Far, far, away, something is made in a factory. That factory may be 5 kms away from your house, or 5,000!
How, then, do things reach us from these factories?
Let’s Understand
As you can see in the illustration, in the first case, where the company sells directly to the customer, the company keeps the entire margin, possibly passing on some discount to the customer too. In traditional trade channels, the distributor, wholesaler, and retailer, everyone gets a small profit, and finally the product reaches the consumer. In case of online retailers, they buy the products directly from the company and offer a discount to the end customer. OR, individual distributors who either buy or make things directly sell on Amazon. Amazon keeps a large part of the margin.
Why does the traditional trade channel still work?
As we can clearly see, the product goes through many hands in the traditional trade channel. We can assume that this means that the end product might be the most expensive in this case. Why, then, do companies use traditional trade channels? Why do trade channel partners do this?
Wholesalers and Distributors
- The company does not have to bear the transport costs of sending the product to every part of the country. The wholesalers and distributors do that.
- The company gets its money within a few days or in advance, even if the end customer buys the product 3 or 6 months later. This cost of finance is borne by the trade channel.
- The company does not have to keep its stock safe. It ships the stock out of the factory much faster than if it was selling directly to customers.
- The trade channel is assured of better sales when it deals in recognised brands. The company’s branding and advertising helps them get steady orders.
Retailers
- Retailers provide free advertisement hoardings for the product. Outdoor hoardings are expensive. Can you imagine how much money Samsung, Vivo, Xiaomi, and other manufacturers would have to spend on outdoor hoardings alone if they did not have these sales stores?
- Retailers also provide an important service – customers like to see their product before buying. Especially for high value things. You also might like to see the dress or phone before buying.
- According to a World Bank report released in December 2019, online sales is only 1.6% of India’s total retail sales. This means that if 100 rs are spent by an Indian customer, 98.4 rs are spent in a physical shop. Only 1.6 rs are spent on online platforms like Amazon, Flipkart, and others.
- Retailers prefer to work with established brands for better sales. Even though branded products give much lower margin to the retailer, the retailer thinks that more pieces will sell, so they will make more money.
Some companies try to sell directly to the customer through their own website. Why do this?
- It helps the company get in touch directly with the customer.
- The company makes the highest margin on the product.
What about online aggregators like Amazon?
Online sellers do one or both of the following:
A. Sometimes, they buy real cheap from the factories and sell it directly to the customer. Their delivery chain is already there, and they make money on every sale. The customer also gets a discount on the product, because the number of people trying to earn from the product is lower.
B. They create a marketplace. If you have been to a weekly market with your parents, you will see that everyone has a stall there. The person who runs the market does not sell any products. They sell the stalls to these people. But instead of charging them a fixed rent, they take a share of all the sales made in that market. That is how online marketplaces like Amazon work.
So, which is the best model?
The same as the best colour, the best place.. there is no single best model. Different things work for different people. For example, someone in your house might want to buy online all the time, while another person always wants to go and buy from the store. Its exactly like that!