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Understanding Margins in the Distribution Channel

This time, I would like to start by understanding each individual concept and tying it all together to really get a grasp of how margins and distributions are connected and how it all works in business. Let’s dive right in!

What is Margin?

In simple terms margin is the amount of money a company makes after covering the cost of actually making a product. Margin is also known as gross margin, according to market business news, in commerce, the margin is the difference between the cost of buying a product and its selling price. The margin-commerce definition we will better understand once we go more in-depth with distribution channels.

As an example imagine you have a product idea, and that product is a candle. Now imagine that for you to be able to make that candle it’s going to cost you $5.00 and your selling price will be $10.00. Meaning your customer will pay a total of $10.00. In this scenario, your profit margin would be $5.00 as it cost you the same to make it.

What is Distribution Channel?

To better explain what the distribution channel is, please review the image below. Let’s go back to our candle example. I invite you to picture your candle starting at the manufacturer and in order to get to the hands of your customer that candle has to go through a few different mediums which we call channels. When we visualize all those different channels that the candle has to take to end up in your customers’ hands we call that entire journey the distribution channel. In other words, it’s the path that a product tackles to be able to make it to market.

So now that we know what margin and distribution channels are, the only thing we have left is to understand how they are both connected.

The Connection

After visualizing the distribution channel of our candle, it’s important to know that at each step of the way of the distribution channel, whether it is the distributor, wholesaler, or retailer, they all have to make money.

Now that we know this, a margin percentage needs to be added each step of the way which will result in an increment of the final selling price of your product when it gets to the hand of your customer. 

I hope that the information explained above helps you in your journey of understanding margin and distribution channels to ensure you have a plan in place when you have a product ready to launch. 

For related content, I invite you to read more on The Hustle of New Product Development by clicking here!

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