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We Pay for Distribution not Goods Themselves

January 5th, 2011

I was musing again today on the cost of distribution having shopped for a replacement cell phone battery. I found it both online and at the local Best Buy electrical store, but the price disparity was surprising. Online video camera and cell phone batteries quote a list price of $35 to $50 online but are discounted online down to $2.50 to $9.50. This is to accommodate the higher price that local stores want to charge as the recommended price.

Best Buy were of course charging $38 for the same battery that I just ordered one from Amazon for $1.38 and which will be delivered for below $4.50. We can fool ourselves with all the justifications used to explain the premium to us. Brand, Service etc. but in reality it was the availability and convenience at the end of the street that provided justification and the cost of running and stocking that store that needed to be paid for. Manhattan rent and staff to find things for us, as oppose to the online search and automated pick and ship warehouse in a cheap location with cheaper staff.

Twenty years ago I designed under contract a simple single chip circuit which a games vendor sold as a plugin component to a games console. The electronics trader in Hong Kong charged 50c per unit. The Chinese manufacturer probably received around 30c. The games vendor sold the units packaged at around $10 to a US distributor who sold them to Game Stop at below $20 who retailed them at $39.95 to the consumer. One could consider it to be a markup of ridiculous proportions but in reality it is the distribution and productization (Branding, selection, packaging, marketing, advertising, placement)  that is being paid for. I did make a mental note to myself to try to be the middle man next time around! Such a next time alas didn’t occur.

In rearranging my apartment recently I found myself selling books, DVDs and furniture that I had purchased at retail, or auction in the case of the furniture. The reality is that the value of these possessions when redistributed by me is negligible. Even worse the furniture has a negative value if I have to pay for it to be stored or removed as identifying a ready buyer is no mean trick even in a world of online markets. I have given up on letting Craigslist people visit the doorman.

All of these experiences remind me yet again that so much of the value is about where something is and identifying somebody who wants it. It is one thing for the shopper to be able to find the object on Amazon but quite another for the object to find a buyer. That is the side of the equation that most of the sales, advertising, brokers and agents work on. This is also the area that GroupOn attacks — being partly marketing to new customers and partly a method of clearing perishable supply. There is still plenty of money to be made in improving this life-cycle. Distribution to the right buyer, not the product itself, is what we are really buying. The distribution and not the product.

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