(Letter): Regarding some issues with sales policies, I am quite confused and was about to ask Teacher Li for advice on designing some framework policy clauses. First, when the company's shareholders set the original price system, they mainly considered cost accounting, period expense levels, and profit expectations—initially, their profit expectations were overly optimistic because they believed the product would quickly ramp up in volume. Now, general mall expense rates are around 10%, and southern markets may be higher. In the early stages of entering new markets, to reduce distributor pressure and share risks, we generally hope to share entry and barcode fees 50/50, but distributors will find ways to make the manufacturer bear more, which is a helpless move. In fact, our price system has been adjusted several times, but each time the market reaction was poor, both helpless and somewhat arbitrary. Actually, the current price systems in the few main markets also differ, which troubles me greatly. Second, the current sales contracts generally include the following support clauses: 2% non-return subsidy; 1% tasting sample subsidy; free delivery CIF price; 2% basic rebate, with additional tiered rebate rates for excess. In addition, each market is allocated 5% for promotional expenses, but controlled by sales personnel (linked to their performance evaluation), mainly used for displays, end caps, promotional items, in-store demonstrators, and some special pricing. Third, we previously provided initial stock (floor stock), but due to differing market expectations between both parties, standards were hard to negotiate, and the results were unsatisfactory. It seems that is why we later changed to the support method of sharing entry fees. In fact, I think initial stock support can be provided in the early stages. Since distributors generally are unwilling to bear operational risks, they will also make such requests, and we want to share the early entry risks with distributors, wanting them to invest as well. That is the divergence, and also the reason for mutual distrust and scheming at the start of cooperation. To have both parties stand on common ground for common goals, we must solve this problem. But how should initial stock be provided? Fourth, regarding credit terms and other management, I also want you to design a framework policy clause. In fact, analyzing the distributor's mindset, they are mainly worried about two aspects: first, the product lacks market appeal, and after much effort, there is no effect; second, the investment thus incurred goes down the drain. If we can to some extent alleviate the burden of early investment, they will only worry about hard work without returns, and the pressure will be relatively less. Our new product design also aims to solve the appeal issue. Actually, I am still worried that if sales are poor, distributors will definitely raise the issue of returns. In fact, I am quite confused about the current sales policy. The basic policy was established by my predecessor (the general manager) (but even during his tenure, he could not fully implement such clauses, with many exceptions), and as the basis for the annual budget, it has been confirmed by the shareholders' meeting. To be honest, limited by the company's strength, developing the market under such conditions is very hard. Distributors' enthusiasm is not high, and sales personnel's enthusiasm is also not high, with no clear direction. This is also the reason I am determined to try new products. Let's continue to exchange other ideas. The above is a letter from a company that Li Zhengquan previously provided consulting services to. Below is my reply. (Reply) Your analysis of distributor psychology is correct. It is precisely for this reason that I have two ideas: adjust the overall profit margin and support system, use more control and stimulation of distributors' market operation process with additional benefits, and overall improve the benefits and enthusiasm we bring to distributors, as well as our control over them. Li Zhengquan thinks there are several characteristics here: First, eliminate the previous hidden policies with greater arbitrariness and latent crises, clarify the total profit operation space and sales policies, so that both we and distributors are clearer and more informed. Second, the original product price system can remain unchanged, but add control points for process benefits, stimulate distributors to pay sufficient attention to key links affecting market operation quality, and enhance their enthusiasm. Third, the total profit operation space given to distributors may appear higher, but part of the benefits can only be obtained if distributors do and meet requirements, meaning it does not represent that distributors will actually get that much. Let's start with initial stock. First, regarding initial stock, I think this: initial stock can be considered, but it needs to be linked with purchase policies. · Provide a certain share of initial stock, but the policy should be linked as much as possible with cash-on-delivery to stimulate cash sales. · Control initial stock costs within product profit margins: for example, for a first purchase of 200,000, provide 20% initial stock (virtual numbers; the specific amount and ratio should be controlled within product profit margins, meaning if we provide 20% initial stock, our profit must be above 20%, to avoid loss-making transactions due to risk). · However, the risk from initial stock cannot be borne by us alone; distributors also need to share it, to convert initial stock into pressure and motivation for distributors and reduce our losses. Specific sharing methods can consider: if the specified shelf placement rate is not achieved within the specified time, the initial stock must be recorded as part of the payment that the distributor bears fully; if stockouts occur a certain number of times within a certain period, the distributor bears a certain percentage of the equivalent payment for the initial stock. Second, regarding credit terms: when it comes to credit terms, it involves the issue of selling on credit—the emergence of credit sales is closely related to brand influence, market support, product strength, sales policies, etc. However, our early efforts should lean towards cash-on-delivery. Although this has certain difficulties. · Set two prices: cash price and credit price within credit limits. The cash price gives a certain discount, but the discount is not offset in kind in the current month; it is realized in kind after one or two months. The condition is that cross-region dumping and price undercutting are not allowed. The credit price is higher than the cash price, allowing distributors with different philosophies and cash flows to choose the suitable method. · Set an annual total credit limit, break it down to each regional market, control the risk of bad debts within a certain range, and expand or contract based on market conditions. · Strive to control credit terms within XX days, and the final collection of accounts receivable should not exceed 1/3 of the credit period, i.e., not exceed XX days. After that, take measures such as intensified collection, increasing late payment fees, deducting rebates corresponding to overdue payments, and stopping supply to reduce risks. · Strengthen credit evaluation and dynamic tracking during credit sales, and re-evaluate some customers every 3 to 6 months. · Adopt a policy combining multiple small-batch shipments with partial credit for single-batch orders. Multiple small-batch shipments will increase our logistics costs, but the credit risk is relatively smaller compared to single large-batch shipments. For partial credit on single-batch orders, for example, an order of 100,000, of which 50,000 can be set as credit, to minimize risk. · For the credit portion, distributors need to provide interest subsidies higher than the current loan interest. · Combine with the already set non-return subsidy, and settle based on actual order payments within the credit period, not based on how much is sold. Like the previous measures, this helps control distributors' irrationality, making them order according to actual market demand, reducing pressure from channel stuffing and price undercutting. Of course, when it is time to push inventory, some adjustments need to be made. · Corresponding to late payment penalties, set rewards for early or on-time payment. Rewards are realized with a delay. · Link with sales personnel's assessment and compensation. · Each month, sort out credit sales and accounts receivable forms, with multi-department checks and balances. Third, regarding other sales policies. Earlier, we mentioned initial stock and credit terms, which are all related to sales policies, market support, and the profit operation space given to distributors. Therefore, regarding the product price system and sales policies, I have an idea. That is, we can slightly adjust or even maintain the current price system, but add some additional benefits for process control, overall improving the benefits and enthusiasm we bring to distributors, and thereby increasing our control over the market. For example, in addition to bearing part of the entry fees, free delivery CIF, non-return subsidy, tasting subsidy, basic rebate, promotional support, etc., we can also add shelf placement rate rewards, display rewards, no-stockout rewards, distribution support, appropriate credit term support, payment rewards, salesperson subsidies, single-store sales maximum rewards, sales growth rewards, etc. (Of course, this depends on weight, and not all need to be added), and raise the overall profit operation space. Many of these incentive measures can be distributed together with the year-end rebate (some items can consider providing interest subsidies at the same level as the current period interest). Combined with whether channel stuffing and price undercutting occur, we can deduct and deter, making the high profit operation space a motivation for market development rather than an incentive for market chaos. Of course, we can also set different profit operation spaces for different single products based on their own profit, market potential, sales momentum, and launch time, rather than a one-size-fits-all approach. I think doing this will not violate what your predecessor and the board have already determined, making it easier to pass; it can bring practical process control benefits to market operations, and solve problems like insufficient enthusiasm from distributors and sales staff. It is more realistic. As for the specific amount of total profit operation space given to distributors, I think we should view this from the perspective of a new category, new product, and high-end product. Stimulating distributors more in the early stage is a strategy for many new products to succeed, in order to first build the market. At the same time, policy differences between regions must be controlled. For example, the purchase discounts I saw on the profit calculation table, in the future, for neighboring and other markets, we should try to offset the policies of Beijing, Tianjin, and other markets through the improvement of new policies, to avoid chaos. Below are the framework clauses for other sales policies. First, ensure that the total gross profit points for distributors operating our company's products reach XX% or more. My suggestion—in the early stage, the total points composed of various sub-items should reach about 35-45%. Second, basic rebate policy: combine with the already implemented tiered rebate policy. There are two characteristics here: First, adjust the current single annual rebate to a parallel annual and quarterly rebate. The benefits of this are—money can be obtained faster, which helps distributors maintain consistent enthusiasm throughout the year; with higher enthusiasm to complete quarterly tasks, it helps avoid distributors using illegal means to disrupt the market at year-end to complete tasks; improve the targeting and effectiveness of rebates. Second, adjust the current policy of lump-sum rebates for all products to setting different annual and quarterly rebate points for different single products (series). The benefits of this are—improved targeting, clear high-profit, volume-driving, and key products; increase rebates for high-profit products, increase rebates for key promotional products, and lower rebates for relatively low-profit products, easy-volume products, and relatively low-end products; due to different rebate stimuli, make distributors pay sufficient attention to key promotional products that are temporarily difficult to ramp up, rather than accelerating the elimination of potential products due to human factors. But regardless of the rebate policy, in addition to considering sales targets and time, it should also be combined with whether distributors engage in price undercutting and channel stuffing to control their behavior, so that rebates become more beneficial. Third, credit evaluation and credit granting policy. We have already mentioned the credit term and credit period policy last time; please refer to the previous opinion. Here, we provide a table for credit evaluation for your reference (the table is omitted in this book). However, note: · Each quarter, re-evaluate and revise credit ratings based on multiple factors such as the distributor's attention to the company's products, execution of the company's sales policies, delivery and service functions, and bad records. · If the attention to the company's products is high, the credit rating is higher; if the company's products are treated equally with other companies' products, the credit rating is lowered; if the company's products are not the main focus, but only auxiliary business items or merely to enrich the product structure, the credit rating is even lower. · If the customer provides delivery or service to lower-level customers, with few stockouts and violations of display rules, and few abnormal exits, the credit rating is correspondingly enhanced. Conversely, the credit rating is lowered. · If the customer fails to execute the company's sales policies well, such as frequent transshipment or low-price dumping, the credit rating is lowered. · If the customer has had bad records during the period, such as unpaid debts, whether against our company or other companies, the credit rating should be lowered. Fourth, process reward policy. · Our company guarantees to give distributors a process reward of not less than XX%. · The specific composition of process reward policy: Shelf placement rate reward XX%—if the shelf placement rate reaches XX% within one month of product launch, reward XX% based on the sales of the first two months; Display reward—if the quarterly display meets and maintains our company's display regulations (display position, facing, maximizing display of bestsellers, priority for promotional items, product mix for entry), reward XX% based on quarterly sales; No-stockout reward—if monthly stockouts do not exceed two (store) times, and stockouts of bestsellers do not exceed one (store) time, reward XX% based on monthly sales; Reward for top ten single-store sales in the distributor system—evaluated monthly, uniformly based on the store's sales proof, reward XX% of the store's sales for distributors whose single-store sales enter the top ten (requires distributors to provide reports, control distributor situation, encourage distributors to maximize sales in stores with high sales and profit contribution potential); Reward for top three sales growth in the distributor system—evaluated quarterly, first place rewards XX% based on quarterly sales, second place XX%, third place XX% (requires distributors to provide reports, control distributor situation, form a competitive mechanism among distributors, motivate and urge everyone to think of ways to improve sales); Inventory optimization award in the distributor system (top three)—evaluated monthly (based on standards such as maintenance of safety stock levels, quantity of soon-to-expire products, first-in-first-out, inventory norms), uniformly reward XX% based on monthly sales (control distributor inventory, alleviate inventory and soon-to-expire product risks that may cause channel stuffing and price undercutting, help distributors formulate more reasonable order quantities); Timely payment reward—distributors who settle payments promptly in the current month enjoy a payment rebate of XX% of total monthly sales; distributors with no accounts receivable for 90 consecutive days enjoy a payment rebate of XX% of total sales over 90 days; distributors with no accounts receivable for the whole year enjoy an additional payment rebate of XX% of total sales; any single late payment cancels the current period payment reward, and if the next period's payment is not settled, the payment reward cannot be enjoyed. · Regional supervisors or sales representatives conduct market spot checks. Fifth, new product promotion policy. If distributors actively cooperate in promoting new products, in addition to regular rebates, they will enjoy an additional XX% rebate for new product promotion (higher than the annual rebate for old products). Sixth, market protection policy. Compensation for product quality issues, handling of price undercutting and channel stuffing, stockout compensation, price adjustment compensation, counterfeit product handling, transfer policy, seasonal inventory pressure compensation. Product price difference policy, expense reimbursement and offset policy, market support policy, etc., are omitted in this book. [Reprint note] This article is from [Business Trends], excerpted from Li Zhengquan's (WeChat: lizhengquan01) book "Foresight: Predicting Marketing Success or Failure", 2010. 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