---
title: "Distributors: Why Higher Sales Volume Means Lower Gross Margins, and What to Do About It"
description: "As market dividends fade and competition intensifies, many distributors work hard all year only to find they've made no money. The question is: where did the profits go? The answer lies with the distributors themselves—their control over operations and management largely determines their gross margins. This article explains how to analyze and improve gross margins from five dimensions and offers four practical methods to boost profitability."
author: "刘华明"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2020-06-28"
language: "en"
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# Distributors: Why Higher Sales Volume Means Lower Gross Margins, and What to Do About It

> As market dividends fade and competition intensifies, many distributors work hard all year only to find they've made no money. The question is: where did the profits go? The answer lies with the distributors themselves—their control over operations and management largely determines their gross margins. This article explains how to analyze and improve gross margins from five dimensions and offers four practical methods to boost profitability.

As market dividends gradually fade and competition intensifies, many distributors work hard all year only to find they've made no money. This raises a question: where did the profits go? It doesn't seem to be with the manufacturers—although they set heavy tasks, most provide sufficient profit margins. Nor is it with consumers, who end up paying fairly high prices. Ultimately, it's in the hands of the distributors themselves. With gross margins often in the double digits, manufacturers provide both expense support and sales rebates, yet distributors end up with a comprehensive gross margin of only a few points, or even losses. It's not that there's no profit; rather, distributors' improper operations lead to shrinking comprehensive gross margins. **A distributor's ability to control their own operations and management largely determines their comprehensive gross margin.** So how can they increase it?

**-01-**
**First, understand where gross profit comes from.**
Let's look at the formula: **Sales Gross Profit = Sales Revenue × Gross Margin Rate**. Simply put, increasing gross profit starts with sales revenue and gross margin. Many distributors know this—just sell more high-margin products and stabilize the gross profit from main products.
That's the simplest understanding. Looking deeper, sales revenue and gross margin depend on the combination of products, channels, and the resulting mix.
**Distributors need to clarify which products and channels contribute to sales, and what the gross margins are for those products and channels.** Once this is clear, you'll find many more ways to improve gross margins.
**Specifically, analyze from five dimensions: time, product, channel, region, and organization.**
From a time perspective, different time points yield different gross margins. For example, during major holidays, when the market is short of supply and demand is strong, you can sell at relatively higher prices, resulting in higher gross margins. Conversely, in off-seasons, demand is low, so you can't sell at high prices, and gross margins are relatively lower.
From a product perspective, different products have different gross margins. If your company's products are all for circulation with no high-margin products, a problem arises: your performance may be excellent, with large sales volume—say, hundreds of millions a year—but at year-end, you might earn less than a company with tens of millions in sales. Therefore, product mix is crucial: you need both high-volume products to open the network and high-margin products to provide high profits.
From channel and region perspectives, different channels have different markup rates. Generally, large stores have high sales volume, which compresses gross margins, while small stores can have higher markups because your delivery and after-sales service costs are relatively higher.
From an organizational perspective, salespeople's abilities also significantly impact gross margins. Many distributors will notice that some salespeople are skilled at communicating with terminals, providing value-added services to command higher prices, and have the ability and skill to negotiate.
**In one sentence: What time, what product, where, through whom, and to whom are you selling?**

**-02-**
**How to increase comprehensive gross margin?**
Take a specific case: Distributor Lao Liu in a county-level market has annual sales of 8 million yuan. Due to market competition, product gross margins have been declining, leaving only 14.7%, while other distributors of the same type have over 15%, indicating problems in market operations compared to peers. Moreover, manufacturers won't invest much in distributors with smaller sales volumes because the market isn't large. To address this, here are four specific methods:

**Method 1: Stabilize the price system**
Price stability is the foundation for increasing gross profit, so prices must be controlled. Most distributors have digital tools; set minimum prices in the system backend to ensure terminal prices cannot be arbitrarily changed. Especially for salespeople, regular training is essential to prevent them from altering prices and disrupting the price system. Reinforce to salespeople the concept that the price given to terminal owners is already low, and they can only help terminals through value-added services, such as better service, product display, store materials, and increased channel expenses.
Tell terminal owners about the risks of accepting parallel imports: many are counterfeit or near-expiry, and if problems arise, no one will take responsibility—high risk.
For wholesale stores and stores with competitive advantages, assign dedicated personnel to communicate, preferably with the boss personally. After communication, these customers can be treated specially, with prices adjusted appropriately, but overall prices should remain stable and not change arbitrarily.

**Method 2: Precise expense allocation**
Some stores may have had good sales before, with high expenses, but now sales have dropped significantly, yet expenses haven't decreased—or even increased due to good relationships. This is unreasonable; the expense-to-sales ratio is not cost-effective.
Distributors should use systems to monitor terminal store sales, movement status, and gross profit contribution. Reduce expenses for stores with low return on investment, optimize expense support, and focus on high-output stores.
Second, strictly assess stores: strengthen display execution standards; for stores that don't meet standards, resolutely cancel display expense support. Delegate expense authority to salespeople, who should rank stores when investing expenses. Reward stores with high sales contributions; if performance is poor, cancel expense support.

**Method 3: Adjust product structure**
Based on current market sales, compare with last month's data and the same period last year. Standardize and review each area's targets, distribution, scheduling, performance incentives, and last year's data. Focus on incentivizing core high-margin categories and actively adjust the product mix.
Have the clerk create a table:
List all products, their current sales, stock levels, sales targets, and terminal fit, comparing with last month and the same period last year to see if key products have improved.
Set higher target values for key products to increase attention and increase rewards—for example, 0.5 yuan per box for regular products and 2 yuan per box for core products—to stimulate terminal retail stores to proactively adjust their product mix. Core products have high enough gross margins, so higher rewards are fine.

**Method 4: Reduce product returns**
Product returns affect company profits. Returned products require free exchanges for customers, and often need promotional discounts to sell, reducing gross margins.
First, control distribution reasonably during the stocking phase. Don't let salespeople push stock to terminals just for performance. If they overstock, movement will be poor, salespeople take their commissions, and goods are returned, with losses borne by the distributor. So salespeople should avoid overstocking; if they do, it should be to large stores or those with fast movement.
Second, salespeople should focus on product dates when distributing. Distributed products should primarily be from the previous month, and dates must not be older than competitors'. Goods with older dates should be collected and placed in large stores or stores with good movement. For small stores, product dates should at least match competitors' or be better, so sales can roll and improve.
You can also collect these older-date products and return them to townships or large exhibitions for promotions, avoiding pressure on small stores.
Finally, for small-volume items with low sales, do a monthly return of the previous month's products to modern channels for movement.
Returning to the initial case, Lao Liu achieved significant results through these improvements. Sales gross margins improved continuously: from 14.7% in July to 15.3% in August, reaching 16.5% in September, exceeding the average of other distributors in the same company.
For distributors, gross profit is a key indicator of whether the business is profitable. By sorting through data to identify directions for increasing gross profit, providing a basis for correct decisions, and focusing on breakthroughs, is a required course in the distribution business.

About the author: Liu Huaming, Partner and Senior Consultant at Sima Consulting, MBA from Sun Yat-sen University. Dedicated to helping consumer goods companies unlock marketing potential and solve regional expansion challenges.


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