Digital Distribution: History’s Best Wholesale Business Model is Now.

The subtle strengths of digital partnerships and how they stack up against traditional alternatives

What if I told you that one of the largest and most successful companies in the world wanted to sell your product.

They are a retail juggernaut. Their name is a household phrase. Their standard of excellence is well-known, and their buyer base is rapidly expanding, always ready to spend more.

Their stores are some of the most popular in the world—moving over $100 Billion (with a “B”) in product back in 2011, and on track to sell $400 Billion a year by 2015.

And they want to put your product on their shelf. They want you to help them reach that $400 Billion.

Their offer is almost too good to be true. Shelf space on one of the world’s most popular stores … customer service, refunds, stock management and merchant fees; they handle it all. You’re just along for the ride, cashing in on one of the hottest brands in the world today.

Oh yeah, did I mention they have thousands of buyers flocking to their store each day, searching the isles looking for stuff to spend their money on… looking for your stuff? 

Wait what? No more lead generation needed either?

And yet some people still don’t think this deal’s good enough. 

I hear a surprising amount of complaints about this specific arrangement, so I’d like to set the record straight and shed some necessary light for new entrepreneurs on the digital frontier …

 

The “New Deal” for Digital Entrepreneurs

As you may have already figured out, the company I’m talking about above is Apple. 

Their App Store offers this very opportunity to third party software creators all over the world, and in my mind it’s perhaps one of the best possible deals a new entrepreneur could find in today’s market.

All you have to do is deliver a working product, and they take care of the practical delivery to the marketplace. Before we move on, let me repeat that word for word at least one time. All you have to do is deliver a working product, and they take care of the rest.

To be sure, you’re still going to be in charge of your own marketing. You’re going to have to decide whether to release a free demo of your software in order to generate a buzz, and you’re still going to be the one running your business.

But all the frustrations that arise from unexpected obstacles … from doing things other than your core business—other than what you really love to do—that’s all taken off the table. If you can finish your product and deliver it to Apple, then you’re guaranteed market exposure under Apple’s masthead.

That kind of simplification alone would be enough to turn my head as a new entrepreneur. But still, it gets better …

Because for all this—for all the benefits and advantages that Apple offers its third-party partners—the massive tech company only takes 30% of your gross sales. Just 30%!

Yep, I said JUST 30%!

Likewise; Amazon offers a similarly favorable deal to authors as a part of its Kindle Direct Publishing program. And as you may already know, a whole new wave of savvy and determined entrepreneurs have managed to turn this deal into a virtual gold mine …

Like Ethan Nicholas, who—despite a lack of programming knowledge and a pile of overwhelming medical debt—managed to develop and release “iShoot,” a simple iPhone game that made over a million in its first seven months after release.

Or John Locke, who turned his hobby of writing imaginative pulp novels into a real profession … selling a million 99-cent novels on Amazon in his first five months as a self-published writer.

These incredible stories are more than enough to make the average entrepreneur take notice. But we’re still left to wonder … are people like Ethan Nicholas and John Locke just the first in a new generation? Or is the whole app business just “tech bubble 2.0?”

And most importantly; is this kind of deal even worth considering in the first place?

Now I’ll be the first to admit that 30% (looks like) a serious chunk of change. Especially when your business is just starting out, trading away a third of your headline sales can come with a distinct stinging feeling to it.

But sometimes that stinging feeling is just that … a “feeling.” A misunderstanding of what could be an extremely profitable opportunity.

That’s why I always take the arguments against Apple’s pricing and policies with a grain of salt. Arguments best outlined by John Gruber of Daring Fireball fame:

  • Apple should be taking less, perhaps far less, than 30 percent.
  • Apple should not require subscription-based apps to use the in-app subscription APIs. If it’s a good deal for publishers, they’ll choose to use the system on their own.
  • Apple should not require price-matching from subscription offers outside the app. Publishers should be allowed to charge iOS users more money to cover Apple’s cut.
  • Apple should consider business models that simply can’t afford a 70/30 revenue split.

So what “should” Apple be charging in a perfect world? James McQuivey makes a reasonable-sounding stab at that question in a recent editorial:

The most direct analog is the credit card processing business. It’s similarly structured: One entity acts as a secure platform on which millions of consumers can transact with thousands of businesses. What do these companies charge? From just below 2% to as much as 5% for low-volume, high risk merchants. 

And while each and every one of these arguments definitely sound reasonable, I believe they’re all lacking the same critical component. Namely, a bit of perspective. 

Because without really experiencing the alternatives to doing business with Apple, it’s especially difficult to put a real-world price tag on Apple’s 30% …

Putting Apple’s 30% into a Proper Perspective 

Before we go comparing Apple to credit card companies, let’s remember that—traditionally speaking—Apple is a retailer in this context … not a merchant processor.

They provide a fixed marketplace for the sale of third-party goods, even if it’s “just” an App Store. That means becoming an app developer for Apple or an author for Kindle essentially makes you into a wholesaler. 

It might all sound like grade-school stuff, but it really changes the context of Apple’s offer – completely!

Think about the way that retailers like Sports Depot made Nike into what they are today …

Think about the way that 7-Eleven and McDonalds have swollen Coca Cola’s coffers …

Or the way that gas stations and auto supply stores have fueled Castrol’s growth.

The list goes on and on and on. Even the most successful, most universally-loved products will struggle in new marketplaces if they can’t nab the right retail deals. Nutella is a great example; a delicious European treat that took years to find a place on America’s supermarket shelves. 

Now think back to Apple’s App Store. Think about the sales once again, and now think about what that’s already doing for up-and-coming app developers …

For starters, there’s the obvious cost factor. Most wholesale businesses can easily run into the millions just to get started, even if we’re just talking about a small vineyard to retire on. That’s in a completely different league from Ethan Nicholas’ shoestring budget. But it’s obviously still worth it for thousands of wholesalers all over the world.

At the same time it’s a simple fact these kinds of companies almost never see gross profits as high as 70% of sales.

Instead, The Wholesale and Retail Guide’s reported average net profit (after costs, interest, taxes etc) across all wholesalers is in fact just 20%. And once that net profit margin dips by any more than 5%—down to 15% or below—it’s reached a level at which sustaining the business just won’t be worth it in the long-run, according to Chris Malta of Worldwide Brands. 

So regardless of your production costs or your level of experience, there’s no arguing against the fact that brick-and-mortar wholesalers are essentially walking a tight-rope in developed countries these days, especially in the face of sweltering global competition.

Apple's Offer Compared To The Real Worl Averages

In the face of such overwhelming competition, some of the remaining “stable” wholesalers either rely on volume or selling their products at a massive premium just to survive.

Some niches, like the clothing industry, still use the “keystone” model for pricing. In this traditional model, a wholesaler doubles the cost of their inputs and then anticipates that the retailer will again double the price.

That means if things go to plan, the wholesaler is virtually guaranteed a 25% profit on all the sales. Making it one of the best prospects out there in brick-and-mortar retail, but only if you can capture the elusive demographic.

Apple’s “Simple Deal” is Simply the Best out there 

Nothing we’ve covered so far is really all that earth shattering.

Every entrepreneur is familiar with the prohibitively high startup costs in some wholesale industries. And it shouldn’t come as a shock to anyone that software development can be unexpectedly expensive and time-consuming.

 So you understand why I’m a little surprised to see that some people are still deeply offended by Apple’s offer to take all these obstacles off the table in exchange for 30% of your sales. Especially when—in my eyes—that’s just the beginning … 

Because in addition to offering a simple solution to all your major obstacles, Apple’s deal also offers solutions to many of the minor hurdles you’d face in wholesale. They handle all of your chargebacks, all of your customer support. Since it’s digital there’s no need to worry about inventory management or repurchase agreements.

 And best of all, Apple pays out every 45 days just like clockwork; so no need to worry or fret over chasing bad debts.

This kind of thing is simply music to an entrepreneur’s ears. The fact that they’ve thought of everything down to the last detail and expense and headache, and they’ve priced it all in. They’re willing to offer you all the benefits that come with the massive scale of their business, and you get it all on day one. 

That is what your 30% gets you 

You get a chance to partner with the tech superpower—one of the most successful companies in the world—and swing for the fences with some of the lowest startup and maintenance costs of any business in history.

If you’re successful, just stay the course and Apple will pay up every 45 days, just like clockwork. No need to deal with a whole list of vendors or accounts receivable … just keep an eye on the mailbox or your bank account and the work is done. It really can be that simple.

The reason why they offer such an impressive deal is honestly pretty obvious when you consider it …

They’ve made themselves into a prestige brand, and they’ve done so by using their own software and systems from the ground up. Allowing a third-party developer to come into that carefully-controlled ecosystem is necessary, but it’s the kind of thing Apple would rather control.

This mentality is even reflected in the iPhone’s design; and what makes it different from a common computer. Once again, DaringFireball’s John Gruber says it best:

“iOS isn’t and never was an open computer system. It’s a closed, controlled console system — more akin to Playstation or Wii or Xbox than to Mac OS X or Windows. It is, in Apple’s view, a privilege to have a native iOS app.”

 As such, Apple has a much greater incentive to get involved in development—and maintain that brand cohesion that they live by—than the usual distributor or retailer.

This might cost developers a little bit more than average off the top, but in return Apple’s also offering to take care of all the little details, almost all the housekeeping and product support that goes into software development. And even with “just” 70% left, they’re still leaving their distributors miles ahead of the competition.

So I hope you can see why I truly believe that companies like Apple and Amazon are offering one of the greatest opportunities out there—especially for first-time tech entrepreneurs—and that the costs are absolutely worth considering.

If not, just ask the tiny tech startup that’s drawn over a billion downloads for something called “Angry Birds,” …

 

about-pete
Pete Williams is an entrepreneur, author, and marketer from Melbourne, Australia.

Before being honored “Australia’s Richard Branson” in media publications all over the continent, Pete was just 21 years old when he sold Australia’s version of Yankee Stadium, The Melbourne Cricket Ground For Under $500! Don’t believe it? You will! Check out the story in the FAQ section (it really is our most asked question).

Since then, he’s done some cool stuff like write the international smash hit ‘How to Turn Your Million-Dollar Idea Into a Reality’ (+ the upcoming ‘It’s Not About the Product‘) and he’s created a bunch of companies including Infiniti Telecommunications, On Hold Advertising, Simply Headsets and Preneur Group.

Lots of other people think he’s pretty good too! He’s been announced as the Global Runner-Up in the JCI Creative Young Entrepreneur Awards for 2009, the Southern Region Finalist in the Ernst & Young 2010 Entrepreneur of the Year, and a member of SmartCompany’s Top 30 Under 30.

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