What should be the ideal breakup of distribution channel for small businesses?

Having a strong distribution channel is a must for any distribution based business. However, like any other business, there is a lot of leakage in distribution as well. There are many reasons that a distributor might leave your company. He found a better brand, he is dissatisfied with your services, or simply because he was looking for more money.

When Hero and Honda split up, Hero literally failed to pick up its distribution channel, whereas Honda emerged a hero because it had better products and it had a better channel in the end. So this makes business men think about what should be your ideal breakup of distribution channel?

1) Having 20-30% contribution via top distributors –

One of the critical things in the breakup of distribution channel is to have only 20-30% turnover being given by top distributors. Reason – Risk diversification. If 50-70% of your turnover is through top 3-4 distributors, then you are in grave risk of your business falling in case any of the distributor leaves you.

In fact, I have seen small businesses of manufacturing, having a single distributor who is more than 50% of the turnover. They might have all the legal binding contracts, but such a tie up is always filled with risks. Furthermore, having a major turnover through our top limited distributors means that your sales team is not concentrating on building the distribution pipeline.

If even one of your top level distributors has a dispute, the dispute can take a long time to resolve, affecting both – the distributor and yourself. In one of the cases, I observed a top level modern retailer in dispute with the company LG. It was a matter of millions, which is common when dealing with the modern retailer. This modern retailer stopped selling LG products for 3 years. And in those 3 years, LG lost considerably market share to Samsung, as it did not get sale through the many counters of this top modern retailer.

2) Having 40-50% mid level distributors –

Once you come out of the top distributors, it is the middle level dealers / retailers / distributors, you need to concentrate on. Where the top level distributors are heavy lifters, and might not change loyalty swiftly, the middle level distributors can change loyalty fast, and hence need to be concentrated on.

The mid level distributors need to be the highest percentage in the breakup of your distribution channel. It is the mid level dealers and distributors who can motivated to become top level distributors, in case a top level distributor fails. It is also the mid level distributors, who can help in liquidation of stocks and can help better penetration of the products.

If your company has a lot of mid level dealers and distributors, maybe you should be happy. This means you have a lot of back up to fall back on, and you won’t fail in the market as long as there is not a drastic change in your product policy.

Overall, having more mid level distributors helps with the following

1. Gives a backup of people to promote in case any top level distributor fails to perform.
2. Increases the penetration in market, ensuring higher liquidity of products
3. Gives a stronger backbone and structure to the company.

3) Most important- 20 – 30% new channel dealers –

It is not necessary that all the channel dealers which you are starting purchase directly from the company. They can also purchase from the top level distributors. Nonetheless, adding more and more channel dealers and retailers to your business is crucial to your business.

Adding channel dealers to the bottom tier continuously does 2 things

1. It proves that your channel executives are working hard and are building references.
2. It increases your market share
3. It reduces risk and dependency.

As long as you keep adding more and more channel dealers, your product will keep moving and selling in the market. Remember, that if you are not aggressive about adding channel dealers, your competitor will snatch the same channel dealers from you. So having 20-30% new dealers in the breakup of distribution channel is important.

Now you need to look at your own distribution channel and decide what is the breakup of distribution channel in your case? And how much exposure is given to top distributors or mid level distributors? I would love to hear your feedback on this.