Building Your Business Plan: Part 1 – Introduction
Building Your Business Plan: Part 2 – Business Overview
Building Your Business Plan: Part 3 – Products and Services
Building Your Business Plan: Part 4 – Studying the Market
Building Your Business Plan: Part 5 – Identify Your Market
Building Your Business Plan: Part 6 – Competition and Industry SWOT
Building Your Business Plan: Part 7 – Business Environment
Building Your Business Plan: Part 8 – Product Sourcing
Building Your Business Plan: Part 9 – Pricing
Building Your Business Plan: Part 10 – Product Development
Building Your Business Plan: Part 11 – Distribution and Sales
Building Your Business Plan: Part 12 – Advertising Plans
Building Your Business Plan: Part 13 – Purchasing Equipment
This article is written to provide you with the tools required to assist with developing your Business Plan as it applies to Distribution and Sales. Please note that not all businesses may require this step, if this is the case, please do not download this section.
In part 10 of this series, we discussed the process in which a business establishes how it will produce its products for customers, how it will test its products, and what warranties will be considered when rolling out the final product to customers. In this part of the series, we are going to discuss Distribution and Sales.
Section 12 – Distribution and Sales
Distribution refers to overseeing the movement of products/services from a business to the customer (point of sale). Determining what distribution strategy will work best for your business requires some basic knowledge around Supply Chain Management (SCM). For more information on SCM, please see the Supply Chain Canada or Investopedia.
Distribution Logistics is one aspect of business to be familiar with, so you can make the right call for your business regarding how your products/services will get to the market, as it is fundamental to your company’s sales.
A. What distribution channel will you use to deliver the products/services to the market?
There are 2 channels of distribution. Direct – the business works directly with the customer/consumer. Indirect – the business incorporates intermediaries that deliver the products/services on behalf of the business to the customer. Relating to these channels are 4 distribution levels.
- Level 0: The simplest, involving a direct sale from the business to the customer. For most small businesses, this will be the only level.
- Level 1: Has 1 intermediary between the business and the customer. For example: A retailer between a business and customer.
- Level 2: Has 2 intermediaries. For example: A wholesaler selling to a retailer who then sells to the customer.
- Level 3: Has 3 intermediaries. For example: An agent/broker is involved. From here, a wholesaler sells to a retailer who then sells to the customer.
You can always continue your research to find out more from other business owners in your industry or local area how they distribute their products/services. Alternatively, you can seek out further understanding by visiting websites such as FourWeekMBA, Neilpatel, Oberlo, or Establish to increase your knowledge on distribution.
B. What distribution strategy will you use?
Once you have determined what channel you will use, you will want to come up with a distribution strategy, which depends on the type of products/services your business sells. There are three methods to consider:
- Intensive: As many outlets as possible. The goal is to penetrate as much of the market as you can.
- Selective: Select specific outlet locations and cap the number of locations in a specific area. Often based on a particular product and fit within a store. Doing this allows businesses to pick a price which attracts a specific target audience, therefore providing a more customized shopping experience.
- Exclusive Distribution: Limited outlets. This can mean anything from luxury brands that are exclusive to special collections available only in particular locations or stores. This method helps maintain a brand’s image and product exclusivity. Some examples of companies that enact exclusive distribution would be high-end designers like Chanel or even an automotive company like Ferrari.
Knowing “Who’s Who” is critical to answering this question as the chain of distribution can get confusing as more middlemen are added into the mix.
C. What costs will your business incur for other businesses to carry your products?
It is quite common for one business to carry and sell or advertise another’s products or services, especially in Saskatchewan where other businesses are more inclined to support each other as they have a common mindset of “keeping it local” or to “shop local.”
If you want to increase your business’s public visibility and/or sell more products/services, you may find this option appealing. This can be accomplished by reaching out to businesses to see if they are interested in advertising your business’s services or to carry your products to sell. However, as amazing as this opportunity is, you may want to consider the potential incurred costs (profit loss).
Profit loss results from various factors, the most common occurrences are:
- Price adjustments from your original price, which is based on the other business’s pricing model, or
- The percentage of profit the other business withholds from selling your products/services
When speaking with other businesses, it is vital that you understand what their terms and conditions are, how much the product/service would be sold for in their store and what profit percentage they are going to charge. Ultimately, what a business offers will vary, and it is up to you to determine what level of risk you are comfortable with.
Pro Tip: Although everything is negotiable, standard revenue profit split is 60% to the store selling and 40% to business where the products originate.1 If your product becomes a “hot” item that helps drive extra traffic to that business, you can always renegotiate to a 50/50 or 40/60 split.
Since there is risk of profit loss involved when participating in this type of business venture, finding the right price for your retailed products is just as important as it was for you to determine the price for your products originally in the previous sections. Many businesses tend to incorporate a product markup on their products sold elsewhere to reduce the amount of profit loss.
D. What impact will this have on the final selling price of the product?
Once you have received the information you need, it would be beneficial to detail everything here to understand the impact these ventures would have on your business’s overall sales by conducting an analysis on the variances. To further your knowledge on this, you may want to look into Manufacturer’s Suggested Retail Price (MSRP), which refers to the list price by some businesses or the suggested MSRP that a product is recommended to be sold for at a point of sale. The MSRP was designed to keep prices at the same level, but retailers may not use this price, and consumers may not always pay the MSRP when they make purchases. Items may be sold for a lower price so a company can reasonably move inventory off shelves.
E. What incentives are you willing to provide to carry other businesses’ products (shelf space)?
You may find yourself in the same shoes as the businesses above are. If this is the case, you will want to consider the same options that were provided to you or try to come up with some other incentives such as a discounted prices for the other business to supply your business with the products/services it needs to run daily, or perhaps you’ll provide the other business discounted prices on your products and services.
F. Indicate the method of shipment, cost, and any volume discounts to be provided to other businesses
What shipment method you will use depends on your business’s location and where your products are going to be sold. Additionally, you will also want to consider the costs that will be incurred and if you are going to provide volume discounts with the distribution.
There are some basics that set a foundation for the rest of your shipping. Key shipping strategies include:
- Shipping Rates: Does the customer absorb the full cost of shipping fees, or will you offer free or flat-rate shipping to absorb some or all of the cost?
- Shipping Methods: How will you ship your products to customers?
- Product Weight: Measure and update the weight of each product you sell. Having that information will help you get a good sense of your total costs and pass along accurate prices to your customers.
- Preferred Packaging: You’ve already considered the best packaging in the previous section; you can calculate the selected packaging into the shipping prices.
- Source your packaging: You can order free packaging from some carriers such as Canada Post, UPS, or DHL, or invest in branded packaging if that’s part of your strategy.
To find out more on this topic and to help you answer this question, you can visit websites like Shopify, ShipHawk, or Economics Discussion where you will further your knowledge on other matters relating to shipping, calculating costs, and standard volume discounts used.
G. Do you have any tentative or firm contracts or commitments in place with potential customers?
Here you will provide summarized details of those customers/businesses, including their letters of intent or contract agreements signed.
With all the questions you have answered as they relate to your business’s pricing, you will have a clearer understanding of what to expect when it comes to Distribution and Sales. Please stay tuned for part 12 of this series when we discuss Advertising Plans.