Creating Your Distribution Strategy

To get a product from parts to consumer in the old economy it would often take five or more companies. There would be a parts supplier, a product manufacturer, a jobber, a wholesale, and a retailer who would finally sell to the end consumer. With each middleman there would have to be another markup. There was great inefficiency and prices were high. Many companies today, however, are turning toward a Direct-to-Consumer (DTC) model. Instead of five or six companies in the distribution chain there are two—the Supplier and the Manufacturer. Now, because of the Internet and mail order, companies that once focused solely on creating, can also built competencies in selling. All the manufacturer has to do is set up a web site, get it to the top of the search engines, and hire a few people to ship out orders. And now, instead of a 40% markup it can charge a 400% markup—all because of a shift to a DTC strategy.
I learned this lesson very well working with the nutraceuticals company in 2001 and 2002. When I got there, the company was focusing on selling to local retailers. We soon shifted toward focusing on DTC internet sales, taking the markup from 3x to 7x.
Here is a comparison chart between an old economy and a new economy distribution model:


As you can see from the diagram, the new economy model is much more efficient. By selling direct to your customers instead of going through middlemen, you’ll be able to increase your price while keeping your costs the same, greatly improving your gross and net margins.
In addition, by developing your consumer channel first, you’ll create demand at the retail level. This is what happened with Icy-Hot when marketing expert Jay Abraham got on board with the initial product developer to sell directly to consumers via mail-order. Before they knew it, they had created a huge retail business in addition to their direct-to-consumer business. It’s a lot easier to get into the GNCs, Wal*Marts, and Sears of the world when they have dozens of customers every day coming to them asking why they don’t stock your product.
While it may make sense in some cases to sell through traditional channels as a wholesaler, I’d encourage you to at least consider the possibility of selling your products direct, either via the Internet or via mail order. Of course, if your product is a high-ticket item or you are selling to businesses, you likely already have a sales force doing just this.