As market competition intensifies, retail formats grow stronger, and manufacturers refine sales territories, overall operational costs rise while distributor margins shrink. "Business is getting harder, and profitability is becoming more difficult" is a true reflection of the current market in 2015. Facing this stark reality, many distributors are contemplating transforming their profit models to break through the impasse. But which model can be adopted to not only transform but also "reach an agreement" with manufacturers and downstream customers, ensuring a win-win for all three parties? Based on my work experience and the actual market operations of distributors, I will analyze six profit models for distributors.
Model 1: Two-P Complementarity The first P is product, the second P is channel. 2P complementarity means that products complement each other across channels. Distributors combine related products based on customer needs, thereby improving their full-set delivery capability and providing downstream customers with "one-stop service." Just as when people go to Walmart or Metro to buy daily necessities, everything they want is available there, eliminating the need to go to another supermarket. Consumers buy their preferred daily items, and distributors earn more profit through the price difference, making both parties happy.
Due to bulk purchasing, this model not only significantly reduces logistics costs but also provides downstream merchants with a relatively complete supply of goods, so they no longer worry about not being able to obtain needed products from "upstream." At the same time, downstream distributors save on logistics costs and reduce purchasing expenses, meeting their diverse needs while allowing them to earn a small margin—everyone is satisfied. Additionally, from the perspective of the company's overall marketing resources, focusing on product mix also enables the integration and sharing of product resources. Key points to note when operating this model: distributors need to prepare a certain amount of capital, a sufficiently large warehouse (or storefront), and personnel in advance.
Model 2: Rapid Volume Expansion The essence of rapid volume expansion is speed and volume-driven profits. This model relies on distributing fast-moving consumer goods, seasonal products, and patented products with no current competition. Distributors reduce operating costs through scale and generate substantial cash flow. Under this profit model, distributors use "volume expansion" as a breakthrough and treat speed as a prerequisite. They choose different sales seasons for different products, gain market share through low prices, win over downstream customers, and achieve rapid profit growth through increased volume.
Distributors can seize the "seasonal (periodic)" opportunity to purchase large quantities of related products and then sell them to downstream distributors and consumers, achieving rapid volume and profit. This model allows manufacturers, distributors, and sub-distributors to all make money. Key points to note: seize the "business opportunity," otherwise wealth will pass you by—it's fleeting! Additionally, it may provoke jealousy and criticism from peers.
Model 3: Focusing on End-Terminals As the saying goes, "A big shop bullies its customers." Large terminal supermarkets, relying on their high-quality terminal resources, impose various demands on distributors or manufacturers and raise entry barriers. For example, they may demand entry fees, barcode fees, new product fees, anniversary fees, display fees, flyer fees (DM fees), promotional management fees, information fees, and even kickbacks for staff. Among these, "entry fees" are the largest. Distributors face three major terminal challenges: difficult entry due to high fees; difficult maintenance due to various supermarket fixed and unexpected fees that deter distributors; and difficult payment collection, with settlements often quarterly, semi-annually, or even longer, placing enormous pressure and risk on distributors.
Facing the strong hegemony of terminal supermarkets, distributors "reflect deeply" and begin to break free from their control, either by focusing on terminals or building their own terminal channels.
The distributor's goal is to earn more money. Previously, they profited from product price differences, manufacturer policies, and year-end rebates. Now, while building and controlling their own terminals, they also develop home delivery services. As long as a consumer makes a phone call, the distributor delivers the product to their home. This model is very popular with consumers because they have strong purchasing power and are willing to accept slightly higher prices than supermarkets if delivery is to their doorstep. However, this model has no competitive barriers; once competitors follow suit, price wars become inevitable.
The advantage of the self-built terminal model is that distributors not only save a series of entry fees but also resolve the issue of credit sales to terminals, weaken the power of original terminals, and capture a large consumer base. This model is also a profit model pursued by manufacturers; finding such a distributor is like finding a qualified "marketing headquarters" or a sales branch. However, self-built terminals inevitably lead to conflicts with downstream customers over local customer resources, regional sales, regional channels, regional sales talent, and terminal and advertising resources (e.g., rural outdoor wall ads). Additionally, when self-built terminals bypass the downstream distribution network to develop customers privately, downstream customers may resent having their "lifeline" cut off, leading to retaliation such as terminating cooperation, dumping goods, or disrupting the market. For example, some downstream customers may spread rumors, demand promotions or larger territories, ask for more rebates, negotiate for better policies, defect to competitors, or even set up their own operations. These are issues distributors must address.
Model 4: E-Commerce Model What if a distributor's store is too small, or if large stores with many locations are costly and unprofitable? The industry's low profit margins dictate that distributors must develop markets at low cost, and the e-commerce model can effectively solve this problem. An online mall is similar to a physical department store, using various e-commerce methods to conduct transactions in a visible but intangible way, thereby reducing intermediate links, eliminating transportation costs, and reducing price differences between agents. This model returns benefits to consumers as much as possible and promotes distributor development.
This profit model primarily utilizes three types of online malls: B2B (Business-to-Business), B2C (Business-to-Customer), and C2C (Customer-to-Customer), each with different functions. Typical B2B examples include Alibaba and Made-in-China.com, mainly for wholesale; typical B2C examples include Joyo, Newegg, JD.com, Juedai Mall, and Tianyue Mall, mainly for retail; typical C2C examples include Taobao, EachNet, and Paipai. Establishing an online mall offers six major benefits: first, increased brand promotion and publicity opportunities; second, free new product launches; third, enhanced brand image and customer recognition and loyalty; fourth, expansion of new sales channels, thereby increasing sales; fifth, zero inventory model, reducing operating costs by saving on inventory; sixth, reducing consumers' options to choose other brands. The online mall profit model avoids traditional channel competition, achieves win-win for manufacturers and distributors, and facilitates consumer shopping. Its disadvantage is that due to network coverage issues, remote rural areas and economically underdeveloped mountainous regions may remain "blind spots."
Model 5: OEM/Own-Label Model So-called own-label (OEM) means that distributors do not produce themselves but entrust other manufacturers to produce, while the brand is their own. By choosing this model, distributors can develop the most appropriate marketing plan based on their actual situation. When problems or changes arise in the plan or market, they can adjust quickly and formulate countermeasures. At the same time, they can control profit margins independently, avoiding disagreements with manufacturers. In the complex and ever-changing business environment, they can respond with the fastest reaction and highest efficiency, while manufacturers can more fully utilize their resources to improve efficiency. This approach achieves true complementarity and win-win.
The profit points of this model include: first, distributors can reduce fixed asset investment in factories and equipment; second, they can have their own products without needing much capital; third, they can focus on design, R&D, and sales, saving time and costs; fourth, they can leverage their strengths by entrusting production-related technology and work to professional enterprises, improving product quality and shortening production cycles. Distributors can first act as agents for a first-tier or second-tier brand, and once they control channel resources, find an OEM manufacturer for own-label production, then distribute to downstream customers, or directly sink the channel to terminals, or do direct sales, thereby eliminating the intermediate price difference and logistics costs of sourcing from manufacturers, earning more profit.
Model 6: "Give and Take" Model "Give and take" means giving first to gain more later. As the saying goes, "You have to lose a child to catch a wolf." The well-known Haidilao hot pot chain uses this profit model by offering free snacks (such as melon seeds, watermelon, cantaloupe, fried shrimp chips, fried green beans,情人果, soy milk, and sour plum juice) and free shoe shining and manicure services while customers wait, attracting them to dine and thus achieving profitability.
Distributors can adopt the "give and take" model in several ways:
- Free logistics and transportation: Distributors offer free delivery, attracting customers to purchase from them.
- Free initial stock: Distributors provide initial stock on credit; customers pay on the second order, creating a cycle of credit and profit.
- Free training on operational skills: Distributors train customers for free to attract them; if customers genuinely need to buy, they will be reluctant to shop elsewhere unless the distributor's prices are unreasonably high.
- Free promotional materials and publicity: Distributors provide promotional materials for free, so customers don't have to worry about promotions—why not?
- Free trial: Distributors offer free trials, allowing customers to experience product performance firsthand. For example, only by trying shoes on can customers know if they fit. This gives customers a sense of ownership and the psychological benefit of getting something for free: "Whatever, let's try it first." Finally, if customers are satisfied or find it suitable, the distributor has almost made the sale.
Although this model incurs some upfront costs, it is worthwhile if it leads to repeat purchases, referrals, and trust-based purchases. This model not only saves customers money, circulation costs, and operating costs but also continuously improves sales profits, operational efficiency, and brand reputation. The key point to note is the risk of "losing the child but not catching the wolf"—spending money without achieving the desired profit.
In a market economy, there is no fixed marketing formula. Regardless of which profit model distributors adopt, the ultimate goal is to maximize profit margins. However, everything has two sides. When some make money, others may suffer or become envious. If major customers defect and others follow, it could lead to a collective rebellion of core customers, even threatening the survival of the business. How should distributors solve this problem? I have summarized several measures to prevent or remedy such situations:
Humble yourself and proactively apologize. If distributors' profit-seeking causes customer defection, they should not blame downstream customers. Instead, they should lower themselves and proactively "apologize" with sincerity, such as treating customers to meals, karaoke, or offering new product incentives.
Investigate whether other customers show signs of defection. One defection is not scary, but a collective "uprising" is a big problem. Distributors must immediately investigate downstream customers, isolate those who have defected to prevent them from spreading "defection plans," and consider "cleaning house" if necessary.
Conduct in-depth communication with customers showing signs of defection. Put yourself in their shoes, help resolve their "defection issues" and concerns, and strive for early "recovery."
Develop a "win-win plan" in advance to retain customers. Once distributors transform their profit model, they must simultaneously formulate a corresponding "win-win plan" and distribute it to downstream customers, so they are prepared and reassured to continue following. Don't wait until after the transformation to "mend the fold after the sheep are lost." Also, create a "profit dream" for downstream customers in advance, making them excited and eager.
Appease major customers. For large or core downstream customers, distributors cannot rely solely on creating dreams. They must implement appeasement policies, such as privately signing appeasement agreements, providing material or spiritual rewards to win loyalty and prevent competitors from exploiting gaps.
Bundle new products with existing ones. When implementing product integration for profit, distributors can first distribute or directly sell through reasonable bundling of old brands, so downstream customers don't notice your "hidden agenda." Like product placement in TV dramas, by the time customers realize it, you've already achieved your goal, and they have unconsciously experienced your profit model and naturally transitioned. Of course, this is an ideal transformation scenario.
Comprehensive distribution and channel restructuring. Transforming the profit model is also a strategic shift. If the new profit model can bring a new profit growth point, especially one that is 10 times the original profit, distributors can consider restructuring the channel architecture. If economic conditions allow and profitability is assured, they can proceed with comprehensive distribution.
Handle defecting customers properly. For customers who hinder your profit model development and are unwilling to "change their minds," and for "dog" customers, try to avoid arguments. Resolve issues amicably, even if it means spending more money, to part on good terms. In the future, they may be reluctant to speak ill of you, and you'll gain a good reputation and image. Additionally, they might even become your "undercover agent" at competitors.
Indeed, regardless of which profit model distributors adopt, it will inevitably cause some pain to downstream customers, and their defection is understandable. However, as long as both parties can find a balance of interests, they will ultimately achieve mutual benefit and win-win.
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