Sales - Direct to Retail

There are a thousand and one elements to managing a retailer relationship, we will examine the most important ones. But first, some terminology.

Nomenclature

• Selling to a retailer is called selling in
• Selling to consumers is called selling through
• Running out of stock is called selling out

Vendor Agreement

The process of becoming a vendor of record is tedious and time consuming. You will be treated to painstaking agreements that explain, among other terms:

• how their procurement works so you can adapt your system to it
• what’s the minimum liability insurance that you will carry
• what are the markings on the packaging and cartons
• what regulations and retailer-specific product requirements with which you must comply
• how will every shipment be inspected for quality control
• what is the policy for returning defective items
• what is the level of customer support you will provide
• and crucially, what are the terms of payment

Payment terms are where retailers first flex their market muscle - they will only pay you 30, 45, or 60 days after your deliver the merchandise. In other words, you have to pay the manufacturer for the full cost of production and not get reimbursed until the term is up. It’s cash game.

Worse still, if the product doesn’t sell out, i.e. if there are some items left on the shelves at the end of the season, the retailers may ask you to pay them to compensate for some of their losses, and they pressure you by not paying what they owe you. Even though they are contractually obligated to do so, they know you do not have the financial means to sue them. It’s a cash game (of chicken).

Defectives returns specify that if defectives account for more than, say, 2%, you will take back the defectives in excess of 2%. Make sure that your manufacturer agreement covers you for at least 2%, if not 3%.

Also, retailers will typically charge you an allowance for the 2% by deducting that amount from the payment they owe you. Welcome to the costs of selling to retailers.

Manufacturers Representatives

A large retailer will easily monopolize the attention of one person in your organization - which is a lot, specially when you have multiple customers (also known as accounts).

It often makes sense to hire Manufacturers Representatives, AKA reps or agents. The most professional among them will charge 3% of net sales, and amply justify their share of the cake. Commissions can go up to 5%. To dis-incentivize them from offering discounts and eroding your margin, tie their commission to the price of the product - the higher the price the higher their commission.

A good rep will have a long-standing relationship to the buyer, their boss, the District Merchandise Manager, and their bosses’ boss. Their relationship may be so deep that they may well work exclusively with a single retailers. They help you navigate the waters of selling your product, getting set up as a vendor, and most importantly, accompany your product through its life on the shelf.

Sell-In Programs

When a retailer decides to list your product on their shelves, they work with you to devise a comprehensive in-store activity program, which may include:

• Location
• Premium placements
• Shelf space
• Promotional displays
• Temporary price reductions
• Participation to seasonal catalogs
• Flyers and coupons

The base location of the product is determined by its category (i.e. RC cars, boys). If your product spans a couple of categories, you can negotiate an optimum placement. The location of the product and what’s next to it influence how a shopper perceives the product, so it’s pretty important to get this right. However, your say is limited as the buyer is the ultimate decider.

You can improve the location of the product by purchasing premium placements such as end caps, also known as gondolas, over a limited amount of time. End caps are the shelves on both ends of a shelving unit. They point away from the aisle and offer higher visibility, as shoppers can see them without entering the aisle. Therefore, the same product is expected to sell much more there (by a factor of 5 or 10) than in its base location.

Other premium placements are displays at the entrance of the store, as islands in the middle of aisles and corridors, and in cash register lanes. In all cases, premium placements are typically sold in 30-day periods, and their price increases as the selling season approaches.

Ideally, you synchronize the timing of the premium placement with a marketing campaign (TV ads, online and print media, etc.) to maximize sales. In practice, the timeliness of execution of the end cap depends greatly on store operations, and therefore vary by retailer and store. It is common for end cups to be setup with many days of delay, thus eating into your 30-day allotment and wasting some of the leads generated by the marketing campaign. There is no good solution to this.

The amount of shelf space that the buyer reserves to your product is a measure of how strong they expect the sales to be, and the level of promotions you will deploy to support sell through. The shelf space can be counted by linear measure of shelf, or by number of facings.

The stronger the product, the more facings it will have allocated, i.e. the more copies of the product will sit side by side. Depending on the depth of the packaging, more products can be stacked behind it to fill the depth of the shelf.

It’s the buyer’s responsibility to determine shelf space in a way that maximizes the productivity of the entire category (or shelf unit). That’s tricky business - so tricky in fact, than in stable categories such as groceries, retailers delegate the management of the shelves to the category captain. The category captain is the lead vendor, who typically knows the market better than the buyer ever would, so the decide what space should be allocated to them and what should go to each of their competitors!

Promotional displays can take several forms, including attention-grabbing signage around the product, videos monitors describing the product, try-me displays, stand-alone signage, and video clips running on the retailer’s own TVs. You develop these marketing assets and pay for deploying them. Here again, the timing of their deployment depends on the retailer’s operational strength and is difficult to control.

Temporary price reductions are self-explanatory. You typically schedule them around seasonal promotions, such as Black Friday in the US. The retailer will ask you to participate in the campaign so the lost margin is shared with them.

Catalogs, flyers and coupons are common media for in-store promotions. You pay to play - to the tune of 10s of thousands of dollars for a catalog listing.

Pricing

Pricing is an extremely important factor in the success of a product, and pretty intricate to get right. On the bottom side, your cost of goods dictate the minimum price to break even. The top side is tricky - it is determined by the perceived value of your product (how do you decide that?), the strength of your brand, the affluence of the market, comparisons to competition prices, and the retailer’s own pricing strategy.

As a rule, prices can go down but never up. So when in doubt, you’re better off over pricing and adjusting down.

Another reason not to start off with low pricing - you would send a signal of low quality, as people expect to pay more for a premium product. If this is your first product and you are confident about its quality, price it at the higher end of the competition price range or beyond to signal superior quality and performance. You would be on your way to establishing a premium brand that anchors high expectations in people’s minds, and you keep the option of developing a second lower-cost product to expand your market without hurting the brand.

Your pricing strategy has to take the retailer’s own strategy into account, as the two may not match. To be sure, consumer-protection laws in the US and Europe does not allow you to dictate retail pricing, you can only suggest it (hence the Manufacturer Suggested Retail Price that you see everywhere).

The best case scenario is for the retailer to view its relationship with you as a partnership. If they buy into your product roadmap, they will want to help you build the brand by supporting your pricing strategy. However, this partnership can be quickly strained if another retailer undercuts the price to steal sales. So you have a big job in managing every retailer closely and monitoring their pricing to ensure that the price is the same everywhere.

How do you do that, since you cannot dictate the price? First, you need to persuade the retailers that it is in their interest to follow a long-term strategy rather attempting to make short-term profits. If you make a strong case, they would understand that under-pricing damages your ability to introduce follow-on products.

In theory, the stronger the product the better your ability to hold pricing - after all, if the product sells at the correct price, everyone makes money. In practice, some retailers use strong products to attract foot traffic to the store so they can sell other products, so they would still cut the price. They can go as far as losing money on it, turning your strong product into a loss leader item.

This is a nightmare scenario as it kills the product in one season. Shoppers get accustomed to the low price, so the only way to sell again next year is to maintain the price. However, the retailer will not accept to keep losing money on the product, so you will have to lower your wholesale price, which you cannot afford unless you gut the product from features that made it great. So you are faced with either selling a crippled product that damages your brand or losing money on every sale. The reality is that you have to stop selling the product and kill it.

You must avoid this scenario at all costs. First you must reason all you can with the retailer to have them stop their damaging practice. If they refuse, your only recourse is to stop shipments so your product goes out of stock once their current inventory runs out. This reduces your revenue but protects other retailers - and preserves the product for another season.

Market Tests

You should really consider testing your product’s sales in a small but representative market before scaling distribution. Here’s why:

• You learn the right combination of parameters that make the product sell (e.g. price, in-store positioning, in-store promotions, print, online, and TV advertising, etc.). You can then apply these parameters when scaling distribution.
• You gain a sense of the product’s sales performance and therefore better forecast production and minimize inventory.
• You discover if the product doesn’t sell before you scale production and invest in marketing. In this case you kill the product, cut your losses and avoid sinking your boat.

A test is typically run in a medium-sized city with a representative population, in partnership with a single retailer, and involving the media promotion you would expect to run at scale. The test is conducted long before the selling season starts, but typically not in the summer when people are expected to be on the beach rather than shopping. So for a Christmas item, you would run it in May.

Recommended Reading

A concise list of pricing mistakes on Techcrunch.