Margin by channel: reconstructing the full cost to serve.
Key distinctions
Three conditions before calculating.
Comparable net price
Discounts, credit notes, financing, trade co-operation and taxes must be restated to obtain the revenue genuinely retained per order.
Activity-based cost
Assign costs according to the activities triggered: acquisition, picking, delivery, return, invoicing, dispute and support. A uniform percentage hides the expensive orders.
Channel incrementality
A positive unit margin does not imply that the channel creates value if it displaces more profitable direct sales. Value the transfers with the margin given up.
Method
Building a profit and loss account by channel
- 01Define the unit
Choose order, customer, contract or shipment according to the cost mechanism; segment by basket, area, weight, return and service level.
- 02Trace the activities
Connect each cost to its driver — order, line, parcel, kilometre, contact, day of credit or return; document the capacity steps.
- 03Compute the contribution
Net revenue − product − commission − payment − logistics − return − service − variable acquisition; present fixed costs separately.
- 04Test the transfer
Estimate the genuinely new share, the cannibalised share and the effect on bargaining power; compute the incremental contribution of the channel.
Two €100 orders broken down to contribution
Direct and marketplace are compared on an identical basis. The costs change in nature, not only in level.
Direct
€15Marketplace
€19The marketplace advantage disappears beyond 21% of orders transferred from direct.
CSVDownload the channel-cost model↓The marketplace produces €4 more per order
On a €100 order, direct carries €40 of product, €8 of logistics, €3 of payment, €6 of returns, €4 of service and €24 of acquisition. The marketplace adds €18 of commission but reduces those lines to €6, €0, €5, €2 and €10.
Direct: 100 − 40 − 8 − 3 − 6 − 4 − 24 = €15. Marketplace: 100 − 40 − 18 − 6 − 5 − 2 − 10 = €19. The gap is +€4 before channel transfer.
The marketplace is preferable for genuinely new orders. If more than 21% of its orders replace direct at €15, the unit advantage of €4 is cancelled.
Acceptance conditions
What must be true to act.
- 01
The net price includes every discount and trade co-operation.
- 02
Each cost is connected to an activity and to a measurable driver.
- 03
Capacity steps are separated from strictly variable costs.
- 04
The cannibalised share is valued before any channel extension.
Limits
What this analysis does not prove.
- Shared costs require allocation conventions that are debatable.
- Bargaining power and access to data change with volume.
- A short-term margin sometimes ignores the strategic value of coverage.
References
Works cited.
- Kaplan, R. S. & Cooper, R. (1998), Cost & Effect.
- Niraj, R., Gupta, M. & Narasimhan, C. (2001), “Customer Profitability in a Supply Chain”, Journal of Marketing.
- Coughlan, A. T. et al. (2006), Marketing Channels.