If your new business is going to distribute products in the U.S. retail market, that means what people call “the channel.” Also known as channels of distribution, or retail channels. As in stores. Big stores or little stores. Macy’s, Office Depot, Staples, Safeway, whatever. I see too many business plans that underestimate the effort, resources, and problems involved in selling things through channels.

So you know, my experience with channels started in 1993 and has been almost entirely in stores and chains selling packaged computer software. I’ve talked to a lot of people dealing in other kinds of channels, and it seems to be quite the same. So that’s a disclaimer.

  1. Understand tiers. Most of the major retail channels in the U.S. involve two-tiered distribution.
  2. The big retailers, who tend to be chains with hundreds of stores, want to buy from distributors, not from you. No offense intended. It’s just that buying from distributors makes their life simple. One bill, one payment, easier administration.
  3. Distributors are tough gatekeepers to get through. They aren’t looking for new vendors. New vendors mean more work. And more risk. So they aren’t anxious to change the status quo. Of course there are exceptions, but that’s the rule.
  4. Retailers are also tough gatekeepers, for the same reason. There too, there are exceptions, but it’s hard to be one.
  5. Both tiers are much happier about new products when they come from existing vendors. Those major companies that are already selling into the channel have it easier.
  6. Packaging is really important for everybody in the channel, and more so for new companies. Obviously this is a matter of different products and different industries, but through retail, buyers make choices based on what they see. We vendors would like them to read reviews and make more informed decisions, but most of the time they decide based on what they see.
  7. Channels take a big cut of your money. How much varies by industry, but if you are planning a new business and you don’t know, find out. The distributors take a smaller cut but they take forever to pay you. The retailers take a larger cut, and they don’t have to pay you, because they bought from the distributors. Both tiers take cuts of the money for co-marketing and things like that. You get a much smaller revenue per unit, and it comes several months after you make the sale.
  8. Most channels will insist on being able to send unsold goods back to you the vendor, and have you purchase them back from them at the same price they paid you, without any allowance for all the co-marketing commissions. This makes financial analysis hard.

One of the things I learned early and hard about channels. They don’t care about your problems. If you’re hard to deal with, they’ll find somebody else to sell into the same segment.

So if you can sell direct, count your blessings. Channels offer volume, and branding, and that’s attractive. But direct sales have some very attractive advantages too.

And in the context of developing the formal business plan, for outsiders to read, unless distribution is completely direct and painfully obvious you should include a discussion of distribution in the marketing section of your plan.

Explain how distribution works in your industry. Is this an industry in which retailers are supported by regional distributors, as is the case for computer products, magazines, or auto parts? Does this industry depend on direct sales to large company customers? Do manufacturers generally support their own direct sales forces, or do they work with product representatives?

Then explain how your specific distribution strategy works. There are almost always variations on the industry norm. In many product categories there are several alternatives, and distribution choices are strategic. Encyclopedias and vacuum cleaners were traditionally sold door-to-door but are now also sold in stores and direct from manufacturer to consumer through radio, television, newspaper, and of course Web ads.

Technology can change the patterns of distribution in an industry or product category. The Internet, for example, changed the options for software distribution, books, music, and other products. Look what it’s done to video and video rental. Look what cable distribution is doing to video and video rental as well.

This topic may not apply to most service companies, because distribution is normally about physical distribution of specific physical products. If you are a restaurant owner, graphic artist, architect, or some other service that doesn’t involve distribution, just leave this topic out of your plan.

For a few services, distribution may still be relevant. A phone service, cable provider, or Internet provider might describe distribution related to physical infrastructure. Some publishers may prefer to treat their business as a service rather than a manufacturing company, and in that case distribution may also be relevant.

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.