Hey guys – this is my second post about things to understand when starting a business. I’m no Jack Welch but I figure that if I can share my experiences it may give you something to think about.
My first post dealt with doing a bottom-up analysis so you can get a real sense for your market size.
This post is all about understanding your sales channel. What does sales channel mean, anyway? Is that a new TV station? Is it like the Food Network but for sales people?
“Sales Channel” basically describes how your product gets from you to the consumer. With Clean Bottle, for example, I have 3 different ways to get the product to the consumer.
1) Sell directly to them through the internet. It goes from my Dad’s garage (I got him to do all the shipping because the alternative was for me to move in with him to save money so I could afford a shipper) to you.
2) Sell to a bike shop who then sells to you.
3) Sell to a distributor who then sells to a bike shop who then sells to you.
Before you start a business you need to figure out the different ways you will sell your product to the consumer, and what % of sales you can expect to come through each area and what each type of channel looks for when deciding to buy or not buy your product.
The way I did this was to call up a bunch of companies that sold products to the cycling industry at basically the same price point as me ($10). I asked them how much they sold on their website, vs to stores vs through distributors.
What I found was that about 60% of their sales were through distributors. This is because bike shops don’t want to deal directly with a lot of different manufacturers, especially for lower price point products. This makes sense – a bike shop is a mom and pop operation that has hundreds of different products from dozens of different manufacturers. Do you think they have time to call Pearl Izumi for shorts, Capo Forma for gloves, Giro for helmets, Sidi for shoes, Oakley for sunglasses, Sock Guy for Socks, Dumondtech for lube, Powerbar for bars, GU for gel, Accelerade for energy drinks, etc . . .
Hell no! Its the same reason we all love to go to Amazon.com or Walmart. In one store we can get all the products we want, from diapers to books. So, many bike shops rely on distributors to buy most of their product. Distributors are kind of like the amazon.com for bicycle shops. They stock thousands of different products that bike shops can buy at wholesale prices and have them all come in the same order. The distributors also offer free shipping and generous terms (ie you don’t have to pay them until 60 days later) so it is easy for bike shops to do business with them.
I also found that there are only a handful of major distributors out there. So, for me to be successful I would need to make sure I made it on the catalogue of a few of these distributors.
Before I started Clean Bottle I had never even heard of a distributor. And as I started talking with bike shops and realized how important they were, I just said to myself “oh, my product is so awesome that they will just want to stock it”.
You see, distributors have questions that are entirely different from the ones that consumers will ask. They largely don’t care how cool or different the product is. They really care about how much money they can make from selling it relative to the overhead it will take for them to stock it.
I spent about a month calling various distributors before I finally got a meeting with one. Here is how it went.
me: “Thank you so much for taking the time to meet with me. I have this amazing product, it unscrews at both ends so you can actually clean it”
distributor: “how much does it cost”
me: “only $10”
distributor: “so I can’t make very much money on it. We do $500M in sales, I would have to sell a million for it to matter”
me: “but its really cool!”
distributor: “we already sell water bottles.”
me: “but its really cool”
distributor: “how are people going to know about this product. What is your ad budget?”
me: “I don’t have any money to spend on ads but I did buy a giant Clean Bottle costume”
distributor “how many other products do you have?”
me: “just this one, but I may make it in black in addition to blue. Does that count as a new product?”
distributor: “as a rule we don’t deal with companies that just have one product, it takes a ton of time to set you up in our system and it isn’t worth it if you are just selling one product”
me: “but this product is really cool”
distributor: “do you have any existing customers?”
me: “no, I was hoping you could help me with that”
distributor: “call us back when you’ve sold 20,000 bottles and have 8 different products and sell to 200 of our customers.”
me: “did I mention how cool this product is? It UNSCREWS FROM BOTH ENDS”
As you can see – this is very much a Catch 22. Distributors want to see sales and multiple products and customers before they will take you on, but you need them to get all these things.
So, I had to pitch my product directly to bike shops because it was difficult to get in to distributors. This is how these conversations went:
me: “I have this really cool product . . .”
bike shop: “Looks cool. Which distributor can I buy it from?”
bike shop: “You know, I have so many other products, where am I going to put this?”
me: “just take out some of those other water bottles”
bike shop “How much money can I make on this?”
me “it retails for just $10”
bike shop “okay, so I can’t make much money off of it. You know, can you call me back later, I need to figure out how I can sell this $3000 frame and when I have some free time I’ll think about stocking your product.”
All the consumer cares about is whether the product solves a problem they have at the right price. But, stores and distributors often make purchase decisions on a totally different set of criteria.
So, before you launch your business you need to sit down and make a list of the different channels you need to sell through and what each of these channels look for. My list would go like this:
Distributors (60% of sales)
1. How much money can I make relative to the time I have to work to set it up?
2. How many of my customers are asking me for this product already?
3. How cool is it?
Sell to bike shops (30% of sales)
1. How much money can I make off of this, and can I make more off of this bottle than from selling other similar products?
2. How easy is it for me to buy this product? (ie, can I get it from distribution)
3. How cool is it?
Sell directly to consumers via the web and at events (10%)
1. How cool is it?
2. How affordable is it?
As frustrating as this process sounds, I am ultimately lucky that the bike industry is fragmented. By this, I mean that most bike shops are independently owned as opposed to one or two chain stores that make up 90% of the bike shops out there. And I have the option of selling directly to shops rather than going through a distributor. So, if one bike shop says no to my product, that doesn’t mean that others won’t say yes.
This is another important point. If you are selling a telecommunications box to cable companies, or a piece of equipment that fast food restraunts then guess what, you only have 5-10 potential customers. You better be VERY sure that a few of them will definitely buy the product before you go build it.
So to summarize, before you start investing time in your invention, understand how you will get the product into consumers hands, who needs to buy the product from you so that it can ultimately be sold to consumers, and what they look for when they bring on new products. And sit down with these people before you get too far along so you can see if you have a chance at winning their business.
As for how we did, I’d probably give us a “B”. I did take the time to understand the different channels but I could have done a much better job at speaking to them beforehand.
Luckily, I was able to land a distributor and we now have about 10 distis in 8 countries. But it was much more difficult than I anticipated to land that first distributor.
Thats all from me. In the next post I’ll talk about how to price your product.
Thanks for reading!