Pay to be distributed: is it the worst idea ever?
We do know channels of distribution including agents, distributors, brokers, resellers and retailers. Not only product needs distribution channel but also services. Running the business through a distribution model has plenty of benefits including more support, marketing channels, better servicing, more stocks being produced and stored at different intermediaries warehouses. Of course if the company is strong enough, they can choose to distribute directly to the consumer and eliminate all middle-man costs and secure the customers’ database.
To become a distributor, one has to prove the principal on their track records, region presence and minimum commitment over a period. Usually the principals will cast their nets and select a few distributors unless the region is as small or the distributor promised a certain volume. Working with only one distributor is always easier to manage, communicate and plan forward, the only downside is if the only distributor is no longer able to provide your service, your entire supply chain is affected. Nonetheless, one will have to spend plenty of resources and be a certain size in order to secure a distribution contract.
There is another kind of distribution style where the distributor gets paid in reverse. It happens when either the principal is new or they are established but testing a new market. Usually they will be looking for smaller distributors or regular business owners without a track record or presence. As they are new, many distributors will not want to bear the risk if anything goes wrong, even if they are being paid. Only desperate small businesses will want to work with such an arrangement as any tom, dick or harry counts.
“You can call yourself founders, group chairman, world CEO, supreme leader or ultimate president since there is only 1 person in your company.”
This kind of arrangement has been pretty hot lately after the initial coin offering craze where the “founders” want to open markets in different regions but have no resources. They linked up with all those so-called “advisors”, got introduced to small businesses and went into a deal with them. It works like a normal distribution where the price increases over each jump, the business owners will be looking for resellers to sell the coin and the resellers probably will create their group of salesperson too. It is an efficient way as the founder gained access to an uncharted market at minimal cost. Do not get me wrong this is not about cryptocurrency, many large and established firms are doing that too.
So what are the claimables?
Staff cost is one of the best ways to justify their claim. Similarly like how you outsource an IT project to India or Philippines, the project manager will keep convincing you there will be x number of senior and junior resources dedicated to your project. They will itemise these people so nicely and justify their hours to you nicely (perhaps they have an additional department just to do such things). What puzzles you is the constant delay and bad workmanship of your project even though there are dedicated resources so one day you sneak up in their office, take a look at the computer of one of your guys named Prakash and see he is working on 20 different projects. Now you finally understand why the manpower is so cheap at certain locations but your work will never be completed. The client, company and programmer should establish a win-win-win situation but the only one who won is the company. This is exactly the same as what happens when the distributor pays for their man hour and gets super discounted results. The mini distributor will have to be someone who is very good at finding excuses and able to pacify the principal.
Marketing cost is the second possible cost to be claimed as the mini distributor doubles up as a marketing expert. Likely this guy has zero knowledge in marketing but since he has positioned himself as a one-stop shop, he would like to take up any other side offering the principal may have. Like I mentioned in my post on how insurance companies milking a cow in different ways with new products, it is exactly the same how the mini distributor milk the distributor. You are not only paying him to learn and also the additional cost where he actually further outsource your marketing to some of his friend’s marketing companies. A $1,000 per month Facebook advertisement suddenly becomes $5,000 and those crook marketing companies will just produce a 20-page report on where the advertising dollar went. You would be wondering why the $10 advertisement you placed gives you some result but this $5,000 advertisement is nowhere to be seen and yet it is done by some “marketing expert”.
Entertainment cost gives the worst result and it is fully unaccountable. The mini distributor will present any kinds of receipts including his mum’s extravagant high tea on Wednesday, his cousin’s nightlife with prosititution on Saturday and his niece’s $2,000 dog grooming services. If you measure dollar to dollar results, you would know this is all bullshit and by entertainment to gain more clients, it means entertaining oneself to milk the principal further. I am glad that most companies dropped entertainment claims and restricted their employees from entertainment sales talk, mainly due to bribery. Let’s face it, if a business requires underhand means to gain clients and businesses, how far can such a business progress? The irony is that legit distributors will not want to deal with principals that offer such services and only shady ones allow entertainment claims. Other words, bad principals and mini distributors are meant for one another. Instead of spending unnecessary money, sales can be motivated though tiered incentives or tiered pricing.
Miscellaneous and setup cost is mainly charging the principal where you have already owned. Oh, I will need to educate my salespeople, let’s claim a training venue and some refreshment - a bill of $1,000 for sending out email instruction. I need extra office space for my salespeople, let’s claim another 5 tables and chairs space for $5,000 per month - while everyone is working from home. The current equipment is not sufficient to run your programs, let’s co-share new devices for the staff - the claim of $20,000 were made from old invoices that you have purchased 3 years ago.
As we can see, such an arrangement is simply unscrupulous and the hole is just opening wider for rats and snakes. Paying a mini distributor to test the market is the worst thing I have ever seen and there is no successful case. The norm is to have distributors look for principals, if not the principal can do a consignment and the worse is to pay the mini distributor. Supermarkets are a very good example of how consignment is bad. A consignment is bad because you are subjected to the mercy of the distributor, if your placement is bad the sales would be bad too. You do not get a fixed purchase and you will need to do manual stock take, there will be plenty of wastage and you need to check on your expiry date. Basically you are paying for everything from production to logistics to better frontage if you want to be seen. It is not all bad because you are riding on an already successful partner, so if you think consignment is bad, mini distributors are hell.
Having a mini distributor means you will be giving exclusivity to him within that region. Any enquiries and sales will be forwarded to the mini distributor if the customer is from that signed region. Do not forget, the principal is doing all the marketing work and even the local marketing is paid by them, so why the sales have to be forwarded. Well, this is how the contract works and it is a very unfair game.
“It is a no brainer game.”
To be a mini distributor is very easy - as long as you are a good liar. Practically you do not need anything else because every other resource you need is claimable as long as you can lie. It is a zero sum game where you will never be the loser. Even for liabilities, many such mini distributors simply evaded all their legal responsibility by showing the relationship with the principal in case anything happened. Since beggars can't be chooser, the principal does not require minimum paid up capital from the mini distributor and they can even register the company at $1. In case of any unprecedented event (or likely these scoundrels would have already been prepared for it), the mini distributors do not have to pay their staff or any pending contracts. On the other hand, if the principal becomes famous and popular, these people will also ride along with their glory and use the profile to lie to new principals.