Channel margins are simply the difference between the price paid by the buyer and the cost to the seller at that point in the distribution channel. Channel margins can be expresses on a per-unit basis or as a percentage of selling price. In “chaining” the margins of sequential distribution channels, the selling price of one channel member becomes the “cost” of the channel member for which it serves as a supplier.
The purpose of channel margins is to evaluate channel value in the context of selling price and the effect of price changes at one level of channel on prices and margins at other levels in the same channel (supply chain).
Channel margin (%) = 100 x [Margin ($) ÷ Selling price ($)]
Note: When there are several levels in the distribution chain—including a manufacturer, distributor, and retailer, for example—one must not simply add all channel margins as reported in order to calculate “total” channel margin. Instead, use the selling prices at the beginning and end of the distribution chain (that is, at the levels of the manufacturer and the retailer) to calculate total channel margin. Marketers should be able to work forward from their own selling price to the consumer‘s purchase price and should understand the channel margins at each step.
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.