Compare a distributor discount with the cost of selling directly

A distributor's discount buys a commercial arrangement whose value depends on the work it performs. Compare the proposal with the selling, fulfillment, credit and support costs your business would otherwise carry. A large discount may be reasonable when substantial obligations move to the distributor, while a smaller discount can be expensive if nearly all the work remains with you.

Start with the proposed contract and the operational plan. Identify who finds customers, holds inventory, delivers orders, collects payment, handles returns and provides support. Record minimum commitments, territory restrictions and any requirement for marketing funds or price protection. Have the appropriate advisers review the agreement's legal and accounting implications.

Distinguish a purchase commitment from a sales forecast. An optimistic distributor projection does not create the same cash certainty as an enforceable order with defined acceptance and payment terms. The financial model should label each assumption according to the evidence behind it.

For direct sales, estimate product cost, sales compensation, advertising, order handling, delivery, payment costs and customer support under the chosen contribution definition. Include costs associated with unsuccessful selling activity when comparing a channel that performs that work. Looking only at the cost of processing a won order can understate the resources direct acquisition consumes.

Separate costs that can fall from those that remain. A distribution agreement does not immediately remove the salary of the employee who previously handled direct orders. If capacity can be redeployed, show the alternative work and its expected contribution. If staffing or software spending can be reduced, state when that change can realistically occur.

Use a consistent unit of comparison. A distributor buying a pallet differs from a direct customer buying a single item. Normalize the calculation to comparable volumes and periods while preserving the difference in packing, delivery and service requirements.

Assume a product sells directly for $100 and costs $35 to produce. Direct acquisition, order handling, delivery and support add $30 per unit under the model. The direct channel therefore leaves $35 per unit before excluded overhead and other costs.

A distributor proposes buying the product for $65. If production still costs $35 and the remaining shipment and account-support work costs $5 per unit, distributor contribution is $25. That is $10 lower per unit, even though much of the direct selling work has moved away. At 1,000 comparable units, the modeled difference is $10,000.

The distributor may reach customers the business could not economically acquire directly, or it may commit to predictable volume. Evaluate those benefits separately. If the distributor's sales merely replace the same 1,000 direct units, the contribution loss is different from a case where the 1,000 units are additional and existing direct demand remains unchanged.

Review rebates, promotional allowances, returns, chargebacks, damaged goods and price-protection terms. The invoice price may differ from the amount ultimately retained. Build the model from net expected proceeds and explain each adjustment rather than burying it inside a generic discount assumption.

Preserve purchase orders, delivery records, claims and credit notes that support the relationship. The IRS identifies invoices and other purchase and expense documents as records supporting business transactions. For a distribution review, those records also let finance compare quoted terms with actual deductions and investigate unexplained reductions in collections.

Ask who holds the risk of obsolete inventory and product changes. A distributor entitled to return unsold goods may provide less inventory relief than the initial shipment suggests. Model the relevant return or stock-rotation scenarios, and have the accounting owner assess the reporting consequences under the actual contract.

A distributor order may require a larger production run before payment arrives. Direct customers might pay at checkout, while the distributor pays after shipment or acceptance. The channel with lower selling expense can therefore require more working capital. Put purchasing, production, shipping and collection dates on the same timeline.

For example, a hypothetical $65,000 order may require $35,000 of production spending and $5,000 of delivery and account costs before collection. The business must fund that gap for the agreed period, even though the modeled contribution is positive. Include financing costs if applicable and examine what happens when payment is delayed.

Check concentration. One distributor can replace many small customer receipts with a few large balances. Set credit review and exposure decisions through the company's established process. The model should show the consequences of a delayed payment without asserting an unsupported probability that the distributor will default.

Agree the data needed for a commercial review before launching: units ordered, accepted shipments, net receipts, adjustments, returns and support effort. Where the arrangement includes sales-out reporting, define its frequency and permitted use. An increase in shipments to the distributor does not automatically prove end-customer demand has increased.

Review whether the promised work actually transferred. If your team still performs customer acquisition, technical support and collections, revise the cost model to match reality. Discuss the discrepancy with the distributor using the responsibility schedule and delivery evidence, rather than relying on the headline discount alone.

For renewal, compare net contribution, cash requirements and customer reach with the direct alternative now available. Approve specific changes to volume, territory, service responsibilities or commercial terms. Keep the decision grounded in the channel's observed economics and the obligations the next agreement will create.