THE BIG PICTURE ON DISTRIBUTION STRATEGY
Distribution models drive the economics and growth potential of companies.
Many companies are innovating through low-cost and viral digital and online distribution channels.
In most industries, some company is compressing the value chain by going direct...shouldn't it be you?
When growing distribution, focus on alignment and synergy with other business model elements.
THERE ARE 3 MAIN DISTRIBUTION STRATEGIES
Distribution is how a business makes its value proposition available to customers. There are three main distribution strategies:
1. Direct - company-owned channels
2. Indirect - 3rd party channels
3. Hybrid - both company-owned & 3rd party
Direct distribution is about company-owned channels, which could include a company's website, contact center, sales team, retail, and office locations. Indirect distribution is about intermediaries such as distributors, agents, brokers, online-only and omnichannel retailers, value-added resellers, partners, and franchisees. Hybrid distribution utilizes both direct and indirect channels.
1. Going Direct - Customer Experience & Economics
More and more companies are moving from indirect distribution to direct or hybrid distribution. These companies want to lower costs and pricing by compressing the value chain while owning the customer experience and relationship.
Companies with direct distribution remove an often expensive intermediary from the value chain. Much of traditional retail utilizes keystone pricing (100% markup, $10 factory cost translates to $20 wholesale, which translates to $40 retail). By going direct, a company can take that $10 product and price it at $25 or $30, while making much more in gross margin. The first retail direct distribution innovators were back in the 70s with the likes of The Gap, Victoria's Secret, and other vertically integrated retailers. Today companies like Anker (power packs) and Vice (golf balls) are utilizing direct and low-capital, low-cost online channels to disrupt their markets.
Direct distribution also gives the company ownership to craft and manage their customer experience and relationship, which drives conversion, and loyalty and is crucial for complex sales, and innovative products and services. Apple took the world by storm by going direct with Apple Stores, and Tesla did the same when they rolled out Tesla showrooms in high-traffic malls. Both Tesla and Apple differentiated themselves from their competition by owning their customer experience and relationship, while also benefiting from compressing their value chain.
Pretty much every industry has innovators leveraging direct distribution to improve the customer experience and relationship, cost and pricing economics, and overall agility. If your business isn't direct, it may be time to try and figure it out.
2. Indirect Distribution - Efficiently Scaling
A company with indirect distribution, partners with 3rd parties to sell and fulfill a company’s value proposition. These 3rd parties can be retailers, value-added resellers (VARs), partners, franchisees, distributors, and brokers. For many industries, such as the beverage industry (Coke, Pepsi), the norm is to leverage indirect distribution, in the form of distributors, supermarkets, convenience stores, vending machines, and restaurants. Even in a predominately indirect distribution industry, such as beverages, there are always players looking to take out middlemen, such as Trader Joe's, an entire grocery retailer that only sells its own brands.
Companies often utilize indirect distribution to focus on their core competencies, while gaining access to customers by leveraging channel partners. A company with indirect distribution gives up margin to channel partners but saves on the costs and capital necessary to go direct. For a company leveraging indirect distribution, the key to growing sales is to drive better value and economics for channel partners than the competition. For retailers, it is driving superior gross margin dollars per square foot. For VARs, it is total sales and margin versus the cost of sales.
If your company primarily leverages indirect distribution, deeply understand players that are going direct, because they are most likely changing the industry dynamics through better economics and more consistent and elevated customer experiences.
3. Hybrid - Almost the Best of Both Worlds
Many companies have a hybrid distribution model, utilizing both 3rd party and direct channels to sell and fulfill their value proposition. With hybrid distribution, companies get the broad distribution of indirect channels, while owning the customer experience and expanding margin through their direct channels.
Nike is a great example of a hybrid distribution model. Nike sells in tens of thousands of 3rd party stores and retailers across the world. Yet, in 2017, direct channels, including Nike.com, and more than 1000 flagship and outlet stores accounted for 28% of Nike's total sales versus 10% in 2010. And, Nike is differentiating their direct channels with personalized Nike ID shoes, exclusive styles, and the broadest selection. Not only are they owning the customer experience, relationship, and data through direct channels, but they
Nike has a hybrid distribution model. Nike sells in tens of thousands of 3rd party stores and retailers across the world. Nike also has direct channels, including Nike.com, and more than 1000 flagship and outlet stores accounted for 28% of Nike's total sales in 2017 versus 10% in 2010. Nike is differentiating their direct channels with personalized Nike ID shoes, exclusive styles, and the broadest selection. Nike is heavily investing in their direct channels because they own the customer experience and make 2-3X in gross margin on each pair of shoes they sell directly versus indirectly. Nike sells a pair of shoes that cost $20 to the manufacturer to a retailer for $40, and the retailer marks it up to $80 to the customer. In this example, Nike would make $20 on the shoes, but if they sell them on Nike.com for $80, then they would make $60 in margin on the shoes. This margin expansion is a big reason why more companies are going direct.
The one longer-term potential disadvantage of a hybrid model is that a direct distribution model could come in and structurally undercut the pricing of the industry.
If you are looking for a business coach to collaborate on your distribution strategy, set up some on-demand one-on-one time with Joe Newsum, the creator of this content and a McKinsey alum
DISRUPTIVE DISTRIBUTION MODELS
Disruptive distribution models are becoming more and more central to the core strategy of companies. Think about Southwest, which doesn’t sell tickets through Expedia, Priceline, and travel agents, but only on southwest.com and 1-800-I-FLY-SWA. Tesla has redefined car retailing with showrooms in shopping malls, bypassing typical dealer networks. Apple wanted to give customers the ultimate showroom to showcase their new products and opened the most productive and profitable retail store network in the world.
Maybe your distribution model is what it is, and you have to follow what the industry does. Though, given the reach and innovation of online distribution models, and what other competitors might be doing in innovating their distribution model, it may make sense to reexamine your distribution model and take some time to think through if you have the right distribution model for your situation or you need to innovate.
In 2012, Dollar Shave Club took the world by storm through distribution innovation. Michael Dubin, the founder of Dollar Shave Club, identified the age-old problem that, "razors are really expensive in the store. It's a frustrating experience to go and buy them. You have to drive there. You have to park your car. You have to find the razor fortress. It's always locked. You have to find the guy with the key. He's always doing something else that he doesn't want to be helpful."
At the time, the razor market was on the plateau of its adoption curve, and was a typical mature market two-company race, with Gillette owning 80% of the market and Schick a distant second. In 2012, a Gillette Fusion ProGlide blade would have set you back a cool $4. So, when Dollar Shave Club, comes out of nowhere with the coolest bootstrapped $4,500 viral ad to ever hit Youtube, promising "F**cking Great" blades for $1 a month, customers loved the value proposition. Within two days of the viral video, Michael's team racked up 12,000 orders and ran out of supply.
At the heart of Dollar Shave Club's value proposition is the cost savings that are passed on to the customer from disintermediating traditional shaving industry distribution of retail stores. Then add on the cost savings of bypassing traditional marketing for cost-effective viral marketing, and you can start to understand the $1 a month for blades value proposition.
The value proposition and go-to-market were so strong that Dollar Shave Club grew to $65 million in revenue in two years, and in five years had 8% of the market and $240 million in revenue. In 2016, Unilever bought Dollar Shave Club for $1 billion.
The Big Decision - Which Distribution Model?
When Expanding, Think About Distribution Models
DIRECT DISTRIBUTION GROWTH STRATEGY
If you have direct distribution, then you need to focus on the strategies for your direct channels, which may include a website, contact center(s), sales staff, and locations. Your direct channels are an integral part of your overall customer funnel. You drive revenue growth by increasing and accelerating awareness, consideration, conversion, loyalty (repeat business), and advocacy. Understanding where your customer funnel excels and lags is critical to prioritizing investments. Read up on developing and executing a great sales strategy and marketing strategy. Furthermore, there are the foundational operations and IT strategies necessary to drive efficient and effective execution within your website and contact centers.
If you have locations, then you have three options to grow:
1. Optimize Locations
2. Grow the Number of Locations
3. Rationalize Locations
Optimizing locations involves driving revenue per location through operational and service excellence, new leadership, remodeling, and improving sales and marketing. For growing the number of locations, leverage the geographic strategy module to understand how to choose the right geographies to expand into that are aligned with your targets and economics. While rationalizing locations is often necessary to shed unprofitable and non-aligned locations from the portfolio.
INDIRECT DISTRIBUTION GROWTH STRATEGY
3 Main Options to Grow Indirect Distribution
There are three main ways to grow revenue with 3rd party channel partners, 1. Optimize, 2. Grow Points of Distribution, and 3. Rationalize.
1. Optimize – Increase sales within existing channels by improving the value proposition, customer journey, marketing, and sales
2. Grow Points of Distribution – Increase the total number of productive points of distribution (e.g., channel partners, stores)
3. Rationalize – Shed points of distribution that are non-productive, or are not aligned with the brand, customers, markets, or other business model elements
1. Optimize Channel Partners
In the end, the relationship between a company and its channel partners always comes down to value. The more value a company can drive through a channel partner, the more the channel partner will focus on the company. Channel partnerships are co-dependent relationships. Similar to the overall business model strategy, it is crucial to differentiate the customer value proposition and amplify the sales and marketing strategies within a channel partner while providing them with efficient processes and operations.
So, when thinking about growing sales within existing channel partners, answer the following questions:
How can you differentiate your value proposition with and improve the overall economics for your distribution partners?
What marketing campaigns and strategies will drive volume for your distribution partners?
What sales support strategies will drive velocity and conversion in your channel partners' sales cycles?
What processes need improvement to better support channel partner growth and satisfaction?
1. Optimize : Utilize a Partner Growth Plan
2. Grow Points of Distribution
3. Rationalize Channel Partners
Putting it All Together in a Plan
Distribution is a critical growth element of any business model. Whether you rely on direct, indirect or hybrid distribution, it is important to develop a strong distribution strategy to focus the execution of the teams.
If you would like to talk to an expert about your distribution strategy, set up some time with Joe Newsum, a McKinsey Alum with significant experience with distribution strategy.
download the distribution strategy worksheets & templates
To get you started on creating a killer distribution strategy, download the free PowerPoint Distribution Strategy Worksheets & Templates, which includes:
1. Distribution Partner Growth Plan
2. Distribution Partner Assessment Matrix
3. Distribution Growth Strategy One-Pager