Buyback contracts

Last week a post looked at supply chains and showed that supply chains are usually inefficient and that leads to fewer units being sold.

One way to improve the situation is through revenue sharing contracts (for example Apple), another is through a buyback arrangement, also known as sale or return.

This works because it reduces the risk that the retailer is left with units that they cannot sell.

In order to reduce this risk a buyback arrangement allows the retailer to sell some or all of the unsold units back to the wholesaler. This shares the risk between the retailer and the wholesaler and means that the number of units that the retailer is willing to take will be higher, so they will sell more, and the wholesaler and retailer together will get closer to maximum profits.

The usual examples of this are in a retail situation, however it occurs in other places too.

For example, ebay offer an insertion fee credit if your item doesn’t sell and you re-list it. This is effectively a buyback situation. You pay ebay a fee to buy the listing, if it doesn’t sell then you return the listing and get your money back. You only get the refund if you agree to re-list the item so it isn’t a full buyback but it works on the same principle.

Today’s takeaway: Offering a buyback arrangement allows the retailer to take more risk and sell more items. Can you do this in your business?

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