Pricing And Profit Distribution For Different Distribution Roles

In the supply chain, the various roles involved in the distribution link, how is a product priced, and what kind of profit can get respectively? We will use an example below to analyze the pricing and profit distribution of manufacturers, suppliers, and retailers. Manufacturer Suppose you are a toy manufacturer, recently produced a new toy, and then plan to sell the goods to some downstream toy wholesalers. At this time, you need to consider how much the product price is more appropriate. We know that when a manufacturer sets a price for a product, it generally includes the cost of manufacturing and packaging the product. Suppose the cost of manufacturing and packaging of your product add up, each toy needs 10 US dollars and pluses the profit, and you are ready to sell it to downstream wholesalers at 20 US dollars, that is to say, you have increased the price by 10 dollars. Let's calculate the gross profit margin of the manufacturer after the price increase. Margin (%) = $ 10 / $ 20x100% = 50%. In other words, the manufacturer's product is priced at $ 20, and the profit margin for selling to the wholesaler is 50%. Wholesaler In the supply chain, the profits of wholesalers are actually not high. His gross profit margin is usually around 25%. Because the wholesaler also has various costs, he may not be very interested in this product if he sells the manufacturer's products and the gross profit margin he gets is lower than the normal level. It is assumed here that this wholesaler is profitable based on a gross margin of 25%. Let's take a look at his wholesale price. For the wholesaler, the price set by the manufacturer is his wholesale cost. In other words, the purchase price of the wholesaler to buy this toy is 20 US dollars / piece, and his gross profit margin is calculated according to 25%. Calculate his selling price, that is, the wholesale price the wholesaler sells to the retailer. Wholesale price = purchase price / (1- gross profit margin) = USD 26.67. We can see that the wholesaler has to sell for US $ 26.67 to ensure that he can obtain a 25% gross profit. In other words, the wholesale price of the wholesaler is US $ 26.67, and the profit margin of wholesale to the retailer is 25%. Retailer Compared with the retailer, the wholesale price of a wholesaler is the cost of his goods. The usual way of pricing in the retail sector is to double the wholesale price. However, for different industries and products, his double pricing is different. For example, toys belong to an industry with fierce price competition, so it is not necessary to double the price. Suppose we set the doubling factor at 1.7 times, then the retail price set by the retailer for the product = the purchase cost x1.7= $45.33. That means the retailer has to make sure it can make a profit while covering the cost of the toy, which retails for $45.33. The retailer added $18.66 to the original purchase price of $26.67. So let's figure out what is the retailer's gross margin? Margin (%) = $18.66 / $45.33 x100 % = 41.2%. That is to say, the retail price of the retailer is $45.33, and the gross profit to the final consumer is 41.2%. To summarize from this example, the gross profit of different distribution roles in the supply chain, and the gross profit of the manufacturer is 50%; the gross profit of the wholesaler is 25%, and the gross profit of the retail is 41.2%. (Under normal circumstances, the retailer's gross profit is between 48% and 52%) We can see that in the entire distribution activity, the gross profit received by the manufacturer is the highest, so is the pricing of the manufacturer acceptable? This should be combined with the selling price of similar products in the market. Assuming that the retail price of similar products is 40 US dollars, and your retail price is 45.33 US dollars, it can be said that the final retail price of your product does not have price competition force, this situation may have a certain impact on your sales. That is to say, for each role in the supply chain distribution link, their gross profit has an approximate range. If it is lower than this range, you will have to reconsider your product pricing, adjust the product markup appropriately or reduce production costs. (The gross profit of many manufacturers is below 20%) Through this example, we can understand that in the supply and distribution link, the supply chain would be very unstable if the profits of each role cannot be reasonably distributed. If the manufacturer squeezes out the profits of other distribution members, it will cause these members to be unable to maintain normal profits, which will relatively reduce the enthusiasm of the members for distribution, even the manufacturers' goods may not be sold.

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