What is distributor margin?
Distributor Margin · Also called distribution margin, distributor markup, distributor fee, distributor cut
Distributor margin is the distributor's selling price to the retailer minus what it paid you, as a percentage of its selling price. It is not the same as a markup on cost or a separate service fee.
What it is
A buy-and-resell distributor buys your product, stores it and delivers it to retailers. Its gross margin pays for the warehousing, delivery, sales support and overhead. A logistics provider that charges you a service fee works differently.
At a $3.60 selling price to the retailer and a 25% margin, the distributor keeps $0.90 and pays you $2.70. Your revenue is your own $2.70 sale. The distributor's $0.90 is not an expense on your P&L, because you never earned it.
If the distributor quotes a markup instead, the numbers change: a 25% markup on a $2.70 cost gives a $3.375 selling price, which is only a 20% margin.
Why it matters
Distributor margin is the second big cut out of your SRP, after the retailer. Leaving it out of your price waterfall overstates your revenue.
The headline margin is rarely the whole cost of a distributor. Agreements can add freight charges, promotional chargebacks, new-item fees, free goods, returns and penalties for missed deliveries. Budget for each one and check deductions against the contract.
Formula
Distributor margin % = (Distributor selling price − Price paid to brand) ÷ Distributor selling price
Price paid to brand = Distributor selling price × (1 − distributor margin), before any separate adjustments in your agreement.
Worked example
A 25% margin versus a 25% markup
- Assume the distributor sells a unit to the retailer for $3.60 and takes a 25% margin.
- Distributor gross profit = $3.60 × 0.25 = $0.90. Price paid to you = $3.60 − $0.90 = $2.70.
- As a markup on what it paid you, $0.90 ÷ $2.70 = about 33.3%.
- If the distributor instead quotes a 25% markup on a $2.70 cost, its price is $2.70 × 1.25 = $3.375. Its gross profit is $0.675, a margin of $0.675 ÷ $3.375 = 20%.
- Confirm which term the quote uses before you build it into your price.
Common mistakes
- Taking the distributor margin off SRP instead of off the distributor's selling price to the retailer.
- Accepting a quote without confirming whether the percentage is a margin or a markup.
- Coding every deduction as trade spend. Some are freight, returns, damage or charges you can dispute.
- Comparing a distributor only against its margin. Selling direct avoids that margin but adds your own delivery and account-service costs.
Common questions
- What is a normal distributor margin?
- There is no single rate for every product and route to market. Get quotes from the distributors that serve your target retailers, and compare them on the full cost, including charges beyond the headline margin.