The world of commerce changed dramatically in 1994. The public Internet opened up the opportunity for every business to sell direct to the consumer, regardless of the traditional place in the distribution chain.
The beginning point of a distribution chain is the manufacturer or company that takes the position of the manufacturer. Therefore, importers, assemblers, patent holders, and others may not do the actual manufacturing, but they have the rights to the basic product or service.
MANUFACTURERS as defined above, often sell to wholesalers or to other manufacturers as the next level in distribution. The traditional margin on this transaction is from 10% for Original Equipment Manufacturer parts (OEM) sold to other manufacturers, to 50% or more when selling to wholesalers.
Some manufacturers sell directly to retailers. These retailers might be individual stores or large chains of retail stores. The margin on these sales is usually between 50% and 70%.
WHOLESALERS buy products from various manufacturers in larger quantities and resell smaller quantities to retailers. Wholesalers usually work on margins of 25% to 40%.
RETAILERS sell to consumers. Their margins are usually 35% to as high as 80% for very inexpensive items.
When a manufacturer sells to a consumer, they pick up all of those lost margins. An item that costs $10 at retail often costs $2 or less packed and ready to ship on the manufacturer’s floor. If they sell 1000 of them to a wholesaler at $4, they are perfectly happy, as the transaction costs are very low per unit. But they are also happy to sell a consumer on Amazon where the margin is 80% even though the transaction cost is much higher. The net profit is significantly higher.
We are all familiar with the self-service (large stores with few employees to help) and retail clerk sales approach in large or small retail locations. Of course, there are many other approaches, from phone solicitations to magazine ads or mailers. Most of those are now dead or almost dead. They’ve been replaced by:
Amazon, eBay, Etsy, and other similar approaches
Websites, blogs, Vlogs that sell stuff
YouTube videos, shows, Podcasts
Advertisements online using Google, Facebook, YouTube, etc
Selling TO THE
Traditional forms of selling the consumer that still work include television, radio, movies, farmers’ markets, swap meets, and seminars.
The marketing department has the job of delivering the consumer to the sales force. Once the consumer has reached the point of speaking with a salesperson, there is an often misunderstood cost.
If James spends $1000 on Facebook ads in one month, and these ads deliver 50 leads to the sales force, he has a cost of at least $20 per lead. If James pays a salesperson to handle those leads and that is their entire job, and if he pays that salesperson $5000 per month, each lead now costs him an additional $100. There could be other costs associated with facilities, support, management, etc., but we’ll keep it simple for now.
If the salesperson closes 10 of those leads for $1000 each, the closing ratio is 20% and the revenue per lead is $200. The lead costs $150 and James is only seeing $200 as a result. It is very unlikely that this is a good deal. His cost of goods or service on that $200 is probably at least $100, so James is out $50.
If that same salesperson closes 20 leads for $1000 each, the closing ratio is now 40% and the revenue per lead is $400. It is likely that James is making $150 before general overhead. This might be okay.
It turns out that Pablo, my competitor has exactly the same setup. But his sale guy is closing 60% for $1000 each. His gross is $600 per lead, with a cost of $150. He is making $450 per lead.
Pablo decides to give his salesperson an additional commission of $50 per close. The total goes up to 80%. He is now generating $800 per lead and a profit of $650 less the $50 commission or $600.
Selling THE Consumer
These formulas are true at all levels in the distribution channel, but retailers seem to be the least interested in hiring, training, and incentivizing salespeople to maximize the profits.
If you are selling products or services at retail, and this includes doctors, lawyers, CPAs, hair salons, bakeries, and selling matters. Here is a series of videos from Small Business Daily that provide the basic building blocks of selling. Please also see a list of potential resources to help train yourself and your people to become much better at sales.
Some categories of sales have always had clear processes with sales management providing the salespeople with specific guidelines for finding prospects, qualifying those leads, moving the lead through a short or long series of stages, closing, and follow up.
Insurance sales come to mind as an industry where the process was very prescriptive including scripts and collateral materials designed to take the guesswork out of the selling method. Success came more from confidence, execution, and energy, rather than charm or technique.
Mom-and-pop retailers were at the other end of the spectrum. The owners and salespeople made it up as they went along.
A great example of how this is changing can be seen in the dentist's office. Twenty years ago the dentist and his staff were unlikely to know anything about selling, and bedside manner moved folks to make decisions about braces or bridges. Today that is all changed. Most serious dental offices have now trained the dentists themselves in sales techniques and also employ “closers” to provide the final estimates and encourage the next appointment.
A growing business in the 2020s is sales process consulting, where the end product is to move other industries to clarify the steps in the sale like has been done in dentistry. While creating a sales process can be a huge difference-maker at any level of sales, the consumer level is particularly well-suited to this direction.
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