What it means
Producers use resellers to reach more customers than they could serve alone. The reseller buys at a wholesale price, adds its own services and sells at a higher price, and the gap pays for its costs and profit.
Sellers often prefer this to handling thousands of small customers themselves. There are several kinds of reseller.
A retailer sells to the public, a distributor supplies other businesses and shops, and a value-added reseller bundles the product with extras such as installation, training or software. Each kind earns its margin by doing a job the producer would rather not do.
Producers and resellers usually sign an agreement that sets the prices, minimum purchases, territories and any rebates. These terms drive the reseller's profit, so finance teams on both sides model them carefully.
A small change in the discount tier can swing the reseller's profit by several percentage points. For the reseller's accounts, a key question is whether it acts as a principal or an agent.
A principal controls the product before it passes to the customer and records the full sale price as revenue, while an agent only arranges the sale and records just its commission. The reseller carries risks that the producer does not.
It must fund the stock, bear the risk that goods do not sell and collect payment from customers, so its working capital needs are high. Many resellers rely on bank facilities to pay suppliers before they are paid by customers.
A reseller's margin is often squeezed from both sides. The producer may raise wholesale prices, and customers can compare prices online, so successful resellers differentiate through service, speed or expertise.
Those that compete only on price tend to struggle.
In practice
Real-world examples
Example 1
An office-technology reseller buys laptops at $800 and sells them to small businesses at $920, with a five-day delivery promise. Its margin is 120 / 920 = about 13%. It makes extra profit by selling three-year support contracts with each machine. The support income is steadier than the margin on hardware.
Example 2
A food distributor buys cheese from a dairy at $6 per kilogram and sells it to restaurants at $7.50. Its gross profit is $1.50 a kilogram, or 20% of the selling price. With a monthly volume of 40,000 kilograms, gross profit is $60,000. Delivery costs and spoilage then come out of that figure.
Example 3
A software reseller sells a licence at $10,000 and receives a 30% discount off the list price from the vendor. It earns 10,000 x 0.30 = $3,000 on each licence. It records only that margin as revenue if it is acting as an agent for the vendor. If it takes on the risk of the product, it may record the full price instead.
Think of it
Think of a reseller like a bookshop. The author writes the book and the publisher prints it, but the bookshop buys copies in bulk at a discount and sells them to readers, making a profit on each sale.
Formula
Calculation
Reseller gross margin = (Resale price - Purchase cost) / Resale price
Markup = (Resale price - Purchase cost) / Purchase cost
Suppose a reseller buys a product for $80 and sells it for $100. Gross profit per unit is 100 - 80 = $20. The gross margin is 20 / 100 = 20%, and the markup is 20 / 80 = 25%. On 1,000 units, gross profit is 20 x 1,000 = $20,000, from which the reseller must still pay its running costs.Case study
Seen in the real world
Summit Audio is an illustrative, fictional reseller of professional sound equipment. It bought speakers from a manufacturer at $500 and sold them at $650, which gave a 23% gross margin.
When the manufacturer started selling directly online at $620, Summit's sales fell by a third. The owners realised that customers were buying from them mainly for price, which they could no longer win.
They shifted to selling complete systems with installation and training, at average prices of $5,000 and margins of 35%. In this illustrative story, sales volume was lower but gross profit rose, because customers valued the service and paid for it. The owners now track gross profit per customer as well as units sold.
Watch out
Common mistakes
- Confusing margin with markup, which leads to prices that deliver less profit than planned.
- Ignoring the cost of holding stock and extending credit, which can erase a thin margin.
- Recording the full sale price as revenue when the business is really acting as an agent.
Questions
People also ask
What is the difference between a reseller and a distributor?
A distributor usually buys in bulk and supplies other businesses or retailers, while a reseller sells to end customers, though the words overlap.
Do resellers need a licence?
Some products and sectors need licences or authorisation from the producer, and tax registration is usually required, but the rules depend on the country.
How do resellers make money besides the margin?
Many earn rebates from the producer, and income from services such as installation, training and support. Services are often more profitable than the products themselves.