---
title: "Distributors Say: \"Selling Your Product Is Too Costly, We Can't Do It Anymore!\" What to Do?"
description: "A daily chemical brand A frequently receives feedback from distributors that its XH category is losing money and unsellable. After calculation, the overall ROI for brand A's products is 18.1%, but the XH category is only 4.1%, far below the industry average. The reasons include lower gross margin, higher operating costs, and more capital tied up. By optimizing distributor trade terms, such as adding conditional rebates and reducing cash and inventory days, the ROI can be improved to 17.1%, making the product attractive again."
author: "刘华明"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2017-03-15"
language: "en"
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# Distributors Say: "Selling Your Product Is Too Costly, We Can't Do It Anymore!" What to Do?

> A daily chemical brand A frequently receives feedback from distributors that its XH category is losing money and unsellable. After calculation, the overall ROI for brand A's products is 18.1%, but the XH category is only 4.1%, far below the industry average. The reasons include lower gross margin, higher operating costs, and more capital tied up. By optimizing distributor trade terms, such as adding conditional rebates and reducing cash and inventory days, the ROI can be improved to 17.1%, making the product attractive again.

**Click the image for details**
A daily chemical brand A has recently been receiving frequent feedback from distributors that its XH category is losing money and can't be sold. But this product has been selling for years; why is it now losing money? Where exactly is the loss? We must understand the reasons clearly to prescribe the right remedy.
★ Where is the loss? Why is it happening?
Company A has four product categories, so first, we need to calculate the return on investment (ROI) for these four categories to see if it's really as unsellable as the distributors say.
After calculation, the overall ROI for brand A's products at the distributor level is 18.1%, which meets industry standards, but the XH category is only 4.1%, lower than the company average and far below the industry average of 15%-20% ROI.
Under such a stark contrast, distributors feel it's not worth it. But which link in the XH category has the problem? We need to break down the ROI formula to see whether it's earning less, spending more, or investing more.
**▎ How much is earned**
From the gross margin perspective, the XH category has a gross margin of 6.9%, while the average gross margin is about 7.4%.
**▎ How much is spent**
The operating cost for distributors in the XH category is about 6%, while the average operating cost is 4.4%.
**▎ How much is invested**
  * Cash: Distributors need to advance expenses, with the reimbursement period for XH being 180 days. These expenses account for about 10% of the distributor's funds, equivalent to 18 days of total funds.
  * Inventory: The inventory days for the XH category are about 44 days.
  * Receivables: The accounts receivable days for the three categories are all about 50 days.
  * Payables: The company gives distributors a 30-day credit period for all categories.
After breaking down and comparing, three factors jointly lead to the low ROI for brand A's distributors:
  * Earning less: The gross margin is low, 0.5% below the average, and the lowest among the three categories.
  * Spending more: Operating costs are high, and close to the gross margin, so distributors may easily lose money on this category.
  * Investing more: Reimbursement of advanced expenses is slow, inventory days are high, tying up distributor funds. Distributors need 82 days for capital turnover, and capital turns only 4.4 times a year.
The deeper reasons are similar to those of most distributors:
  * Product aging leads to declining gross margins.
  * Rising costs: Sales expenses, management expenses, etc., keep increasing, and since the XH category accounts for a large share of sales, the cost allocation also increases.
  * Performance pressure: To meet targets, more stock is pushed, leading to increasing inventory.
At the same time, the company's management has not adjusted to market changes; processes are complex, communication chains are long, and reimbursement of distributor advanced expenses takes longer, further tying up distributor funds.
But the XH category is a sales contributor, so it can't be stopped. How can we make distributors willing to continue selling? The key is to let distributors make money; a business that doesn't make money won't last.
So how to make distributors earn money? Here is a method to share with you: through [**Optimization of Distributor Trade Terms**], improve distributor ROI.
★ How to make distributors willing to sell?
Distributor operating costs are the result of years of operation and cannot be compressed overnight. At the same time, individual distributor situations vary greatly, and optimizing one by one is difficult and time-consuming.
Therefore, starting from Company A itself, adjusting distributor trade policies is an efficient means applicable to most distributors. So what aspects can we start from?
**▎ Earn more**
  * Increase conditional rebates
  1. If XH category distributors meet KPI requirements, they can get an additional 2.5% rebate.
  2. KPI requirements: order quantity, outlets, active outlets, product distribution rate, inventory days, etc.
The gross margin for XH category distributors becomes 8.9% = 6.9% + 2.5%/(1+tax rate)*(distributor average purchase price/distributor average selling price) = 6.9% + 2.5%/1.17*(75.7%/82%) = 6.9% + 2% = 8.9%.
Assuming operating costs remain at 6%, the distributor's net profit margin becomes 2.9%.
**▎ Invest less**
  * Cash: Use information systems to improve efficiency, or optimize the reimbursement process, shortening the reimbursement period for advanced expenses from 180 days to 120 days.
  * Inventory: Reduce inventory days by lowering the company's inventory days requirement from 40 days to 30 days, and monitor distributor inventory to avoid excessive stockpiling.
The capital occupation days for XH category distributors are significantly reduced, and capital turnover frequency increases.
Capital occupation days:
From the previous 82 days = cash + inventory + receivables - payables = 180*10% + 44 + 50 - 30 = 82 days
Optimized to 62 days = cash + inventory + receivables - payables = 120*10% + 30 + 50 - 30 = 62 days
Capital turnover frequency:
From 4.4 times = 365 days / 82 days
Increased to 5.9 times = 365 days / 62 days
**▎ Willing to sell**
  * ROI: Raised to the industry average, making the product attractive again.
From the original 4.1% = net profit * capital turnover = 0.93% * 4.45 = 4.14%
Increased to 17.1% = net profit * capital turnover = 2.9% * 5.9 = 17.1%
The newly adjusted trade terms bring the ROI for XH category distributors back to the industry level. As long as selling XH products makes money, distributors will definitely be willing to continue selling. The remaining question is how to sell the products. We'll discuss that next time.
**Source: Weizhi**
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