Paper Napkin Math for Adding a Sales Channel

Some call it the Distribution Channel, I call it the Sales Channel.

A sales channel is for reaching customers and selling them your product.

If you made and sold cupcakes, your cupcake store is a sales channel.Customers walk in to buy your cream filled cupcakes and other goodies.

Suppose you want to reach customers who do not come to your store but are already visiting another store. You can sell to those customers if you make your cupcakes available in that store by cutting a deal with that store. For example, if you sell your cupcakes through local Whole Foods, that is yet another sales channel.

Your goal here is not about bringing those who buy the cupcakes at Whole Foods back to your store but to reach them where they are. For providing you this access, Whole Foods (or any other sales channel) will take a cut of the sales. That is the cost of hiring the sales channel.

Sales Channel unlocks value for you. It helps you reach new customers and likely different willingness to pay for your product.

These new customers are a different breed. They may not value your product the same way those who walk into your store do. The price they are willing to pay may be higher or lower.

For some sales channels, like GrouponLive, it is lower because of the way they have been trained to expect discounts. The You need to discount your cupcakes 25% (or more) and also give another 25% or more to Groupon as sales commission for making this sales possible.

You may be able to sell 1000 additional cupcakes per day with this new sales channel. But should you do it?

When is a sales channel profitable? Only when every sale is profitable. You need profit on every cupcake sold. If not, you are better off not adding the sales channel.  As the saying goes, you cannot make it up in volume if you are losing money on each unit.

 

When an App developer splits the 30% distribution fee with their customers

Apple is a powerful and ubiquitous distribution channel. It helps App makers and content creators reach a large market that is otherwise not available to most. The scale of this market and access comes with big revenues. For that kind of access, Apple takes 30% of the revenue generated.

For an App developer with no brand recognition outside of Apple’s channel and no access to customers, this is not a bad deal. They are comparing getting $0 with $0.7.

For others who already have established customer base, have autonomously built their brand outside of a device or distribution channel and simply want to serve their existing customer base through Apple’s channel, the 30% fee is unpalatable.

One such brand is The New York Times. Its monthly subscription for smartphone plus tablet costs $35 a month. Apple likely takes $10.5 of this.

What is Times doing? It is offering to share HALF of this $10.5 with its customers. They are doing it by offering   Sunday Print + All digital access for just $30.

Customer saves $5 over the Digital only option and Times gets the rest.

If you are wondering about marginal cost of Sunday Paper – most of the cost of printing a paper is sunk and any marginal cost is covered by Ads and inserts.

Net-Net : Customers and Times win by working around a costly channel.

See also: Math on App Store pricing