Scaling out distribution

The company scales out distribution by signing up independent bicycle shops (IBS) as “agents” of the brand. For example, an IBS reviews the company website, makes a few calls to the company for more information about warranty, returns, customer support etc; inspects a sample frame and then opens an account with the company.  There is no cost to the IBS for becoming an agent; there are no minimum order requirements; there are no floor space or product placement requirements. Becoming an agent of the brand is similar to  opening an account with eBay or Amazon. The significance of the agency model is that the IBS does not have to purchase a dozen or more fully built up bicycles of various sizes and keep them in the store (on the floor or in the basement) as inventory. This is expensive and risky for the IBS and an inefficient use of resources. The IBS can order frames as and when the customer demands one.

Instead, the IBS holds a few sizes for demonstration, inspection and sizing purposes only (this complements what has to be the company’s very comprehensive website). When the customer decides to buy a frame, the IBS places the order with the company and the frame is delivered to the IBS.  The IBS takes a percentage of the value of the order. The IBS then orders the components and wheels for the customer and builds up the bicycle. The IBS makes money on the component and wheel order, the mechanics stay busy and most importantly, the IBS retains the relationship with the customer. 

There are no restrictions on how many agents there can be in a given geographic location or market. Currently, manufacturers ensure that their dealers are more than a few miles apart; this means that dealers of Fast Frames Bikes will have a small monopoly on that brand in their local market. It also prevents unhealthy competition among dealers. You will rarely find two dealers of Fast Frame Bikes in the same neighborhood. 

The trouble with this arrangement is that a customer may like and want a Fast Frame bike but he may not want to buy it from the local dealer. For example, the local dealer of Fast Frame Bikes may charge slightly higher prices because they are located in an expensive neighborhood where the rent is high or incomes are high; they may have a reputation for poor service; they may have poor selection; their mechanics may be not very well trained; there are any number of reasons. The result is that these restrictive arrangements eliminate choice and ultimately drive the customer to the Internet.

The agency model reduces risk and cost for the IBS and allows the customer to choose which IBS he wants to work with. The IBS reduces its investment in inventory and overhead without losing the relationship with the customer and the customer gets the convenience and selection of the Internet with out losing the support and community of the IBS.  The finished product is better too: it is built up by a mechanic from scratch at the IBS rather than at a factory; it is build up with all of the components that the customer wants and with the wheels the customer already has or decides to buy.