Economics of Distribution

Migrated. Originally posted May 31, 2009

I think that this is by far one of my favorite topics in business to talk to people about. I think some of it has to do with how much my affiliate marketing business interacts with this model, but mostly because of the immense amounts of opportunity that are out there for anyone looking to capitalize on how the internet allows the average person to become a player in the middleman game.

Economics of Distribution

I think that this is a fairly simplified model of the standard distribution channel. If it’s a national company, 

there may be an extra layer or two, and if it’s an imported product, there are definitely more middlemen layers. 

So a producer makes something, and then that product enters the distribution channel. As the product goes through each of those layers in the middle, the price of the product goes up because everyone makes a profit. At the end, we the consumers, get the product at a steep markup form the original cost of manufacturing. 

The internet has given these producers a convenient way of getting their products directly in the hands of the consumers. In the process they cut lots of the middle men costs, and profit more on the sale of the product. Other companies have opted into affiliate programs, where they pay people to use their products and build a community of loyal customers for them. The profit that would normally go to the middle men gets thrown into a pool, and everyone involved in that community gets paid out of it.

 

Just to give you an idea as to how much money is made by middle men, when Sam Walton cut as many of those layers out as he possibly could, he became the fastest billionaire in American history, and his company, WalMart, became the fortune 1 company in America. There is a lot of money in there, and I’ve got a very simple example that will hopefully illustrate it.

I love this example, because it shows the impact of middle men costs on a product. You basically have the same product, but the big difference between the two is that one is significantly more expensive than the other. 

frostedmw

alfrostedwheat

 

The reason for this is fairly simple, one has gone through more of that distribution channel than the other, and look at the impact on the price. The Albertson’s brand is $1.70 cheaper,and if you can see it, it is discounted more from the original retail cost than the other.

Some of you guys are now reading this and thinking, okay, so outside of this affiliate program that you are involved in, how does this work for me? Advertising, Advertising, Advertising!

If you can build a community of people, whether it be through a blog, a website, or in whatever way you do it, there is a way to capitalize off it. It is my opinion that every single dollar of advertising is completely up for grabs, and people just have to figure out how to grab at it. Television, and print media are now, particularly in this economy, too expensive for most companies to use, and the smart ones are looking towards Social Media as an outlet. If you have anything, even if it’s your Facebook or Twitter messages, that gives you other people’s attention, there is totally a way of profiting off it. In the world of advertising, whoever attracts the most eyeballs to them gets paid. 

Okay, so if advertising is not your deal, there are other ways of doing it. Link up directly with a company, and become some form of a reseller online. Get the products off of them as cheaply as possible, and sell them at a deep discount off retail. In other words try and become the wholesaler of distributor. This may take quite a bit of work, but if you get really good at doing it, and create a solid enough community, there is some money to be made there. Personally, while I think this route is feasible, I think that affiliate marketing or developing an online community of people that read your blog or visit your website has a significantly bigger upside, since the cost of entry is minimal and your real costs are measured in time and sweat equity.