---
title: "How Distributors Can Innovate Their Profit Models"
description: "A hen and a pig plan to open a restaurant selling ham and eggs, with the hen providing eggs and the pig providing ham. After reflection, the pig decides to back out, feeling the profit model is unfavorable—no future, only danger. Profit model, or business model, is about 'what to do to earn whose money.' Innovation is harder to discuss, but the aim is to explore business development possibilities, as each distributor's situation differs."
author: "王烈"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2016-06-18"
language: "en"
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---

# How Distributors Can Innovate Their Profit Models

> A hen and a pig plan to open a restaurant selling ham and eggs, with the hen providing eggs and the pig providing ham. After reflection, the pig decides to back out, feeling the profit model is unfavorable—no future, only danger. Profit model, or business model, is about 'what to do to earn whose money.' Innovation is harder to discuss, but the aim is to explore business development possibilities, as each distributor's situation differs.

_A hen and a pig planned to open a restaurant together, selling ham and eggs. The hen would provide the eggs, and the pig would provide the ham. After thinking it over, the pig decided to give up, feeling that the profit model of this business was not good. For it, there was no future, but definitely danger._

Profit model, also known as business model, is a set of ideas and methods about **"what to do to earn whose money"**. Wherever there is business, there is a business model.

Explaining profit models clearly is not easy, and discussing innovation is even harder. The purpose of sharing is to explore the possibilities of business development. Since each distributor's business situation is different, the direction of effort naturally varies. Let me briefly introduce the concepts and various possible innovative approaches, so that everyone can see things from their own perspective and take what they need.

**First, let's talk about profit models.**

Let's first look at what the "conventional profit model" of distributors is.

To avoid being too scattered, let me give you a "business model" framework as a main line, so you can interpret your own business along these lines:

**"What to sell"**: This refers to the product portfolio, including tangible products and intangible services, both of which are used to make money.

**"Who to sell to"**: This refers to customer segmentation. Who are your target customers? Those who buy your things.

**"What to do"**: How to reach target customers? This is the issue of customer development. How to maintain cooperation with customers? This is the issue of daily front-end operations.

**"Why you"**: Why do target customers choose to cooperate with you continuously? This is a big question and the focus of the business model. For example, are you the customer's only choice? The safest choice? The most profitable choice? We summarize these as customer relationships—not about giving gifts or entertaining, but about "Why you?" and "Why always you?"

These four types of questions combined are the basic questions of a profit model, and they are **questions about the external environment**. Your description of these four questions might be: "I represent seven brands from four manufacturers across three major product categories. I sell them to large supermarkets, small and medium supermarkets, and wholesalers in six counties outside the city. All customers are long-term relationships. We follow orders with payment before delivery. I am the regional general distributor; they can only get goods from me." See, a conventional profit model looks roughly like this.

Let me add some more content to discuss **internal issues** to make the interpretation more complete:

**"What do we have"**: People, money, and things—these are the core resources.

**"What to manage"**: What internal management issues are there to do this business well? Logistics systems? Information systems? KPI systems? These management activities ensure the business can be maintained and developed.

**"Who to partner with"**: This refers to partners in the industry and supply chain. For distributors, "partners" often include manufacturers, but there may also be investors, industry alliances, etc.

The interpretation of the profit model is not over; in fact, we have reached the most critical point. Since it is a profit model, we naturally need to answer **"how much to sell, how much to spend, how much to earn, and how much to invest"**. This is the cost structure and sales profit part of the model.

**Let's talk about market-based innovation.**

Using this profit model framework, we have interpreted the current state of the business. For each of the nine aspects mentioned, there can be unconventional practices, and combined with the combinations of these nine aspects, a large number of innovation possibilities emerge. Among these combinations, only a few are feasible and can be turned into action plans. It's not worth mentioning them; innovation for the sake of innovation will inevitably lead to shameful failure.

In the traditional society of the past three thousand years, business profit models have hardly changed, because the economic and political environment has not changed qualitatively. In the past thirty years, distributors' profit models have basically been "buy low, sell high, earn the difference". Some have started to provide "value-added services", but even so, they are not more advanced than the various trading firms and foreign firms of earlier times.

Why can we talk about innovation now? The premise for profit model innovation is **"information has become fast and cheap"**. The times have given us this opportunity. Change is bound to happen; the difference lies in which path to take and who will lead.

Let's explore innovation from the four basic questions: **"customer segmentation, service methods, product portfolio, and customer relationships"**.

**1) From distributor to e-commerce:**

**Customers change from distribution channels to consumers, and service methods are mainly based on stores on platforms. This is not difficult. There are many professional e-commerce service companies in society that can help you achieve all this within a month. At this point, "customer relationships" become a big problem: Why should consumers choose you? Exclusive sales? Lowest price? Safety guarantee? Service efficiency? Any one of these will pose huge challenges to other factors in the profit model, such as core resources, key actions, and partners.

Entering e-commerce almost means investing in a new field, where our distributors seem to have no special advantage. If we rashly apply the 1/7 rule for "new products entering new markets", to be polite, the odds of success for distributor innovation are unlikely to exceed 15%.

**2) From distributor to logistics provider:**

**Most distributors already play this role, that is, "the manufacturer's sales staff do the market, and the distributor is responsible for delivery and collection". If we apply the profit model analysis again, we will find that this is a dangerous position, meaning there is no way out:

- What you sell is logistics services, which will be replaced by professional logistics companies within 10 years (in fact, logistics giants are planning for 5 years);
- Your core resource is capital, which will be replaced by close cooperation between manufacturers and commercial financial systems (product finance is a hot topic now);
- You need to profit through scale and low cost, which poses extremely high challenges to your internal systematic management (think about why IT giants are all setting up logistics companies).

In this role, either upgrade to a professional logistics provider, or downgrade to fourth- and fifth-tier remote cities to survive a little longer, or gradually rot in this position, nourishing new life as humus. Actually, this is not about innovation; it's about basic survival, a philosophical question that black-and-white TVs, pagers, film, and Hamlet have all considered.

**3) From distributor to channel service provider:**

**From a profit perspective, distributors sell "products + services". Selling products yields gross profit and rebates; selling services yields commissions. I wrote an article explaining this view back in 2002, when it could still be considered innovation; now it's just common sense. In this model, distributors not only sell products but also channel services.

The innovation lies in the level of channel services—an innovation of degree—providing ultimate channel services to meet the needs of demanding manufacturers. Ultimate channel services (including logistics services, financial services, channel development, and daily operation and maintenance) answer the question "Why you?" to both manufacturers and retailers simultaneously, and are the guarantee of continuing to make money by selling products. The higher the service quality, the higher the barrier, and the stronger the irreplaceability, which often means excess profits. The real challenge on this path lies in "key actions" and "core resources", especially the "business team" factor among core resources, which is the biggest obstacle to channel transformation and a common headache for distributor bosses. However, for distributors to achieve innovative breakthroughs, this path has the highest success rate and is the safest approach when the future is unclear. Even in the worst case, it can ensure you get a higher premium from acquirers.

**4) From distributor to category operator:**

**Let's turn the profit model upside down: "customers" are manufacturers, "products" are regional brand promotion services, and "business partners" are various retail terminals in the region. Because distributors have their own retail networks, they become the local operators for several well-known manufacturers, becoming "regional category monopolists". From this perspective, forming a close alliance with retail channels is the core and the threshold for distributors as "brand operators": first, you must be irreplaceable to retailers, then you can be irreplaceable to manufacturers.

This is still not an innovative concept. More than a decade ago, a distributor in South China tried to introduce the foreign CPFR model to China. CPFR is an acronym for four English words, translated as "Collaborative Planning, Forecasting, and Replenishment". In the CPFR concept, distributors cooperate with a large number of retail terminals, jointly formulate promotion plans, and conduct sales forecasting and replenishment, similar to "contracting" a certain category or department of the terminal, and being responsible for the final performance of that category or department.

At the same time, by aggregating retail terminal resources and achieving scale, distributors have stronger bargaining power with manufacturers, securing more benefits to feed back to retail terminals. Sounds familiar? This is the "package operator" movement surging in South China and East China. Since it is just starting, young package operators may make some mistakes in product selection, price control, and logistics management, with a feeling of villagers who suddenly become rich and wear leather pants, but this does not prevent it from being an advanced profit model.

The "key actions" of a brand operator are the ability to manage categories, optimize product portfolios based on shopper needs, and, based on efficient information management systems, have real-time control over downstream customers' inventory and sales. This is not easy to achieve; such management talent is hard to find. Ultimately, it comes down to finding and retaining talent.

**5) From distributor to supply chain operator:**

**A few years ago, in a Wrigley candy project in Vietnam, I met Bill, a Malaysian Chinese who was a distributor for Vietnam, Laos, and Cambodia (the wholesale markets in these countries commonly use Cantonese; if interested, consider going abroad to earn income). The products for these three countries were produced in Guangzhou, and Bill's company sub-packaged them in Ho Chi Minh City, including regular and promotional packs. Almost all operations for Wrigley in these countries, such as sales plans, promotion plans, order logistics, etc., were completed by Bill's company. He expanded horizontally across several countries and vertically integrated multiple links, making him a supply chain operator.

There are more dazzling cases in the industry. In the pharmaceutical industry, Cardinal Health is a banner. This trading company, founded in 1970, has ranked within the top 50 of the Fortune 500, far ahead of Procter & Gamble and Unilever. It is a pharmaceutical distributor, but it believes its customers are all entities in the healthcare chain, including patients, and it rethought "what to sell"—**"Customers do not buy products, but quality, safety, and efficiency in the medical process"**. So their "product portfolio" became: "Provide unprecedented services to all links in the industry chain. Help patients feel better and recover faster; provide the widest range of products and services in the industry to help the entire industry improve quality, safety, and efficiency in all aspects of patient care." Under this model, they extended downstream services from selling goods to dispensing systems, medical device allocation, waste drug liquid treatment, etc., and expanded upstream services to targeted R&D for pharmaceutical companies. This is a typical supply chain operator.

Eternal Asia is a leading supply chain service provider in China. In 2009, Eternal Asia proposed the 380 Plan, covering 380 cities and developed counties, with 2 million retail terminals, accounting for nearly half of the 4.6 million terminals counted by AC Nielsen. This network has been initially built. Eternal Asia is a listed company with public information; you can check online if interested. This is the beginning of a major transformation. Following Eternal Asia, Jack Ma's 1688 platform and Cainiao Logistics, JD's new channel, and the O2O Wanda e-commerce jointly operated by Baidu, Tencent, and Wanda, are all B2B efforts moving in this direction. According to the development experience of the US, Europe, and Japan, it may be within 15 years that these super supply chain service providers will have integrated the Chinese retail service market. By then, China may be divided among 50-100 large supply chain service providers. The time and numbers mentioned here may not be accurate, but I believe this trend is inevitable and in line with economic development laws. If you have the strength and ambition, become the supply chain integrator in your category; if you have strength but no ambition, wait to sell yourself to Eternal Asia and its ilk for a good price; if you have neither strength nor ambition, then actively adjust your mindset, "stay away from upside-down dreams, and ultimately achieve nirvana".

**Innovation based on internal management**

The previous discussion focused on innovation through external cooperation. Profit model innovation can also start from within the enterprise. In the past few years, colleagues at SMI Consulting have been promoting the "profit center" management model to enterprises, which we believe is correct and efficient. This idea originates from Mr. Kazuo Inamori's "Amoeba Management" concept: a company makes money because every link makes money. Manage every link like a vegetable stall, making each link profitable, and the enterprise will inevitably be profitable. This idea undoubtedly applies to distribution enterprises and distributor companies.

Each brand department of a distributor has always been a profit center, and each brand department can be clearly seen through its income statement. The key is how to turn functional departments into vegetable stalls, making warehousing, fleet, administration, and finance all profit centers. This is the focus and difficulty of "Amoeba Management". Simply put, it means setting prices and costs for their actions, and profits naturally arise. SMI colleagues have been promoting the "ecological law", which is to give principles and environment, let employees manage themselves, so that management is most efficient and the enterprise is most profitable. Profit centers can help distributor friends effectively implement the ecological law. As for the specific operating methods of Amoeba Management, let's dig a hole first and talk about it later; you might also buy a book by Mr. Inamori to read.

To summarize the above, distributor innovation can be considered from **external and internal** aspects. Externally, based on the business profit model, **with the core of thinking about "what to sell", "who to sell to", "how to sell", and "why you"**, we conceive innovative paths. We have provided several innovative options for your consideration. Internal innovation is less risky. **How to use the "profit center" model to maximize revenue and minimize costs, and mobilize employees' abilities to achieve profit maximization** is a win-win topic.

-END-

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