Recently, I was invited by a friend to discuss how distributors choose products, so this article will talk about product selection. A distributor's ability to make money is directly related to their product portfolio. It is irresponsible to select products without maximizing portfolio profits and to lead your team towards prosperity without a clear plan. So how exactly should one choose products to sell?
-01- When selecting products to distribute, study your product structure.
I once served a distributor who was one of the top trading companies in the local area. His product structure was very scientific: he only distributed four products—Nongfu Spring, a local instant noodle brand, Six Walnuts, and a student soy milk—with annual sales of 150 million yuan. In summer, he focused on Nongfu Spring; in autumn and winter, instant noodles; during Mid-Autumn Festival and Chinese New Year, Six Walnuts; and for schools, student soy milk.
Many distributors like to "bite off more than they can chew" when selecting products, wishing to have all brands under their name, but in the end, they find that none of the products are done well, and profits are negligible.
One point to note here: Brand owners and distributors are mutually beneficial. No manufacturer wants its product to be an accessory in someone else's hands, and they dislike distributors who are half-hearted in their operations. Once a brand owner puts pressure on a distributor, the distributor can only respond by raising funds, renting warehouses, hiring staff, and other actions, which inevitably increase costs.
The purpose of business is to make a profit. Taking on more products has nothing to do with profitability, but optimizing your product structure can. So here are my suggestions for product structure:
a. Seasonal complementarity: If your product is in peak season in summer, choose a product that is in peak season in winter to balance your profits.
b. Channel complementarity: The market capacity a distributor serves is limited, so try to have your products cover all channels in your market as much as possible.
c. Item complementarity: A friend of mine who distributes Nongfu Spring also distributes a sparkling water to meet the rigid demand of some terminal stores for different items.
d. Gifting products for major festivals: China has two very important festivals: Spring Festival and Mid-Autumn Festival. During these specific times, the market for social visits is huge, and you might make more profit in two months than in a whole year.
-02- When selecting products to distribute, study your profit structure and business purpose.
In the market, we usually divide products into several types: first-tier, second-tier, and third-tier. First-tier products mainly serve to "drive sales," third-tier products mainly serve for profit, and second-tier products play a bridging role. Let's analyze this in detail.
1. First-tier products
Profit: The return on investment is very low, with gross profit below 10%. After deducting warehousing and distribution costs, personnel wages, expenses, losses, and taxes, net profit is almost nothing.
Business purpose: First-tier products are usually "must-sell" in the channel. They can leverage their platform to "drive sales," quickly build your channel network system, and cover basic operating costs to ensure the normal survival of the business.
2. Second-tier products
Profit: The return on investment is relatively high, with gross profit generally around 20%, making them the main contributor to a distributor's profits.
Business purpose: Distributors have little say with first-tier products. Once they lose the distribution rights, the personnel, vehicles, warehouses, etc., configured for first-tier products become a heavy burden. At this time, second-tier products can ensure the normal survival of the business and strengthen the distributor's ability to resist risks.
3. Third-tier products
Profit: The return on investment is the highest, with gross profit as high as 30%-40% or more.
Business purpose: Implement a "short, flat, fast" operation model to periodically increase the income of distributors and their employees.
Let's look at a few examples:
- Case 1: A distributor exclusively for Nongfu Spring plans to take on a third-tier functional beverage.
- Case 2: A distributor exclusively for Master Kong instant noodles plans to take on Coca-Cola series products.
- Case 3: A distributor, to meet profit needs, operates only third-tier products.
Summary analysis: In Case 1, the distributor's profit structure is fine, but the sales growth requirements for the first-tier product Nongfu Spring are high. If the distribution rights are lost, the third-tier products cannot support the business, and the business will face huge difficulties. Also, during operations, they will face various "threats" from the brand owner's personnel.
In Case 2, the distributor operates only first-tier brands. In my view, this is a "fat but weak" situation—"small profits but high turnover." The annual sales volume sounds impressive, but the profit is so low that it's embarrassing to mention to peers.
In Case 3, the distributor is a typical "profit-hungry" type, but during operations, they will find that all products need to be hard-pushed. Without traffic-driving products, the cost of manual distribution is too high, sales are slow, and returns and exchanges follow, ultimately not achieving expectations. So when selecting products, pay attention to profit structure and business purpose, and don't be lost in the dazzling array of products.
-03- When selecting products to distribute, study your own operating situation.
These past few days, I visited several Snow Beer distributors. They have a common trait: The beer manufacturer divides the market into segments: dining and circulation.
A distributor is only responsible for a fixed area and channel. Take one dining distributor as an example: he has been distributing Snow Beer for five years, cooperating with 200 dining outlets. Over these five years, the outlets served have not changed much and are stable, with annual sales of about 150,000 cases.
In the first two years, he exclusively distributed Snow Beer (beer competition mainly involves buying stores). Later, competition became more intense, costs increased, and new outlets had high input but low output. He eventually gave up opening new outlets and focused on maintaining existing ones, supplying all products needed by the dining stores. He also took on coconut juice, mineral water, soda water, beverages, baijiu, milk, and even some seasonings, contracting all products for the 200 dining stores.
In one year, his profits multiplied several times, costs decreased by one-third (because the manufacturers of the products he handled all had cost inputs), and the stability of these 200 cooperative customers greatly increased.
This case tells us a truth: If the cost-effectiveness of adding new outlets is low, then consider how to maximize profits from existing outlets. When selecting products, start from your own operating situation. There is no best product, only the most suitable one.
-04- When selecting products to distribute, study whether the target product is a "windfall" product.
Lei Jun, CEO of Xiaomi, once said, "Standing at the风口, even a pig can fly." When selecting products, distributors should also see if the product they fancy is at the风口.
For example, in 2011, functional beverages led by Red Bull, Mizone, and Nongfu Scream rose rapidly. At that time, one of my distributor clients did not choose these famous brands but chose the newly launched Heika. In just one year, his profit exceeded 500,000 yuan.
His words are still fresh in my memory: "Now functional drinks are popular. As long as the taste is not bad, you can sell them once you get them on the shelves. It's the best time to make quick money." Indeed, he succeeded. That year, he completed the accumulation of initial capital, rising from a wholesaler to a trading company. Now his annual sales are around 50 million yuan.
To summarize: Windfall products must be distributed. So how do you discover if a product is a windfall product? I have a suggestion: pay close attention to the dynamics of first-tier brands. Windfalls are not random; they are created by the market. For example, I think soda water might be a windfall product in 2020 because giants like Nongfu Spring, Jinmailang, Wahaha, and Uni-President have all laid out soda water this year. Each brand owner has its own unique consumer education methods. If I guess correctly, the "windfall" is in the making.
-05- When selecting products to distribute, study the comparison between the target product and its main competitors.
When selecting a product, distributors must thoroughly research how the competitors of this product operate once you start distributing it.
It is recommended to take samples to visit terminal outlets, visit your fortress customers, and discuss with your team using the marketing 4P and SWOT analysis methods.
- a. Product: What are the differentiations between your product and the main competitors in the market? Where is the core competitiveness? How does the product power and brand power compare?
- b. Price and profit: Pay attention to the prices and profits at each sales link of competitors, such as the distributor's purchase price and profit, wholesaler's purchase price and profit, and terminal store's purchase price and profit. This cannot be sloppy. From the current market situation, especially for low- and mid-end products, price factors are still very important.
- c. Channel: For channels, mainly consider the manufacturer support and investment for your product and competitors. Inquire clearly about the intensity, form, and timing of both investments.
- d. Promotion: No need to say much; just compare channel promotions, terminal store market promotions, and consumer promotions.
To summarize: When taking on a product, you must understand the brand owner's operational capabilities in detail, understand the operational capabilities of the main competitors in the market, fully analyze the product's strengths, weaknesses, opportunities, and threats, and make a decision after comparison. You can even visit other markets to investigate. Comparing and researching before paying for the product may cause pain for a while, but being too lazy to compare and research now may cause pain for a lifetime.
-06- When selecting products to distribute, be familiar with the target product's period status in the local market.
Any product has four periods: introduction, growth, maturity, and decline. This is the market law for products and is inevitable.
Distributors can consider taking over products in the first three stages. However, for products entering the decline stage, even if the conditions are very good, I strongly advise against taking them over because as a distributor boss, you must understand:
Your purpose is to do business first, then build the brand. You don't have the energy or ability to save a dying product. Business has its own rules; violating them will cost you, and it is also irresponsible to your marketing team.
-07- When selecting products to distribute, understand the manufacturer's operating situation.
Before confirming to distribute a product, distributors should first understand the manufacturer's operating status. It is best to visit the factory in person. The items to inspect include:
- Are the manufacturer and brand owner the same? If it is an OEM product or a shell company, be especially cautious.
- Product inventory situation (production batch numbers, inventory quantity, inventory management, etc.) and the logistics fleet situation at the factory gate (the best is a queue waiting to load).
- Equipment operation status. If the equipment has been stopped for a long time, you will understand the product's sales situation.
- The company's overall management and the mental state of the operations team. If it is inconvenient to visit the factory, it is best to understand the target product's operations in other markets. You can also learn more about the manufacturer's operation model, agency requirements, market reputation, etc., from distributors in other markets, so as to comprehensively judge whether the manufacturer is strong.
Final words:
In the daily operations of distributors, selecting new products is a very important component. If the introduction of new products is not ideal, there is almost no possibility of business success. Many distributor bosses, when they fail after introducing new products, often blame the product or complain about the market environment.
In fact, products themselves have no good or bad; they only differ in whether they are suitable for the distributor's operating system and the local market. Unlike the decision-making layers of formal enterprises, distributor bosses rarely conduct rational market system research and special analysis when deciding whether to take on a new product. Instead, they rely more on personal market operation experience and insight as the basis for analysis, combined with some intuitive feelings about the new product, and then make a judgment.
In reality, in recent years, the average survival rate of new products taken on by distributors has remained below 30%, while the average success rate of new products launched by brand owners can generally remain above 50%. Where is the difference? It is not the difference in scale or capital, but the difference in research and judgment methods.
Rational and systematic analysis and judgment methods are naturally more scientific and useful than emotional and personal analysis and judgment methods. After all, very few people can guide or create trends. As commercial intermediaries, the vast majority of distributors can only follow trends. But many distributors overestimate their own vision and judgment, believing that their experience can already insight into the market and accurately predict, often resulting in eating the bitter fruit they planted themselves.
Time flies quickly, and 2019 is coming to an end. Distributors, have you prepared your products for 2020?
Extended reading:
Defensive War of Strong Brands | Nongfu Spring's Distributor Reform
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