The beauty of distribution is instant results and cash flow. Distributors do not need to invest years in R&D efforts; they simply buy the product and resell it. The extra income is particularly important when attempting to retain sales reps. As a newcomer, you have no choice but to engage the services of independent rep firms, and these folks are driven by dollars. If they can make money on your line, they will stay with you. By having a diverse catalogue, you can increase commissions, which will, in turn, result in a more stable sales force.
The profit margin for a distributor can be much higher than for a wholesaler—in the range of 25 to 35 percent, depending on where the product is made. For instance, if you are selling your wares in Australia, the distance from the United States makes it much more difficult for grey marketing to affect pricing, while in Canada, the United States is right next door. As a small and new distributor, Cabletek (the company I founded, which later became Radial Engineering) did not have the clout or finances to attract A-lines like Shure, JBL or Peavey. Instead, we had to find product lines that either filled a niche or were unknown, and then work hard to get them into the dealers’ hands. Some of the brands we represented included Hafler studio power amplifiers and Sonex acoustic panels, Audix microphones and Atlas mic stands for stage, and Telecast fiber optics and SurgeX power conditioners for broadcast and installation.
Back in the 1980s, I had a knack for finding small companies that would eventually grow big; this list included Alesis, and Akai and PreSonus. The latter, a small, Louisiana-based company, had some really smart people behind it, and my “spider senses” told me it would eventually become a winner.
Here’s the kicker: When the product sells so well that demand cannot keep pace, the manufacturer may bypass the distributor to sell direct or engage a bigger distributor that is better financed. That’s what happened to Cabletek with PreSonus; even though our sales were growing, they opted to drop us and go with Erikson Music, part of the huge Jam Industries group of companies. At the time, this was a real kick in the teeth, but I cannot blame them—and to be honest, I have done the same to other distributors in several markets around the globe. Business is business, and you have to do what you believe is best for your company. To this day, I am still good friends with Jim Odom, PreSonus’ president.
Related: The Aha Moment: Controlling Your Own Destiny, Part One, by Peter Janis, May 31, 2019
The advent of the internet caused a new problem: information flow. Individuals began to educate themselves about products by reading and eventually watching videos, which diminished the importance of the distributor and dealer as being the sole sources of information. And the fact that pricing could now be published “on-line” ensured that margins were further squeezed. The consumer could be convinced to pay maybe 10 percent more for a product so long as it had local service, but any more than that, they would buy stateside. The downward price pressure made it impossible to make a sufficient margin with American-made brands, and with the Canada-United States free trade agreement in place, it became too easy to ship product across the border. We had to change our business model.
It is easy to take on a brand for distribution, but it is equally easy to lose the brand. As a middleman, you are replaceable. This “reality” was the spark that led us to transition from being a Canadian distributor to a manufacturer. I recall our sales team suggesting that we open an office in Toronto or Montreal, as those cities are where Canada’s big population is. In response, I asked why we shouldn’t open an office in New York, London or Tokyo. To grow, we had no choice but expand outside of Canada. The Aha Moment: We had to take control of our own destiny.
The transition took about five years, so while we were developing in-house brands such as Tonebone, Radial and Primacoustic, we were still selling a number of brands to dealers in Canada, which enabled us to fund in-house product development. As our manufacturing came online, we then began visiting dealers and sound companies in the United States, and eventually made strides to find distributors around the globe.