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:

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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