Happy Holidays! OK, maybe that’s premature. But, it is that time of year when you’re likely sending products to retailers for the holidays.
Now that your products will be out in the wild on retail shelves, are you ready for what’s next?
Across Rush Order’s many consumer electronics clients, we field lots of questions about retail distribution strategies and best practices. In this four part series, we will share a few of the most important lessons we’ve learned. Let’s make this your best year ever.
In this first installment, we’ll start with your existential questions.
- How much inventory should I commit to a particular retailer?
- What else should I consider when deciding how to fulfill retailer demand?
How much inventory should I commit to a particular retailer?
There is no one size fits all, but here are a few things to consider.
First, a big part of this answer comes down to confidence in a given retailer’s ability to sell product for you. It’s often said that retailers are good at fulfilling demand, but they are not good at creating demand.
The ideal scenario is to quickly sell through your products on a retailer’s shelves and watch those replenishment orders roll in. However, if your products collect dust on the shelves and eventually come back as returns several months later, you risk the following issues, among others:
- No cash received for those returned units = Large dent in your cashflow. You shipped those units and they sat in the retailer’s distribution network for months. Now you’re getting them back with no cash to show for it.
- After all these months have gone by, you could have sold those returned units through other retailers or via your own ecommerce store. Those are lost opportunities. Good luck explaining to your board why you are revising your forecasts sharply downward.
- Those returned products now have outdated firmware and components that could present problems when they land in the hands of the next customer.
- You may have already released a new version of the product that renders all of the returned units obsolete. Liquidating old our outdated products is painful to say the least.
- You now have a black eye in the market. Retail buyers are smart. New potential buyers may ask for references of where your products were successfully sold recently.
One other unintended consequence of returns from retailers is the impact on revenue recognition. First, before finalizing any potential deal, check with your finance team or accountant to understand how terms of the deal will impact revenue recognition. For example, can you record each sale as revenue when the units are shipped to or received by the retailer? Or, do you have to wait to recognize the revenue on your books until after the products sell through in the store? Answers to these questions have major impacts on your financial performance.
Setting a precedent with a given return rate this year also means that your finance team may be required to set a higher return reserve next year. Return reserves are based on historical performance. Those reserves are removed from your top line revenue performance on your company’s income statement.
For example, let’s assume your company sets a 20% return reserve next year based on the actual returns received this year, you’ll need to work that much harder to meet your forecast next year. Ensuring a good fit and managing sell through now will save you major headaches in the future as well.
Some of our clients have successfully negotiated “no return privileges” with some retailers. However, be careful with this approach. Your contract with a retailer might stipulate that they cannot break minimum advertised pricing (MAP), but that doesn’t guarantee that the retailer won’t break the agreement. If a heavy discount is displayed online by any one retailer, your chances of success with other sales channels, including your own website and Amazon, are zero.
Obviously, your best course of action to increase sell-through and reduce returns is to make an awesome product. Of course, all of our clients make awesome products, but that’s not where your channel strategy should end.
The next best course of action is to take responsibility for sell-through. Again, retailers only fulfill demand. It’s your job to determine which markets and specific retailers attract a demographic that is most likely to buy your product, and then figure out how to ensure many of those customers snatch your product off the shelf.
For example, maybe Target and Walmart (USA) or Media Markt (Europe) aren’t the right fit. Maybe they are. Have you considered the differences in strategies for your product category at Best Buy USA versus Best Buy Canada? They’re drastically different in many cases.
Smaller specialty retailers, airport stores, and even non-traditional consumer electronics retailers can be great options as well. It’s a big retail world out there. A little creativity can go a long way.
Once you’ve found your match with a retailer, it’s up to you to create great packaging that clearly explains the product’s value proposition. It’s also your responsibility to create buzz via effective PR and marketing strategies.
Rush Order doesn’t provide sales & marketing services, but we do see the empirical results driven by the very best in the industry. Over and over again, an experienced and talented salesperson (usually a VP of Sales type role) is the key driver behind the biggest successes we’ve seen. This VP of sales can be an internal or external hire. Regardless, a successful VP of Sales will develop an integrated strategy that combines the “the right” retailers with the best PR and marketing efforts to drive sell-through at stores.
All that said, deciding how much inventory to commit to a particular retailer is a delicate balancing act. Many of our successful clients started small by only testing sell-through at a few stores with each retailer before expanding nationwide / worldwide. Sometimes it’s better to dip your toe in the water before chasing the mirage of a 10,000+ unit purchase order from a retailer who may end up returning most of those units.
What else should I consider when deciding how to fulfill retailer demand?
Many Rush Order clients have experimented with “.com-only” relationships out of the gate. Lots of retailers are expanding their ecommerce businesses by offering more products online than they do in stores. And, many of these retailers are open to negotiating drop-ship arrangements. By setting up an EDI integration, you can ship each order from the retailer’s website directly to the individual consumer.
Rush Order provides these EDI integrations on behalf of our clients and we’ll even place the retailer’s packing list in the box and ship on the retailer’s FedEx or UPS account. As a result, it appears the retailer is providing an end to end solution to the customer.
Drop-shipping helps you avoid a lot of inventory risk as you sell one unit at a time. In addition, drop-shipping removes most of the revenue recognition and return reserve headaches mentioned above. The largest downside is that you’re taking on more of the logistics burden as a result of shipping each unit one at a time. This impact on your margins may or may not be worth it.
The retail strategy you take should be unique to you, based on the specific nature of your products and business. This is not an area where you should be following the pack of other hardware companies. Careful deliberation is critical. Then be ready to move fast and adjust your plans frequently.
Contact us if you would like to discuss any of these strategies in more detail. We will gladly share our experience, empirical benchmarks and make any useful introductions we can for our clients.
Join us next month for installment 2 when we cover the retailer setup process. What operational requirements will retailers demand of you? What do those requirements mean for your profit margins?