Distribution - Online
Distribution is risky and expensive. Depending on how you go about it, it can make you or put you out of business. And the line in-between is thin. Here are lessons we learned from the trenches.
To gain wide distribution of a product, it needs to get on retail store shelves. As of 2012, more than 80% of sales still happened in brick and mortar stores. Online sales are growing, but are still small. So you will ultimately want your products in stores, but don’t rush.
In a series of articles, we will cover three distribution models - online, distributors, and retailers. First, online and crowd funding.
Crowd Funding
Ideally, you want to test your product before you scale distribution - promote your product, test demand, and minimize inventory risk. Remarkably, you can now pull this trifecta with crowd funding. You will probably need to seed the promotion with online media articles pointing to your online listing. This is hard work and takes time, but you can do it without a PR firm.
From there, the ball rolls - if there is demand, users will pre-pay for the product; the more the users, the greater the publicity, the more the users. As a cherry, these pre-payments should cover your production costs, thus allowing you to fulfill this small first order at low risk.
Evidently, the real value is in proving on the cheap that there is demand for your product at your listed price. This hopefully gives you the confidence to start production and expand distribution.
It is very important not to price your product too low. Even though you can make a large margin selling directly to customers via crowd funding websites, you should anticipate having to split the margin with distributors/retailers in the future, as well as pay for promotions, customer service, etc. A rule of thumb is to price your product at 4.5x ~ 5x your production cost.
Online
If you’re selling a consumer product, a companion website is a must. People will seek it to research before they buy, so it is your opportunity to 1) educate them about the product, 2) give them comfort about the company, and 3) convert a sale.
At minimum, you want a Where to Buy page listing your distribution channels. You would be remiss if Amazon were not on the list.
You may want to sell directly from the website, but this is more complex than coding. Consider all the elements that hide behind the Buy Now button:
- A shopping cart solution to process the order
- An SSL certificate so the transaction is secure
- A merchant account with a bank to process a credit card payment
- A fulfillment solution, typically a full-service warehouse, that stocks, picks, packs and ships your product
- A communication system to transfer your orders to the warehouse
- Inventory at the warehouse so you can ship orders quickly. The US stipulates that orders must be shipped within a 30-day window.
The most important element is inventory - holding it is risky. First, it freezes your capital for an extended period of time - from the moment the goods leave the factory, through sea freight (weeks), customs clearance (days), warehouse stocking (1-2 days), and until shoppers have the good idea of buying.
Your objective must be to shorten that time, so consider warehousing your products near the factory and fulfilling by air - despite the added costs, you would free up your inventory money faster.
Second, if the product doesn’t sell, you can’t release your inventory money and that may be the end of the road. So keep the inventory at a minimum - even Apple famously reduced its inventory to a single day’s worth of sales!
The other elements of the list can be solved through third parties who combine many of them into turnkey solutions. Search the web for e-commerce solution providers and full-service fulfillment centers.
Keep in mind that shoppers will typically prefer buying from Amazon anyway - you are likely to generate 10 times more sales there than from your website. That’s the power of Amazon’s branding and its ability to inspire consumer confidence.
Next up: Distributors