In today’s issue, I’ll share my 3-step process to improve your approach to creating your value chain. I don't have a silver bullet for the perfect one but I can give you some guidance on what you should consider when creating one.
By adopting this process, you’ll ensure that it works bottom-up. You’ll likely increase your rate of sale in outlets.
Unfortunately, most people forget to consider the whole ecosystem. This way, they forget who to give margins to because they think top-down.
Value chains start from the glass, not from the distillery.
It's not about how much you want to earn, it's about what the market can absorb. There is a glass ceiling in what consumers, bars, etc. are willing to pay for a brand. What you bring to the table drives how much you can stretch that (recommended) price ladder. If you can't drive people to pay more for your product, you must live with the value you manage to get and share it with the ecosystem. Without acknowledging that, your brand will lack a rate of sale.
If you are good at sales, you'll maybe manage a good sell-in but you will lack sell-outs and reorders. So what are the reasons why this happens?
Challenge 1: You forgot to account for wholesalers' margins
Very often, brands create a value chain that considers only one line for "distributors". They don't realize that an importer has only a small sales force and most of the sales will be done through wholesalers in a city. If you don't make room for another line on your value chain, either the importer or the wholesaler will not have enough margins and they will not push your brand. They may stock it but do nothing more than move boxes.
Challenge 2: You built your value chain top-down with the wrong COGS
Brands are created in-house, but they are built in the market. Often brands have too high expectations creating the brand in an irrealistic way. This happens with expensive ingredients, production costs (especially with third parties), bottle design, transportation, etc. (COGS = Cost Of Goods). All these costs pile up and after adding excise, taxes, and everyone's margins it ends up on the shelf with a crazy price that no retailer nor consumer will be interested in.
Challenge 3: You want to retain too much margin
The issue with creating a brand top-down is that it makes you cocky. It makes you think that people will accept your recommended price because your brand is the best in the market (of course, it's yours). That approach pushes you to procrastinate, treating the value chain as if you kick a can down the road. "I want to keep this margin, so I'll sell at this price" makes you pass the issue on to the next link of the chain. The problem with that is that if everyone thinks like that, you end up at an unacceptable shelf price. You may be lucky and sell your first order to a distributor or an importer but it's just a matter of which link of the chain wakes up first and stops ordering and your brand gets stuck in some warehouse, without any more pull.
So how do I fix this, you wonder?
Here’s the 3-step process I follow to overcome the above challenges: