Distribution business pitfalls: what you need to know before starting
Our Russian consumers have long been accustomed to imported goods and they are always in good demand. Therefore, the profession of a distributor is in fact in great demand.
Today we decided to talk about how Russian distributors actually work with foreign manufacturers. This area is not often talked about, but this activity is very profitable and the Russian market needs such professionals. Let's talk today in detail about the intricacies of this profession and how to start working in this area.
Main Distributor Functions
In general, the primary task of a distributor is the maximum expansion of the sales regions of any product. Usually, a distributor is an intermediary between the manufacturer and dealers who are already engaged in the direct sale of goods to end customers. Therefore, the function of a distributor usually also includes the creation of a dealer network. One or more distributors can work in the market of the importing country at the same time, it depends on the demand for this particular product from our customers.
Thus, the distributor creates a sales market for the products of a foreign manufacturer in our country, and the greater the capacity of this market, the larger the regional dealer network, the higher the distributor's income.
The distributor himself, after creating a dealer network, may not be engaged in direct sales at all, his main function becomes only to maintain the functioning of the sales chain he has created and receive income from the total trade turnover of goods sold.
Depending on his intentions and an agreement with a manufacturer of products, a distributor can become a general importer for a given foreign manufacturer, develop additional services or, for example, arrange supplies of components. In this case, the responsibility of the distributor will include the warranty exchange of low-quality goods, components and spare parts.
Typically, manufacturers have standard distribution agreements that contain a set of specific conditions, often with specific requirements related to the legal practice of a given exporting country and the characteristics of the product. Often, the contract with the manufacturer also contains an indication of the volume of products that the distributor needs to sell over a certain period of time. All this must be clarified in advance and carefully studied all the terms of future contracts.
When creating a dealer network, a distributor must understand that in the future, a lot will depend on the partner-dealers he has selected, because then they will represent the foreign manufacturing company before the final buyer.
Therefore, the distributor must take care of carrying out the necessary advertising and marketing campaigns in order to create the image of the manufacturer of the product, and its promotion in the domestic market.
How and where to start - step by step instructions
How to open a distribution company from scratch, however, like starting any other business, largely depends on how successfully the future entrepreneur will cope with the existing economic, opportunistic and psychological barriers. Below we will talk about how to become a founder of a distribution services company and what it takes to earn the appropriate capital on this.
The concept of distribution came to us from the English language and has become familiar to our ears for a long time. In the most general sense, distribution is a type of activity in which a business entity purchases goods from a direct manufacturer and takes an obligation to him to retail or wholesale these products. However, this activity includes other areas of work related to the development and implementation of logistics processes, the organization of distribution networks and distribution of goods.
There are two main views on this small business:
- From the side of the manufacturer of products, distribution consists in organizing channels for selling goods and effectively managing their movement from the manufacturer to the end consumer.
- From the side of the distributor himself, this activity is considered as a process starting from the placement of goods on his territory and up to bringing the products to the consumer.
Thus, both directions complement each other, and, in accordance with which of them is accepted as dominant, different types of distribution can be distinguished. Even an individual entrepreneur can legally act as a distributor. But, as practice shows, the most effective way to conduct this activity is through the creation of a distribution company.
General Business Principles
As mentioned above, in distribution, the interests of the manufacturer and the supplier ultimately coincide. Consequently, a distributor can act both on his own behalf and on behalf of the manufacturer, identifying himself only as a supplier. As a rule, these approaches are combined.
Between the two main business entities - the manufacturer of the product and its seller - a corresponding agreement is concluded, in which the principles and conditions of cooperation are clearly defined and spelled out. They can also be viewed as step-by-step instructions for creating a company from scratch. This:
- Product cost.
- Amount of markups applied for goods sold.
- Wholesale trade conditions.
- Policy of discounts and preferences.
- General description of the market and its regional distribution.
- Target audience of consumers.
- The procedure and conditions for making settlements.
- Terms of sales of marketable products transferred by the manufacturer to the supplier.
The amount of a distributor's income depends mainly on how competently he calculates the profitability of the business, what equipment he will use to run it, whether it is profitable for him to find premises, transport, staff. Most often, the income of an entrepreneur-distributor has a variable value, because it is determined by seasonal factors of consumption, the volume of supplies of goods from the manufacturer, the time of settlement with buyers on specific terms for each sale.
It may seem strange, but Russian legislation does not regulate the distribution agreement in any way. Neither the Civil Code nor other laws and regulations contain any normative provisions about it. However, since paragraph 2 of Art. 1 and item 1 of Art. 421 of the Civil Code of the Russian Federation determine that legal entities and individual entrepreneurs are free to choose the terms of the contract (except for cases when these contracts contradict the existing legislation), then they act as a legitimate legal act that has no restrictions on the territory of our country.
Defining goals, paths and resources
In a competitive marketplace, businesses need planning to become viable and profitable.
An effective tool for planning project and investment activities in accordance with the needs of the market in a changing external environment is the company's business plan.
The defining elements of a business plan are assessing the current state of the enterprise, defining the company's goals, choosing effective ways to achieve goals.
The structure and content of the business plan: company strategy, sales plan, marketing plan, operational plan, major procurement plan, personnel plan, financial plan. The company's strategy includes the main elements of short-term planning, provides the basic procedures for the analysis and setting goals and objectives. The first step in preparing a business plan is to determine the current position of the company. An objective assessment of the state of affairs of the company today is required. After assessing the current state and potential, you can form goals for the planned period.
Main directions of distribution
The main indicators of the distributor's effective work are sales volume, the level of qualitative and quantitative distribution in the assigned territory.
Evaluation criteria when a manufacturer selects this trading company:
- A well-organized structure of active sales.
- Availability of sufficient resources to cover the allocated area.
- Ability to effectively plan and execute agreed procurement plans on a weekly / monthly / yearly basis.
Distributors are the official representatives of the company's economic interests.
The efficiency of the company's distribution network is determined by the optimal ratio of the achievable level of customer service and the amount of logistics costs. The main costs of the distribution network are the costs of storage and warehousing, transportation, inventory management, and provision of distribution management.
Business Plan Sales Budget
How to enter the intermediary market, assess the prospects for distributed goods and technologies, and hedge your own risks.
The Russian distribution market is quite well developed, many niches are already occupied in it, relationships have been built between major players. With such factors, it is difficult to achieve a quick result. At the same time, the industry is characterized by a low level of professionalism among B2B consumers. The main factor in making decisions is still the price. The lower the cost of a product, the more willingly people buy it. This is an objective difficulty in dealing with a quality product or service.
A lot of effort and energy goes into explaining to customers their own benefits from consuming a quality product. Sometimes it comes to the point of absurdity: together with the client, we thoroughly study low-quality products and come to the conclusion that quality, safety, image, durability, efficiency are still more profitable.
Most large distributors of quality equipment, goods or services have to open training centers, in fact, at their own expense, complete the training of clients so that they can understand the "obvious" things.
The market for professional equipment for fitness clubs is very conservative. It will take at least three years to launch a company similar to MFitness. Even for the most modest start of such a multi-brand company, an investment of $ 1-1.5 million will be required. You can reduce the initial investment by opening a distribution kit of one or two innovative products. Investments in such a startup will range from $ 30,000 to $ 100,000. At the same time, the state and financial structures are in no hurry to support novice distributors.
Entrepreneurs need to seek support from a vendor. He is more interested in cooperation, and if you prove your reliability to a potential partner, then the chances of success are very high.
There are probably no problems with entering the market only if you sell an innovative product in demand, for example, an iPhone. In all other cases, tactics and strategy depend on the specific product and industry specifics. The technologies that are applicable in St. Petersburg, as a rule, do not work in Astana. If you know your product and market, then there should be no difficulties. But if there is not enough knowledge, you must either study yourself, or hire a "scientist". To achieve a quick result, it is often more profitable to find a ready-made specialist and entrust him with finding a client. But do not forget to calculate the cost of such a specialist and the income that he will provide you.
It is important to assess the market size soberly, especially when working with a foreign partner. Almost all Western "non-global" companies incorrectly assess the size of the Russian market. For example, they impose the financial results of their activities in a small European country on Russia. Moreover, the logic is often strange: we earned a million on a population of 1 million, you have a population of 143.5 million, so we can earn 143.5 times more.
You should also think about the intangible part of the business - reputation. This is a lengthy process where you have to constantly prove your reliability in practice. You should also remember about the image. A specialized organization will help to create it.
The most important thing is to determine the time and place where the main stream of information will go. You can get a faster return on your investment by complementing your direct selling with more external customer inquiries.
The success of any MLM company is based on a well-thought-out concept and a balanced business plan, like any other type of business. However, both the MLM business itself and its concept have many differences from the traditional business. Indeed, in an MLM company, the main focus is on the person, and not on capital, means of production and other standard points of support of the business we are used to.
We will try to analyze the features of the concept and the formation of a business plan, their starting points in this article. Let's start in order.
MLM Business Concept
The word “concept” is often used to refer to the principles of building an MLM business system. Like any other business, MLM entrepreneurship has its unshakable footholds.
They are obvious, but let's try to highlight them and organize them correctly. So, MLM business is based on the following components:
- A product that is in demand and can be implemented within the framework of network marketing. For example, the products of the "Seven Jewels of Life" company are exclusive high quality preparations, the usefulness of which has been proven both by many years of use and by laboratory tests.
- The structure of an MLM company, where each person, being a link in the system, can create his own subsystem and receive income not from the direct sale of the product, but from attracting new participants to it. However, the interests of downstream partners in the chain are not infringed upon, because the longer the chain, the lower the percentage received by the upstream participant, and the profit is ensured through sales volumes.
- Motivation of each participant in the system, where each partner knows in advance and can calculate his income, his work is not controlled, and he himself enjoys a very large freedom of action.
- Income received by each member of MLM companies. Moreover, its structure is different. If ordinary distributors receive their percentage only from sales, then upline members receive a small commission from the sales of each member as a bonus for attracting "their" distributor.
In order to link all these issues, to make the business attractive, another document is being prepared for its participants, called a business plan.
MLM Marketing Business Plan
A business plan for any promising business is a multi-page document consisting of several sections, which formulate the essence of the business, its potential target audience, investment volume, costs, and pay attention to profit calculations.
The business plan of an MLM company is no less complicated, based on a mass of mathematical calculations, difficult to understand, so we will try to briefly and succinctly convey its essence to an ordinary person.
The peculiarity of an MLM business plan is that the organizer of a company and a simple distributor have it in many respects similar in their main parameters, which, by the way, puts an ordinary participant and a leader on the same planning stage. For example, in a store, the level of planning for a director and a salesperson is initially different, and therefore an ordinary salesperson will never become a director and will not come close to him in terms of income. In the MLM business, any participant can achieve very great heights and even not become a director, but certainly equal to him in income. Of course, such peaks have been reached for more than one year.
The concept of doing business for the director and any member of the network is the same - it is getting income from the sale of certain products, built through an organized system and ensuring the motivation of all its members. We have already covered this issue in detail above, therefore we will not repeat ourselves.