Dhal Laddu or Rava Laddu?
“Both the market and distribution channels are often more crucial than the product. They are primary; the product is secondary,”
- Peter Drucker
To taste economic independence, my wife decided to make laddus (ball shaped Indian sweets) and sell them to students of a nearby school. She prepared about 50 laddus in the first batch and took them to her friend, who runs the school canteen.
The laddus, made of pure ghee and dhal, looked good, smelled great, and tasted wonderful. The canteen owner was happy. Now it was time for fixing the price. My wife had her accounts ready. The cost of production worked out to Rs 4.5 per laddu. If the canteen owner and my wife decided to have a margin of Rs 1 each, the selling price should be Rs 6.5 per laddu.
But the canteen owner, who knows her customers well, firmly said that it was not possible to sell a laddu to school students for more than Rs 3 a piece. My wife knew it was impossible to make dhal laddu at that price. Later, she learnt that other suppliers used vanaspati ghee, a low cost and, compared to cow ghee, an unhealthy cooking oil. There’s no way, she would compromise on quality in a food item.
She has two options: 1) to try another low-cost product — say, rava laddu, another laddu variant, whose ingredients are cheaper, or 2) tap the right channel — say, an employee’s canteen, instead of a school canteen, where laddus of such quality are sold for Rs 10 per piece.
It was a housewife learning the importance of distribution in business. Coming up with a wonderful product is only half the job, there is a more important function of identifying the right distribution channel.
As they say the greatness of Thomas Edison lied not in the fact that he invented the light bulb but he created the entire electric grid and the whole power distribution system!
The extraordinary success of Estée Lauder cosmetics is another case in point. The company was founded by a housewife, Ms Estée Lauder, who ended up becoming the wealthiest self-made woman in America. Estée started her company in 1946 with four cosmetic products. Today it is a 30 billion dollar company with a large portfolio of entry-level prestige to ultra-premium luxury brands sold in more than 150 countries. A key factor that made the company what it is today was its initial distribution strategy.
Estée wanted to sell her products only through upmarket department stores. Her first break came from Saks Fifth Avenue, an American luxury department store chain. She waited for two years to convince Saks to place an order for her products. The products sold out within two days, giving Estée the confidence to take on Revlons of the world.
Estée focused only on fine department stores. She traveled across the length and breadth of the United States knocking the doors of such channels. When Estée expanded to Europe, she was again at prestigious retail stores there.
One of them was Galleries Lafayette in Paris. It was reported that “when the manager refused to stock her products, Lauder ‘accidentally’ spilled her first women’s fragrance Youth Dew on the floor during a demonstration in the middle of a crowd. As the appealing scent wafted through the air, it quickly aroused the interest of customers, who began asking where they could purchase the product. Seeing this, the manager capitulated and gave Lauder her initial order.”
Whether it is the story of Edison or Estée, the message is clear: it is distribution that makes wonderful products successful ones.