AUGUST 2002
Greetings & Salutations:
Originally, I had another subject written for this issue but
when I received the following, I decided to use my answer as
the lead article for this month. -- I'll save the other article
for another time.
I hope my answer to Burt's questions will help you in ...
Establishing Distribution for Your Product!
Burt Moore wrote:
"I've been reading your Business Lyceum for months and
I'm SUPER impressed with the information it contains in every
single issue. Probably more astonished at the wide range
of subjects you cover. Truly impressive!
"I have a couple of questions for you that I hope you
can answer. I've been busy creating computer software and
it's ready for prime time. I'd like to offer it to the
retail community so it can be sold in stores. I'm already
going to be offering it on the Internet. Here are my questions:
"1) How can I find out whether I've priced the CDs realistically
so that the retail corporate buyer doesn't laugh in my face or,
even worse, I royally screw myself out of a lot of money?
Is there some sort of industry standard like x% of whatever the
final consumer price will be?
"2) Where's a good place to locate corporate buyer contacts
so I can send them an evaluation copy of my software?
"3) My CDs will need to be registered by the end user
so that I can prevent unauthorized distribution. Should
I send the retail corporate buyer the same type CD and make him/her
jump through the same hoops the customer will have to or should
I send them a registered copy so the evaluation process is easier
for them? After all, I don't want to turn them off after
I've gotten them all the way to opening the evaluation package.
And finally...
"4) Speaking of packaging. I've never been a big
fan of large, colorful, fancy, cardboard boxes that hold one
single CD. Seems such a waste to me. Do you think it would
help or hurt sales if I just went with an attractive Jewel case
with an illustrative insert that highlights the benefits of my
product. Seems to work fine for musician and movie distributors.
"Hope you can help."
Burt:
I will answer your questions using the same numbers you applied
to the question:
1) Pricing is always a problem - AND - there really
are no hard fast rules.
When arriving at a retail price, the college boys will consider
all of the costs involved in the product ... development, production,
advertising, distribution. Then, they will attempt to determine
the size of the market; whether the product will be a one-time
purchase, or how many times the consumer will buy the product
(weekly, monthly, annually); and guesstimate the market share
they anticipate. Of course, all of that also has to be
balanced against the real value of the product and the perceived
value of the product. -- If you have ever seen any of these analytical
cost/price/value calculations, you know how complex they can
be. -- BUT ...
Ol'timers in business do it the easy way. -- Just look for
"similar" products that sell to the same demographic
of buyers. Check the prices at which those products are
being sold. Then, "guess" where your product
falls between the lowest priced and the highest priced - or -
if you have a "unique selling proposition" that will
place your product in a class by itself (giving your product
a higher perceived value), you may want to price the product
even higher than the highest price. -- Remember: You can
always come down in price but increasing the price can be all
but impossible.
Back in the mid-80s, I priced a video tape course at $399.95
-- Sales were slow but I made a significant profit - but - when
I lowered the price to $199.95 as a test, sales increased by
400%.
On the other hand, I once offered a product for $19.95 with
limited sales - but - when I increased the price to $39.95 (by
withholding the product from the market for 6 months, then adding
a very inexpensive incentive) sales went up by over 500%.
So ... no matter what price you begin with, it would be best
to test to see where the product sells best. -- One of the ways
you can accomplish your testing in the beginning is by doing
an A/B split on your original offer.
Make up two copies of your sales material with the only difference
being the price ... one low, one high. Then, distribute
the sales pieces into two comparable markets ... I used to use
Dallas and Chicago. -- If the lower price sold better, it was
easy to go back to the buyers at the higher price and give them
a better deal.
If the higher price sold better, after filling the orders
you simply discontinue using the sales material offering the
lower price. -- Should anyone who bought at the lower price ask
about the "new" higher price, you simply tell them
the price they paid was an "Introductory" offer (which
it was).
Actually, it would be a good idea to do a couple tests on
your "retail" price before you even consider establishing
any kind of distribution network.
Once you have determined the "retail" price for
the product, you will need to set your distribution prices.
In "most" industries, the Retailer gets a price
from 33% to 40% off the retail price on products that sell across
the counter ... like most of your retail stores. -- The discount
usually starts at 33% on standard packing (small volume) orders
and moves up to 40% on volume orders. (In the book publishing
business, bookstores only get a 25% discount on orders of from
1 to 4 books ... they get 40% when they order 5 or more.) --
Of course, if a retailer buys mega-volume, the discount can go
up; depending upon the volume ordered. (These prices are
never published and are subject to negotiation.) But, believe
it or don't, the maximum discount ... even on mega-volume orders
... rarely exceeds 50% on hard goods and 80% on information products.
-- But ...
When a "Wholesaler" is involved in the distribution
chain, the discount to the "retailer" will rarely,
if ever, exceed 45% and that only occurs when the "Wholesaler"
is willing to allow the retailer some of the wholesaler's discount.
Depending upon the industry, most "wholesalers"
work on a margin of from 15% to 25% ... NOT 15% to 25% of the
Retail Price but, rather, 15% to 25% of the Wholesale Price.
-- So ...
If your product has a Retail Price of $1. with a 40% discount
to the retailer, the retailer would pay 60¢ for the product.
-- The "wholesaler" would take a 15% to 25% discount
on the 60¢ price; not the $1 Retail Price. That means the
wholesaler would earn from 9¢ to 15¢ on each item (paying
you from 51¢ to 45¢ for the product). -- Again, these
discounts are determined by the volume of orders received from
the wholesaler.
We could stop there, since most businesses in this country
don't even use wholesalers. -- They usually just sell their products
at wholesale themselves and don't sell to wholesalers for further
distribution.
Then again, there are those businesses that sell only to Wholesalers,
letting the wholesalers sell to the retailers. -- But ...
Of the businesses that do sell to wholesalers a small percentage
of them rely upon another level in the distribution chain. --
That level is the independent ..
Manufacturer's Representative
A "Manufacturer's Representative" ... as the name
implies ... represents the manufacturer and sells the manufacturer's
products to the wholesalers for further distribution to the retailers.
And, most Manufacturer's Reps handle a broad range of non-competing
products ... usually in a specific industry. That way,
the reps can call on a host of wholesalers to sell them a wide
variety of products in a given industry.
NOTE: Although any Manufacturer's Representative
can handle a wide variety of products in a specific industry,
most manufacturers will not allow the reps they employ to represent
competing products. -- In other words, a Manufacturer's Representative
who markets Clairol products will not be able to sell Revlon
products; or vice versa. -- Wholesalers, on the other hand, may
buy both Clairol and Revlon from different Manufacturer's Representatives
for distribution to the retailers.
For example: A Manufacturer's Representative
in the grocery industry may represent a variety of foodstuff
manufacturers; as well as some manufacturers of sundry items,
novelties and notions. Then, when they call of a wholesaler
that sells directly to the grocery stores and chains, they can
offer any or all of those products to the wholesaler. -- The
wholesaler buys from the manufacturer through the Manufacturer's
Representative and then sells to the retail grocery stores.
On average, Manufacturer's Representatives earn from 8% to
12% on the products they represent ... NOT 8% to 12% of the Retail
Price but, rather, 8% to 12% of the price at which they sell
to the wholesaler. -- That means on a $1 product, with the wholesaler
paying from 51¢ to 60¢, the Manufacturer's Representative
would earn from from 4¢ to 7¢ from the manufacturer.
Amounts earned by the Wholesaler and the Manufacturer's Representative
may seem low but remember, where a retailer sells products one
at a time ... earning the higher discount ... the wholesaler
might sell the products in dozen lots and buy in gross lots from
the Manufacturer's Representative. -- The actual dollar (or penny)
amounts are smaller but the size of the orders makes each level
of distribution profitable.
Therefore, after establishing your retail price structure,
the most effective method of distribution is by using a Manufacturer's
Representative. Let them call on the Wholesalers in your
industry. -- It's much easier because the reps already have an
established relationship with the wholesale buyers.
Or, if you would rather limit your total distribution costs,
market only to the wholesalers in your industry. -- They already
have established relationships with the retailers who market
products similar to yours.
Then again ... you can eliminate most of your distribution
costs by simply selling directly to the retailers - or - eliminate
almost all of your distribution costs by selling only to the
end users; at the retail price.
2) When looking for "corporate buyers" ...
you FIRST need to determine what companies will "need"
your software. -- Once you have identified those companies, call
and ASK "who in your company would be responsible for ...
" -- computer training, or whatever area of corporate responsibility
that would have a "need" for your software ... sales,
management, traffic; whatever -- get his/her name
After you have identified the person you need to contact,
it is best to write a very simple letter directly to that "person"
at the corporate address. -- Something like this ...
Dear Mr./Ms. Jones:
Would you do me a favor?
I have developed a software program that would ... (state
what problem your software would solve) ... for your company.
If you would be so kind, I would greatly appreciate you reviewing
the software and giving me your honest opinion about it. -- To
that end, I will be happy to send you a copy. (Or - To
that end, a review copy is enclosed for your evaluation.)
Please let me know if you would like a review copy.
Thank You for your time and consideration.
Yours truly,
NOTICE: You ASK for a favor ... believe it or
don't, ever'body likes to do favors because it makes them feel
good. -- You DO NOT try to "sell" anything ... just
ASK for an honest evaluation.
The responses you get will truly amaze you. -- Some of them
will ASK you for pricing. -- Others will tell you why it won't
do the job ... which will give you ideas for future enhancements
to your programs. -- Either way, you win!
By the way, after you get one good, solid review praising
your software, use that review as a testimonial in your further
presentations. -- Also, ASK the person who gave you a praise
review if they know anyone else in the industry that might benefit
from your product ... use that as an introduction to another
person you can ASK for a favor.
3) Any time you send out review copies; or sample copies,
of your product for evaluation by a potential buyer or reseller,
make it the absolute best, most complete, top-of-the-line example
of your wares. -- Don't skimp ... even if it costs you an arm
and leg to get it to them.
Of course, since piracy is always a threat to software programs,
you should use every effective device to prevent it.
Recently, I was approached by a software company about distributing
their product. -- They sent me a fully functional copy on CD.
-- When I tried to copy the program to my hard drive, it wouldn't
copy ... stating it was "locked" ... and, after I had
played with the software for a couple days, the program refused
to open again ... telling me the program had expired. (I
ain't very computer literate but with your knowledge, you can
probably figure out how the "lock" and "expiration
date" work.)
4) I, too, remember the days when software programs
came in 6"x8"x2" boxes ... covered with the finest
examples of graphic arts ... containing just one teeny-tiny floppy
disk.
Last week, when I bought a new program for my 'puter, it was
a CD in a light weight cardboard cover with very simply graphic
and instructions printed on the front and back of the cover.
-- Inside the cover was the CD and a 5.5"x8.5" sheet
of paper with installation instructions. -- AND ...
I actually paid more for that CD than I used to pay for the
big old boxes with one floppy disk.
The computer using public of today is accustomed to getting
their programs that way.
Hope that helps in some small way.
J.F. (Jim) STRAW
Distribution Specialist
Copyright - 2002, J.F. (Jim) Straw. All rights reserved.