So, you have perfected your product or service and you have a created a value proposition to a very specific target market! Now all you have to do is sell it (which will require a route to market)! Sometimes so much passion and time is spent on the first bit, it is easy to overlook which are the most effective distribution channels to get your product and service in the hands of those who need it most whilst making you the most money!
‘Place’ is one of the fundamentals of marketing and focuses on how you get your offering from A (you) to B (the customer). To some, the answer may be obvious, but to others there may be a variety of different options which could fast track the business considerably. This blog is going to look at the various options that may be available to you, some of which you may not have previously considered, and outline how you can evaluate whether it could work for you and maximise your growth potential.
Stage 1 – Identify the Opportunity
The starting point is a blank sheet of paper and consideration over what opportunities there are available to you, in terms of distribution channels. This will largely depend on the type of business that you have – whether it is a tangible product or a service, whether you manufacture the product in-house or buy-in to sell on, or perhaps whether your product or service is one component part of a much larger product or service. At this stage, don’t rule things out, if there is an opportunity just get it on paper – you can discard them later when you have given the options careful consideration and explored them fully.
Opportunities which may be available to you, (note that this is not an exhaustive list), could include…
Direct to customers
Direct to customers is where most people start their thinking – the reason being that it typically yields the biggest margin (or they consider it to). Selling direct to your target market can take place via a number of methods:
Online – either an e-commerce store or an enquiry generator to start the conversation
Face to face direct selling (either via yourself or a sales team – this would include via word of mouth marketing as well)
Telesales including transactions over the phone
Through your own retail outlet or showroom
Official tender/bid process and contract
If selling direct is a viable option, you also want to consider how you can potentially lock customers into your company for longer – with potentially monthly retainer, fixed term contracts/agreements with renewal periods, subscription models, as well as added value selling, cross selling, upgrades etc.
Although direct to customer can usually generate the highest margin, it will also usually be the slowest method. This is because you need to get established and you need to invest time and money in getting the enquiry pipeline moving. If you are looking to grow in a slow and controlled manner it can be the perfect route to take. If, however you need a reasonable volume of sales pretty quickly – some of the alternatives may be better for cashflow purposes.
In order to evaluate whether direct is the best route you also need to know what your gross margins are. Bigger margins don’t necessarily mean more profit, as you may sell dramatically less due to the higher price.
For example, if you sold £1m of product direct at 65% margin you would make a gross profit of £650K. However, if another method generated sales of £3m over the same period but at only 35% margin your gross profit margins would exceed £1m (so lower margin but higher profits).
If selling direct to a consumer (as opposed to a business), the chances are your selling price will also be inclusive of VAT. In addition, you make also incur transaction charges if, for example, they are paying by credit or debit card. You also have to consider the net cost of overhead that goes into fulfilling that sale – time, manpower etc in comparison to a large bulk order. It may take just as long and cost as much to service a £50 direct end customer than a £5000 trade reseller customer order. These are all elements that can eat away at your margin when selling direct which you need to consider.
Via 3rd party resellers
If you are looking to sell a high volume at a higher rate, and your pricing strategy has allowed for margins to be made at different stages, then via 3rd party resellers could be a good route for you. Within 3rd part resellers you would consider:
Retailers – you sell direct to a retailer who then sells your product on at an additional margin to the end consumer. Retailers could be physical stores or online stores. Some online retailers may not even buy your product from you to sell on – they may just take the order for you to fulfil at an agreed price (think Amazon marketplace).
Wholesaler – you sell your product to a wholesaler who then sells on to a number of retailers. Note that wholesales will often have specialist areas that they focus on so the right wholesaler could provide a great route into a specific market for your product.
Distributors – a distributor is typically a step before a wholesaler and would often have an exclusivity agreement for a particular territory. The may sell into wholesalers, retailers or whatever channels they have developed. You may want to tread carefully with exclusivity agreements as you don’t want to sign up with someone who then doesn’t purchase the volume – so a minimum volume agreement would ideally be in place.
Build your own distribution channel
Building your own distribution channel is not an easy process and takes time. However, on the plus side it is a route to market which still allows you to maintain closer control of your brand and also the speed with which you grow your sales. It enables you to achieve a much wider geographical scope at greater speed with methods such as franchising, licence agreements, network marketing models and retail concessions. What it basically means is that you are organically building your own infrastructure for distribution of your product.
Commission based partnerships
These tend to be less structure arrangements where a third party is looking to work with your company to promote your product or service in return for a commission payment for any sales generated. These could be loosely structured partnerships agreements, independent sales agents, white label partners (selling your product or service under their branding) or affiliates. The benefits of these type of arrangements is that there is only a cost to the sale, once the sale has already taken place. They are doing all of the promoting on your behalf and you are merely fulfilling the product or service promise. Although you are relinquishing some of the margin, what you are saving in terms of sales and marketing time and cost usually far outweighs this. There are a number of cloud based affiliate tracking software solutions which also takes the headache out of the administration of such an agreement.
Stage 2 – Evaluate the Opportunities
Once you have identified those that could potentially fit your business model, you want to evaluate the pro’s and cons of all of them and such analysis may take into account:
– The buying process – from interest to sale
How simple is the customer buying process? Is it an impulse purchase, or is likely to be a researched purchase based on specific fact finding criteria? How important is personal interaction in the buying process? Are there too many variables to attach a standard price to the offering – does there need to be a “quote” stage or a “trial” stage to the buying process? What is the price point of the product and how is it positioned (i.e would someone buy it online)? There is a lot to consider.
– The margin tree
Does the pricing of the product or service allow for different levels of margin to be made at different links in the distribution chain? If not, could efficiencies be worked on to facilitate this? For example, if your product is a consumer product and is priced at £25.00 inclusive of VAT then the margin tree may look like….
Unit cost of sale = £2.00
Price to a Distributor = £5.00 (60% margin for manufacturer)
Price to a Wholesaler = £7.50 (33% margin for distributor)
Price to a Retailer = £12.00 (37.5% margin for wholesaler)
RRP £25.00 (inclusive of VAT) = 32% margin for retailer)
– The investment vs margin scale
So in the above example, on the face of it, you may think surely it is better to sell direct as we will achieve a selling price of £25 as opposed to £5. However, as mentioned earlier, you have to take into account VAT (which is another £5 off your profit) and probably a transaction fee (let’s say £1.50). Suddenly the profit in a £25 direct sale is £16.50 (66%) – only 6% more margin than selling it to a distributor for £5, and actually less margin than direct to wholesale or retail (although still more profit in monetary value per order).
However, what you also need to consider is volume. The direct to customer sales is 1 unit. The distributor, wholesaler or retailer sale could be 10s, 100s or 1000s of units in one transaction (particularly if dealing with a retail chain of stores as opposed to one outlet).
Then you have to balance the time and effort and marketing cost of getting 1000 direct sales as opposed to 2 wholesaler or retailers placing an order of 500 units each (plus their potential repeat value). If you have a clear finger on the pulse of you KPIs you can calculate which route makes more economical sense. There is no right or wrong answer – it will depend on your product/service and business model.
– Speed of upscale
You need to consider how important is the speed of growth. Is your business model centred around a high price, high margin and low volume or is it a low margin, high volume (or somewhere in-between)? How much have you invested to get your business where it is and how soon do you, or your investors, need to see a payback? How critical is cashflow? Is there only a small window of opportunity that you need to exploit to maximise returns? All of these points, among others, need considering.
– The Capacity Dilemma
Another factor to take into consideration, particularly in the early days is the level of capacity that you have. This may largely govern how quickly you can grow and may be influenced by the complexity of the offering, the availability of raw materials, man-power (and ease of recruitment), time (hours in the day). Is there always going to be a fine balance between supply and demand? Can you afford to stock hold or is it a just in time model? If you went down a third-party reseller route and next week they placed an order which was equivalent to your previous three months of trading, could you fulfil it (and profitably)? Your biggest opportunity could also potentially be your biggest headache.
– Brand control
You have created this baby and you have a clear mission/purpose, vision and values. Would, or could, a 3rd party compromise these? How would you feel if your brand positioning was compromised by price discounting or some negative PR for the reseller which in turn had a negative impact on your brand through association? How important is brand control to you? Some business owners will be very protection (if the mission of the business is strong). For others, it will just be about what makes the most money.
So, you can see that there is a lot to consider about one of the fundamental elements of your business. Many people would not even consider this to be relevant to marketing. However, unless you know where the business wants to go and how – how can you know what audience(s) you are trying to appeal to. Also, having read this blog, are there alternative routes to market you had not even previously considered?
Quite often the marketing challenge will not only involve how to drive demand from the end customer for your offering, but how to attract other parties on board to present your offering to a wider audience.
Latest posts by Ian Kirk (see all)
- The Secret to Keeping Customers Smiling - January 30, 2019
- Why you need to get inside the customer’s mind - December 18, 2018
- What your business can learn from New Year rituals! - December 12, 2018