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Prepaid 101: Distribution
By Gene Retske |
There is probably no part of the prepaid product cycle that is as important as distribution. Although it might seem obvious, you may have the world’s best product, but if you can’t bring it to the marketplace, it may only be destined for a dark corner of the Smithsonian. Whether your product is hardware, software, or services, the way you distribute them to the end users is critical. An effective distribution strategy is far greater in importance than the attributes of the product itself.
Although many may disagree with the following hypothesis, your old professor can cite examples to prove that it is true. Effective distribution is more important to the success of a product than features, price or quality. If you don’t believe it, look at Wal-Mart, McDonalds, or any other national consumer chain. The secret to their success is the way they move their goods to the marketplace. Everything else is secondary.
For a high tech example, look at Dell Computers. When they started, their product was similar to most other manufacturers in the industry. Their strategy was to offer computer users a custom product, built to the exact needs of the consumer, at a price competitive with equivalent manufacturers. By avoiding the cost of bricks and mortar retail locations, low cost delivery and just in time parts acquisitions, they were able to carve out a large market share in a short period of time. They also cut out all of the middlemen, the usual array of distributors and retailers, all of whom add delivery time, cost and demand a significant share of the margins.
This elimination of distribution layers is called “disintermediation.” Retske’s Law of Distribution states, “Disintermediate to the point where the product flow just starts to pinch, and stop.”
Balancing the variables in designing a distribution strategy for prepaid is a tricky proposition. On one hand, cutting out the middlemen is attractive for a number of reasons, beyond just preserving margin, which is not insignificant. For one thing, it reduces competitive pressure at the point of sale.
Think about it this way. Which would you prefer, a consumer looking at a wall of prepaid card posters in a c-store, where your card is one of many, or a consumer looking at a web page with all of your cards, and only your cards? I think the answer is obvious. The question is whether you can get enough eyes on your web site to justify the cost and time involved in developing such a website?
Does this sound impossible to you? Consider Amazon, who entered the highly competitive book selling business against highly entrenched national retailers. Their proposition was simple; find every book imaginable, get it fast and at a discount. Instead of building retail locations, like Borders had just done, Amazon spent their money on a limited number of large distribution centers and a website.
Today, most prepaid products are distributed either via the Internet or in retail locations. Those in retail locations are usually offered through distributors who put together programs for acquiring the appropriate products for each retailer. Some of these distribution schemes are electronic, using electronic kiosks, while others use physical displays for the accumulation of products. There are variations on these themes, as well as some very creative innovations.
How does a prepaid provider decide on a distribution strategy?
It is ironic that although we have said that the distribution strategy is the most important issue in the success of a prepaid product, that it is often given the least thought. It is not just ironic; if the distribution scheme is not right, it can be tragic. Let me drag out my oldest example, Picturephone. It was first demonstrated by AT&T at a World’s Fair in the 1950s, but because the Bell System did not have an effective strategy for distribution of the concept, it flopped. Several times, in fact. And, always for the same reason. The company always assumed all they had to do was invent it, advertise it and the world would jump at it. Didn’t happen, never will.
The elements in deciding on distribution are complex, but start with where your audience is, and the best way to get your product to them. Designing a distribution strategy will force you to look at all the elements of your offering. Be prepared to make changes in everything else, if need be, to fit your distribution strategy, including price, packaging, promotion, and features. All of these elements will interact with your distribution strategy, and may have to be modified to fit the strategy.
Distribution changes are the most exciting in business, and have the greatest long-term impact. Not to mention the successes that await those with the creativity to think outside the box and the patience to let a new distribution scheme develop.
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