ShmoopTube

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principles of finance a la shmoop distribution distribution what is it

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well it's this and this and this distribution is the process of getting [child feeding ducks, person serving food, newspaper thrown onto doorstep]

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your thing or product whatever it is food golf putters clever little

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advertising messages double-sided forks all those out to your buying public

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that's distribution distribution for a ketchup company is getting their ketchup [ketchup in store]

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stocked in great places in the store and sold in big fat volume through Safeway [forklift carrying load of ketchup]

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and Kroger x' and 7-eleven and the fake blood company behind mom Massacre for

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and time to take a blood bath seven okay but you're the CEO and founder of Blade [bloody magazines]

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Runner a recently IP owed manufacturer of toy drones sold through retailers and

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on your website to destinations all around the globe you are proud of the [Blade Runner drone merchandise]

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fact that when you sell your drones through retailers they've given you

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highly favorable distribution terms like usually they take a lot more than thirty

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percent of the sales price for stocking your drones in prime shelf space that [merchandise stocked on store shelves]

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they've charged you stocking fees and all kinds other fees in addition to way

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more than thirty percent of the selling price but the retailer's love the rich

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geeky people your drones attract into their stores the geeks with green come [people walk into store holding money]

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into the store and buy other products after your drones have drawn them in so [woman carries multiples drones away]

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the retailers are happy to cut you a bit of a break and get lots of drone lovers

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you know and drones on the shelves going there yeah

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so that's physical quote brick-and-mortar unquote retail

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distribution physical goods get shipped from your manufacturing plant in Beijing [world map with plane flying across it]

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to your American warehouse in Peoria to the shelves of Walmart and Target and

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shopping malls all over the country in world brick mortar physical distribution

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lots of UPS hauling but a kind of competitor to this distribution exists [drone website]

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you have your own website and on Bladerunner comm you respect retail

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pricing that is you sell your own product on your own website for the same

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price that retailers sell it for if target stores are selling your drones

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for $2000 Bladerunner comm website offers this

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same product for the same price even though when you're selling it to

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brick-and-mortar guys you know you get a lot less and you make a lot less profit

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from them right it's a big deal because if you're selling to the public for 2 [writing on white board]

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grand and you get $1,500 from a retailer for a minute cost you 1100 bucks well

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you make $400 on the sale to a brick and mortar retailer but if you sell it

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directly off your website now you're making 2,000 - the 1100 bucks it cost

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you or $900 but so why do you respect pricing then why do you keep your prices

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high basically the same price that the retailers are selling them for why

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because if you undercut the brick-and-mortar guy's on price they'd [man leaves store without buying drone]

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stop selling your product and the retailer's know that you're a public [drone product gets kicked out of building]

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company and if they ever pulled you out of their stores

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you'd miss Wall Street earnings expectations in revenue also and growth

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and all that stuff and your stock would be crushed you and the brick-and-mortar [hand crushes flower]

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guys yet you're frenemies and gasp welcome to the disadvantage side of

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being a publicly traded company on the street because you're public you have

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few secrets and you're kind of vulnerable in the sense that you have

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immediate feedback on the price of your stock and the value of your company and

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it forces you to both think short term at times while you're trying to think

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long term long term value anyway value builder for your company when you sell a

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unit for $2,000 on your own website while you keep all 2,000 of it - and 20 [writing on white board]

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30 40 bucks and credit card charges and there's little shipping but usually you

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charge the customer for that it's way higher contribution margin when you sell

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it off your own website like you keep more profit and when you do sell it off

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your website well then you know who your customer is so you can then spam email [person clicking drone website]

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communicate to them all kinds of annoying ads for upgrades and future

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sales of drone things coming their way and they can add on for 99.95 if they

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order this week and buy some drone insurance yeah yeah that's it we can

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sell them that as well when you sell to a brick-and-mortar guy well you don't [man in store that cells drones]

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get that data so when you sell off your own website that's generally a good

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thing and owning the customer allows you to sell and already prove an interested

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buyer all kinds of crap in the future so there's a big fork [drone throws flames]

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in the road revolving around whether you should focus on selling through [road signs]

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brick-and-mortar outlets and old proven paths in the world or whether you should

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sell through your own website which has unclear results yet and it'll always

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compete against Amazon and well it carries costs and other kinds of risks [amazon businessmen]

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like fraudsters and the management of direct to home shipping and all kinds of

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other things so one big fat strategic question should you spend big money to [writing on white board]

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market your own website and maybe start to control your own distribution better

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relying on a bunch of price pinched retailers is kind of a scary thing to go [man hides under bed covers]

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to bed to each night and you remember Toys R Us went famously bankrupt the

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targets probably not too far behind them and Sears is pretty much already there

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so you know SHhhh in the numbers and you're thinking that almost playing

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defense you have to build your own website because the brick and mortar

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guys are all dying well the cost to upgrade your Bladerunner comm website to

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be a top-notch one would cost you a million bucks it's mostly creative work [writing on white board]

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painting it all pretty shooting some demo videos of crazy people strapping [dog strapped to drone]

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their dogs underneath the drones dressing the dogs as dragons and flying

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them all over the backyard so you did your IPO not long ago and you had

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budgeted a big part of that 50 million bucks now on your balance sheet to

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market your website improve distribution and touch your customer legally more [hand comes out of computer to poke person]

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after spending a million bucks to make your website all pretty collecting crazy

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videos of users while there's now forty nine million dollars left over and

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capital to go spend and you comfortably note that in the normal course of doing

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business you generate a few million bucks albeit seasonally per month in [businessman laying back in chair while money piles up]

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cash so in theory at least the dollar amount on your balance sheet should

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continue to get fatter and presumably whatever you spend that 50 ish million

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bucks on will produce more revenue more profits better earnings etc or you

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wouldn't be spending the money in the first place alright well after much

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internal debate you decide to spend 40 million dollars in Internet direct

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target marketing ie Google keywords that you just go by and yeah you buy a ton of

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traffic the dough is dropped and you get affiliate clicks to your site on that of [traffic on highway]

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those billion clicks you get 10 million people who actually do stuff on

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Bladerunner like watching the videos play with the

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product configurator read about the performance and so on and after this

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marketing campaign you do the tally which shows that a hundred thousand

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people actually bought a unit so is this a good use of your precious capital for

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distribution or not well your costs are eleven hundred bucks a unit and you

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retail them for two grand the gross profit then was nine hundred each but [writing on white board]

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you need to subtract credit card fees which retailers don't deal with because

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well they just pay by wire which is almost free and there are some handling

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shipping and restocking fees for returns which retailers also handle so to be

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fair you really have to take off about a hundred bucks from the unit sale to

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compare apples to apples and not to kumquat [apples and kumquats]

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so you made eight hundred bucks per unit relative to their brick-and-mortar

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retail guys on a hundred thousand units incrementally sold on this forty million [writing on white board]

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dollar drop you just grossed eighty million dollars in profits from this

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forty million in spend and you know a hundred thousand rich geeks who like

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your drones and swag well things feel great and you were able [man throwing drone swag into crowd]

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to pull this off in ninety days and yeah web traffic moves bath way faster than

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brick-and-mortar retailers so when you proudly report the next quarter

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estimates for next year's earnings get published as two dollars and the whisper

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number goes to three dollars a share well the stock zooms to a hundred

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dollars valuing your company now at two billion dollars right twenty million

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shares out ten hundred bucks each everyone thinks you're a genius so all [business magazines]

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is great right and not so much there were only about 300,000 units in total

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that you sold last year and you just took a hundred thousand of them away

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from the retailers who Brun yeah so all of the sudden the traffic of drone sales

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at Walmart and Target and the other brick-and-mortar places actually

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declines and oh dear the kindly loving buyers at Walmart decided that there was

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another new whiz-bang gadget that would fly off the shelves on wealth less [fidget spinners on store shelves]

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literally but generate more profits for Walmart so they replaced you by contract

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they finished selling the remaining 14,000 units you'd left with them and

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then they waved buh-bye meanwhile the street with its insatiable

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appetite for growth and ceiling breaking never stopped raising estimates on you a [goblin bouncing up and down]

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chicken in every pot and a drone in every garage it's

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new thing alright so what do you do now well you're officially worried about now

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missing your next quarter pressure is massive to keep your enormous hundred [man biting nails in business meeting]

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times earnings multiple you have employees shopping for Porsches

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journalists waiting to laud you and clever tax planners waiting to buy homes

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for you in the Caymans with the clever ways to avoid paying your share and a

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quarter goes by and surprise surprise you miss badly watch the next video in [man throws basketball and misses hoop]

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this unit to continue the saga

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