Posted by Asako Tsumagari on 11 Oct 2007,
(14) Comments — Sales & Distribution
Mass retailers will not take in a new product with an unknown brand name, especially from small business owners, unless your product is truly hot. Even if you think it’s hot, you still need to do your homework to prove your product is hot. But what defines hot?
In this second article from my series of Six Tips for Getting Your Product into the Mass Retail Channel, I talk about how mass retailers define what’s hot and what’s not using key performance indicators (KPIs), and why you need to know your product’s KPIs.
What are you trying to prove, anyway?
To prove to the retailer that your product is hot, you need to prove that your new product will provide profitability on par or greater than that of other products of the same category sold by that retailer.
This means you need to know your customer (target retailer) and provide business performance data that demonstrate your product will satisfy the KPIs of the target retailer.
There’s really only one set of KPIs that every mass retailer cares about:
- Dollar sales that your product can make on 1 square foot of shelf space per week
- Dollar margin between the retail price the consumer pays and the list price the retailer pays you.
Realize that mass retailers run a real estate business. They watch closely on how much they can sell on the limited space that products occupy.
So, what is the KPI hurdle for your product
Mass retailers have different KPI hurdles for different products. Retailers learn from their long operational history how fast each category of products turns. You need to know if your product fits the buck.
How do you do this? Study your category. Let’s take as an example our hypothetical new concept SUV-- The Ultimate Shower Tile Cleaner, which is a brush that uses sonic and UV light technology to clean and sanitize bathroom tiles.
With SUV, you will be fighting for a shelf space in the home cleaning aisle. Visit your local mass retailer, such as a Target store, and you’ll get a good sense of the KPIs for the category. Specifically, look at competitive or substitute items that are shelved where you want to be shelved.
In the case of SUV, you might look at tile cleaning solutions, such as the Tilex brand soap scum remover. Bring your measuring tape, a calculator, and paper and pen with you, and this what you mind end up jotting down.
To figure out your hurdle, let’s do some simple math. Divide your competitors Revenue Per Week per Square Foot ($105) by your unit price ($50). You get 2.2. Now, divide that by the number items per square feet your product takes (1), and you 2.2.
This means that to match the performance of Tilex, your SUV ultimate shower tile cleaner, the retailer must sell at least two units of your product per week.
Look at a number of other comparative items on the shelf to round out your estimate.
Next Steps—Proof of Concept
With your KPIs in mind, you’ve now defined your goal. A great first step! Your job now is to collect sales data on your product that create a proof of concept that explains why the retailer should believe you when you tell them they can sell at least two units of your product each week.
See more practical business tips.
Comments for "Know Your Key Performance Indicators to Get into Mass Retailers"
11 Oct 2007 at 06:01 AM
Asako - this is brilliant information. I have always been interested in starting a product based business at some point, but I’ve never had the knowledge.
What kind of mark up do retailers add on to the price you sell to them for?
I’m guessing it’s probably hard to get in front of them, but not impossible with the right product?
Are they sometimes willing to trial your product in one store, or is it a case of all or nothing?
Catherine
11 Oct 2007 at 10:41 PM
Markup very much depends on the category and the type of mass retailer. For example, home cleaning and laundry products typically have gross margins of 10% at warehouse stores like Costco, and 25% to 30% at stores such as Wal-Mart, Target. Slower moving items (such as a high priced mop or brush) may have higher margin to make up for lower of quantity sales.
Since retailers do not typically disclose their margins, the small business owner needs to do rough estimates. Take a look at “clearance” sale pricing, and you can see how low the retailer can go.
The other way is to guess the gross margin by using both a bottom-up and a top-down approach.
For the bottom-up approach, figure how much it costs to make the product, and note the difference between that cost and the retail price charged the mass retailer. Split the amount in half, and you’ll have a very rough estimate of the retailer margin.
Then for the top-down method, look at the annual report of the mass retailer (most of whom are publicly traded companies), which can be found on their websites. Note their average company gross margins, and business results by category to weasel out the rough gross margin for the product of concern.
Mass retailers such as grocery stores do typically run market tests of new products in a number of store for particularly demographically representative region. Stores like Costco sometimes allow what they call an “in-and-out”, trial run, as well.
--Alec
13 Oct 2007 at 11:07 AM
Thank you Alec. This is very useful information. So, it sounds like warehouse stores would not be good to sell to, but Walmart and target would.
And would smaller shops eg - specialist shops, boutiques etc have even higher margins?
13 Oct 2007 at 12:30 PM
Hello Catherine and Alec,
Yes, generally, small shops that do not drive a lot of consumer traffic will require higher margins. The same products that are sold with 25% retail margin to Target could require 35% retail margin to drugstores. Retail margins can go up to 55% margin to local stores, particularly because you will likely use distributors that add 10-15% margins on top.
Sometimes, manufacturers try to avoid the issues by differentiating SKUs, e.g. coming up with Wal-Mart specific packaging to look different…
In Europe, the situation is even more different, because small local stores are still common, and each country has very different distribution structures. Many cases, you have to go through distributors, then, group purchasing organizations in the local area, and then, stores.
I will write more about the European case in Series VII.
15 Oct 2007 at 01:36 PM
Hi Asako,
I have a family member who has a small gift shop type business, in a small town. She buys wholesale, (or sometimes finds things on clearance, in other stores), and she just doubles the price she paid for the merchandise.
She said this simple method works for her, but in a competitive market, I would suspect one needs to do extensive homework.
16 Oct 2007 at 12:55 AM
Hello Barbara,
That is definitely a good retail store proposition she found in her neighborhood.
In the large city as well, if her gift items are unique, it works as well. It would be difficult if she is selling the same things other big stores in the same neighborhood are selling.
I agree there are a lot of good retailer business propositions we can find. Also even in the big city, there’s a case you can dominate the very small local area. For example, in Washington State, we have a small coffee express stand in every gas station. It is not a retail store, but we can use it as an example of monopoly created in a city environment. They really monopolize the whole traffic coming to the gas station!!
I should think about an interesting retail proposition next!
16 Oct 2007 at 12:00 PM
Well, all this sounds good for me, as I live in quite an isolated rural area. So, it sounds like I could do quite well with a little shop out here.
20 Oct 2007 at 02:49 PM
How does the retail model compare to online affilliate schemes?
Sorry, I’m a little dim at times (well actualy quite often!).
Where the cost per square foot for a retail model with a physical high street presence is huge, how does afilliate marketing change the principal?
21 Oct 2007 at 03:59 AM
Great question, Ian.
Online affiliate programs will make publishers a sort of a distributor / retailer who does not carry any inventory. That’s why the margin publishers can get from one sale is low like 4-6%.
So for a product manufacturer, it makes sense to set up an affiliate program and have web publishers promote the products.
Somehow, I do not see many small businesses taking advantage of affiliate programs to promote their products. Probably, it is due to the complexity of setting one up from software implementation viewpoints, but this is my guess… (I am not the expert of web software).
21 Oct 2007 at 02:30 PM
Actually it’s not that difficult for a small company to implement an online affiliate program. There are many software options out there, many of which are free.
The tough part is figuring out which program best fits your needs.
If you have a simple business with only a few products and a simple affliate scheme, the free programs are probably quite sufficient.
The more advanced programs allow you to designate different affiliate levels, manage promotions, email lists, etc.
07 Jan 2010 at 10:35 AM
Hi Asako,
I just stumble across your “Six Tips” and find it easy to follow and very helpful.
One Question . What is the best way to find out how many competing items are sold at a retailer per week to be able to figure the KPI’s ?
17 Feb 2010 at 01:56 AM
Softwares are designed looking and the current needs and uses of a company, and while working with it, gradually people have requirement for more features, upgradation as when the remote pc access plateform changes. Why do we need software implementation & maintenance in software?
09 Mar 2010 at 11:27 PM
i have a simple business with only a few products and a simple affliate scheme, the free programs are probably quite sufficient.
10 Mar 2010 at 11:57 PM
it makes sense to set up an affiliate program and have web publishers promote the products.