Deciding and planning to distribute a new product can be very stressful and exciting at the same time. I will discuss some analysis that you should make before giving the green light to new product distribution.
Defining your sales margin
Firstly determine your margin or the added price that you will give to the product to cover your expenses and generate profit. For example, if the cost of the purchase is 15 dollars and you sell the product at 25, then you will have a 10-dollar margin.
When negotiating your margins, estimate the volume of sales that you think you could have at each price. Also think of any variable cost that this new product will generate, for instance, if you require additional staff.
Understand your variable and fixed costs
Any project has a variable and fixed costs. For instance, in our case, we will need to pay a 3-dollar commission for each unit sale and a 2-dollar average cost per unit for logistics (Transportation, warehouse, etc.).
For our fixed cost in our example, let’s simplify the case and think that our only fixed cost will be 10,000 dollars in salary for an additional staff member for the project and 40,000 dollars in prepaid royalty that the manufacturer demands. Other projects cover all other fixed costs. So, for our example, we have 50,000 dollars in fixed costs.
In real life, there are many types of fixed and variable costs, always work with your financial team if you have any questions.
New product breakeven analysis
Once you understand your margins is time to make a breakeven analysis. You will need your selling price, your variable cost, and your fixed cost. They will be used to calculate the number of units required to achieve breakeven.
For our example, we have a result of 10,000 units. You must evaluate the probability of selling 10,000 or more units before accepting the project. To do that, you can look at your team’s past performance, competitor’s results, and business trends.
A breakeven analysis allows to evaluate risk of your operations, and enable you to establish sales goals and timeframes. You should work closely with your finance team in this planning face for your project. It can also make you rethink the margins needed to be successful and give you additional information before closing a negotiation to become a distributor.
I hope you enjoyed this week’s article! If you want to learn more about how marketing analytics can impact your distribution strategy, please visit my last week’s post. For questions, feel free to reach out in the comment section below.