Cost Analysis of Distribution Programs
By setting smart goals, companies can save 50% of their investment on sales driving programs.
An obvious leading indicator of sales is distribution. The thought is, the more accounts sold, the more volume will follow. This is not all together accurate or at least not strategically sound. The 80/20 rule holds very true here. The top/best/most strategically appropriate 20% of accounts will produce 80% of the volume, while the other 80% of accounts that are “bad fits” for the product will deliver the remaining 20% of the volume.
A standard sales driver for any distributor is to secure more distribution through some kind of program, goal or quota. Often referred to as “Distribution Drive”, these programs often waste a good deal of sales rep time, good will with accounts and ownership’s money. Why? Because goals are typically assigned in the absence of strategic guidelines. Typical scenarios include:
The “2 per” or the assignment of a goal requiring each sales rep to deliver two new accounts sold. These can be any type of account within a specific channel – bars, restaurants, nightclubs, gas stations. Who cares — just acquire any two new accounts. Any idea how many of them will re-order?
The “Sell 20% more”, requiring the rep to exceed their prior year accounts sold by 20% is only slightly better than the “2 per” and yields the same wasted resources and long term poor results.
While wasting time and good will is bad enough, there are also financial implications to these poorly applied programs. In order to help secure this new distribution, the company puts a deep discount in place to encourage the retailer to buy. A “B.O.G.O.” (buy one get one free) is the typical method. This is completely unsustainable, and retailers who buy into this rarely ever reorder the product!
On top of the deep discount or BOGO, incentives are used to motivate the sales reps to get the goal achieved. Typical distributor reps don’t get out of bed for an incentive of less than $25/new placement.
Cost Analysis
A two-bottle placement to a non-strategic account can costs the company dearly in wasted money. In this “2 per” example for a $20 retail priced product, the hard costs come out to a $35 investment for a 2 bottle placement, which nets the distributor a $30 loss. Multiply this times 25 sales reps each achieving their “2 per” and the total cost is $1,750 for a net loss of $1,500.
Distributors want to appear as partners with suppliers to promote and build brands, so this type of investment happens all the time. There is absolutely nothing wrong with a distributor spending money against product development, but the amount of wasted money is the issue.
How is this a waste of money? Since the program didn’t strategically target specific accounts for distribution, an estimated 50% of the accounts sold during the program are likely to be the wrong ones. These accounts will have trouble selling the product at the suggested retail price because the target consumer is not visiting their venue. So, they will reduce the price down to their normal markup for the acquisition price which was very low due to the BOGO, and the product will eventually sell off the shelf at half of the strategic shelf price desired for the brand. This account will not repurchase, unless perhaps you offer them another BOGO.
The best case scenario is 50% of the accounts are successful with the product long term. In this case, that is 25 accounts. So the distributor actually invested $1,750 to secure 25 new “appropriate” accounts sold or $70 per account. Ouch.
A better way is to target the right strategic accounts for distribution based on account attributes like segmentation and consumer demographic as well as historical sales on similar products. Goal and award incentives for new distribution in only these accounts and the program will deliver far better return on investment. In fact, if the above program is executed correctly with strategic guidelines, the distributor can spend just $875 to secure distribution in the 25 “appropriate” accounts or $35 per account. A much better ratio and return.
