Marketing 101: “How I Stopped Worrying and Learned To Love the Middleman”

Yesterday, I defined the process of marketing in broad terms. Today, I’m going to explain the process of distribution, from a publishing industry point of view. I’m also going to explain why middlemen are a good thing, despite what you may have heard.

For example, let’s say that I want to self-publish my children’s novel, The Adventures of Oscar the Scottish Terrier. I have the option of selling that book directly to consumers at my own expense by opening my own store and making the book available for sale. The advantage of this setup is that I keep 100% of the profits, but the disadvantages are many:

1) I’m responsible not only for the process of creating my book, but also for dealing with individual customers, accounting for all the money on a transaction-by-transaction basis, running a store, and keeping myself stocked up on my single product.

2) Another major drawback is that I don’t have anything else to offer customers unless I create it myself; that’s fine if they want to read about the Adventures of Oscar, but if they’d rather read about cats, or pirates or mobsters or how to crochet, I have nothing to offer them.

3) My ability to sell the book is limited to my ability to get customers into my store, and even if I do accept mail-orders and Internet sales, my business will only do as well as my ability to promote my book.

In the end, if I have 1000 customers buy my book, that’s 1000 people I have to take care of in addition to all my other duties. Many of them will expect some level of competent service, which I’m happy to provide. But that’s also a problem for me, because I didn’t get into the publishing business so I could spend all my time making sales; I want to focus on publishing books!

So, my next option is to sell my book to a company that specializes in selling books so that they can deal with all the customers while I focus on producing more books. Note that if I’m selling books to a retailer, I’m not selling them to customers; I’m selling them to someone who is going to work on my behalf to sell the book to customers. And though most consumers don’t think about it this way, the retailer is a middleman (though in the marketing profession, the term “intermediary” is preferred). But it does come at a price; in order to carry my books, the retailer will expect a discount, usually anywhere between 20%-55% off the cover price. And, since this is the publishing industry, the retailer will probably expect me to accept returns for full credit on unsold or damaged books. (This little twist has a long history behind it that we’ll save for another article).

Let’s say, for the sake of simplicity, that I sell my book through 100 individual retailers. I’ve reduced the amount of work I have to do since I’m no longer dealing directly with customers, and it’s likely that my sales will go far beyond what I could have accomplished on my own because the retail chains will have more resources to focus on selling my book. Great. But the downside is that I still have to deal with 100 retailers, many of whom will want to know why they should carry my book. Once again, I’m forced to spend much of my time selling my products when I really want to be publishing more.

That’s where wholesalers and distributors come in. Here’s what they do:

A wholesaler purchases products in bulk and sells them to retailers. They usually require a large discount for this service, often as much as 65-70%. The advantage of working with wholesalers is that they usually have substantial purchasing power. The disadvantage of working with them is that they generally do not assist manufacturers in directly promoting the product.
In the publishing world, two of the largest wholesalers are Ingram Book Group and Baker & Taylor. Both are heavily used by booksellers as a source of product.
A distributor assists manufacturers in procuring orders from wholesalers and retail chains by focusing on selling. Distributor fee structures vary, but generally, they are the equivalent of adding a 10-20% discount to the product. Distributors often use catalogs and sales representatives to highlight key products, and they generally have the corner on some area of the market. The advantage of working with distributors is that are often well-connected with retail purchasing agents (particularly the people who buy products for the national chains). The disadvantage of working with distributors is that they tend to expect exclusivity, which can work against a manufacturer if the distributor is not as adept at selling the product as a competitor might be.
Two major distributors in the publishing world are National Book Network (NBN) and Independent Publishers Group (IPG). In the comic book industry, many publishers work with Diamond Distributors for monthly issue sales and Diamond Book Distributors for graphic novel and paperback/hardback collection sales.

If, as a publisher, I’m distributing my books through NBN, I’m making sales to retail chains, who in turn are making sales to customers. But I only have to deal with NBN, which gives me more time to focus on producing more books. Notice: I get to do less selling because I’ve found another company willing to do it for me. The only drawback is that I have to sell my products at far lower prices than I would if I’d sold them directly to customers.

To some people, that sounds like a bad thing, so let’s examine the problem. Let’s say, for the sake of simplicity, that NBN manages to get my book into 1000 retail stores. Now, recall that when I was on my own, I sold 1000 copies of my book directly to customers. Assuming the book was $4.99, I made just under $5,000 and, after printing and promotion, produced a profit of around $1500. Not bad. But remember — I either have to sell those copies myself or hire someone else to do it.

NBN gets my book into 1000 retail stores, selling an average of two copies per store. Orders come in for 2,000 copies, and I fulfill them, selling then to NBN for 50% off (which covers all my fees for them as well). Assuming I get no returns, I see exactly the same revenue (~$5000) and I actually make a larger profit (~$1700) because I printed more copies and spent less on printing per unit. Plus, I have 1000 stores who will order more copies once they sell the ones they have. And, best of all, I don’t have to do any selling; I can instead start working on Even More Adventures of Oscar the Scottish Terrier!

Does it always work out this well? Of course not. This is a very simple model, and it completely ignores the fact that the publisher still needs to promote the heck out of the book once it hits the marketplace in order to make any sales to begin with. The purpose here is to demonstrate just how helpful these intermediaries can be.

Because, you see, a lot of people hate middlemen.

There is a commonly held perception that all middlemen do is buy something at a low price, mark it up, and sell it to consumers for much more. People call them parasites and accuse them of artificially inflating prices. But the truth of the matter is that these intermediaries don’t inflate prices; they reduce costs. And while it is true that there are occasional distributors and wholesalers who get in the game for a quick buck, they don’t stick around too long, because nobody wants to do business with them.

Imagine if every publisher in the book industry — numbering over 10,000, by the way — sold its books directly to consumers. Every publisher would be responsible for running its own store, and virtually every book would have to be ordered by mail or by the Internet unless you happened to live in a place like New York City where publishers tend to congregate. Books would sell fewer copies, and thus be more expensive to print. Publishers would have to raise cover prices just to stay in business. The cost of shipping books would also increase the price for those who could not purchase them locally. And, worst of all, consumers would be bombarded by advertising at every turn as publishers attempted to make more people aware of their products.

Any sensible person can see that this system would put a lot of companies out of business quickly, and it would mean that only the big publishers who could afford to operate large company stores with diverse product lines would be able to remain in business. The costs of these operations would be enormous, and books would be less available and more expensive as a result. And many products would only be widely available regionally since there would be no national or global distribution network in place.

So the middlemen serve a valuable purpose, and as a small publisher just starting out, I’m grateful they’re around. I do have some complaints, such as the antiquated process of returns, but that’s another story for another time.

Now that you have a better understanding of distribution, don’t miss tomorrow’s topic: The Four P’s*, or Marketing is more than sales and advertising!

*Yes, that is an appropriate use of the apostrophe, would-be grammar police; my source is Strunk & White’s Elements of Style, which says that the apostrophe should be used in the plural of a letter to differentiate it from a word. Note that this is NOT acceptable for acronyms, however; CDs, DVDs, and other plural acronyms only need an apostrophe if they are a possessive noun or a contraction, such as “The DVD’s features include…” or “This CD’s got some killer tracks.”

Writing Scraps

by Sean J. Jordan