Customer is oxygen for business. More customer means higher sales and thus better financial health. To remain in business – manufacturers have no option but to seek out more customers in larger markets. Effective distribution strategy enables a business to achieve this goal without significant investment in sales infrastructure.
So, how should a business go about building distribution channel ? The first task is to create a distribution plan charting a path for accessing market. Ideally, businesses should consult experienced distribution trade professionals to prepare customized distribution plan matching their products. Failure to do so may lead to loss of money and wastage of resources or in worse case – loss of brand image and reputation.
This article outlines essential parts of a distribution plan. In case you need a customized distribution plan prepared by experienced distribution trade professionals – please tell us here.
1. Analysis Of End-User
Foundation of a distribution plan depends a great deal on nature of product. Majority of products may sell directly on its own without demanding special skill from channel partner while others may invite some complexities. Its extremely important to understand the product characteristics before setting on channel building. Nature of product and how its going to sell depends largely on nature of end user. For example:
- Does the end-user likely to buy the product from a physical store or online (e.g. consumer products, snacks, soaps, washing powder etc.)
- Does end-user need personalized service ? (e.g. consumer durable like washing machine, air conditioner etc. that need installation/service)
- Does the product needs end-user education ? (e.g. software, special gadgets that require initial training)
If end-user (customer) needs personalized service, one may utilize dealer network or reseller program. If customer prefers to buy online, one can create an e-commerce website with fulfillment system and sell directly or opt for e-commerce marketplaces like Amazon, Flipkart etc. One may build specialized sales team to prospect and close deals directly with customers or, one may reach out to larger retail stores.
Based on end-user characteristics – a business may opt for wholesaler, distributor, retailer, dealer, sales agent, Value Added Reseller (VAR) etc. or any combination thereof.
2. Identifying Target Channel(s)
In sales and distribution – a channel means a business or a chain of businesses that a product must pass through before customers can buy it. There are multiple channels available for selling products/ services in India – manufacturers need to select the best or a combination thereof that suits his/her product best. For example – available channels for any Indian business
a) Direct To Consumer Using own sales force (all companies start with this channel for local market)
b) E-Commerce (Online) – easiest e.g. Amazon, Grofer, BigBasket, Flipkart etc.
c) Modern Trade (MT) e.g. Retail chains like BizBazaar, DMart etc.
d) General Trade (GT) i.e. distributors, dealers etc.
f) VAR (Value Added Reseller)
g) Sales Agents
Selling through a single channel is extremely risky. Businesses should work out coherent channel strategy that ensure channel partners are in mutually exclusive zones – i.e. one kind of channel partner does not intrude on other’s space.
3. Identification of Target Markets
‘India is my market’ is a great statement but one has to prioritize states or regions in view of limited resources. The company needs to identify where to start immediately and where to continue afterwards. This is generally done by analyzing the product and its end users, supply chain requirements, regulatory restrictions (if any) etc. For a company starting on distribution – perhaps the best solution is to start from home state and gradually cover other states in a concentric circle. This would avoid unnecessary pressure on supply chain logistics. However, needs of every organization differs – there’s no one-size-fits-all solution.
4. Channel Structure And Margins
The channel structure depends on number of channel partners and their mutual inter-relation. It has great influence on product pricing and profit margin of manufacturer. Distribution cost may vary widely – from zero (for direct sale) to upwards of 40% depending on channel structure and margins of channel partners. More the channel partners – more will be distribution cost, more pressure on training, skill development, logistics etc. Its a trade off between sales volume/ absolute profit against distribution cost and profit margin.
Channels tend to expand with time. Product pricing should be based on present and future distribution cost, otherwise it may adversely affect profit margins of successful products. Here’s an article on possible margins of channel partners – How To Price Your Product Realistically And Avoid Common Mistakes
5. Credit Policy
Credit is not an option but necessary (evil) in distribution trade. For most companies, offering trade credit isn’t optional: When your competitors do it, you are at a disadvantage if you don’t – and on similar terms. Sooner, than later – companies in distribution trade have to develop a credit policy.
Granting credit has a cost. There’s cost of capital – either cost of borrowing or the opportunity cost of lending, given that money advanced to the client could have been put to better use. Then there are administrative costs of maintaining track, cost of collection etc. Finally, some customer debt may go bad. A business can mitigate these costs by establishing a smart credit policy and then carefully managing accounts receivable. If business fails to turn receivables into cash, its bound to affect vendor payment and consequently vendors’ credit decisions. Credit policy is usually tied to sales strategy.
Two kinds of credit predominate in the business-to-business world. Open credit requires no down payment and levies no interest or carrying charges. The payment is simply due in full on the specified date, typically 30 days after the goods are delivered (widely denoted as “Net 30” on an invoice). Revolving credit, on the other hand, sets a limit on how much a customer can borrow. The customer pays interest only on the principal actually borrowed; as the debt is repaid, the credit available increases. These are the basics. In addition, the terms of sale may include discounts for early payment; a common incentive reduces the bill by 2 percent for full payment within 10 days. (In a 30-day cycle, this is denoted as “2% 10, Net 30.”) Or one may demand a penalty or interest payment when a due date is missed. There may be many other components in a credit policy.
The idea is to remain ready with a policy when its known that sooner or later the company may have to extend credit to channel partners.
6. Supply Chain Policy
Supply chain, or rather its reach and capacity, greatly influences choice of target markets. A company should not appoint channel partners indiscriminately unless cost effective supply chain is available.
7. Customer Segmentation And Market Positioning
Though these concepts belong to domains of marketing and branding – there could be implications for distribution trade for some products. Customer segmentation refers to segmenting customers into groups and then tailoring marketing campaigns to requirements of specific groups. Market Positioning refers to the ability to influence consumer perception regarding a brand or product relative to competitors. The objective of market positioning is to establish the image or identity of a brand or product so that consumers perceive it in a certain way. For example, manufacturer may position a product as premium (status symbol), innovative, inexpensive, cost saving etc.
A customized distribution plan may include other factors also, such as
- Kind of customers a company aspires to have,
- Special skill/expertise required for potential channel partners
- What kind of geographical territory the company needs to serve
- Any quantitative criteria for selection of channel partner such as investment capacity, size of sales force, no of years in business etc.
- Kind of value proposition and brand strategy – the channel partner needs to uphold etc.
A distribution plan may change course or evolve over time – there’s nothing wrong with it. However, having a distribution plan is highly recommended as its an insurance against expensive trial and error method.