If your new business is going to distribute products in the U.S. retail market, that means what people call “the channel.” Also known as channels of distribution or retail channels. As in stores. Big stores or little stores. Macy’s, Office Depot, Staples, Safeway, whatever. I see too many business plans that underestimate the effort, resources and problems involved in selling things through channels.
So you know, my experience with channels started in 1993 and has been almost entirely in stores and chains selling packaged computer software. I’ve talked to a lot of people dealing in other kinds of channels, and it seems to be quite the same. So that’s a disclaimer.
- Understand tiers. Most of the major retail channels in the U.S. involve two-tiered distribution.
- The big retailers, which tend to be chains with hundreds of stores, want to buy from distributors, not from you. No offense intended. It’s just that buying from distributors makes their life simple. One bill, one payment and easier administration.
- Distributors are tough gatekeepers. They aren’t looking for new vendors. New vendors mean more work. And more risk. So they aren’t anxious to change the status quo. Of course there are exceptions, but that’s the rule.
- Retailers are also tough gatekeepers, for the same reason. Here, too, there are exceptions, but it’s hard to be one.
- Both tiers are much happier about new products when they come from existing vendors. Major companies that are already selling into the channel have it easier.
- Packaging is really important for everybody in the channel and more so for new companies. Obviously this is a matter of different products and different industries, but through retail, buyers make choices based on what they see. We vendors would like them to read reviews and make more informed decisions, but most of the time they decide based on what they see.
- Channels take a big cut of your money. How much varies by industry, but if you are planning a new business and you don’t know, find out. The distributors take a small cut, but they take forever to pay you. The retailers take a larger cut, and they don’t have to pay you because they bought from the distributors. Both tiers take cuts of the money for co-marketing and things like that. You get a much smaller revenue per unit, and it comes several months after you make the sale.
- Most channels will insist on being able to send unsold goods back to you, the vendor, and have you buy them back at the same price they paid you, without any allowance for all the co-marketing commissions. This makes financial analysis hard.
One of the things I learned early about channels: They don’t care about your problems. If you’re hard to deal with, they’ll find somebody else to sell into the same segment.
So if you can sell direct, count your blessings. Channels offer volume and branding, and that’s attractive. But direct sales have some very attractive advantages, too.
This entry was posted on Thursday, March 20th, 2008 at 3:56 am and is filed under startup advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.2 Responses to “8 Tips on Getting Into Retail Channels”
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March 31st, 2008 at 4:31 am
Tim,
All very good points and important things to keep in mind. I would like to clarify that your advice is intended primarily for consumer retail channels. While most of your points hold true no matter who your customer is, when your end-goal is to sell to businesses, there are a couple of key differences in how one should approach the sell.
Having worked in consulting and sales within the enterprise channel for the past 7 years, I’ve found that sometimes marketing (not selling) directly to your intended client can be quite effective, if your value proposition is good enough. This holds true especially for the tech sector where most often the products that are pushed from the top of the channel on down to the clients are influenced by financial incentives to the distributors and resellers, as opposed to meeting the clients’ needs. Very often I see clients bringing very good products to the attention of their resellers, therefore spreading the sale upwards (or at least creating a more direct sales channel). These are great opportunities which shouldn’t be missed, in conjunction with your other points. Thanks,
Jake
April 17th, 2008 at 11:47 am
Excellent post. How do you view the role of independent manufacturer reps? I’ve seen some industries where you can’t get in front of a retailer without having a good rep behind you; apparel comes to mind.