Distribution Chain Selection - Choose a Chain with Care
Before you select a distribution chain, consider the following:
- Is your product perishable? A need for refrigerated storage containers may limit your choices for distribution.
- How large is your product? Its size will impact the type of transportation required. Also, it may cost you more to transport an oversized product -- a factor that would also dictate your distribution chain.
- Does your product require a display area, a fitting room or a live demonstration before your customers are likely to buy? The manner in which your customers actually purchase your product may limit distribution options.
- How often is your product used or consumed? If return customers frequently buy your product, then you probably will require more outlets. If it is bought once every few years, such as a mattress or other larger-ticket item, your customers may be more willing to travel to one or two outlets
Producers examining their distribution channels also should look at the roles of distributor versus agent. In a nutshell: Distributors buy your products and sell them to their customers. Agents, however, work on your behalf. They negotiate the sales and typically earn a commission as a result. The customer pays you, and your product goes directly to the end user.
Regardless of your choice, you will need to find key people to help your product branch out into new markets and outlets. As you begin the selection process, remember that you will need to relinquish control of the sales process, so choose the intermediaries who represent you the best. Experts recommend that you:
- Get to know your intermediaries intimately. Make sure you gather as much information as you can about the companies including profiles, territories, marketing, public relations, sales force, other products they represent (including any of your competitors'), financial information and support channels.
- Create a contract between you and the intermediary. Typically, this will include a six-month trial period, the amount of time before which either party may terminate the contract, geographical area to be covered by the intermediary, the particular type of outlet through which the intermediary will operate, marketing strategies and more.
- Consider licensing your distribution avenue of preference, specifically if you can easily link your product to a well-known brand.
Here's an example: An entrepreneur started a company that makes baseball cap-shaped computer mice with team logos. The business was able to secure a number of licenses from university teams, as well as from major and minor league organizations.
This arrangement worked well because licensed items, as a rule, target specific demographic groups and demand relatively high prices. In fact, product development specialists point out that, on average, licensees pay about five percent of the wholesale price of each product sold as royalties to the licensor. Analysts recommend seeking legal advice to help secure a mutually beneficial licensing agreement.
Licenses typically remain valid for a limited amount of time, renewable upon meeting certain provisions. Sometimes, automatic renewals are built into the terms of the contract. From the licensor's perspective, a fixed term employs less risk.