Every business starts with either using direct selling or third party sales channels such as distributors, sales agents and retailers. Choosing your distribution channels and knowing how to reward them is an important step to make your product successful in a new market.
The typical retailer and distributor margins for various categories
|Fast moving consumer goods||3-10%||8-25%|
|Clothing and apparel||10-20%||20-30%|
|Electronics like mobile phones||3-7%||3-7%|
|Electrical equipment and lights||5-7%||15-25%|
Do you have information on average margins for other product categories? Please email us.
Let's start with the basics: what is the role of the retailer?
A retailer is a person or business that sells goods to the public in relatively small quantities for use or consumption rather than for resale. In our case we focus on businesses, and preferably with multiple retail outlets. The retailer is the last shackle in the distribution chain and has the best information on what sales price is still acceptable. A retailer can for example be a supermarket. The most important asset of a supermarket is shelf space. The actions of most retailers are aimed at maximising the margin on their assets.
What is the role of the distributor?
The distributor is the middle men between the manufacturer and the retailer, or between the manufacturer and businesses that integrate the product or use the product for their own consumption. There can be a chain of distributors, for example a global distributor who sells to specialised distributors for certain industries. In B2B markets, e.g. for desks, complicated machinery or cleaning services, you generally have no retailers.
The main assets of a distributor are his sales force, transportation means and storage. He will try to optimise the margin he can get with these assets. So it helps if you create an easy ordering process for him, with packaging that he can easily split and handle, and good documentation for his sales force.
Distribution and retail activities
Your distributors and retailers should be able to cover their costs and make a small margin. Therefore the next step is to list their activities and add a value to it. These activities could include:
- Packaging and unpackaging
- Sales, either in personal sales or by putting the product in their shops
Adding up the estimated costs of these activities will give you a good basis for negotiations. Discussing the list will also help to clarify expectations, which is especially important if you work with foreign distributors.
Not all distribution margin is profit: the distributor margin formula
In a good entrepreneurial setting, a manufacturer must understand the purpose of a distributor and vice versa. A distributor is a sales agent that caters to retailers. Distributors are the middle-men in a three-tier distribution chain. Given a maximum sales price to the consumer, the manufacturer, distributor and retailer have to split the revenues.
However, not all margin is profit. In order to earn the margin, distributors and retailers have to make costs, for example for shipping, storage, financing and of course selling the goods. They also have their overhead, leaving only part of the margin as their profit. When negotiating with the parties further in the distribution chain, you will have to take this into account.
Available distributor margin calculation
How to calculate distributor margin? The first step is to calculate what margin is available and which part of it should go to your distributors.
- Calculating for a reasonable margin begins with determining the cost of your goods. Be clear about which units you sell your products in, and be consistent in you calculations to take that as a basis.
- The next step involves establishing a MSRP (Manufacturer suggested retail price). You must configure your MSRP by considering the profit earned across all your sales channels and the product competition in the market. Also take into account applicable taxes, like VAT.
- Distributors and retailers typically get discounts on the MSRP in exchange for selling your products on behalf of you. Distributors usually command large discounts due to the bulk of their orders, and the number of retailers ordering from them. They don’t usually need too much support, except for notifications of new promotions and progress of the prices on your products.
- You must anticipate hidden costs. Damages or product losses could occur during shipments. To avoid this, you should ensure quality containers which would require additional costs. Include it in your calculation of unit sales to adjust your margins. Most distributors and retailers would also ask for as many samples of your products as possible. Reasonable margins for your distributors should be computed only when all costs (including hidden variables and miscellaneous) are known.
The second step is to divide the margins along the distribution chain, e.g. between you, the distributor and the retailer. Keep in mind the work that each party has to do and the risks they take. In general the profitability of a product is lower for the distributor than for the retailer but distributors have more sales due to the sheer volumes that they deal with. Try to determine with what transfer prices it still is interesting for your distributor and when applicable your retailer to sell your products.
A special case: franchised distributors
If you talk about franchises distributors, or generally called franchisees,then there is a complete different relationship between de manufacturer or supplier and the distributor. Under the franchise agreement the distributors will be obliged to purchase most of their goods from the manufacturer. The distribution company will have its own trade name, but will profile itself as representative of the manufacturer. Formally the distributor will have the freedom to determine its own prices, but the manufacturer can give recommendations. The price that the distributor pays is often a fixed percentage of the recommended price.
Calculating a decent margin, a reasonable mark-up and a worthy price for your distributors and retailers takes careful planning and market research. It takes analysis and understanding to successfully sell products in the market. This process differs from determining the fee or percentage for a sales agent.