Doing Volume, Also Doing Profit Products with volume have no profit; products with profit have no volume. This has never been easy. Manufacturers often complain about distributors' volume growth, while distributors complain more about profit issues. Distributors complete the manufacturer's volume target, but profits fall short of expectations, sometimes even working for a year without profit. Distributors can't accept that. Is the distributor's profitability problem a unilateral issue or a shared problem between manufacturer and distributor? In the game between manufacturer and distributor, there is mutual blame, but it is definitely a shared problem. Distributor profit management has evolved over time. In the early days, volume management was equivalent to profit management—the more you sell, the more profit you make. This was the intuitive stage of profit management, solved by the boss's instinct and common sense. At this stage, if occasionally distributor profits were generally low in a certain year, manufacturers would compensate distributors. For example, adding a few points of rebate at year-end or bearing some market expenses. But there was basically no profit management. However, profit issues are tricky. When small, you make money; when big, you lose money. This is a widespread phenomenon because the breakeven point for the whole society has risen. Later, channel costs became complex, and excessive channel policies caused cross-regional dumping, severely impacting channel profits. Additionally, near-expiry products eroded profits significantly, requiring financial personnel to participate in distributor profit management, entering a professional stage where some large distributors hold monthly financial analysis meetings. Now, with severe involution, volume growth is difficult, costs are rigid, and solving profit problems from volume and costs is generally hard. Therefore, the manufacturer-distributor game intensifies. So, we need to discover factors affecting distributor profits beyond volume and profit. At this stage, profit is designed and strategically managed. If individual distributors have profit problems, the responsibility may lie with the distributor itself; if a manufacturer's distributors generally have profit problems, the responsibility lies with the manufacturer; if distributors across industries face common problems, the solution lies in new thinking. Solving distributor profit problems is no longer something distributors can do alone; it requires joint design and management by both manufacturer and distributor.

Profit Is Managed Manufacturers have multiple goals, especially big brands, and can tolerate short-term or even long-term losses in certain areas. But distributors are businesspeople, typically profit-oriented, and find it hard to tolerate losses for more than a year.

Of course, distributor profit management is very difficult, for several reasons:

First, in the manufacturer-distributor game, distributors habitually say "not making money." After crying wolf too often, manufacturers become numb. Second, some distributors lack systematic financial management systems, so their claims of "losing money" have no basis. Third, distributors' "brand portfolio" is a basic tactic—using big brands to attract traffic and white-label products to make money. Yet they say "big brands don't make money." After too much of this tactical loss-making, manufacturers don't accept it. Fourth, in China's channel circulation, big brands have high price transparency, making it hard for distributors to control the channel and make money from big brands. Fifth, distributor profits are calculated, not managed. By the time they calculate losses, it's too late. Manufacturers only have compensation as a solution. The masses fear results, the Bodhisattva fears causes. Profit and loss are results; what are the causes? During the period of "flood irrigation" in mass product channels, the cause-and-effect of profit and loss was simple: volume equals profit. But when there is no volume and no profit, profit management is no longer simply equivalent to volume management.

Where Does Profit Come From? Twenty years ago, when deep distribution was just being promoted in China, I proposed the "Marketing Trilogy," which left a deep impression on many readers. The Marketing Trilogy is: single-product breakthrough, product enrichment (long-tail products), and product structure. The Marketing Trilogy is not only the evolution and deepening of marketing itself but also the trilogy of profit growth. Corresponding to three profit models: scale profit, long-tail profit, and structure profit. These three models are more accurately described as profit sources for distributors than for manufacturers. Because manufacturers, in addition to the above three sources, also have supply chain profits. In the highly competitive state of involution, any single profit model is unreliable, and competitors have disruptive measures. But if the three profit models become a stable profit structure, supporting each other, it's completely different. When one profit model is affected, the other two can respond to each other. At one stage, one profit model may be mainstream; at another, another may become mainstream. In the era of shrinking volume, the path to making money through scale is blocked, so new profit avenues need to be opened. Distributors must move from doing volume to doing product richness (a large number of long-tail products), and then to doing product structure. When volume and profit are shared, there is a solution. Of course, achieving all three simultaneously is very difficult. Because it's difficult, few can do it, and only those who do it make money. The ability to make money is actually determined by the scarcity of capability. This article will revisit the Marketing Trilogy and the profit models behind it.

Single-Product Breakthrough, Scale Profit The concept of scale profit is easy to understand but hard to grasp thoroughly. When scale increases, fixed costs are spread. The gross profit from incremental volume is net profit. That's the logic of scale profit. But what is the engine of enterprise scale? It's the big single product. For a company to achieve large scale, it must first create a big single product. Creating a big single product doesn't mean making only one product, but concentrating resources on one product to lead the way. For example, Master Kong's strength lies in having the big single product "Braised Beef Noodles," whose sales alone equal the total of the second-place competitor. This is the ballast stone for the industry leader. Uni-President has strong brand power, but before 2008 it had no big single product, and sales were hard to grow. Later, it successfully created the big single product "Old Pickled Cabbage" (Laotan Suancai), which drove sales of Uni-President's entire instant noodle series. Many people have the illusion that brands are abstract. In fact, big single products are the carriers of brands. If consumers think of the brand but can't recall the big single product, then the brand will struggle to drive sales growth. In "Chinese-Style Marketing," I and Mr. Jin Huanmin summarized the brand evolution map as: reputation product → product reputation → brand reputation → corporate reputation. A reputation product is a big single product that can generate brand power. When a company successfully creates multiple big single products, it gains product reputation, which can become brand reputation. There's a convention among dairy industry leaders: if a big single product can't achieve 10 billion in sales, it should be replaced by cultivating a new big single product. Yili's strength lies in having several super big single products worth 20 billion and 10 billion. Mengniu follows the same logic. Big single products emerge in mainstream price bands. But mainstream price bands change constantly, so companies' big single products also change. Where do big single products come from? From market practice, like horse racing, "water the seedlings when you see them." For example, "Old Pickled Cabbage" was chosen as a big single product by Uni-President because it naturally emerged in the market, becoming a top-three seller without policy support. Once selected as a big single product, all policies are "concentrated on one point," making it a national big single product without mistakes.

Long-Tail Products, Long-Tail Profit Many companies focus on big single products, but few pay attention to long-tail products. Some even think long-tail is the domain of small and medium enterprises. On the contrary, the hidden profitability of big brands lies in long-tail profit. Product richness corresponds to the "long-tail profit" model. What is long-tail profit? First, long-tail refers to a bunch of products with small sales volumes that competitors don't pay attention to. But small sales volume doesn't mean small total volume. As long as the long-tail is rich enough, the total volume is still significant. That's the benefit of product richness. Why do we need long-tail products if we have big single products? Because big single products have a paradox. Once a product becomes a big single product, it becomes a "target" for competitors, who always attack it. For example, they launch similar products, interfere with pricing, and disrupt policies. This interference has benefits, like "carrying the sedan chair," making the big single product seem even more influential. But the side effects are obvious: frequent responses to competitor interference cause profit erosion. Whether competitors interfere or not, they always gain something. If you don't respond, they succeed; if you respond, even if they don't succeed, they achieve a "small to big" effect. Therefore, after a big single product succeeds, manufacturers and distributors should increase the proportion of long-tail products and reduce the proportion of big single products. The more dispersed the sales, the harder it is for competitors to respond. The value of long-tail products: first, because each product has small sales, it has good concealment, competitors won't interfere, so profits are stable and guaranteed; second, with enough long-tail products, competitors can't find a "target," and attacking any single long-tail product has little value, so market impact is poor. How to enrich products? Enrich around the big single product. Both borrow the big single product's halo and differentiate from it. But in long-tail products, pay special attention to a phenomenon: manufacturers have enough long-tail products, but each market doesn't have many. The long-tail products a company needs: first, each market's long-tail should be long enough; second, the proportion of long-tail products should be roughly a certain share. How should big single products and long-tail products coordinate in marketing? In the most intense competition, always use the big single product to respond quickly, even if it means losing profit to protect volume. In normal times, focus on long-tail products to accumulate enough profit sources, ensuring that even without big single product profits, there are profit sources at critical moments. Without a sufficient proportion of long-tail products, the big single product will be unable to stand alone during intense competition. As mentioned earlier, long-tail profit has strong concealment and stability. This is determined by the fact that long-tail profit is not noticed, and competitors have no countermeasures.

Product Upgrade, Structure Profit There is always a structure at any time; structure is the width of the price band. If we divide product structure into low, medium, and high tiers, the low end is the firewall. Even big brands often have "no price, no goods" low-end structures to solidify the price firewall. Another value of the low end is to open channels, spread costs, and maintain personnel. The medium (mass) generates scale, and scale generates profit. This is a familiar concept, so I won't elaborate. The high end generates image, and today's high end is tomorrow's mass. So, the high end is also a strategic layout. When Uni-President launched Old Pickled Cabbage, it also launched a high-end product, "Tang Daren" (Soup Master). Competitors also launched similar products, but Tang Daren didn't gain volume until it exploded in 2016. Now, Tang Daren is only a mass product. I remember when I worked at a leading FMCG company, the boss gave sales two indicators: one was sales growth rate, 30% annually; the other was structure adjustment rate, 5% (high-end) structure adjustment annually. The biggest problem with structure profit is using the profit margin of mass products for high-end products. Not daring to raise prices, frequent promotions, and pushing for distribution coverage. Finally, it results in neither volume nor profit.

Profit Models Shared by Manufacturer and Distributor Before 2013, the big single product model supported most companies. Because before the FMCG industry peaked in total volume from 2013 to 2016, sales were always growing. The costs generated by each round of sales growth were diluted by sales growth. So, even if gross margins fell, profits still grew. In this environment, making scale through big single products to generate profit had no obstacles. Of course, it also made some companies addicted, forming a dependence on big single products. When scale profit couldn't continue, they still hoped for the scale profit model. This is a problem in recent years. After 2016, quite a few companies woke up and resolutely pursued structure. Now, companies that mainly rely on structure profit have better profits for both manufacturers and distributors. Problems caused by environmental changes require institutional solutions. In China's channels, where manufacturer management extends, individual distributor problems may have roots in the distributor. Overall distributor problems have roots in the manufacturer. Manufacturers' profit models, in addition to the three above, also include supply chain profit, which may even be the main source of profit. In short, manufacturers have more profit sources. If distributors only have a single big single product profit model, the manufacturer relationship will definitely have frequent problems. Therefore, manufacturers leading distributors' profit models is definitely a consideration for large manufacturers. How are manufacturers' profit models transmitted to distributors? Definitely through the sales force system. Therefore, manufacturers' assessment of salespeople should also consider this factor. In recent years, excellent distributors have paid high attention to profit, and in their assessment of salespeople, profit proportion is increasing. Some even reach half. For manufacturers, distributors assessing salespeople on profit is both good and potentially unfavorable. Good because distributors finally consider profit independently. Unfavorable because distributors' salespeople's profit orientation may not be beneficial to manufacturers.

Profit Layout Twenty years ago, volume meant profit. Therefore, regardless of company size, profits were decent. Thus, most only considered volume, not profit structure. At that time, I proposed the three sources of volume and the corresponding work, hoping manufacturers would lay out in advance. The so-called layout is to start with the end in mind, do things that need to be done sooner or later, do them early, and do them incidentally. When it's not important, when everyone doesn't value it, do it without cost or at low cost. The success of any matter depends on two major resources: one is human and capital investment; the other is time resources. Laying out early and doing it incidentally is using time resources. Only by doing it early is it easy to do incidentally. When it becomes urgently needed, you can only invest a lot of manpower and resources specifically in a short time. The relationship between strategy and tactics is also reflected in profit model layout. First, start with the end in mind and lay out early; second, accumulation of tactics becomes strategy. Distributor profit issues seem to be distributor problems. But in China's channel environment, they are also manufacturers' profit management problems. Because China's channels are actually an extension of manufacturer management. The bigger the brand, the more so. Profit management has a period when it's volume management, especially during rapid growth of mass product sales. Equating volume management with profit management has led manufacturers to neglect distributor profit management. Moreover, many distributors have incomplete financial systems, making profit management impossible. In the past, conflicts between manufacturers and distributors over profit were common, often resolved by manufacturers "conceding profits" or bearing costs. But in recent years, due to the profit shrinkage from mass product sales peaking, severe involution making profit difficult, and the norm of volume without profit or profit decline despite volume growth, manufacturers have made distributor profit management a topic. Manufacturers and distributors differ in profit: manufacturers have multiple goals, while distributors are typically profit-oriented. If they don't make money for two or three consecutive years, distributors will definitely quit. Manufacturers' profit management for distributors should start from three aspects: First, where does distributor profit come from? Here we only discuss increasing revenue, not reducing costs; second, how do manufacturers manage distributor profit; third, how to lay out new profit models in advance.

Regarding distributor operation and management, at the "2024 6th China FMCG Conference & 3rd China FMCG Distributor Conference & 3rd China FMCG Hard Discount Conference" held on August 20-22, 2024, New Distribution invited more than ten benchmark regional FMCG distributors to share their practical experiences and thoughts in depth.

At the same time, the conference will release the "FMCG Industry Distributor B2b Platform Strategy Guidance Report," "2024 FMCG Distributor Operation Status Survey Report," "FMCG Industry O2O Regional Practical Implementation Guidance Report," and "2024 China Hard Discount Development - FMCG Industry Insight Report."

Interested friends are welcome to scan the QR code to inquire about the conference details!