How to Easily Start a Distribution-Supply Business
Many entrepreneurs wonder how they can turn the products they love and use into income and a good living. Starting a business as a distributor is one way to make money through promoting and selling products you love. Distributors are different from wholesalers or affiliates, and they make their income through promoting noncompeting products to wholesalers, retailers and consumers. Starting a distribution business can be complicated, but with the right products and budget, it doesn't have to be that way.
When manufacturers produce goods, they cannot make a profit unless they find a way to get their products into the hands of consumers. The distribution business model is one way that manufacturers solve this problem.
Distributors contract with manufacturers to promote their products in exchange for a cut of the sales. While distributors sometimes represent multiple manufacturers' products, they do not represent competing products. For instance, if a distributor represents one nail-wrap company, there will probably be something in its contract preventing it from representing a competing nail-wrap company.
Working within the distribution business model can be costly and complicated if you are required to take ownership of the goods prior to selling them. However, there are distribution business opportunities that allow you to sell the products without keeping a stock of them on hand. Some of these opportunities require very little investment so that you can start slowly and build your business gradually over time.
When you start a distribution business, you are contracting directly with a manufacturer to promote its goods. There are some incredible advantages to this business model, especially for someone just starting out on an entrepreneurial journey:
- You have the freedom to sell to wholesalers, retailers and consumers, creating a wide market.
- There is less concern about profit margins because you aren't purchasing large quantities of goods at a discount to hopefully sell for a profit later.
- You get a cut of every sale you make, but you don't have the overhead of manufacturing the products.
- You have the flexibility to contract with multiple noncompeting manufacturers to appeal to a wide customer base.
In addition to these benefits, you have the flexibility to determine when, where and how you work without the confines of regular office hours. You choose your fiscal, work and customer policies so that they align with your mission, values and goals.
While working as a distributor can be rewarding, it is not without its risks or pitfalls. As long as you understand these possible hazards, you can plan for them to minimize the risk to your business. Some of these disadvantages include:
- Possibility of manufacturer mergers and the loss of important contracts
- Changes in manufacturer quality, vision or product lines that cause customer dissatisfaction
- Economic ups and downs that impact demand
- Changes to your distributor quota or marketing expectations
- Ethical or public relations problems with the manufacturer that impact how people perceive your integrity
- Space and the need for a warehouse if you are required to keep product inventory on hand
- Temptation to buy merchandise to meet monthly quotas when sales are low in order to remain a distributor
While the terms "distributor" and "wholesaler" are sometimes used interchangeably, they are not the same thing at all. The wholesale business model includes the following features:
- Buying large quantities of goods at a discount to sell to retailers at a higher price
- Selling competing products to offer the retailer a variety of options
- No contract or quota with manufacturers to promote their products for commission
- No sales to wholesalers or consumers
- Special wholesaling business licenses are required
For instance, a wholesaler of commercial kitchen equipment will likely offer refrigerators from a variety of competing brands. In contrast, a distributor will contract with one particular refrigerator brand to sell a certain dollar amount of its products each month for commission without offering any competing products. Distributors are free to sell to a wider market that includes wholesalers, retailers and consumers.
Just as distributors are different from wholesalers, they are also different from affiliates. When someone says he is an affiliate, it can mean different things in different contexts.
- An affiliate can be someone who sells a manufacturer's goods under his own label for a small commission and with no quota.
- An affiliate can be someone participating in an affiliate marketing program by sharing affiliate links. He gets a small percentage of the profits and does not have quotas to meet.
For instance, an online plus-size website might share affiliate links and pictures of dresses from a variety of different competing manufacturers and then receive a small portion of any sales made. A plus-size dress distributor would only promote one manufacturer or designer's clothing and would be required to sell a certain volume every month in order to remain a distributor.
One of the easiest ways to begin a distribution-supply business is to work from home and take advantage of online and social marketing. To begin this type of business, you simply contract with one or more noncompeting companies that you want to represent. Sometimes, you are required to pay a fee with your application or for a kit of starter materials.
Depending on the company, you might be required to keep stock on hand. If this is the case, smaller products work best, as they can be stored in a spare room, basement or garage. Larger products might require you to rent office or warehouse space, making it harder to work from home. Some companies do not require you to keep stock on hand and will ship goods to retailers, wholesalers and consumers as you make sales.
Not all distribution business opportunities are created equal. While this business model can seem appealing, be careful about the companies with which you partner. Some things to look for include:
- Stellar reputation and ratings online
- No push to recruit new distributors to work under you, which can be a sign of multilevel marketing companies or pyramid schemes
- Consistent quality control and a track record of updating products to meet trends
- The manufacturer's ability to meet inventory demand and ship products efficiently
- Fair quotas and marketing expectations that meet your sales skill level and budget
- Clean legal records without bankruptcies or significant lawsuits
- Excellent product warranties to help ensure customer satisfaction and retention
- Fair labor and environmental practices to protect your conscience and reputation
- Products that are in demand with climbing sales numbers
One of the most challenging parts about becoming a distributor is the time, energy and money required to establish a strong customer base of wholesalers, retailers and consumers. An easy way to get around this obstacle is to purchase an existing distribution business. When you purchase an existing business, you are responsible for maintaining the business, caring for existing clients and procuring new clients.
While gaining an existing client base is attractive, purchasing an existing distribution-supply business isn't always the most practical decision. Before you jump in, find out why the owner is selling the business. Make sure there are no major financial problems or risks for bankruptcy. Look at past sales numbers and projected sales numbers to ensure it's a sound financial investment.
In addition, ensure that purchasing the distribution-supply business is legal. Some manufacturer distribution contracts state that the terms cannot be transferred from one person to another, and each new distributor must apply independently and cannot transfer existing clients to anyone else. Instead, the manufacturer automatically reassigns clients to someone new if a distributor leaves the business. In this situation, you could spend a lot of money to purchase a distribution-supply business but still lose the entire client base and have to start from scratch with new clients to get things going again.
When existing distribution business opportunities do not meet your needs or budget, starting from scratch is always a possibility. In these cases, you are not necessarily limited by manufacturers who already have distribution programs and policies in place. You are free to approach unique and creative manufacturers to propose a distribution program.
For instance, while traveling, you might meet basket-weaving artisans in Ghana looking to make a fair wage for their work. In this case, they are the manufacturers. You decide to draw up a distribution contract with them and then come back to the United States, where you secure sales with a variety of ethical and fair-trade retailers. They purchase several hundred baskets from the artisans, and you make a commission on those sales as your profit while the artisans still make a generous wage.
Every state has different business-licensing rules, but distribution-supply companies are required to carry business licenses. The type of license you need will vary by state, county and city as well as the size of your company.
A sole proprietor working as a distributor in rural North Carolina might only need to fill out the assumed business name form, while a corporation needs to complete LLC or nonprofit forms. In a different area, city or county business licensing might also be required. When in doubt, contact the Small Business Administration for counseling and advice.
Small business leaders and entrepreneurs go into business for themselves with a dream and hope of making a good living doing something they love. The profitability of your distribution-supply business is dependent on a variety of factors, including:
- Initial investment: If your budget can only afford a $100 initial investment, start there and pursue more expensive opportunities as profits grow.
- Overhead costs: Avoid spending more in inventory, services, office space or warehouse space than your profits can handle after salary.
- Product demand: Choose products that are in demand and that consumers will need to purchase again and again.
- Quota amounts: Low quotas allow you to start small and increase sales and profits over time rather than sinking profits into inventory just to meet a high quota.
- Competition: If the market is saturated with other distributors, finding clients can be next to impossible. Partner with manufacturers that don't have lots of other distributors.
- Economic conditions: Include at least one or two manufacturer contracts for products that are still in demand when the economy isn't doing well.
- Substitutes: If you sell essential oils for $30 a bottle but comparable oils are available for $8 a bottle, your profits will suffer.
- Efficiency: Ensure you and any employees are working efficiently. In other words, work smarter instead of harder or more often.
- Quality: Manufacturer products that are of high quality result in better customer satisfaction and retention. Those repeat sales are a boost to your bottom line.