Rationalize Channel Margins to Optimize Distribution Costs
Rationalize Channel Margins to Optimize Distribution Costs
By
Makarand Joshi
Asst. Professor - Orange City Institute of Higher Education, Nagpur
Email: makarand1234@gmail.com; Mobile 9422805719
ABSTRACT:
Distribution Channel Margins form an important component of the distribution cost which directly affects the bottom line of any company. While the companies are trying to reduce the distribution costs, to improve their own margin pressures, there seem to be little innovations in this area.
The margins offered to the distribution channel members by most of the companies are fixed in percentage, which is directly proportional to the price of the product. In case of any change in price, the channel margins in absolute rupee terms also fluctuate regardless of the factors affecting the change in prices. If the cost of distribution is a factor affecting the price, change in the channel margin is justified. But the price of the product depends on many factors like cost of raw material, processing cost, positioning strategy, marketing cost, overheads, etc. If the prices change due to factors other than the cost of distribution, the increase or decrease in the channel margins are difficult to justify unless the investment, revenue expenditure and business volume of an individual channel member is taken into account.
The author, in this paper, makes an attempt to bring out the deficiencies in the traditional percentage system of channel margins and also proposes a comprehensive model for calculating rational channel margins, which can help in optimizing the distribution cost.
Key Words
Channel Margins, Distribution Cost,
INTRODUCTION:
A survey of about 25 distributors of FMCG products in the city of Nagpur revealed that the distributors get their margins in some percentage and is directly proportional to the price of the product. These distributors are dealing with multiple brands within the same product category of the firm. The only
By
Makarand Joshi
Asst. Professor - Orange City Institute of Higher Education, Nagpur
Email: makarand1234@gmail.com; Mobile 9422805719
ABSTRACT:
Distribution Channel Margins form an important component of the distribution cost which directly affects the bottom line of any company. While the companies are trying to reduce the distribution costs, to improve their own margin pressures, there seem to be little innovations in this area.
The margins offered to the distribution channel members by most of the companies are fixed in percentage, which is directly proportional to the price of the product. In case of any change in price, the channel margins in absolute rupee terms also fluctuate regardless of the factors affecting the change in prices. If the cost of distribution is a factor affecting the price, change in the channel margin is justified. But the price of the product depends on many factors like cost of raw material, processing cost, positioning strategy, marketing cost, overheads, etc. If the prices change due to factors other than the cost of distribution, the increase or decrease in the channel margins are difficult to justify unless the investment, revenue expenditure and business volume of an individual channel member is taken into account.
The author, in this paper, makes an attempt to bring out the deficiencies in the traditional percentage system of channel margins and also proposes a comprehensive model for calculating rational channel margins, which can help in optimizing the distribution cost.
Key Words
Channel Margins, Distribution Cost,
INTRODUCTION:
A survey of about 25 distributors of FMCG products in the city of Nagpur revealed that the distributors get their margins in some percentage and is directly proportional to the price of the product. These distributors are dealing with multiple brands within the same product category of the firm. The only
References: The paper is based on the Author’s 15 years experience in the Sales and Distribution function across various product categories. No published material was referred to.