Insights — Channel Creation & New Revenue Streams — 3 min read
How Distributor Margins Work
Distributor margin is not a 'loss' to your business; it is the fee you pay for their market access, logistics, and sales effort. Understanding the math behind it is critical to channel success.
In short
Distributor margin is the difference between the price the distributor pays you and the price they sell to the end customer, expressed as a percentage of the selling price. It must cover their 'Cost to Serve' plus a reasonable profit. A B2B distributor's margin requirement varies considerably by sector and the specific functions they perform. Getting this right requires 'backwards pricing': starting with what the market will pay and working backwards to your factory-gate price.
One of the biggest shocks for a business moving from direct sales to a distributor model is the 'hit' to the gross margin. If you have been selling a product for £100 and a distributor asks to buy it for £60, it can feel like you are giving away a significant portion of your profit for nothing.
This perspective is flawed. A distributor carries costs that you no longer have to: warehousing, local shipping, credit risk, and the salary of the salesperson who closed the deal. If you don't build a sustainable margin for them, they won't sell your product; if you give too much, you won't stay in business.
Margin vs. Markup: The Math Matters
Many manufacturers confuse margin and markup. If you sell for £70 and they sell for £100, that is a £30 profit. That is a 42.8% markup on your price, but it is only a 30% margin for the distributor. Since distributors think in margin, you must too.
| Level | Typical Margin | Expectations |
|---|---|---|
| Wholesaler / Logistic Partner | Lower margin | Low-touch, high-volume, no active selling. |
| Standard Distributor | Moderate margin | Holds stock, local delivery, basic sales support. |
| Value-Added Reseller (VAR) | Higher margin | High technical expertise, installation, and after-sales service. |
The 'Cost to Serve' Analysis
To determine the right margin, you must understand the distributor's costs. If your product is heavy and expensive to ship, or if it requires significant pre-sales engineering, the distributor will need a higher margin to remain profitable.
Conversely, if you are generating all the leads and the distributor is just an 'order taker', you can justify a lower margin. Conflict arises when the manufacturer expects 'Value-Added' effort for 'Wholesaler' margins.
Rebates and Incentives
The best margin structures aren't flat. They use 'Growth Rebates' to reward performance. For example, a distributor might have a standard margin, but if they exceed their performance targets, they receive an additional rebate on all sales for that year. This keeps them focused on your brand when they have multiple products to choose from.
Evans Sales Consultancy helps you build these financial models. We test the economic value of the channel to ensure it generates more profit than the direct route, even with the margin 'loss'. We look at the 'Total Cost of Sale' to prove that a distributor can often be more profitable than an internal sales team.
Could your business support another route to revenue?
Evans Channel Creation identifies, validates and builds additional revenue channels from capabilities a business already has — B2B to D2C, D2C to B2B, product to service, recurring revenue or partners — and says so plainly when a channel should not be built. Programme from £1,995 + VAT per month over six months.
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