![]() ![]() Convenience is their overwhelming added value function. They add value by locating their stores or offices near where end buyers live, work, and travel. Unless they are very big retail chains that can afford to have their own warehouses and distribution systems, dealers tend to buy smaller quantities than manufacturers need to profitably sell, but larger quantities than end buyers want to buy. The price they need to charge dealers to earn a 15% GPM is 1.18 times the price they pay for products from the manufacturer (1.18C-C)/1.18C = 0.15. To do this work, they typically need Gross Profit Margins (GPM) of 10 to 15%. Therefore, distributors perform a “warehousing” function where they become the warehouses for manufacturers and for their dealer customers. They also like to sell items in quantity, but exist to sell smaller quantities to lots of dealers that either cannot afford, or do not have the space for, the large quantities retailers would have to buy directly from manufacturers. Distributors typically acquire inexpensive warehouse space in industrial areas that are near transportation centers so they can easily receive goods from manufacturers and ship them to dealers. ![]() Since only the largest dealers and end buyers can buy products in the quantities manufacturers need to profitably sell them, an opportunity is created for distributors. There are manufacturers that do custom or small quantity work, but they have to charge custom prices to survive and thrive. To be efficient and keep their prices at “affordable” levels, most manufacturers need to make products in sizeable quantities. I explained this in my previous post on pricing strategies. While gross profit margins can vary from this “typical” number, manufacturers should understand the justifications for deviating from this target. To earn the money they need to pay their costs and expenses and earn a reasonable profit, manufacturers typically sell their products for twice their costs, or a Gross Profit Margin of 50%. Manufacturers are willing to do this because they can earn profits to improve the lives of their owners, executives, customers, and employees. The idea is that end buyers (these can be consumers, businesses, or governments) can save considerable time and money buying products made by others and investing the time and money savings in whatever they choose. Manufacturers are willing to make products so their customers don’t have to make their own.They are commonly called the (1) Manufacturer (2) Distributor (Wholesaler) and (3) Dealer (Retailer) levels, or functions. There are three classical distribution levels that provide needed functions. In order to provide convenience to their customers, marketers employ a variety of distribution strategies. Each company that operates at a certain level (or provides a certain function) makes it convenient for the level below (their direct customer) to buy their products. While marketers take full account of these economic issues, we are more focused on the customers – thinking about distribution as a way to provide them with “convenient” places to buy the products they need. Therefore, a typical distribution system looks like a pyramid with each manufacturer selling their products through a number of distributors that sell them to many dealers, who turn around and sell them to a larger number of end buyers. Dealers, in turn, have stores and websites from which they are willing to sell one or a few to lots of end buyers. Therefore, an opportunity for middle people, or resellers, is created.ĭistributors, also known as wholesalers, are willing to buy products in quantity, and put them in warehouses to eventually sell them to many dealers, also known as retailers. Most end buyers (consumers, businesses, and government) typically need just one (or a few) at a time. That is, to make money, most manufacturers need to sell their products in sizeable quantities. Account icon An icon in the shape of a person's head and shoulders.
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