still relevant for hardware and hybrid deployments). Technical enablement: they train and certify resellers on the vendor's products. Market reach: they have established relationships with resellers the vendor could not efficiently recruit on its own.
In the SaaS era, the two-tier model has evolved. Physical logistics are less relevant, but the credit, enablement, and market reach functions remain valuable. Cloud distributors like Pax8, Sherweb, and AppSmart have built modern versions of two-tier distribution optimized for subscription software.
Two-tier economics reduce the vendor's margin per unit but increase total units sold. The vendor might earn 50 cents on the dollar instead of 70, but sell five times the volume. The math works when the product has low marginal cost (software) and the reseller network provides coverage the vendor could not achieve alone.