Category: Channel management

Commodity Distribution Model

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Which Commodity Distribution Model to be used is the first key decision which a company has to take while entering a market. There are several models prevalent in the market. This decision dictates the marketing mix, logistics arrangement and often product specifications.

Commodity Distribution Models

Selling Through Distributor/ Wholesaler

This is the most prevalent commodity distribution model, used by most of the conventional companies. Here the manufacturer appoints an Distributor for an area, who may or may not stock material in his godown. Together the Distributor and the company find potential retailers who can sell their material to the consumer.

The Distributor margins are set depending upon what costs are incurred by the company like secondary freight (freight from Distributor godown to Dealer shop), godown rent, material handling costs, etc.

The Distributor bears the risk of payment defaults by the Dealers. The Distributor, being small firms, are able to address the issues of the Dealers fast and keep the business running. Marketing is either directly done by the company or expenses are reimbursed to the Distributor. The branding guidelines are issued by the company for uniform message in the market.

Selling Directly to Retailer

In this commodity distribution model, the company does not have any Distributor. The retailers in an area are directly approached by the company and appointed as authorized stockists. These retailers sell the product to the consumer and company does the marketing activities in the area. This model is generally adopted in areas which are close to factory or depot of the company so that small load orders of the retailers can be serviced by the company. The Distributor margin, otherwise incurred by the company, is saved and spent on marketing or passed on to the customer.

Due to many retailers in the market and limited financial strength of the retailers, the churn rate in this model is high and companies have to keep looking for new partners.

Selling Direct to Consumer

This is a commodity distribution model in which the company opens retail counters on its own. In a few cases, company makes an existing shop in the marketplace its franchisee to sell its products exclusively in his shop. The franchisee shop cannot keep products of other brands and to a lay man, it will look like a company operated shop only. The engagement level of the company is very high and stock levels, branding and approaching the customers is done by the company personnel primarily.

Through online means, companies are trying to gather customer requirements and service them directly in areas close to their factories/ warehouses/ company outlets. The spend on digital marketing is significant. In this case, the role of logistics becomes very important.

It has been seen that companies do not adopt a single Commodity Distribution Model universally. Depending on the area, companies keep a mix of all three. It also acts as a deterrent from allowing any one player in the value chain to become dominating.

Distributor ROI

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Distributor ROI or Return on Investment simply put is the total return as a percentage of the investment. All companies want to understand the ROI of its distributors. This is done to ensure that the Distributor is neither working by charging the Dealers exorbitantly nor is making so little money that he might lose interest in the product later. The profit margin is a major consideration for the wholesaler motivation to be associated with a brand.

Uncertainties in business

In case of building materials, there are certain factors which complicate the actual Distributor ROI calculation.

  1. There is seasonality in the product, which means that there is not a fixed sale every month. This also demands that Distributor has to invest additionally during some duration of the year on manpower, storage space and other infrastructure.
  2. Product price changes due to seasonality or due to raw material cost changes or due to structural changes in the external environment (entry of a new market player, exit of an existing competitor, changes in application cost due to change in price or unavailability of some other component or accessory which is needed for fixing or applying the building material, etc.) leading to varied Distributor ROI in an year
  3. There is no fixed storage/ handling/ transport charges per unit of the commodity as some material has to be stored by the Distributor for servicing the market and some material gets dispatched directly to the Dealers/ customers from the manufacturer’s premises, depending on the order size.
  4. Distributor is engaged in wholesale of multiple products, so it is difficult to allocate the various expenses, like manpower, rents, account-keeping, fuel, equipments, etc. to multiple products.
  5. Recovery of credit given by the Distributor from different dealers happens at varying periods. Credit terms also affect the price for the Dealer.
  6. A contingency like fire in godown, market shut down, transport strike, bad quality of incoming material, disruption in invoicing infrastructure, etc., might affect business for some time. This can affect Distributor ROI drastically in an year.
  7. Increase in cost of most of the inputs due to increase in sale is not a linear relation. Sale during the end of the month is higher than that in the beginning of the month due to increased activity by company sales personnel to achieve their targets, which means that the Distributor has to employ additional labour only for the last few days, arrange for vehicles at higher freights and get additional space for storage due to increase in incoming material from the factory.

Distributor ROI should be enough to cover for these costs and risks, plus yield a reasonable return for the Distributor to stay invested in the business. Else, he will stop making efforts to expand the business, which will hurt the commodity brand only.

Simplistic case to calculate Distributor ROI

We assume that there is there is a fixed sale every month. There are no price fluctuations during the year. The profit margin on every transaction is fixed, say 3%. The initial capital invested by the Distributor in the first month of the year gets rotated, say two times in a month and he gets back the money from the Dealers after fifteen days of material delivery. The Distributor is engaged in the business of wholesaling a single product and all the expenses incurred are loaded on this product. There is no variation in these input costs over an year.

In the above scenario, due to two rotations from the initial investment in the first month, the Distributor earns 6% on his investment every month. At the end of the year, his Gross ROI is 72% (i.e., 12*6%). Now subtract all the expenses he has incurred in the year from the Gross Return and Net ROI can be calculated by dividing this Net Return value by investment. The various expenses incurred by the Distributor are fixed for an year. Say, rent is 1.5% of monthly purchase value, Labour 0.2%, Freight 0.3% and other costs 0.25%. Cost of capital is 0.75% per month of initial investment. Net ROI will be 9%.

Distributor ROI- Simple case
Table 1: Distributor ROI calculation

More complex case to calculate Distributor ROI

In the more complex case, we will assume that sale is not uniform in a year, so the Distributor will have to make additional investments during the year and a some portion of the investment made during the peak month of the year, will be idle in off-season month of the year. Below illustration provides a tool to estimate the ROI. However, here also, rent has not changed over the year, assuming that no additional space will be needed even during the peak season. The increase in costs due to higher demand of material handling resources or decrease in costs due to economies of scale has not been captured in the model.

Distributor ROI- Complex case
Table 2: Distributor ROI calculation with fluctuations in price, sale volume and input costs

In the above examples, we have not included any Channel Incentive schemes which the company might be running for the Distributors or marketing expenses incurred by the Distributor for promoting the product in the market or for adding new Dealers to the network.

Trade Partner schemes

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In the earlier post Dealer Incentives, we had discussed about the various types of schemes floated by the companies to increase the off-take by the dealers. The change in purchasing behaviour desired through these trade partner schemes has to be clear upfront. Then only they can achieve their objective.

Trade Partner scheme objectives

The desired objective of the trade partner schemes can be one or many of the following:

  1. Increase off-take of the product by the trade partner over several months, sometimes even more than a year. Generally targets assigned to each stockist or dealer is for a minimum 3 months period. The targets should be set up at least 5% or 10% or as per the company’s objective higher than last year achievement in the same period. Payouts are generally grand as incentive accumulated over the scheme period is high. It can be in the form of tours, gold, electronic items, etc.
  2. Motivate the dealer to stock up the product by the trade partner in a short span. This is often a special price scheme valid for a short span. Generally, there are slabs in trade partner schemes and payout is often in form of cash back or gift coupons. Sometimes, payout is in the form of product itself.
  3. Incentivize the dealer to purchase value added products or new products launched recently. These type of trade partner schemes are often the most complicated. The major portion of the incentive is on purchasing the new or premium products, and a nominal or no incentive on the existing/ flagship product. The companies often introduce incentive multipliers during the scheme period to further boost the sales of the focus products.
  4. Annual Turnover discounts to motivate the dealer to do business round the year and not switch to competitors. This is a volume-based discount. Objective is to motivate the trade partner to do business for the whole year. This incentive is seen by the trade partners as pure profit from the business as often they have passed on all other discounts to their customers.
  5. Incentivize a competition dealer to switch loyalty or to increase the shop share. Single brand outlets are given additional incentive by a few companies over multi-brand outlets. Sometimes the shop also gets incentive of it keeps the advertisement for a certain period of time. This is a short-term scheme to increase the shop share.
  6. Incentivize the channel partners if they bring other influencers to company fold. Companies track the sale activity through these new influencers. The tracking mechanism can be physical passbooks, mobile apps, physical coupons placed with the product, etc.
Trade Partner schemes
Trade Partner Incentives

How to make Trade Partner schemes successful?

Trade partner schemes can be made successful if there is proper planning done during the scheme formulation, enough engagement is built with the channel partners during the scheme period and satisfactory closure of the scheme is done. The scheme should have simple terms and conditions for the sales team to be able to explain it to the dealers and for the dealers to understand easily. Constant communication about the scheme or about achievement by the dealers helps in making the schemes successful.

Equally important is the closure of the trade partner schemes. The disbursement of the payouts has to be as fast as possible and with good transparency so that the beneficiaries look forward to the next scheme. Internally for the company, it is necessary that it analyzes what went right with the scheme and what went wrong and where did the scheme fly and where it was a failure.

A sample Loyalty scheme is attached for encouraging the channel partners to do business with the commodity company regularly as well as not to switch to a competitor.

Commodity-Loyalty-ProgramDownload

Wholesaler Promotion- How to achieve

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Wholesalers are the first contact for the company’s for B2C sale. It is the wholesaler who pushes the brand to the retailers and other bulk consumers. He plays a big role in maintaining the price in the market. So, wholesaler promotion or motivation is an important task for the companies.

Why should commodity wholesalers be promoted

If a wholesaler is able to generate good business through a brand, he might also take steps to promote the brand. A dealer of my cement company was so happy with our services that to boost sales in his region, he got advertisement sign-boards installed, distributed Point-of-Purchase material to his retail network and conducted promotional meetings at his cost. A wholesaler will give a brand he trusts on credit to his retail network with confidence that his investment will not sink as the retailers will be able to liquidate the product. Same cannot be said for untrustworthy brands.

Remember, having quality wholesalers in the network reduces the effort of the company towards push sales and company can concentrate on creating a pull from the market. They can make or break a brand in the market. They are so closely associated with companies that often customers cannot distinguish them from the company. That is why wholesaler promotion is an important strategy element.

Wholesaler Promotion requirements

Wholesaler promotion needs to fulfill two needs of wholesaler from the brand point of view: monetary & psychological. Companies need to fulfill both these needs in their wholesaler promotion plan.

Monetarily the commodity brand should be as rewarding or better than the competitor brands. Only exception is when the commodity is having a good brand equity and despite lower returns, the wholesaler is able to quickly rotate his money and does not need to give material on credit in the market. Apart from the mark-up on the billing price of the company, the wholesalers also earn through the discounts and schemes run by companies.

However, if the company gives entire discount along with billing itself, there is a possibility that the wholesalers will pass it on to the retailers due to pressure to clear the stock. This will put a downward pressure on the prices in the market. So the companies pass on some discounts at the end of the year. This is not informed to the wholesalers initially and is an additional profit for him. Also, often schemes benefits are in the non-cash form like gold, white goods, vehicles, etc.

Psychological satisfaction is the second thing wholesalers look for when dealing with commodity brands. It is due to this reason that companies conduct competition for highest sales at district, state or national level as part of their wholesaler promotion plan. To encourage small wholesalers, companies often have various other categories, like highest growth, highest market share, etc.

Big wholesalers always want a treatment different from the smaller ones. A few big wholesalers are so egoistic that they do not like to stay in the same rooms as small wholesalers when the company takes them to tours. Companies need to be careful while handling such wholesalers. At the same time, the small wholesalers should not feel step-brotherly treatment. There should be an endeavour to reduce company’s dependence on the egoistic wholesalers.

A tertiary need of some wholesalers is the relationship building by the companies. Companies organize picnics, festival get-togethers, movie shows, etc. to allow wholesalers interact with company personnel in a non-business set-up. Company personnel personally give birthday and anniversary gifts to Wholesalers. Companies are trying to have formal systems to track this initiative also. Automatic messages are sent to local salesperson, reminding him of the birthday or anniversary of the wholesaler. On festivals or important occasions, greetings are sent by the company directly to the wholesaler or through the sales personnel. All these initiatives are taking wholesaler promotion to a new level.

Wholesaler promotion
Wholesaler promotion- How to achieve