Distribution Channel Discounts for Inventors
{Don Debelak’s new book, Turning Your Invention into Cash is now available on Amazon for $3.49. Go to Amazon.com and enter inventions Don Debelak to purchase. From the author of Entrepreneur Magazine’s Bringing Your Product to Market.}
I’m going to start with the area that inventors seem to understand least: the money the inventor will make through the distribution network. The most common distribution methods are:
- Sold through a distributor to retailers.
- Sold direct through retailers, either through manufacturers’ representatives or a direct sales force.
- Sold through distributors to industrial users.
- Sold direct to industrial users or consumers.
Your first goal is to understand what percentage of the money you will receive from sales to each channel.
| Through distributors to retailers | Direct to retailers | Through distributors to Industrial users | Sell direct to consumers or industrial users | |
| Price paid by end-user | 100% | 100% | 100% | 100% |
| Price paid by retailer | 60% | 50% | N/A | N/A |
| Price paid by distributor | 42% | N/A | 60 – 65% | N/A |
| Typical Sales / Marketing Cost % | 10 -12 % | 15 – 20% | 15 – 18% | 30 – 50% |
| Net to Company | 30 – 32% | 30 – 35% | 42 – 50% | 50-70% |
As you look at this chart you can see why most new products people feel a product needs to be produced for 25% of its final selling price. If that is not the case the company is often forced to sell to consumers or industrial accounts direct, and as a rule they can only generate a fraction of the sales volume that they can selling through distribution. That low volume makes it difficult to cover your fixed costs such as rent and administrative salaries, which includes the inventor’s salary. If your costs slide up, you dramatically cut your product’s ability to make money.
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