Does your margin survive a distributor? A worked example

A distributor survives your margin only if the units it sells outweigh the discount it takes. In the example below, a 30% distributor discount cuts profit per unit from $12.00 to $5.40, so the distributor must sell about 2.2 units for every unit you would have sold direct.

Every figure here is illustrative. Replace them with your own cost and your own quotes.

How do you calculate your margin selling direct to a store?

Your direct margin is the store's wholesale price minus your cost, divided by the wholesale price. Many retailers expect to buy at about half of the retail price, so start there and confirm it with your buyers.

Assume a serum with these numbers:

• Retail price (MSRP): $40.00
• Your cost to make, pack and ship to the store: $8.00
• Store wholesale price at 50% of MSRP: $20.00

You earn $12.00 per unit, which is a 60% gross margin ($12 divided by $20).

How much does a distributor take?

A distributor buys from you at a discount to the store's wholesale price, then sells to the store at that wholesale price and keeps the difference. The discount varies by distributor, category and volume, so use the figure in a real quote.

Assume the distributor wants 30% off the $20.00 wholesale price. You sell to the distributor at $14.00. If you also pay $0.60 per unit to ship to their warehouse, your profit is $14.00 minus $8.00 minus $0.60, which is $5.40 per unit.

How many more units must a distributor sell to match your direct profit?

Divide your direct profit per unit by your distributor profit per unit. In this example, $12.00 divided by $5.40 is 2.2. The distributor has to move about 2.2 units for every unit you would have sold direct before you earn the same money.

That is the number to put in front of yourself before you decide. If you can credibly sell 1,000 units a month to stores on your own, a distributor needs to commit to roughly 2,200 units a month to leave you equally well off. If you cannot sell 1,000 units on your own, the distributor may still be the better choice, because the comparison changes when you have no other route to those stores.

What other costs does a distributor deal add?

Distributor agreements often add costs beyond the headline discount. Ask about each of these and put a number on it:

• Promotional or marketing allowances, usually a percentage of sales
• Payment terms, such as net 60, which delay your cash
• Returns or damaged goods charges
• Slotting or listing fees if the distributor sells to larger chains
• A minimum order or a required stock level at the distributor's warehouse

Add each one to your per-unit cost and rerun the table. A deal that looks like 39% margin can drop below 30% once these are in.

What margin is enough?

Enough margin is the amount that still pays for your marketing, returns, overhead and a profit after the distributor's discount. There is no single right number. Many founders set a floor of their own, for example a minimum of 30% gross margin on any channel, and decline deals that fall below it.

If your numbers fall under your floor, you have four levers: raise the MSRP, lower your cost, change the pack size, or negotiate a smaller discount. Test each one in the table before you pitch.

What to do this week

• Write down your true cost per unit, including packaging and freight to a buyer.
• Build the two-column table above with your own numbers, and set a gross margin floor you will not go below.
• Ask for the distributor's discount, payment terms and fees in writing before you compare offers.