The Buyer is a Curiously Important Ally

From Episode 35 of Startup Confidential:

So many founders, early on, they get sucked into what I would call a distributor first mentality, all hail the distributor. And that is because it’s often the only way into many of the retailers that you have available to you in your local area, and primarily the independents that obviously use distributors exclusively to get their product, because they’re too small. So in order to get into independents, or many different chains, sorry, you’ve got to have inventory inside that distributor’s local warehouse first, or at least have proof of onboarding at such a warehouse.

And the way that distributors treat small brands is, well, shall we say beyond notorious in its indifference, if not outright fee exploitation at times. But buyers, see, buyers are very, very different stakeholders than distributors, and not for the obvious reasons that you’re thinking. And the most important reason that they’re different, that I want to discuss today on this episode, is that you can actually make them material amounts of cash very quickly if you’re growing exponentially. And that’s because their markup is significantly higher in penny gross profit than that of any distributor. It’s based on where in the price waterfall they locate their markup. How convenient for them.

For example, if you have grown your company to a million dollars in company book sales through distributors, then you’ve probably added … If you’ve grown to a million dollars in company sales to a specific chain retailer, and let’s say it’s through a distributor, you’ve actually added anywhere from three quarters of a million to one million dollars of gross unit profits to that retailer’s balance sheet and to that buyer’s desk, in many, many cases. So this is literally three times more per unit in money than you’ll be grossing off of the same inventory at the price you’re selling it into the distributor, as you painfully know.

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Dr. James Richardson