The role of a distributor in selling your product
Video transcript
This video is all about the role of a distributor in selling a new product and this video goes through: what they do; why you might want to use them; but critically also talks at the end about the cost implications to your margin of employing a distributor to market and sell your product.
A distributor’s role is as the name implies – to distribute your product. Now, what does that mean? In all reality, there are various things that they will do. For example, they will be the salespeople to get your product into retailers and this is one of the main advantages of using a distributor they have a sales team with existing relationship buyers. So if they ring up the likes of Halfords, Argos or John Lewis they’re going to get through to the buyer, and in theory, they have a much better chance of selling the product because they already have an account with that retailer.
Now, once the product is sold in then they can account manage that reseller because getting the product in is really only the first step of the journey. After that you’ve got to manage that retailer in terms of training their staff, working at the point-of-sale display negotiations; annually negotiating the margins and setting volume targets. All of those things, your distributor will manage for you.
Their role is also to warehouse your product and then to get the product into the various different stores and this can be quite complex because a lot of the larger retailers have particular ways of doing things, in terms of when lorries can arrive to drop off pallets for example. Your distributor should be well up on all of that and more than able to do that without getting the fines. (Some of these big retailers otherwise do put fines people when they’re delivering their products incorrectly according to their system.)
The distributor should also manage your customers service so if anyone struggles when they get your product because there isn’t one of the parts in the box that should be or they can’t understand the instruction manual, then your distributor will be the first line of defence! The customer will ring the distributor number and they will have a customer service team that deals with those kind of issues. Repairs and returns should also be done by the distributor and this is one of the main things to check out to make sure that you’re not just going to get a whole lot of product sent back to you if there’s a problem, but the distributor actually has the capability in-house of dealing with kind of minor issues on the product and then returning those products obviously are suitable back to stock. The distributor may also deal with picking and packing your direct to consumer orders. If you have a website and you’re selling product direct to the customer, someone needs take the ordered product out of the warehouse, apply address labels and pack it for sending. They then arrange the delivery company to send it out to the customer.
Finally, and this is a big part of it, some distributors will offer marketing of the product. They would expect the brand to provide a certain amount of assets in terms of product photography, video, descriptions the products and that type of thing but then from there, they can often do things like Instagram, consumer shows, marketing and trade magazine adverts. They’ll often handle all of that for you. Obviously, this is going to cost you something and what it costs you is margin so the distributor will want a margin on top of your product before they sell it to the
retailer.
Now in some cases this just makes the relationship entirely unworkable it may well be that there is not enough margin in your product for you to have someone else in the chain between you and the end customer. But that’s okay, it just means all of these other things you’re going to have to handle yourself because you can’t afford to pay someone else to do it all for you.
Now let’s look at distributing margins and how this adds up.
Let’s assume that your product costs £96 by the time you take off the VAT% you’re down to £80.
By the time you take off the retailer margin (let’s say the retailer want 50%) you’re down to £40.
Now of that your distributor is likely to want 35% so by the time you’ve taken off that you are down to £26.
Then obviously you’ve got your factory gate price to take off of that and then that leaves you what you’ve got left for you. This is likely to be around £6 as the facotry gate price is generally around 1/5 of RRP.
Now in some models this works and for some companies this simply doesn’t work and there’s just no way of having a distributor in that chain.
There is another advantage that’s worth bearing in mind if you use a distributor. Often they will buy stock from you. For example, they might buy a container load directly from the Chinese factory and they may even organize the shipping and pay for that. This can be hugely advantageous because you’re suddenly getting a lot of volume in terms of your sales very quickly and it also hugely helps your cash flow because the distributor is buying the stock off you before it’s actually been sold to the retailer. Often resellers don’t pay for 30 days, or larger retailers even 120 days, but all of that then is the problem of the distributor not you.
So, to sum up the distributor can provide a huge benefit to a start-up company with a new product because they take all the hassle out of retail sales and maybe even marketing as well. However, for that they are going to want a margin on your product and in some cases this is going to work and sometimes there just won’t be the margin to allow for a distributor.
When selling in a foreign country, often a distributor is the only way but this will depend on the retail and distributor margin for your market and that country, as it whether this is affordable.