Choose Your Early resellers Carefully; They Could be Your Last

I work with a lot of entrepreneurs. Occasionally, they have ideas or inventions which have enough commercial potential to be viable products and/or businesses. When I say viable, I mean have enough margins, sales volume, market and profit potential, novelty, protection, value and opportunity to be a commercial success.

Let’s say an inventor or entrepreneur has actually made it through the design and prototyping of a new product. Packaging, sampling, initial sales efforts, manufacturing, price modeling, marketing, PR, etc. all quickly follow. After the product related issues are resolved prospective clients and sales channels need to be addressed.

Every inventor dreams of having their products sold at major retailers, on TV shopping networks, through the big web e-tailers, or through a major service organization. In the instances when the call comes to “go to the show” and deal with a major league retailer, many are not prepared for the economics of the sale, the repercussions of a bad experience with a major retailer, and the business models involved with selling through indirect channels.

First and foremost are the logistics of the sale. Will you sell direct, or will you have to go through a distributor or aggregator to sell to the retailer. Many retailers will not deal directly with new or small manufacturers due to the cost of administering the relationship or the flexibility (and leverage) that they have with their existing distribution partners.

The Terms of the sale are also important. What are the sales terms: payment terms, discounts, back ends (rebates), accruals, return privileges, F.O.B. terms, ownership issues (title) and administrative costs? If the product does not sell or sells slowly what are your risks?  Are there enough margins to actually support the indirect channels? What promotions are required or necessary to sell the products?

Going back to the proverb; “Be careful of what you ask for – you may get it”, let’s look at a few examples.

A Software Example

I had an associate that led a company which developed multimedia software products. Having been a publisher for many years he keenly developed a series of titles with seemingly broad appeal, high quality content, and good packaging. He was a master showman and created a tremendous buzz at trade shows with his initial launch of the products. He had contacts in the book distribution and publishing industries and gained distribution though those channels and knew what to expect.

What he wanted, and ultimately got, was a deal with a major warehouse club. Yes, he was going to put pallets, mostly full, of his products throughout the chain of club stores. He expected quick re-orders, cash flow, and lines of other retailers wanting to take his products. He added a few other retailers, a few units per store, and got listed in catalogs.

Next he waited. And waited, and waited for re-orders and cash flow. From all appearances he was doing great. He was in a few major retailers, had pallets of products distributed throughout the U.S., and ran out of cash.

More than six months after shipping the pallets he was paying to get them shipped back. The sales of the product through the warehouse club were dismal and of the small quantity not returned most did not show up on the sales reports as sold – they were shrinkage (damaged, stolen, or lost).

The total tally; truckloads of product, freight bills, and no cash flow, the company closed. There was no “test” to see if this was the appropriate venue to sell his products through. An as is almost always the case, the terms of the agreement paid post sale. My friend was too good a salesman.

Novelty Products

Another associate and partner developed a novelty product a few years back. They invested in patents, set-up low cost manufacturing, obtained prototypes and went to a few major trade shows. At a show they met with a number of retailers and a few of the Shopping Networks.

They got what they wanted—a deal with a TV Shopping Channel! They negotiated and delivered at a low price, in exchange for a P.O. without sales return privileges. Yes, the inventors dream, a non cancellable, nonreturnable order from the big leagues.  The product was placed on air a few times, and for whatever reason, did not sell up to expectations. Everyone was disappointed, the retailer, the partners, and their investors.

The partners had ordered “back-up” product in anticipation of great sales which was never ordered. They also had inventory left at the TV retailer. As with any retailer that has slow moving merchandise, their product was discounted and a close-out price was posted on their web site.

Whenever any sales person approaches a retailer, the retail buyer or merchandiser always checks their competition to see what the street price, margin opportunity, and availability of the manufacturer’s products are. The web site discounted price listing was the kiss of death. No other retailer would touch the product. Their take was if you could not you’re your product with 5-10 minutes of TV broadcast time, they would not be able to sell on a shelf.

The sales terms negotiated, which seemed so good early on, were now painful. If the finances and determination of the entrepreneurs were up to the task, buying the product back – so they could have more control of their destiny - might have been an option.    

Managing your distribution and reseller partners needs to be part of your strategy. Know who you selling through, who they are selling to, what is selling, what promotions are effective in getting sell through, and what you need to do to position and protect your brand.

Upcoming Blogs:

“Using contract call centers for lead generation, sales, customer service and support, and disaster planning.”

“Small product and packaging changes can open new market opportunities with little additional cost.”

“Inventory from Raw Materials through the sales channel.”

“Terms of Sale, knowing how and what you are really selling for”