Moving too quickly into different regions and channels without the sales to support it will result in unsustainable cost of fulfillment and cost of sales
Moving too quickly into different regions and channels without the sales to support it will result in unsustainable cost of fulfillment and cost of sales. In turn, these costs will prevent you from achieving your financial goals to build profitably. This knowledge article explores why this is the case and what to do about it.
#1 High Cost of Fulfillment
When fulfilling orders from various regions with low sales movement in each, your cost of fulfillment will be high, especially for frozen products. This is because you are shipping smaller quantities over longer distances.
Regardless of how much you ship, 3PLs still have to send out an entire truck, use gas, and expend labor. Let's look at an example from the knowledge article: Mastering Regional Saturation.
Imagine you have a total of 50 accounts and your distributor has a minimum movement requirement of 2 cases/per SKU/per DC. In one scenario, all 50 accounts are in the Mid-Atlantic. In the second scenario, you have 10 accounts in 5 different DCs. In scenario two, with fewer accounts per distribution center, it becomes a lot more challenging to achieve the minimum requirement.
Moreover, distributors charge for storage and transfer fees when the product does not move. You do not want to open a new warehouse for an account, pay all the onboarding fees, including slotting, and then get dropped a few months later for lack of movement. Be strategic in what deals you say yes to and don't be afraid to say no if the math does not work. There are a lot of stores to hit.
#2 High Cost of Sales
Expanding into new regions requires an increase in Cost of Sales to drive trial and build brand awareness. You need to reach and engage potential customers who may not be familiar with your brand or products. This process can be time-consuming and expensive, as each new account demands considerable effort and investment to convert into a loyal customer.
On the other hand, by saturating a region, you can concentrate on increasing sales to existing customers by providing more locations for them to purchase your products. This not only boosts brand awareness within the region but also makes it easier for your loyal customers to find and buy your offerings. In short, you are able to reduce your Cost of Sales.
What to Do Instead
✅ Saturate Region by Region
Focus on one region and one channel at a time. By establishing a dense customer base within a specific region, you can increase the number of products shipped in a single delivery and reduce shipping expenses. This will result in lower fulfillment costs and improved profitability. Instead of spreading your resources thin, concentrate on building a strong presence and sales throughput in each region.
✅ Set a Sell Through Metric
To ensure efficient expansion, set a sell-through metric for each distribution center (DC) before venturing into a new region. It is better to decline a new account opportunity than to open a new DC without sufficient sales, only to incur onboarding fees, storage fees, and transfer fees, potentially leading to product buyouts if the sales do not meet expectations.
Effectively managing sales in multiple regions requires a strategic approach. By saturating one region at a time through the specialty channel with low placement fees, you are able to establish a dense customer base, which, in turn, lowers Cost of Sales and Cost of Fulfillment.