Go directly to the consumer
As it is, there is a huge tendency on the part of entrepreneurs to bypass all and reach the customer directly. With the advent of the net, this has become a very popular alternative. Using the net is a natural choice if your product can be digitized and distributed, for example, music, books and software; but that does not mean that this alternative is restricted to these categories. Michael Dell used a business model dependant on reaching the customer directly and was able to grow Dell computers into one of the leading PC manufacturers and he is now among the wealthiest people in the world.
Going direct to the customer is feasible in the case of many high value items. Consumer durables, custom made sports gear and real estate are some big ticket items which are routinely sold directly by the producers.
Another category that uses the direct route is services. For example, Café Coffee Day does not franchise its operations. All outlets are company owned and company operated. That is a very effective way of maintaining high service standards.
Reaching the customer directly means that all the activities that were the responsibility of the distribution channel are now your direct responsibility. Sometimes new ventures can start off with a strategy involving going direct to the consumer and then as sales volume increase, bringing in intermediaries.

Go directly to the retailer: bypass distributor
A traditional distribution system will have super-stockists, distributors and retailers. Many entrepreneurs find it profitable to bypass the distributor and go directly to the retailer. This is a sustainable strategy, especially in the light of the current crop of retailers coming into the market.
Ordinarily, there is no major scope of a distributor till a certain volume is achieved. So an effective strategy could be to go directly to the retailer and once there is a certain volume of sales, an independent distributor can be contacted to take over the distribution. Naturally, it will be cheaper and easier to convince a distributor to take on a product that is currently selling in the market than trying to convince him to sell a new untried product totally new to the consumer.

Use sales agents
It is more appropriate to use agents when selling to businesses. Till volumes pick up, it will be costlier to rely on your own sales force. Even in the long term, many firms have found it profitable to have a company sales force that works in tandem with sales agents. Sales agents are valuable because of their specialized knowledge on certain sector or certain regions. Also in the case of B2B sales, losing one customer can make a huge difference to total sales.
The use of agents to sell high value items in the consumer market is also very prevalent. It is common to see agents in dealing in real estate, travel packages and costly educational products.

Participate in establisher channel structure
Each region is likely to have many established distributors. These distributors have been dealing with retailers for a long time and have developed a working relationship with them. Some of these distributors will have specialized in certain product categories but many others would be dealing with varied products. Many of them would have grown big and now would also be providing carry and forward services.
Making use of their services is a tempting alternative. It would immediately allow you to access a number of retail outlets and you would be associating with an experienced intermediary.
There can be a number of disadvantages in tapping existing established intermediaries. They would be willing to take on your product but that would cause decrease in sales of their existing brands. For example, if you go to a distributor of P&G and ask him to stock your shampoo he will be immediately concerned that the sales of Pantene (a P&G product) will get affected. An alternative could be to go to a distributor who does not stock a similar product. For example you could go with your shampoo to a Britannia distributor. This is a better strategy but the established distributor will always place very stringent conditions while dealing with a new inexperienced manufacturer. Usually he may ask for higher margins, longer period of credit, free samples and for reimbursement of some market related expenses.

Set up your own intermediaries
A very good alternative is to set up your own intermediaries. It can even be friends and relatives. There will be some people known to you who wish to get into the distribution business, they can be persuaded to start with your product. Now it should be kept in mind that if you have encouraged someone to start his business dependant on you, your responsibility towards that person is more. Practically speaking, if anything goes wrong, he is going to lay the blame on you.
Another way of doing this is if you have started by going directly to retailers, in time one of the retailers can be persuaded to take up the distribution function. This will work much better than bringing in an absolute novice.

Copyright © 2009 Small Business Resource

Distribution Models for the Entrepreneur

The important consideration is to try to maintain sales, even if some of them yield marginal or no profit (i,e, break even). In other words, so long as you are covering your costs, particularly fixed costs, then there is value in doing so.

However, unless you wish to become the low-cost leader going forward, then this low pricing may create a precedent which customers expect to continue, and it also may devalue the brand.

So pricing strategy must be decided carefully, with all things considered, including unintended consequences. And it may be better to have various incentives rather than simple price cuts in order to sustain sales.

In the article “Pricing in an Inflationary_Downturn”, McKinsey recommends the following actions:

-Watch for sudden shifts in price structure
-Adjust to changing customer needs
-Monitor customer-level profitability
-Update price sensitivity research

Many companies across the nation are on the verge of closing their doors and some have already started liquidating their inventory. This can be a great time to create opportunity for your business. Here are a few items to look at:

Item 1: Renegotiate Your Vendor Pricing:

Go to your current vendors and request price decreases due to the economy. You may be able to receive your inventory at a fraction of your old rates because of the risk of your vendors losing their business. Most agreements can be negotiated when financial conditions are more abundant ….. so this provides the perfect opportunity to turn the financial crises into an opportunity for your company.

Item 2: Create A Customer Loyalty Program:

Many companies started slashing prices to attempt to drive additional business to their company. However in researching the response of the consumers you may find them upset because if those prices were always available why did they not get them before. So you may consider creating a customer loyalty program ….. send a letter and give fliers to every customer saying that you want to retain them as a customer and are now rewarding them with a % off by signing up. What this does is make it look like you are giving an additional perk instead of cutting all your costs.

In any environment, it’s a best practice to price based on your customers’ willingness to pay. To the extent possible, strive to understand if and how your customers’ willingness to pay has changed and also how able you are to meet those customers’ needs relative to your competition. Unless you have a sustainably lower cost business model, you’ll want to avoid competing on price as a price cut is very easy for a competitor to copy but leaving you both with lower margins in the process. The airline industry comes to mind.

Are you in a position of relative strength? If so, that might allow you to innovate, differentiate your offering, and improve your value proposition based on shifting customer needs, thereby taking market share without necessarily changing your price.

If you find that your customers’ willingness to pay doesn’t cover your costs, you’ll have to re-examine your business model.

Keep in mind that there would be different answers for a lot of different situations. First of all strategies may be different in B2B than in B2C. Within each type the following factors will play an important role:

1. Company strategic posture – what you want out of the situation: sail through? Take advantage? Weaken competitors? Portray as socially responsible? Etc.
2. Financial strength/leverage available.
3. Brand positioning
4. Relationships with customers
5. Distribution leverage
6. Product category in terms of price elasticity
7. Cost cutting advantages available.

You should consider the above and more factors before determining how to price during a slowdown.

The only thing I would add is to caution that:

1.Understanding price sensitivity in the current climate is critical – price decreases may not have the expected effect and that’s an expensive mistake.

2. Be aware of potential changes in your value proposition as the market changes. Your product may now be perceived in a different way and the value you deliver will still be the ultimate driver behind what you can charge.

3. Price is a key positioning statement, not just a piece of simple mathematics. Think long and hard about how a price change will be perceived by your customer and the long, as well as short term effects a price change may have.

In the end cutting the customer’s price just for the sake of cutting their costs isn’t the answer. Lower your costs first ….. ensure your product/service maintains “value” …. and focus more on customer loyalty/retention.

Copyright © 2009 Small Business Resource

What Are The Best Pricing Practices For Small Business During An Economic Slowdown?