---
title: "How Can Distributors Make Easy Money? Let Me Calculate It for You Line by Line!"
description: "A distributor's profitability and ease of making money are directly related to their product portfolio. When selecting new products, besides considering whether the product has selling points, one must also think about how it fits with existing products. Among the products distributed, which ones are \"profit\" and which are \"weapons\"? Below, the editor of Dealer's Home calculates which portfolio model is best, analyzing as follows: the different characteristics of three types of brands."
author: "New Distribution"
publisher: "New Distribution"
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published: "2015-10-09"
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# How Can Distributors Make Easy Money? Let Me Calculate It for You Line by Line!

> A distributor's profitability and ease of making money are directly related to their product portfolio. When selecting new products, besides considering whether the product has selling points, one must also think about how it fits with existing products. Among the products distributed, which ones are "profit" and which are "weapons"? Below, the editor of Dealer's Home calculates which portfolio model is best, analyzing as follows: the different characteristics of three types of brands.

How can distributors make money and easily earn more profit? It is directly related to the distributor's product portfolio. When selecting new products, besides considering whether the product has selling points, one must also think about how it fits with existing products. Among the products distributed, which ones are "profit" and which are "weapons"? Below, the editor of Dealer's Home calculates which portfolio model is best, analyzing as follows:

Characteristics of Three Types of Brands
Based on the level of distribution gross margin, FMCG products can be broadly divided into three categories: first-tier brands, second-tier brands, and third-tier brands.

First-tier brands include world-class international brands such as Coca-Cola, Wyeth, Unilever, Nestlé, and Dove; they also include well-known domestic brands such as Wahaha, Yili, and Mengniu. Generally, first-tier brands have a low return on investment, commonly following the "6+1" or "7+1" profit model, i.e., 6%-7% distribution gross margin plus 1% annual rebate, with the highest distribution gross margin generally below 11%, and they usually implement a no-return policy. After deducting warehousing and distribution costs, personnel wages, expenses, losses, and taxes, net profit is minimal. However, first-tier brands have many advantages: strong brand support, fast-moving products, and the manufacturer provides a large terminal market maintenance team, making it relatively easy for distributors to operate such brands; distributors can obtain shorter payment terms or even cash settlement from downstream distributors, ensuring rapid capital turnover and basically no operational risk; large turnover, with regional annual turnover ranging from millions to hundreds of millions. First-tier brands are typically "must-stock" in channels, allowing distributors to quickly build sales networks and obtain favorable terms with retail outlets.

Second-tier brands usually refer to brands with high product quality, no large-scale brand operation, but providing proactive and skilled channel promotion support. The return on investment for second-tier brands is relatively high, typically between 12% and 20%. The characteristics of second-tier brands are as follows: brand awareness is generally low, some appear as regional brands; there is no terminal market maintenance team or the team is small, so terminal maintenance is the distributor's responsibility, with distribution gross margin including terminal maintenance costs of about 1%-1.5% of turnover; distributing second-tier brands can also achieve high turnover, with regional annual turnover reaching millions or more; payment terms for second-tier brand products in modern channels are longer, requiring significant capital and bearing corresponding bank interest; market management level is lower and less standardized, placing higher demands on distributors.

Third-tier brands have basically no brand awareness. They typically target low-income groups or narrow markets, or impact the market with prices far below first- and second-tier brands of similar products. The characteristics of third-tier brands are as follows: low brand awareness, opaque pricing, distribution gross margin can reach 30%-40% or more; due to lower quality and lack of good market planning, turnover is generally small, with regional annual turnover below hundreds of thousands; they are prone to slow sales, with high returns and losses; distributors bear the risk of market investment costs; product life cycles are short. Distributors operating third-tier brands face high risks, but due to distribution gross margins as high as 30-40%, it presents a picture of "infinite scenery at the perilous peak." Some distributors leverage their keen market observation to find products among the vast number of third-tier brands that meet local market demand, implementing "short, flat, fast" operations, and can also reap substantial rewards. Operating third-tier brands requires continuous elimination of products and introduction of new ones to address the short product life cycle.

Best Product Portfolio Model for Distributors
Let's first analyze the returns of investing one million yuan of working capital separately in each of the three types of brands.

Investing in first-tier brands: Assume distribution gross margin is 7%. Taking a typical warehouse sales model as an example: distribution cost 2%, personnel wages 1.2%, management expenses 0.3%, losses 0.2%, taxes 1.4%, monthly interest 0.5%. Assume payment period is 15 days, ignoring in-transit factors, capital can turn over twice a month. Monthly net profit: (7%-2%-1.2%-0.3%-0.2%-1.4%-0.5%) × 1,000,000 × 2 = 28,000 yuan.

Investing in second-tier brands: Assume distribution gross margin is 15%. Distribution cost 2.5%, personnel wages 1.2%, management expenses 0.4%, losses 0.3%, taxes 1.8%, monthly interest 0.5%. Assume payment period is 60 days (varies by region and outlet), ignoring in-transit factors, capital turns over once every two months. Monthly net profit: [(15%-2.5%-1.2%-0.4%-0.3%-1.8%)/2 months - interest 0.5%] × 1,000,000 = 39,000 yuan.

Investing in third-tier brands: Assume distribution gross margin is 30%. Distribution cost 3%, personnel wages 1.5%, management expenses 0.6%, losses 1.5%, taxes 2.2%, monthly interest 0.5%, market investment costs 6%. Assume payment period is 75 days (varies by region and outlet), ignoring in-transit factors, capital turns over once every two and a half months. Monthly net profit: [(30%-3%-1.5%-0.6%-1.5%-2.2%-6%)/2.5 months - interest 0.5%] × 1,000,000 = 55,800 yuan.

From the above analysis, we can see that investing solely in first-tier brands yields the least profit; investing solely in second-tier brands, despite longer payment terms, yields higher monthly profit; investing solely in third-tier brands yields the highest monthly profit.

In fact, if a distribution company operates solely with third-tier brands, although profits are highest, sales are very unstable, and it is difficult to establish influence in the channel, leaving negotiations with retail outlets at a disadvantage. Frequent "sudden death" of products can cause significant harm to the company's stable operations. Operating solely with second-tier brands, while profits and sales stability are relatively high, requires significant capital. Operating solely with first-tier brands, although sales are not a concern and risk is low, profits are not high.

Therefore, if a distribution company selects several brands from each of the three categories for a combined portfolio, it can complement the advantages of the three types, reduce opportunity costs, and achieve optimal returns and operational stability.

In this portfolio:

Tasks of first-tier brands: Bear the basic operating costs of the company, ensuring normal survival; bundle with second- and third-tier brands when negotiating with retail outlets to improve trading conditions for second- and third-tier brands, such as shortening payment terms and reducing fixed monthly and annual deductions; assist second- and third-tier brands in rapidly covering the sales network; dilute distribution costs, wages, and management expenses for second- and third-tier brands; fifth, contribute a certain amount of net profit.

Tasks of second-tier brands: After first-tier brands bear the basic operating costs, second-tier brands become the main profit contributors; since first-tier brands have large sales volumes, the distribution company must allocate significant personnel, warehouse space, vehicles, etc., which become a heavy burden if distribution rights are lost for some reason. At this point, second-tier brands can ensure the company's normal survival, enhancing its ability to resist risks; provide terminal market maintenance teams for third-tier brands.

Tasks of third-tier brands: With first- and second-tier brands as backing, third-tier brands further increase profit margins, and with careful control of losses, they can generate extremely high profits. Since third-tier brands have very small per-SKU turnover, their sales weight should not be too large; otherwise, too many SKUs can lead to management issues, reducing profitability.

Generally, for a well-developed distribution company, the optimal product portfolio model is to control the sales weight of first-, second-, and third-tier brands at 40%, 40%, and 20%, respectively. At this point, the return on investment per million yuan can reach about three times that of investing solely in first-tier brands. Specifically, the optimal number of brands is 1-2 first-tier brands, 4-6 second-tier brands, and 5-8 third-tier brands.

Source: Dealer's Home

**-END-**

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