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Rationalize Channel Margins to Optimize Distribution Costs

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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 …show more content…

2. Distributor’s Cost: The above model does not consider the cost of running the business of the Distributor. Due to diverse nature of the Indian markets, cost of running a distribution business differs from market to market. Some markets may have higher concentration of retailers in few places whereas some markets offer scattered locations of retailers, thereby affecting the transportation cost. In highly populous markets, the speed of credit cycle may be high as compared to less populous markets, thereby affecting the working capital requirement. The congestion on the urban roads, distribution time, manpower requirement, average order quantity, etc. also need customized considerations. 3. Return on Investment: When the margins are standardized, the ROI calculation is totally dependent on the volumes of business. Executives often inflate the targeted volume of business to meet the ROI expectations of the distributors. Many times, such inflated targets are unrealistic and unachievable, resulting in loss to the distributor. This results in loss of trust and goodwill of the firm and higher attrition rate of the distributors. 4. Firm’s Marketing Strategy: A Firm may change its marketing strategy which may require price changes. Such strategies may include re-positioning,

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