We are a start-up hair care company that has been utilizing social media to launch our product to the masses. Channel Margins Tool by Harvard Business School.Do some research within your industry to determine the standard discount rates and margins expected by distributors, wholesales, and/or retailers. Or it may guide you to support fewer channels initially. But failing the 7x COGs check doesn’t mean you’re doomed - your industry may function with smaller margins across channels. It’s not a hard and fast rule, it’s simply a guideline for quickly determining if you “can” support various sales channels - including distributors. Hopefully I’ve shed some light on the quick formula of 7x COGs. So, after the long explanation, the answer is still, it depends. Which isn’t the end-of-the-world, it simply presents different challenges. Unless your industry works on lower margins across the sales channels you may be forced to sell only to retailers and to consumer directly. But if the consumer will only pay $40 it’s likely you’ll have to forgo distribution initially (distributors will often expect to pay 70% off MSRP - so $12 on a $40 MSRP). That is, if your product costs $10, the quick formula 7x COGs would suggest an MSRP of $70. You may be forced to abandon distribution and wholesale and offer only direct to retailer and/or direct to consumer sales. If 7x margin is typical, but for some reason your final MSRP is out-of-whack with the standard accepted price, this simply might mean you can’t support several levels of distribution. You will need to do your research to determine the typical margins. This type of margin isn’t standard in all industries or across all products. First, your industry may not support 7x multiples through the channels. Whatever the cause, market pressures, competition, higher initial costs, if you can’t establish an MSRP at 7x COGs it doesn’t mean the situation is dire. If your MSRP isn’t 7x COGs it doesn’t mean the end-of-the-world. In this case you’re stuck again accepting a lower MSRP and lower margins (and should probably find a new supplier). ![]() Of course they can sell the product cheaper - to them direct to consumer sales offer big margins - so if they’re aggressive on pricing, it’s still more profit for them. ![]() Or perhaps you’re competing against a manufacturer that is direct selling - and in the worst case - that’s also your supplier. But if the market and your customers are unwilling to accept a premium price you’ll have to establish a MSRP close to the established market price - or spend heavily to create and support your premium brand position and pricing. Perhaps you’re establishing a premium brand and paid extra for better ingredients or materials - this by default will create a higher cost to you. There are many factors that might contribute to reduced margins across your sales channels and/or a lower MSRP than the 7x COGs formula would dictate. Of course determining your actual MSRP and discount rates is hardly ever as simple as multiplying your costs of goods by seven. The quick formula of 7x COGs is merely a handy guide to determine if you’re “able” to support various, typical discount levels across various sales channels. ![]() There are many factors that will determine your overall MSRP and various discount levels (for distributors, retailers, etc.). But this has led to many follow-up questions from blog readers asking if they should use the 7x COGs formula to determine their MSRP and subsequent channel discounted pricing. In my prior blog “ How to price your product for retail, distributor, and direct to consumer sales” I allude to and then expand upon in the comments a quick rule of thumb equation for determining your MSRP.
0 Comments
Leave a Reply. |