Incentive System for Distributors

[LukePerry085]

For starters let me apologize if this is the wrong subsection. It seemed as close of a match as any. Anyway, I'm working on creating a new startup company that will be manufacturing an invention of mine. I'm currently in the final stages of prototyping, so some may see this as putting the cart before the horse, however I'm the type who likes to build a road map long before I get to my destination.

I am close contacts with executives within a few large distributors of wares within my field, so I should have an easier time than most getting my product into distribution channels.

That being said, I'm curious if anybody has any advice regarding what sort of sales incentive plan can be developed with a distributor. I would love to be able to write a contract in a manner that would make sure it was in the distributor's best interest to work to move as much of my product as possible rather than letting it get dusty in the shelf, selling only when a customer specifically requests it. I would like it to be more profitable to the distributor to be actively talking to their customers saying, "Hey we've got this new product that you're not familiar with, but I bet it will solve a problem you have that you don't even know there's a solution for."

Any ideas?

[Harold Mansfield]

I am close contacts with executives within a few large distributors of wares within my field, so I should have an easier time than most getting my product into distribution channels.

That being said, I'm curious if anybody has any advice regarding what sort of sales incentive plan can be developed with a distributor. I would love to be able to write a contract in a manner that would make sure it was in the distributor's best interest to work to move as much of my product as possible rather than letting it get dusty in the shelf, selling only when a customer specifically requests it. I would like it to be more profitable to the distributor to be actively talking to their customers saying, "Hey we've got this new product that you're not familiar with, but I bet it will solve a problem you have that you don't even know there's a solution for."

Any ideas?

Right away my first thoughts are that you're doing it wrong. Instead of trying to incentivize the distributor to push your product for you, you need to put that effort into marketing and advertising to get the product to move off of the shelves. If the product is in demand or has a lot of buzz the distributors will be begging you for it, not the other way around of you begging them to push it.

I come from a mostly bar background and it's normal for a distributor to promote a new product for you to try at your bar. I've had cases and cases of new liquors collecting dust because no one knew they existed and after a while you get tired of trying to sell other people's products when you already have 100's that sell on their own. I mean it's not like that many people are continuously looking for a new vodka.

The best successes are products that are already creating a buzz with their own advertising and marketing so that when people come into the bar, they are asking for it.

This is the approach you need to take. Do your own sales and marketing. Don't rely on a middle man to do it for you.

[LukePerry085]

Thanks for the advice Harold. I agree completely that I need to be the one pushing the marketing, which I am doing. I have about a 10 headed marketing approach that will be done on my end, at a surprisingly low cost. I certainly don't expect a distributor to do all of the marketing for me, but if I can come up with a method that would motivate them to bite off their own chunk then that can only equal more sales on my end.

Cheers! :cool:

[Harold Mansfield]

Thanks for the advice Harold. I agree completely that I need to be the one pushing the marketing, which I am doing. I have about a 10 headed marketing approach that will be done on my end, at a surprisingly low cost. I certainly don't expect a distributor to do all of the marketing for me, but if I can come up with a method that would motivate them to bite off their own chunk then that can only equal more sales on my end.

Cheers! :cool:

Them taking more product doesn't mean more sales for you. That only works once. If the product isn't moving off the shelves on it's own, they won't keep ordering it for you. Worse yet, they can demand you take product back so that they can make room for things that are selling.

I'm just one opinion, but I say make nice with distributors but ultimately if you do your job and create an awesome product with great marketing, getting orders won't be a problem. Everyone will want to carry it and as much as you can send. Target the market, not the middle man.

[Fulcrum]

So you have enough capital to outfit a plant to produce your invention?
How about if you hit a home run, can you afford and are you willing to take on that kind of debt in this economy?

I've also noticed a trend that manufacturers, who used to sell via distributors only, are starting to sell direct to the end user. As I see it, there are two main reasons for this:

1) Distributors have shifted from warehousing goods to acting as contract salespeople relying on the producer drop shipping. Too many producers haven't taken this shift of burdens into account. Why should you, as a manufacturer, still offer a 30%+ (if you're lucky) discount for the pleasure of "doing business" with them? Not to mention the 2+ levels of distribution chains when going from national, regional, local sales territories.

2) The internet, the improvement in CRM (I believe) software and the integration of the two. Producers no longer need as large a staff of inside sales people since the CRM software and associated databases that get created replace desks, phones, and filing cabinets.

Personally, I'd stay away from distributors when you're getting started. You would be better suited to having a few sales people, receiving an above average commission, and keeping the profit difference for yourself. At this point, if a distributor wants to come on board, you will be in the driver's seat and will have a lot more negotiating power.

Edit:
Any chance you can give us an idea what your product is? We may be able to give you more accurate help if we knew a few basic details.

[LukePerry085]

Fulcrum,

My business partner and I will be assembling the product ourselves in a home workshop, not in a plant. I have received quotes for all of the various pieces to be laser cut, powder coated, holes tapped, etc. so I have a very good idea on what we're looking at for build cost. Yes, we have the capital to order enough supplies to build enough product to get started and immediately start filling orders. We will then assemble the parts ourselves. The assembly is quite easy with the majority of the time consuming steps being taken care of for us at the fabrication plant, so we estimate that we can combined assemble over $10,000 worth of product per hour. Because it is easy to build, scaling a certain degree will be achievable just by hiring assemblers who can work a screw gun. Now if assembly was all that we needed to do to run a manufacturing business we'd be totally set. :p

What is our product? For starters, we have met with a couple of patent attorneys and they love the idea, but it is their opinion that the invention would be difficult to adequately protect with a utility patent, so we have opted out of patenting it. Since a patent would be a waste of money we have decided that we will need to keep it a secret as long as possible and be first to market, establish a customer base, build the best quality product possible, and survive on reputation alone to compete against the larger players that will inevitably pop up trying to get their piece of the pie. The product, in a nutshell, will be a retrofittable (but could also be installed in a new build) solution to make cubicle desks height adjustable on the fly, allowing the user to switch back and forth from sitting to standing at their desk throughout the day. There are a number of height adjustable desks that cost big bucks that are designed for offices and things like that, but nothing that is a good solution for the typical cubicle employee. Ergonomics is an undertapped market. Within the last couple of years people have started to figure out that they can get absolutely anything they want by reporting discomfort to a doctor, who will then write a note legally obligating the patient's employer to oblige the employee. The market has not yet caught up to this demand.

Anyway, it is our intention to sell our product from our own online store, as well as eBay, Amazon, etc. The best returns will come from selling on our own site since we will be selling at retail prices and won't have marketplace fees, but it is my intention to saturate the online markets so that no matter where one of our potential customers looks for our product they will find it for sale (within reason of course - it would not be productive to maintain listings on the sites with a few 10ths of a percentage of market share).

That being said, since our sales will be exclusively B2B, I know that most businesses have preferred vendors already setup who are major distributors of many products that they use. When they find out about a product that they're interested in (even if they know where they can buy it online) the first thing they do is pick up the phone and call their vendor and ask for it from them, since that vendor is already setup in their accounting system on a Net 30 plan and it saves a lot of time and headache (the whole reason for having preferred vendors in the first place). Having the executive contacts that I do in a couple of major office supply and furniture vending companies it makes sense to me to go ahead and increase the availability of my product by partnering with them. Also, our margins are good enough that selling the extra product even at the lower wholesale price point would be very beneficial. Interesting insight on the drop shipping. The extra volume I think would be beneficial, although drop shipping is much less appealing.

Whenever I come up with an idea I am its biggest critic. I am always looking for a reason that it won't work, thus helping me avoid wasting my time and money. This invention, however, has very little downside. Even the few trusted business associates that I have shown it to are very excited about it. If people know about it they will buy them, so the only limiting factor on how many purchases we get is how well we get the word out. This is the main reason that a distributor interests me, is the added exposure that comes with that, being in catalogs, etc. I will talk to my business partner regarding your recommendations. You have given me good advice here and it is much appreciated.

I have a road map of how to get to where I want to go, but I have always said that they guy who thinks he knows everything can learn nothing and is destined to fail. I'm no fool, so I will gladly accept any further advice that you or anybody else would like to provide.

Thank you again!

[Fulcrum]

Let me apologize for any skepticism in my earlier post. Usually when an "inventor" comes here all they have is an idea and no real plan for production and sales.

I also understand your wanting to work with a distributor. You're in a position where it's first to market (large scale) can pretty well control things. From what you've described, I like the idea. Quick, simple, high margin.

[Harold Mansfield]

At this point I'm obviously repeating myself...which I hate doing. But I also hate seeing people so focused on the visions they have in their head and all the great things that people are telling them that they don't handle the basics first.

I understand that in your industry you're saying distributors is how it's done. And yet you said your best margins come from selling direct to consumers, so obviously direct to consumer is also how it's done. So why are you putting so much emphasis on selling through 3rd parties?
You're spending more time and probably money to sell through other people, who take a cut. And you still have to do the same marketing.
Spend your time and money getting YOUR OWN sales process set up first.

Not only will it help you establish your own market (independent on others), but it's credibility, and you will be able to deliver better customer service when you're dealing with the customer directly. No one says you can't sell in bulk on your website to store owners or other distributors.
You also need to learn and control this for yourself so that if the distribution world ends tomorrow and Amazon stops carrying your product, you still have a sales funnel that you control that no one can take away from you.

Amazon, Ebay and others are great ADDITIONAL sales outlets. They should not be your only online sales outlet. Your own website comes first. Always. There are no exceptions.