How to Pick a Distribution Channel

Three Choices

Distribution of your product is such an important consideration when deciding how you want your customer to interact with and ultimately purchase your product.  Although there are industry-specific nuances, most designers and makers will have three options for distribution:

1)    Selling to retailer to resell to customer

2)    Selling to wholesale distributor to sell to retailer who will sell to customer

3)    Selling direct-to-customer via e-commerce website or in-person sales (like a craft or makers fair)

In the past, designers and manufacturers have had to rely on retail stores or wholesale distributors to make their products available to customers.  With the advent of social media marketing, e-commerce platforms, and drop shipping services, we all have the capability to sell directly to customers.

Beginner’s Glossary

A few terms to familiarize yourself with before we dive into the details of these distribution channels:

Cost of Goods:  What it costs to make your product, including costs of materials and labor

Wholesale Price: Cost of Goods + % Profit*

Retail Price: Wholesale Price x 2

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So, if a product costs $3 to make and your desired % profit is 33%, then your wholesale cost will be $4.  Your retail cost will be around $8.

* If you choose to work with a wholesale distributor or retailer, determining the % profit to build into your wholesale pricing is a critical step.  A great resource to help you with this calculation is Arianne Foulks’ article “The Not-So-Dark Art of Wholesale Pricing.”

Below you’ll find a list of pros and cons related to each of the three distribution channels mentioned above plus some additional questions to consider when determining which of these options (or combination of options) is right for you and your product.

(1) Selling to Retailer

The Good

  • » Division of labor and costs for the marketing, sales and distribution of your product to customers
  • » Division of labor for customer service
  • » Exposure to a wider audience of customers who shop at these retailers
  • » Potential for higher volume of sales from upfront orders by retailer
Related Reading:  3 Simple Things You Can Do to Get into More Stores

retail

The Not-So-Good

  • » Retailers expect to purchase your product at a 50% markdown from its retail price
  • » Unless otherwise stated, retailers can slash prices on your product, which can drive its value down across the market
  • » Less targeted customer base – your product will most likely be one of hundreds of products the retailer is trying to sell to a broad group of customers
  • » Minimal opportunity to build brand loyalty or form relationship with customer
  • » Must rely on retailer’s customer service standards and practices
  • » No guarantee year over year for repeat sales

(2) Selling to Wholesale Distributor

The Good

  • » Division of labor and costs for getting product into retail stores
  • » Division of labor and costs for marketing, sales and distribution of product to customers
  • » Division of labor for customer service
  • » Distributors already have relationships with retailers in your industry
  • » Exposure through a wider customer audience through placement in nationally recognized outlets
  • » Potential for higher volume of sales from upfront orders by distributor

The Not-So-Good

  • » Distributors expect to purchase your product at a 15 to 20%  markdown from its wholesale price (…which is 65-70% of your retail price)!
  • » Less targeted retailer acquisition – your product will most likely be one of dozens of brands that your distributor represents
  • » Once your product makes it into the retail store, it will still encounter a less targeted customer base because your product will be one of hundreds the retailer is trying to sell
  • » Very minimal opportunity to build brand loyalty or form relationship with customer
  • » Must rely on retailer’s customer service standards and practices
  • » No guarantee year over year of repeat sales
Related Reading:  5 Ways to Get Noticed by Retail Buyers

(3) Direct-to-Customer Distribution

The Good

  • » More control over pricing, brand messaging, and perceived value of your product
  • » With this option, you keep 100% of the profit
  • » Lower costs when there are no distributors or retailers involved, which allows you to hand off that savings to customers in the form of better prices (think Casper mattresses)
  • » Highly targeted customer acquisition through social media and Google AdWords
  • » Direct line of communication between you and potential and existing customers
  • » Ship directly to customer from manufacturer or fulfillment center
  • » Flexible decisionmaking regarding growth, volume of production, discounts to customers and new products

direct-to-consumer

The Not-So-Good

  • » The tradeoff to keeping 100% of your profit is that you are responsible for the all of the business details a retailer or distributor might help you take care of, including:
    • › Relaying customer orders to the manufacturer
    • › Shipping your product to customer (or to fulfillment center, who will fulfill customer orders as they are placed – a totally worthwhile investment if you ask me)
    • › Labor and costs associated with marketing, sales and distribution of product to customer
    • › Handling customer service

A quick note: Now if, like me, you subscribe to the idea of automating business processes a la Tim Ferriss and The Four Hour Work Week, there are some simple tweaks you can build into your sales and production workflow to help you step away from the grind of logistics and get back to doing what you do best – creating beautiful work to share with the world! And if you’re selling your product through a Shopify e-commerce site, there’s an array of apps available to help streamline order fulfillment and shipping logistics.

Ask Yourself: For Retail and Wholesale Routes

  • » Would you product fit within the shelf space of your industry’s typical retail store?
  • » If your product is customizable or comes in multiple sizes – would a retail store accommodate the various options you have available, or will you construct a single version of your product for their customers?
  • » After determining what your customers are willing to pay for your product and how much it will cost to make your product, is there room in your profit margin to consider working with a retailer or distributor given their associated costs?

Ask Yourself: For Direct-to-Customer Route

  • » Will you be able to draw customers away from other brands with similar products by offering better prices, higher quality, faster shipping, exceptional customer service or creating a unique, memorable customer experience?» 
  • » Are you willing to put in the time and effort to build a remarkable brand that’s able to attract customers through non-traditional means like authentic communication via social media or unconventional experiences that help customers feel connected to your brand and part of something bigger than themselves?

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My Library on Distribution Channels

1) Vik Venkatraman: Inspired! Take Your Product Dream from Concept to ShelfChapter 7: “Get Distribution and Get on the Shelf”

2) Tim Ferriss: The Four Hour Work WeekChapters 9-11: “Income Autopilot”

3) Tamara Monosoff: Demystifying Profit Margins and Markups

 

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