By reading this post you will learn how to work out the right price to attract importers, distributors, resellers and win new markets.
The starting point is understanding the Sales Channel Length and define a Suggested Retail Price (SRP) which has to gain acceptance in the market you want to penetrate.
When approaching new markets, many companies do not investigate enough on the sales channel length.
This is a mistake because if you do not know how many players are involved in the sales process you are not able to understand how you product is going to be positioned in the market and if its positioning is acceptable.
If you define your price list either in a self-referential way or by considering your domestic market, your ability to attract foreign business partners can be compromised.
Sales Channel Lenght
By Sales Channel Length we mean: “Number of individual entities comprising the channel of distribution between the producer and the consumer” (this definition has been taken from here)
The sales channel can be:
- Long, when goods are sold to an importer. Then the importer sells them to a distributor (also called wholesaler) who then sells the goods to a reseller who finally sells them to the public. In this case there are 3 stages before your product reaches final consumers and end-users;
- Medium, when goods are sold to a distributor. Then the distributor sells them a reseller. In this case there are 2 stages before the product reaches the public;
- Short, when goods are sold directly to a reseller (1 step away from the final user/consumer).
Why is it important to know the lenght of sales (or distribution) channel? Because it affects the final price as any stage of the sales process consists of a specific level of marginality you must guarantee to your business partner.
If you decided to go for an Indirect method of exportation, you know that you have to partner with intermediaries.
So, what role do each partner plays on how do they affect your Export business model?
Let’s see what activities any of this intermediary carries out.
Importers are companies that:
- Buy large quantities of your product (full containers), source them directly from your country and imports it to the their country;
- Are specialized in logistics and customs activities;
- Has a logistic structure in place that allows them to ship, import and sit on large quantities of goods at a very competitive prices;
- Move inventory often and fast;
- Sell in bulk to Distributors;
- Normally, importers do not sell in small quantities but they may sell directly to Resellers. They never sell to the public.
You will need an importer when you sell to overseas countries where customs regulations are difficult to manage and shipping are high.
In this situation, finding an importer it means find a “home” to your product and it is key for winning new markets.
Distributors are companies that:
- Buy in bulk either from importers or manufacturers;
- Sell their product in bulk to resellers;
- Normally, they do not sell to the public;
- Guarantee sufficient stock levels and distribute goods fast all round their territory;
- Have a well established and widespread sales network;
- Carry out marketing and sales activities to push sales. For instance, they participate in trade shows;
- Carry out post sales service, such as machinery refurbishment, spare parts supply etc…
- Are able to sell on terms and are able to provide more articulated financial services such as leasing;
- Are usually located in industrial or commercial districts just outside the urban agglomeration. This allows to do fast deliveries to local markets.
The right distributor partner can make the very difference between a successful and an unsuccessful Export operation.
In some case, distributors can act also as importers
RESELLERS (RETAILERS, DEALERS)
Resellers are companies that:
- Buy from medium to small quantities from distributors;
- Sell directly to the public (consumers and end-users);
- They are usually located either in the city centers or in easy-to-reach suburbs where most people live.
Very often, the words resellers, retailers and dealers have the same meaning.
Let’s see how the the sales channel lenght influences the marginality and pricing structure for all players involved.
An example of marginality level and sales channel length
Now, we will show you how the sales channel length affects the final price positioning.
FIRST STEP: the importer
- The importer “X” buys a 20 feet container from you (11-12 pallets). To ship it and get it custom cleared (tariffs, taxes, documents etc…). Importer “X” bears costs for 10% calculated on top of total value of imported goods;
- To keep goods in stock and deliver them to distributors’ warehouses, the importer “X” thinks that a reasonable gross margin is 25%.
Let’s say that the unitary price of your product is € 1, importer “X” will work the gross margin in the way that follows:
- € 1 + 10% shipping and customs costs = € 1,10. This is what it is called Landed cost;
- € 1,10 + 25% gross margin applied by importer “X” = € 1,47. This is the price that importer “X” will charge to distributors.
The new price level after the addition of importer’s costs and marginality is € 1,47
SECOND STEP: the distributor
- Distributor “Y” buys 4 pallets of product from the importer “X”. To cover its cost for warehousing, sales reps commissions, marketing costs etc… , distributor “Y” thinks that a fair gross marginality is 40%.
- € 1,47 + 40% distributor “Y” gross margin = € 2,45 which is the price that distributor will charge to resellers.
The new price level after the addition of distributor’s costs and marginality is € 2,45
THIRD STEP: the reseller
- Reseller “Z” buys half a pallet from distributor “Y” and put this product on sale in 2 shops in the very city centre;
- Reseller “Z” showcases the product in a very appealing way, allows consumers to see it and try it. To carry out all these activities, reseller “Z” needs a gross marginality of 35%.
- € 1,47 + 35% reseller “Z” gross margin = € 3,77 (local VAT excluded). This is the price that the public will pay and this is the price you have to consider as your starting point when calculating backward your SRP.
The new price level after the addition of reseller’s costs and marginality is € 3,77
Let’s wrap it all up
Now, you know:
- the sales channel lenght;
- all players involved in the sales process;
- the marginality structure.
Therefore, you have all the elements to define your SRP: Suggested Retail Price (also known as the Manufacturer’s Suggested Retail Price (MSRP) or the Recommended Retail Price (RRP) ).
DETERMINE YOUR SUGGESTED RETAIL PRICE (SRP)
Let’s sum up all the calculations we made above in our example:
- € 1 is the price you charge to importer “X”;
- Importer “X” bears costs for about 10%. So, the Landed cost will be: € 1 + 10% (shipping cost, duties, taxes etc…) = € 1,10;
- Then, importer “X”, to cover is activity costs and earn a fair amount of money, wants to make 25% gross marginality. So, you will have: € 1,10 + 25% = € 1,47. This is the price that importer “X” will charge to distributor “Y”;
- Distributor “Y” buys 4 pallets of product from the Importer “X”. To cover its cost for the warehouse, sales reps commissions, marketing costs etc… , distributor “Y” thinks that a fair gross marginality is 40%. So, you will have: € 1,47 + 40% distributor “Y” gross margin = € 2,45. This is the price resellers will pay to distributor “Y”;
- Now, reseller “Z” wants to make 35% gross margin. So you will have: 2,45 + 35% = € 3,77 (local VAT excluded).
€ 3,77 represents not only the price that the public will pay. It is also the price you have to write in your price list as this includes all necessary marginality to keep the sales process up and running and keep your business partners happy.
If just one of the intermediaries will not earn a fair marginality, the sales process breaks down and your product will not reach the market.
WHAT IS THE TAKEAWAY?
The answer is simple: any company involved in the sales process has to earn a satisfying marginality.
We can spend all day talking about sales channel length, what a fair marginality is all about etc… but what I can assure you is that if you do not guarantee a sufficient marginality to all players, you will struggle to find companies which will be available to sell your product.
The importance of keeping all business partners happy may sound trivial but I can assure you that many small and medium enterprises do not take this aspect into appropriate consideration.
Your business partners’ profit is as important as your company’s profit. Do not forget it!
If we want to use a metaphor we can say that sellers and buyers have to sit on the same side of the table.
They partner and they are not at odds like it was 15 or 20 years ago.
Your success can come only through your business’ partners success.
Importers, distributors and resellers are our allied.
After having read this article, you should have learnt that knowing the sales channel length is necessary to set a price list that is suitable for attracting and retaining business partners which are indispensable for you to win new markets.
Indeed, setting up an appropriate Suggested Retail Price is one of the main pillars to penetrating new markets by creating a “healthy” business partners network who will support your brand and will allow you to generate recurring sales volumes.
What do you think?
Did it ever happen to you that you had a price list that was not suitable for guaranteeing enough marginality to your business partners?