Are you retail ready?
“You will never get a second chance to make a first impression” ( Will Rodgers )
We know most Entrepreneurs or Inventors are excited about their product but before you present your product to any retailer and consumer you need to make sure that you cover main areas.
Packaging / Messaging / Merchandising
Your packaging tells a story and is your primary interface with consumers in retail. You need to define your messaging tailored toward your target audience. Your messaging needs to be consistent with your web and social presence as well as your sales materials such as catalogs, presentations and even price lists.
A significant part of the retailer’s decision making process to assort your product line is your strategy and efforts to create demand for your product, drive traffic and help a retailer convert traffic into sales. You need to consider 3 areas of digital marketing:
- Social Marketing
- Digital Advertising
The most important part of your digital campaign is your messaging. You need to be consistent across all platforms and media.
PR gives you a really good foundation of recognition and traffic.
These are comprehensive listings of free PR news and distribution sites.
It is my experience that PR agencies usually start to work with you in a fury but settle down quickly and fade away unless you continuously push them. I truly believe that if you are looking for help to communicate your message that you are much better off hiring a Social Agency that manages your entire social footprint.
You have to keep track of your activities and use the success and numbers to gain leverage in your discussions with retailers.
Lots of companies leave huge opportunities untouched when they are not exploring partnerships with other companies that have synergistic products offerings and are targeting the same consumer.
Pricing This is the most important milestone in becoming retail ready. We call the pricing in retail a pricing waterfall model. There are various plateaus defining categories of expenses and discounts that you need to be aware of.
You need to set a competitive SRP – the right value proposition for your product within its space. The first step is to define the retailer surface margin. This may vary by channel – e.g. Warehouse Clubs are looking for a lower SRP but are also happy with less margins then let’s say specialty retailers.
By defining your retail surface margin (discount off your SRP) you arrive at the first plateau. Now you have to consider if you are selling your retail customer via a wholesaler or not. If a Wholesaler / Distributor services your customer you need to provide that Distributor with a margin. In this case you reach your second plateau.
Most retailers want a “Back-End” program – money they use to fund their marketing and advertising campaigns, pay for training or simply add to their bottom line. Such programs can vary significantly from retailer to retailer and even between categories. We will work together to advise you what type of programs to expect. Now you arrived at the fourth plateau of your waterfall pricing model.
Most product in Consumer Electronic retail is sold as part of some type of promotion. Usually retailers will agree to advertise your product if you give them a reason such as temporary discount (Instant Rebate). At times retailers may also suggest to include you in bundle promotions. Regardless of what type of promotion it will cost you money. Promotions are more effective when giving higher discounts (15 to 20% would be considered adequate).
Now during a promotional period retailers will want you to keep their margin whole at the discounted price. They will ask you to pay them the difference between their normal cost and their cost at the discounted price. At the end of the promotional period the retailer will report the units sold and then create a “charge back” (debit memo) for the number of units sold times the difference in cost. We typically assume that about 30% of your total sales will be generated during a promotional period. You should assess the potential cost – e.g. your regular retail price is 59.99 – a good promotional price is 49.99. Let’s assume you give a retailer 30% margin – this will cost you about $3 / unit. Based on the assumption that 30% of your sales are on promotion you need to accrue 30% of $3 / unit you sell = $1 / unit! Since this is a variable cost it adds another plateau to your pricing model.
The next step is to consider commissions you have to pay to your sales teams. Commissions should always be paid on Net/Net sales – meaning invoice cost minus back end program and net of all returns.
Commissions can vary depending on the category and the complexity of the product.
Now that you reached the seventh plateau of the waterfall you have to consider returns. In Consumer Electronics you will average between 6 and 10% in returns. Returns are neutral to your P&L in the sense that you reduce sales and COGS – however you have to consider the expense of returning the product and refurbishing it.
It is our experience that 75% of all returns are caused by buyer’s remorse – that means the product is perfectly fine and can be reworked. Now you need to consider the cost of testing, refurbishing and repackaging the product. Keep in mind that refurbished product has to be marked as such and can’t be sold as new. To sell refurbished product you have to create a lower SRP and preferably find different channels of distribution. Sometimes it is more cost effective to provide your retailers or distributors with a return allowance – a discount on all invoices to cover returns.
Operations / Business Processes
Retailers have very specific operational requirements from packaging to shipping and invoicing. All data and communication of Forecasts, Orders, Shipping Notices, Receipts , Invoices and Return Authorization requests flow electronically – most commonly known as EDI.
Many start ups or smaller businesses will use a Distributor or a 3PL provider to manage that part of their business. The fundamental difference is that a distributor will take possession of your product and handle all transactions with your retail customer. The distributor will be your customer and is responsible to pay you.
There are many distributors and before you choose who you want to do business with you need to make sure that the distributor(s) have relationships with your target retail customers.
A 3 PL provider is strictly a service provider. They manage your inventory , communication and shipments to your retail customers. Most of the larger 3PL providers have existing relationships with most retailers in North America and the set up process is fast and easy.
The biggest issue any start up and small business has to deal with is cash flow. Most retailers push really hard to extend payment terms. One of the retailers KPI is “owned inventory on hand” – meaning how much inventory do they have in their stores that is actually paid for. Ideally retailers want to drive that to ZERO which means there is constant pressure on the vendors to extend terms and accept faster order cycles with short commitment periods.
Even start ups with minimal sales history need to work on accurate forecasting models. Companies can not afford to extend long payment terms and have high inventory levels – regardless of margins or profit levels.
Taking weekly sell through / POS data from your retail accounts help you to establish an accurate forecast based on your retailers inventory levels. We call that a PSI process: Purchase – Sales – Inventory!