The distribution margin is a concept that can apply to any product with a more complex supply chain that simply manufacturers selling direct to customers. The distribution margin measures the difference between the wholesale cost and the retail price, after taking into account taxes and other mandatory fees. Looking at the distribution margin can show the comparative bargaining power of manufacturers, distributors and retailers.
- Skill level:
- Moderately Easy
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Gather together the wholesale and retail costs of the product, along with the taxes that retailers must collect and pass on for the product. Make sure that you are using a consistent quantity of the product in all cases: for example, if you are looking at the costs for every widget, work out the taxes that arise from the sale of one widget.
Check you have only included sales and excise taxes that directly relate to the widget; don't include taxes on profits such as corporation tax.
Calculate average wholesale and retail costs across an industry if you want to get a picture of the overall distribution margin rather than just that with a particular distributor or retailer.
Take the retail cost, then subtract the wholesale cost and the taxes. The result is the distribution margin for the particular unit or units of the product that you used for the calculation.
Tips and warnings
- The distribution margin is a raw figure, unlike most accounting terms with the name "margin." If you want to make fair comparisons across different products of industries, divide the distribution margin by the retail price to express it as a percentage figure. This would allow you to, for example, figure out if a 15p distribution margin on a loaf of bread is proportionally higher than a 35p distribution margin on a litre of petrol.
- The distribution margin figure is made up of several factors, most significantly the costs borne by distributors and retailers (other than the cost of buying the product) and the profits of the distributors and retailers. It could also include the share of marketing costs not borne by the manufacturer. This means that you can't tell just from the distribution figure whether distributors and retailers are making higher profits that manufacturers.
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