Market Research Margins2018-09-15T07:03:11+00:00

Market Research Guide
Investigating The Market
For A New Product


  1. Market Research
  2. The Target Market Segment
  3. The Competition & Market Trends
  4. Sales Channels & Required Margins
  5. Determining Product Price
  6. Sales Volume & Market Share
  7. Hurdles & Barriers To Market Entry
  8. Financial Planning & Analysis

4.  Sales Channels & Margins:
How Will Customers Buy The Product?


It is critical to understand the the possible sales channels for your product and their required profit margins, because this information, in combination with the price that the end customer will be paying is used to determine the upper limit on how much it can cost to manufacture your product.


A sales or distribution channel is the path a product takes between being manufactured and ultimately sold to the end customer. Sometimes the sales channel is as simple as a business that actually makes the product selling directly to the end customer. However, many times the sales channel is more involved. For example, the product may pass from the manufacturer, to a distributor, to a retail store, and only then to a customer.


Many new inventors have visions of seeing their product on the shelves of major retail stores. However, they are often shocked to learn that it can be very difficult, if not impossible, to sell directly to a large retail store.


With regards to major retailers, many may be unwilling to work directly with an unestablished business selling just a single (or even a few) products. The expense, hassle, and risk just isn’t worth it to them. They prefer to deal directly with large distributors who stock in quantity many of the products the retailer will be ordering and can provide a high level of service.


This is comparable to the way it is more convenient and cost effective for consumers to shop at a single large mall, or large retailer, that carries many of the items they are looking for, rather than making multiple trips to multiple small stores. Even if a large retailer will deal directly with your business it can be very difficult. Large retailers have been known to demand huge upfront payments for placing a product in their stores, insist upon unique packaging, be very slow to pay, and demand that the seller both accept, and pay for, the shipping and return of any unsold merchandise.


It is not necessarily an easy thing to have a distributor accept your product. They will often need to be convinced that carrying your product is a good thing. As a seller you will have to demonstrate the product features, packaging, and also demonstrate what type of marketing and advertising you will be doing to support sales of the product.


Some businesses use outside sales representatives who operate businesses that may already have established relationships with retailers. A sales representative can use their relationships to help open doors at retail stores for your product.


Accordingly, research needs to be done about the sales and distribution channels in the market you are entering. When investigating sales channels for the product it is also important to get an understanding of the required margins of the sales channels. Many inventors are shocked to learn from such research that the price their product will sell for on a retail store shelf to a customer may often be four or five times what it costs to actually have the product manufactured.


The basic reason for this is that before the product gets into the hands of a paying end customer, depending upon the sales channel, it may have passed through the hands of multiple other businesses, each of whom will increase (or markup) the price of the product to their direct customer by the amount of their required gross profit margin.


For example, let us say that your product is a combination flashlight/radio, and that you will have it manufactured in a factory somewhere. It costs the factory $10 in parts (e.g. the purchase of radio electronics and flashlight bulbs) and labor (direct wages paid to employees who assemble the flashlight/radio from the parts). The factory however is in business to make a profit for its owners. This means that the factory must charge you an amount over its direct cost. The amount of the price that is over the direct cost will be the factory’s gross profit (or margin).


Money from gross profit is used to pay for indirect costs like overhead (e.g. the amortized cost of the factory building), administrative and selling expenses, warranty obligations, etc. . . AND also to provide a net profit for the owners after all of the indirect costs are taken care of.


Let us assume that in our example, the factory will want to charge a price to you that includes a 50% gross profit over the direct cost of the flashlight/radios. This 50% is the factory’s gross margin. This means that the factory charges you $15.


The $15 you pay the factory will be your direct cost (also known in accounting lingo as the "cost of goods sold"). Like the factory, you are also in this venture to make a profit. So, like the factory, you will charge a price that covers your direct "costs of goods sold", other indirect expenses associated with your business (e.g. development expenses, sales and administrative expenses, customer service, etc. . .), and which leaves you with a profit sufficient to justify the risk and expense you have undertaken.


The amount your price is over your "costs of goods sold" will be your gross margin. Let us assume that your required gross margin is also 50%. This means that the price you sell the product for will be $22.50 ($15 x 1.5).


If you will not be selling directly to the end customer, but rather through a retail store, than the sales channel will continue on further, and may include a distributor as well as the retail store. Just like the factory and you, they will include their required gross margins in the price charged to their customers.


Depending upon the distributor, retail store, and product the additional gross margins charged by the distributor and retailer could add up to as high as %100. If this is the case the retail store would sell the product to an end customer for $45.00 ($22.50 x 2). This is more than four times what it cost the factory to make the product.


The customer doesn’t care about costs or profit margins, only about the price they will have to pay for the product. Accordingly, if you can’t manufacture the product for a cost that, after adding on the required margins of everybody in the sales channel, will result in a price the customer is willing to pay, then there is little chance that the product will succeed commercially.


So it is very important to have an understanding of the sales channels and their required margins. It is also important to have a reasonable prediction of what customers will be willing and able to pay for the product.


Previous Guide Section
Next Guide Section


Market Research Guide
Investigating The Market
For A New Product


  1. Market Research
  2. The Target Market Segment
  3. The Competition & Market Trends
  4. Sales Channels & Required Margins
  5. Determining Product Price
  6. Sales Volume & Market Share
  7. Hurdles & Barriers To Market Entry
  8. Financial Planning & Analysis

4.  Sales Channels & Margins:
How Will Customers Buy The Product?


It is critical to understand the the possible sales channels for your product and their required profit margins, because this information, in combination with the price that the end customer will be paying is used to determine the upper limit on how much it can cost to manufacture your product.


A sales or distribution channel is the path a product takes between being manufactured and ultimately sold to the end customer. Sometimes the sales channel is as simple as a business that actually makes the product selling directly to the end customer. However, many times the sales channel is more involved. For example, the product may pass from the manufacturer, to a distributor, to a retail store, and only then to a customer.


Many new inventors have visions of seeing their product on the shelves of major retail stores. However, they are often shocked to learn that it can be very difficult, if not impossible, to sell directly to a large retail store.


With regards to major retailers, many may be unwilling to work directly with an unestablished business selling just a single (or even a few) products. The expense, hassle, and risk just isn’t worth it to them. They prefer to deal directly with large distributors who stock in quantity many of the products the retailer will be ordering and can provide a high level of service.


This is comparable to the way it is more convenient and cost effective for consumers to shop at a single large mall, or large retailer, that carries many of the items they are looking for, rather than making multiple trips to multiple small stores. Even if a large retailer will deal directly with your business it can be very difficult. Large retailers have been known to demand huge upfront payments for placing a product in their stores, insist upon unique packaging, be very slow to pay, and demand that the seller both accept, and pay for, the shipping and return of any unsold merchandise.


It is not necessarily an easy thing to have a distributor accept your product. They will often need to be convinced that carrying your product is a good thing. As a seller you will have to demonstrate the product features, packaging, and also demonstrate what type of marketing and advertising you will be doing to support sales of the product.


Some businesses use outside sales representatives who operate businesses that may already have established relationships with retailers. A sales representative can use their relationships to help open doors at retail stores for your product.


Accordingly, research needs to be done about the sales and distribution channels in the market you are entering. When investigating sales channels for the product it is also important to get an understanding of the required margins of the sales channels. Many inventors are shocked to learn from such research that the price their product will sell for on a retail store shelf to a customer may often be four or five times what it costs to actually have the product manufactured.


The basic reason for this is that before the product gets into the hands of a paying end customer, depending upon the sales channel, it may have passed through the hands of multiple other businesses, each of whom will increase (or markup) the price of the product to their direct customer by the amount of their required gross profit margin.


For example, let us say that your product is a combination flashlight/radio, and that you will have it manufactured in a factory somewhere. It costs the factory $10 in parts (e.g. the purchase of radio electronics and flashlight bulbs) and labor (direct wages paid to employees who assemble the flashlight/radio from the parts). The factory however is in business to make a profit for its owners. This means that the factory must charge you an amount over its direct cost. The amount of the price that is over the direct cost will be the factory’s gross profit (or margin).


Money from gross profit is used to pay for indirect costs like overhead (e.g. the amortized cost of the factory building), administrative and selling expenses, warranty obligations, etc. . . AND also to provide a net profit for the owners after all of the indirect costs are taken care of.


Let us assume that in our example, the factory will want to charge a price to you that includes a 50% gross profit over the direct cost of the flashlight/radios. This 50% is the factory’s gross margin. This means that the factory charges you $15.


The $15 you pay the factory will be your direct cost (also known in accounting lingo as the "cost of goods sold"). Like the factory, you are also in this venture to make a profit. So, like the factory, you will charge a price that covers your direct "costs of goods sold", other indirect expenses associated with your business (e.g. development expenses, sales and administrative expenses, customer service, etc. . .), and which leaves you with a profit sufficient to justify the risk and expense you have undertaken.


The amount your price is over your "costs of goods sold" will be your gross margin. Let us assume that your required gross margin is also 50%. This means that the price you sell the product for will be $22.50 ($15 x 1.5).


If you will not be selling directly to the end customer, but rather through a retail store, than the sales channel will continue on further, and may include a distributor as well as the retail store. Just like the factory and you, they will include their required gross margins in the price charged to their customers.


Depending upon the distributor, retail store, and product the additional gross margins charged by the distributor and retailer could add up to as high as %100. If this is the case the retail store would sell the product to an end customer for $45.00 ($22.50 x 2). This is more than four times what it cost the factory to make the product.


The customer doesn’t care about costs or profit margins, only about the price they will have to pay for the product. Accordingly, if you can’t manufacture the product for a cost that, after adding on the required margins of everybody in the sales channel, will result in a price the customer is willing to pay, then there is little chance that the product will succeed commercially.


So it is very important to have an understanding of the sales channels and their required margins. It is also important to have a reasonable prediction of what customers will be willing and able to pay for the product.


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Next Guide Section