Five Crucial Considerations for Taking Your Wholesale Business Direct
August 08, 2012
We’ve all seen the writing on the wall: online sales across nearly every industry are growing faster than their brick and mortar counterparts. It is true that certain industries have been better suited for this new medium of commerce. Every industry believes itself to be well suited for eCommerce, while in truth that isn’t always the case. A great example of this is the mostly failed attempt to take grocery shopping online. In my opinion, it is naive to think that in the next 10 years all business is going to be conducted over the Internet, but it is equally naive to believe that the landscape of commerce will not be drastically different from what it has been for the past 100 years.
One of the major shifts that we see in this new era of business is that increasingly manufacturing companies are selling direct to consumers, rather than going through the traditional routes of distributors & retailers. The shift actually began before the Internet was established with manufacturer-owned brick and mortar stores, but was reserved for only the top in brand names: Nike, Gucci, Apple and Sony to name a few. Only the best of the best were able to participate in this direct to consumer model because manufacturers need to have deep pockets and broad product lines to warrant the overhead of a retail store.
When eCommerce began to gain credibility as a viable means of shopping, these premier brands were first in line to be manufacturers selling direct online. This transition was easy for those brands because they had already dealt with the two primary hang-ups of going direct.
The first is maintaining retailer relationships that the company will now be supplying and competing against. After all, you don't want to gut the wholesale side of their business prematurely because it is not only the primary revenue channel but also the biggest marketing avenue. A huge portion of product discovery happens when people discover a product while shopping for something else, and this happens very effectively in a multi-brand retail environment.
The second is to understand the dynamics of consumer-based sales & customer service. Wholesalers often find it hard to understand all the extra effort that goes into dealing with consumers. Ask anyone who has worked a cash register during holiday season and they will tell you exactly what I'm talking about. This aspect is often underestimated by newly founded online businesses.
Now that we've identified the primary roadblocks, how do we plan to overcome them?
1. Instigate MAP Pricing
Pricing is one of the most important things that a manufacturer can control. Often the primary concern of retailers is their supplier’s competitive advantage in margin when that supplier starts selling direct. We mitigate this concern by instigating MAP (Minimum Advertised Price) policies even before moving to direct sales. In the short term, such a program helps to level the playing field among existing retailers who are now in the same marketplace online, and it sends a cohesive message to the consumer about the value of your product. In the long term, when you do launch your site, you are better prepared to play by the same competitive rules that you have put in place for the retailers. But why would you want to have to play by the same rules?
Keep in mind that the competitive advantage of margins is exactly what we want to exploit when taking the business direct. You can do this even with MAP policies in place by offering bundled discounts, loyalty rewards, shipping promotions and other key consumer-decision makers.
Think of it this way: you could avoid having a MAP policy and offer a $100 retail item for $75 direct instead of selling it to a retailer for $50. Great! You’ve made an extra $25 but are sure to lose that retailer and their future sales as well as devalue your product and brand. On the other hand, you could offer the same product at $100, just like the retailer, but provide free next-day shipping (a $25 cost to you). On the face of it, you are selling your products for the same price as your retailers, maintaining product value, and still capturing your end customers back from the retailers.
2. Toss Your Retailers a Bone
While MAP pricing is going to help with retailer relationships, we need something to sweeten the deal. In order to do this we want the retailer to feel that your increased online presence is going to be good for their business. There are lots of ways to do this, and it varies between industries, so you'll have to think about the best approach for your particular business. However, one idea is to increase the exposure of your dealers online. Maybe next to every "Add To Cart" button you have a "Buy Near You" button that pops up a menu of the closest dealer to the consumer.
More forward thinking and technologically savvy businesses will actually sell the product online for the retailer, and then have the customer pick up at the nearest retail store. This is great from retailers’ perspectives, because they get to sell the inventory they are sitting on without the leg-work of acquiring the customer themselves, and that customer is then exposed to the rest of the products they offer when showing up to pick up the goods. From your perspective, this deal is even better. The cost of storing inventory, which tends to be the largest cash flow concern of a business, is offloaded to the retailers. They pay up-front to store your inventory, while you slowly train customers to come to your website to buy your goods directly.
3. Holy Shipping
Now that we have our retailers feeling all warm and fuzzy (ok maybe just content) let’s talk about the challenges that are awaiting us on the customer side of things. The most obvious of these challenges is the dramatic difference between shipping one or two items at a time and shipping pallets of products. What’s more important is that now you will be forced to do both. Depending on the business, there are different solutions that you will need to implement to make shipping a success. You could segment your warehouse into wholesale and retail sections. Typically retail fulfillment operations have setups with a much more robust picking system and inventory management controls. Remember that the retail operation will potentially be 10 - 1000 times more orders than your wholesale business. That means x times more pick tickets, packing slips & shipping labels than you are used to. You will also need to make some tough decisions about inventory allocation between what is available to your wholesale customers and what is available to retail customers.
When it comes to shipping providers, taking your business online may be a good opportunity to re-evaluate the best cost; using split providers may end up being the most cost effective. For example, shipping via UPS Ground or Freight for wholesale will yield the lowest rates for bulk orders, but in the micro shipment space perhaps USPS is going to provide the best bang for the buck. It is going to be extremely important to work with technology systems that facilitate this multi-faceted approach to shipping providers, inventory management, and order fulfillment.
4. Return Policies
If you've never sold direct before, then it is going to be very important to get your return policies in place before launching any online store. You may be used to having a customer call you and negotiate credits for slow moving products, or exchanging last year’s models for this year’s, but the landscape in direct to consumer sales is vastly different.
I can almost guarantee you that in your first 10 orders you will have an irate customer requesting cash back in full, delivered by unicorn, your first born child, and free goods for a year! Ok now stop - take a deep breath - and know that this is normal. Online customers are crazy, it’s just a fact: they will maintain unbelievable expectations. That is why it is so important to be 100% clear internally on your return policies so that you send a clear message that cannot be twisted. Also, be prepared to have a policy that acknowledges that sometimes you will be doing deals at a loss. Your return policy is as much of a marking expense as your ad budget. With the increase in margin comes an increase in the cost of doing business. Prepare yourself.
5. Time to Steal Back our Customer
Let’s get down to brass tacks and talk about the real motivations for going direct: staying ahead of your competitors and increasing market share. Now that consumers have every product option available online, they are in the drivers seat for when it comes to the products that win and the ones that lose. More than ever, it is crucial for you to take control of the consumer experience as it relates to your brand. At the end of the day, you have x number of people who end up with your products in their hands; the goal is to have all of those people get that product directly from you…in other words, we need to steal our customers back from the retailer.
Retailers are essential for gaining us new customers, but we don't want them to retain that customer for future purchases. They also have a large portion of customers that may have not been previously exposed to our brand. Consider including online sweepstakes in your packaging that drive those customers online to participate. Once on your website, they should be able to find it easy to order from you direct online (most likely with better promotions than the retailer can offer). Another option is to do joint online sweepstakes with the retailer, where you provide the free product, and they provide the email list as well as an opt-in to your list as part of the sweepstakes form. While seen as a Win-Win, at the end of the day, you are building your direct marketing assets, and ensure better future control over the brand message.
While this isn't a definitive list of To Do's nor is it a complete playbook, it’s something you should be embracing, not avoiding. At some stage in the near future, retail establishments as we know them today will be a thing of the past because there just isn't a need for most goods to be distributed via a middle man anymore. You can either adapt and stay ahead of the curve, or try to play catch-up, and hope that it isn't too late. The fittest always adapt and survive!Back To What We're Up To