As a small to medium-sized business owner, you are probably aware that opening a new sales channel can be an exciting process: New sales channels can mean accelerated growth and increased revenue, and the idea of reaching new customers is understandably appealing to business owners.
What you might not be aware of, though, is how new sales channels can often represent pitfalls that can ultimately hurt a business. Sales channels often come with hidden costs that — without careful analysis — can make them unprofitable. In this article, we will explain what sales channels are, and then describe in more detail how to calculate whether a new sales channel will be profitable for your business.
What is a sales channel?
Put simply, a sales channel is a method that a business uses to deliver its products or services to customers. Sales channels can be broken into two broad categories: Direct channels and indirect channels.
Direct sales channels are the ways that a business’ products get to customers most directly. For food and beverage manufacturers, examples of direct sales channels include:
- Brick-and-mortar retail stores, like bulk food retailers who directly sell a business’ products.
- Online stores and ecommerce platforms that don’t go through third-parties, and which directly connect a business to its customers, like a business’ own website.
Indirect sales channels, in contrast, are the ways that products get to customers through intermediary means. Examples of indirect sales channels include:
- Resellers, who sell a business’ products on its behalf, like how cell phone brands are often promoted at the brick-and-mortar stores of cell phone service providers.
- Independent sales agents, like insurance salesmen, who are paid on commision when they sell a business’ products.
- Affiliates, or third-party businesses who use the primary business’ sales process to independently sell its products, and who are paid only when sales are made.
Why is it important to track sales channel profitability?
More than ever, food manufacturers have the ability to capitalize on new sales channel opportunities: The ecommerce sector, for instance, has grown by nearly 20% in the past few years, and new sales channels like pre-packaged meal delivery services have begun to overtake more traditional, retail style channels. Thanks in no small part to the pandemic, food manufacturing sales channels are undergoing a kind of revolution, and food and beverage manufacturing owners need to be aware of these new opportunities.
New sales channels aren’t always profitable, though. The hidden costs associated with new channels can make them unprofitable on the whole, even if they seem to be facilitating sales. Food manufacturing owners should ensure that they are calculating sales channel profitability carefully in order to avoid pitfalls. Understanding sales channel profitability isn’t just a preventative measure, either: Ranking sales channels and understanding which channels are most profitable can be the basis of a proactive sales approach.
How to calculate sales channel profitability
So, now that you know why calculating sales channel profitability is important, you may be wondering about how where to begin. First, unlike other kinds of data about your business, sales channel profitability isn’t calculated using a straightforward formula: Whereas inventory spoilage, for instance, can be expressed as a simple percentage, sales channel profitability is a complex measure that involves taking into account many different metrics. It can help to think of sales channel profitability in the same way you would think about key performance indicators (KPIs) that describe your business, and to approach calculating it by paying attention specific, crucial metrics:
- Total channel marketing and sales cost to channel revenue ratio. This metric describes the ratio of capital spent on marketing and developing a certain sales channel to the revenue that channel generates. Profitable sales channels, as a general rule, should only cost about 30% as much to market and develop as the revenue they generate. If the new ecommerce platform your beverage manufacturing business has partnered with is charging fees that represent 50% of the total revenue it is generating for your business, for example, it probably isn’t a profitable channel.
- Return on market development funds. This important metric helps business owners determine the return they are getting on the cash they spend to market a new sales channel. The most profitable sales channels will, unsurprisingly, cost very little in marketing development compared to the amount of sales they generate. Use this metric to rank sales channels and understand which are the best and worst performing.
- Total and average revenue per partner. Partners are kinds of indirect sales channels as described above, and could be resellers or affiliates, among other things. This metric provides owners with an easy way to rank them, and to understand which partners are the most profitable. Because of the complexity of some sales channels, it can be difficult to know which partners are most profitable through gut feeling, and data-driven analysis using metrics like this one can help paint a clearer picture.
This is only a few of the most important metrics food manufacturers should be using to calculate sales channel profitability, of course. And, if these concepts seem foriegn or difficult to you, you aren’t alone: Most business owners aren’t financial experts, and analysis of this kind can be daunting to non-experts. If calculating the profitability of your sales channels seems like a good idea to you, consider outsourcing the services of a virtual CFO or other accounting professional.
How Krieger Analytics can help
So, now that you know how a CFO would benefit your business as it prepares to calculate sales channel profitability, you might be wondering if you have the means to hire one. And rightfully so: A full-time accounting executive can demand a 6 figure salary, and most small businesses don’t have 40 hours of high-level accounting work to be done every week. Consider, instead, outsourcing the services of a virtual CFO. Even 10 hours worth of consultation with a virtual CFO in a month can mean tangible benefits for your business’ financial health.
Krieger Analytics specializes in outsourcing accounting services for small businesses, from bookkeeping to virtual CFO and controller consultations, and our background in entrepreneurship and finance means we know what running a business entails. Our goal is to meet your small business accounting needs without burdening you with the costs of a full-time accounting staff. And, we understand your position as a small business owner, because we have experience running businesses ourselves.
Have questions about anything discussed in this article, or interested in what valuable insights a CFO and former franchisor has for your business? Conversations are free, so don’t hesitate to reach out at [email protected], and let us explain how our services could be the right fit for you.