3 methods of successful product distribution for first-time entrepreneurs

Sept. 1, 2012
So you have the next great product idea. You've spent tons of hours, and part of your personal savings, developing and manufacturing this new innovation and are waiting for the world to beat a path to your door.

By David Brown

So you have the next great product idea. You've spent tons of hours, and part of your personal savings, developing and manufacturing this new innovation and are waiting for the world to beat a path to your door. Before you spend all of your upcoming riches on that new vacation home, consider your plan to bring that product to market. Don't have one? You're not alone. Most first time entrepreneurs don't think about this aspect of their business. Even the ones that do will many times underestimate the time and resources it takes to successfully launch a product into the marketplace.

With that in mind, here are three of the most common methods of product distribution. While the success of your idea is ultimately up to you, these methods will help build a blueprint for positioning your product for greater market accessibility.

Direct Source

While the Direct Source method offers the most overall control, it also creates more work for the entrepreneur. Creating and maintaining your customer database, designing and mailing any promotional materials, posting your product on the web or e-commerce site, contacting trade journals to place ads or publish articles, joining trade organizations, and attending industry trade shows are all potentially expensive and time-consuming tasks when it comes to marketing and distributing your product. Utilizing the Direct Source method also means that you, the entrepreneur, are solely responsible for stocking your product, taking and shipping all orders, and billing and accepting payment for your product.

One other aspect of the Direct Source method is that the rate of growth may not allow you to recoup your development costs in the short term. Even though you have greater margins by going direct, you also incur greater marketing and overhead costs by handling all operational and marketing aspects of the business yourself. Time, too, can become a liability when the Direct Source method is used. All responsibility for product management, sales, marketing and operations is on you, leaving very little time for further product development and expansion.

The advantage with going direct, however, is that it puts you in direct contact with your customer. You'll know very quickly what they like and dislike about your product. This direct access to customer feedback will be invaluable for product refinement in the early stages of your launch phase. It is much easier to make changes to your product if your demand is ten units a month than it will be when your demand is 10,000 units month.

Over all, the Direct Source method is a great method for entrepreneurs who want to start out small and have plans for expansion over time. Growth is achievable as long as you have ample time and resources to control all necessary aspects of the sales and distribution process.

Dealer Network

Utilizing a Dealer Network may be the most popular of the three methods for product distribution. This method still offers the entrepreneur some degree of control over the product and the flexibility that comes with having other parties handle the sales and distribution to the end user.

By allowing other companies to warehouse, market and sell your product, you are relieving yourself from some of the burdens that come with working directly with the end user. This method also allows better penetration into the marketplace by channeling your product(s) through a dealer's pre-existing customer base. This works especially well if these dealers are active in markets that you cannot enter as a direct source, or have marketing channels that are unavailable to you, i.e. a national/regional direct sales force.

Dealers typically have a much better understanding of their unique customer base and know how best to market to their best buyers. Finding a dealer, or a network of dealers, that best matches your product is the hard part. Remember, just being in a dealer's catalog doesn't necessarily equal an increase in sales or market exposure. Dealers only provide increased market accessibility and exposure opportunities in whatever market share they hold. Therefore, it is ultimately the responsibility of you, the entrepreneur, to provide a proper marketing plan in order to achieve your sales goals. A marketing plan that utilizes each dealer's available assets must be in place in order to help drive customers to the point of sale. Most dealers have media kits that will outline marketing and sales vehicles that are offered. These promotional vehicles can be quite lucrative if the potential return on investment is profitable against what the dealer is charging. Not all dealers, however, are willing to give your product the focus it may need in order to make an immediate impact in the marketplace. You may even find that some dealers only give preference to products that have higher margins and price points. For this reason, it is important that you or someone on your behalf advocate for your product with each dealer's marketing and sales team. Just because you grant dealers the right to sell your product doesn't always mean that they will.

The two advantages of the Dealer method are:

a. A more immediate exposure to the marketplace and less over-head costs associated with distributing your product

b. Time. Your overall customer count is much smaller; therefore, you should be able to devote more time to three of the most important aspects of growing top line sales: product development, brand management and marketing.

The one downside associated with the Dealer method is that you are selling product at a wholesale margin rather than at retail. Typically, dealers require a 40 percent discount off of retail price for new products or products that have smaller price points. If the dealer method is used, it is highly advisable to try and set your retail price at a point that provides sufficient gross profit after any associated marketing expenses, overhead and discounts to the dealer.

Master Distributor

The third method of product distribution is the Master Distributor method. This is similar to the Dealer Network method in many ways, but it takes the concept a bit further. In this scenario, the entrepreneur appoints a single entity, such as a dealer, as a "master distributor" to facilitate the entire distribution chain and marketing efforts. This master distributor receives a much higher discount, usually around 65 percent off the retail price. For this higher discount, the distributor takes on all associated risk such as marketing expenses, warehousing, customer service, etc. This shared risk concept can also increase the distributor's motivation for success by directly tying them to the overall success or failure of the product. This larger discount also allows enough gross-margin for the master distributor to sub-distribute the product to its dealer network.

Like the Dealer Network method, the Master Distributor method allows for much easier management of your product. Dealing only with one specific distributor, rather than a network of dealers, affords you more time to refine other components of your business such as manufacturing efficiencies and further product development.

If the time you can devote to this product is limited and your gross margins are high, the Master Distributor method is a great choice. This is especially true in situations where the product is a side venture for the entrepreneur and not the primary source of revenue.

One last but equally important aspect of the Master Distributor method is that a solid relationship of trust be established. This relationship should be clearly outlined, in a written agreement that defines the responsibilities of each party, compensation, and pricing structure. This agreement does not have to be long or complex, but it should be thorough enough to eliminate any ambiguity and protect both parties involved for the length of the relationship.

As daunting as it seems, bringing a new product to any marketplace can be extremely rewarding for you, both personally and professionally. Never assume, however, that you have to do it alone. There are numerous resources in your chosen industry that can help you, be it professional associations, trade groups or consulting firms who specialize in launching new products, distribution and marketing. Don't be afraid to explore all of your options and above all make sure that you are comfortable with whatever route you take. Remember, when the world comes to beat that path to your door, make sure you have the right key to open it.

David Brown has worked in the dental industry for the past 12 years and is currently the Director of Dealer Sales for Practicon, Inc. He also works as a consultant to inventors and entrepreneurs in the dental industry. David holds a degree in Media Communications from East Carolina University. He can be reached at [email protected].