9 tips for product selection for your distribution business
Every distribution business needs to constantly increase its portfolio with new products. The question is: What are the criteria for new product selection and who to buy them from? In this article, I will address the new product selection criteria most commonly used by distributors.
Criteria for new product selection
There are a million reasons why you may decide to add specific products to your portfolio. I am compiling the most used ones here.
Number 1.- The product must respond to market needs
New product selection must not be based on a hunch. The great advantage of a distribution company that sells directly to stores is the live feedback from store managers. What products are they dissatisfied with? What customer needs are they not meeting? What is the manager looking for? The answer to these questions is the basis to decide how to expand your portfolio.
Number 2.- The product must fit into your growth strategy
Growing without control or planning is one of the main factors for distribution companies to get into financial problems. You need to have a growth and portfolio expansion strategy, and your specific product selection must adjust to it. Two of the key elements of a portfolio strategy are:
- Will you remain within a cluster of categories or will you seek to associate new products with new categories?
- Once you define the market needs, you need to define whether to go with one product or a family of products.
Number 3.- What is the size of your reachable potential market?
Your decision about new product selection cannot be based on the “feeling” that the managers will purchase it and consumers will buy it. Fortunately, as a distributor, you have access to on-site information. Combine that with available market research and determine potential sales.
Number 4.- What legal barriers must be overcome for a potential new product entry?
You need to know the government regulations to import and sell the new products. If it is a food product, learn about FDA requirements and import restrictions.
Number 5.- What are the market barriers for new products?
In addition to legal barriers, there are market barriers to the entry of new products on the market. Before making the final decision about the product or family of products to add, you need to understand your competition. How many different brands of similar products are being sold? Is there a clear leader in the category? How much space does the category take up on the shelves? For instance, wines, beer, cookies, cereals, etc., fill the aisles of the stores. If your decision involves a product with lots of competition, you need to ensure that there are enough differentiators to allow you to successfully sell the product in stores. Private branding can be a way to differentiate yourself.
Number 6.- What channels to use for initial sales
In “What is the best way to get your product in stores” we explained the different channels available to get products in stores. For new product selection, we need to be very clear in which market segments we will try to introduce the products. Supermarkets, supercenters, and wholesale clubs tend to be more demanding, but the potential sales are higher.
Number 7.- What are the potential sales, growth, profits, and payback time?
At this point, you have the products that you will introduce, know their market, and how to buy them. But none of this is a guarantee that the new addition will become profitable and will effectively grow your business. You must first run your numbers. Get a clear idea of your cost structure, how many sales you need to break even and post a profit, and what your return on investment will be.
Number 8.- Marketing plan
Any new product requires marketing actions to make it known to consumers and facilitate the initial purchase. In “How B2B distributors can increase retail sales in this new age” we went over different ways to promote new products and boost sales. Promotional events, launch prices, in-store tastings, and free samples are some of the actions of the marketing plan. One of the aftermaths of the pandemic is that customers opened up to try new products, so this is a good time to think about portfolio growth.
Number 9.- Investment level
New products require a certain level of investment. If you are buying the product from a manufacturer, the investment involves the purchase of stocks and promotional events. If you decide to manufacture the product, there will be an investment associated with developing and manufacturing the product. As mentioned in previous articles, we do not recommend going with your own brand unless you have a proven sales record with a third-party brand.
Criteria to select the supplier of new products
In “Are my vendors helping? A guide to vendor selection criteria” I provided a comprehensive guideline on vendor selection. Here is a summary. I grouped the criteria into 4 categories.
- Product criteria: How well can the supplier manufacture the required product?
- Market considerations: What is the reputation of the vendor in the market for the product?
- Service and Support elements: What special considerations is the vendor willing to make to help you penetrate the market and get to the profitability point?
- Financial conditions: What are the incoterms and payment conditions offered by the vendor? Remember that the Vendor Financial Cycle (VFC) index of the vendor must be positive if we do not want the product to become a cash flow drain.
I hope this article has been helpful to you. I will continue to post information related to warehouse management, distribution practices and trends, and the economy in general. If you are interested in this article or want to learn more about Laceup Solutions, please subscribe to stay updated on future articles.
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