Relationship between Sales and Distribution

Establishing and maintaining a channel network for products with extensive distribution is a resource-intensive and time-consuming endeavour. While there are advantages to expanding the distribution network, it is essential to consider both the benefits and costs involved. As manufacturers broaden their distribution reach, they eventually reach an optimal level where the incremental gains from adding more outlets may not outweigh the expenses associated with servicing them. Furthermore, retailers need to evaluate their return on inventory for the products they carry. If the return on inventory is insufficient to justify listing of an item in some stores, retailers may choose not to stock it in those locations.

To know whether it is cost-effective, manufacturers need an understanding of how much sales and profits they stand to gain from further expansion in distribution, and how much this will cost them.

Exhibit 31.2 provides a visual representation of the relationships between the sales and distribution. Let us consider the scenario in the exhibit where a brand has sales amounting to $2,000,000 and a weighted distribution of 40%. Now, the sales manager aims to develop plans to enhance the brand’s distribution and is interested in understanding the potential sales growth that could be achieved by increasing the distribution.

If the relationship between sales and distribution is linear, doubling distribution from 40% to 80% will result in doubling of sales to $4,000,000. Sales will increase to $3,000,000 if distribution is expanded to 60% and $2,500,000 if it grows to 50%.

The linear model, however, is theoretically unsound because it suggests no cannibalization of sales between stores, no store switching behaviour, and a homogenous trade channel.

It is more realistic to assume either a logistic or an exponentially declining relationship between sales and distribution. Most products that are launched with substantial marketing efforts and investments would tend to exhibit an exponentially declining relationship, where incremental sales from expansion in distribution, decline with increase in distribution. As the velocity of sales decreases with expansion of distribution into smaller stores, it becomes increasingly less viable for these smaller retailers to stock the brand, and for the manufacturer to distribute it.

Like the exponentially declining functional form, the logistic relationship captures the notion of saturation. This is the point at which cannibalization offsets the impact of any further gains in distribution on sales. The logistic relationship also assumes that at low levels, the impact that distribution has on sales will be constrained due to factors such as lack of awareness. This may hold true for products that have limited advertising and rely on their in-store presence and in-store initiatives to gain share of mind.