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The ladder / How the levels connect

Mind maps

How the levels connect

The four levels are not separate worlds. They are links in one chain, and these mind maps show how.

Think of any product you sell or use: a tyre, a packet of biscuits, a motor. Before it reaches the customer, it passes through many hands. Someone develops the idea or the technology. Someone makes it. Someone sells it under a brand through dealers. Someone else moves it in bulk to the shops. Each of these businesses earns its money at a different point along the way.

Management books call this the industry "value chain". In plain words: the chain of businesses a product passes through, from raw material to the final customer, with each one adding something and taking a share of the money. (Strictly, "value chain" on its own means the chain of activities inside a single company; the chain across companies is the industry value chain.)

The maps below use three kinds of line. Every box is a link: tap a sub-level to read about it on its level page. The customer boxes jump to where the customer's money goes.

  • Goods (solid line)
  • Money (dashed line)
  • Knowledge or technology (dotted line)

1. A product's journey: the whole ladder on one map

The centre of the map is a product's journey. It branches into the four levels, and each level into its sub-levels. The arrows between boxes show what actually moves between these businesses.

This map is wide. On a phone, scroll it sideways, or use the list under it, which says the same thing in words.

A product's journey: how the four levels connectMind map. The centre, a product's journey, branches to the four levels: New products and services, Manufacturer, Dealer and Trader, each with its sub-levels listed in order, from x.1 at the bottom up to the highest at the top. Arrows show goods (solid), money (dashed) and knowledge or technology (dotted) moving between sub-levels and on to the customer.A product's journeyA product's journeyLevel 4: New products and services. Open the level page.Level 4 · New productsand services4.4 Deep tech or platform company: You turn new scientific or engineering knowledge into products.4.4 Deep tech4.3 Own R&D and patents: You develop your own technology and protect it, usually with patents.4.3 Own R&D + patents4.2 Product startup on licensed or open technology: You build a new product or service by combining technology you license, or that is freely available (open-source software, published methods, standard components), with your own design, and sell it under your own brand.4.2 Product startup4.1 Technology licensee: You license a technology developed by a laboratory or institute (such as a CSIR laboratory, an ICAR institute or an IIT, directly or through NRDC) or by a company, Indian or foreign, and make and sell the product.4.1 LicenseeResearch labs and institutesResearch labsand institutesLevel 3: Manufacturer. Open the level page.Level 3 · Manufacturer3.5 Own-brand manufacturer (the OEM): You make, or have made for you, products sold under your own brand.3.5 Own brand (OEM)3.4 Commodity or bulk manufacturer: You make a standard product with your own process and materials and sell it to many buyers at the market price.3.4 Commodity / bulk3.3 Component supplier (Tier 2, then Tier 1): You make parts that go into another company's product.3.3 Tier 2 / Tier 1 supplier3.2 Contract manufacturer (including ODM and EMS): You make complete products that another company sells under its own brand; that brand is the OEM.3.2 Contract manufacturing3.1 Job worker: You carry out a process, such as machining, plating, heat treatment, printing or stitching, on goods that belong to someone else, and charge for the work.3.1 Job workLevel 2: Dealer. Open the level page.Level 2 · Dealer2.5 Master franchisee or regional distributor: A brand gives you the right to develop its business across a large region.2.5 Master franchise2.4 Multi-outlet dealer group or multi-unit franchisee: You run several dealerships or franchise outlets, of one brand or several, across towns or a state.2.4 Dealer group2.3 3S dealer (sales, service, spares): You sell the brand's products, service them in your own workshop, and stock its genuine spare parts, all under one roof.2.3 3S dealer2.2 Authorised dealer (sales): You have an agreement directly with the brand to sell its products in a territory, following its rules on display, prices, stock and targets.2.2 Authorised dealer2.1 Sub-dealer: You sell a brand's products in a smaller town or area, but you buy from the brand's authorised dealer or distributor, not from the brand itself.2.1 Sub-dealerLevel 1: Trader. Open the level page.Level 1 · Trader1.5 Importer, exporter or trading house: You buy goods from other countries, sell goods to other countries, or run trading branches in many cities.1.5 Importer / exporter1.4 Super stockist or C&F agent: You work one step closer to the company, for a whole region.1.4 Super stockist / C&F1.3 Wholesaler or distributor: You buy in bulk and sell to other businesses (shops, hotels, offices) rather than to final customers.1.3 Wholesaler / distributor1.2 Shopkeeper or retail stockist: You buy goods, keep them in your own shop, godown or online store, and sell them to final customers.1.2 Shop / retailer1.1 No-stock seller: You sell, or arrange the sale of, goods or services without ever owning or storing goods.1.1 No-stock sellerThe customerThe customer: a household, a shop owner, a businesstechnology licencelicence fee, royaltypatent licenceroyaltydesignmakes theproductraw materialparts: Tier 2 →Tier 1 → OEMmakes forthe brandprocessed partsvehicles,genuine sparesproductsFMCG routesuper stockist pays · C&F agent earns a commissionsuppliessell to customersimportedgoodssells; supplier orplatform delivers
Each branch lists its sub-levels in order, from x.1 at the bottom up to the highest at the top, like the rungs of the ladder. Ideas and technology (dotted lines) flow from research and product startups into factories. Goods (solid lines) flow from factories through dealers or traders to the customer. Money (dashed lines) flows back the other way at every step, and that is how each business is paid. On the FMCG route, goods go from the brand to a super stockist or C&F agent, then a distributor, then a shop; in vehicles, from parts makers to the brand and then through its dealers.

The same map as a list

Level 4: New products and services (4 sub-levels)

Open the new products and services page

Level 3: Manufacturer (5 sub-levels)

Open the manufacturer page

Level 2: Dealer (5 sub-levels)

Open the dealer page

Level 1: Trader (5 sub-levels)

Open the trader page

Outside the ladder

2. Where does the money get split?

When a customer pays for something, that money is shared out along the chain. Each business keeps the difference between what it is paid and what it paid the step before. A trader or dealer uses that difference to pay its own rent, salaries and interest, and keeps the rest as profit. For the maker, the amount it receives must also pay for material and making, so its share is not comparable with a trader's margin.

The two maps below use made-up prices to show the arithmetic. Real margins vary widely by product, brand and region.

Hypothetical A ₹100 packet of biscuits

Where the money goes: A ₹100 packet of biscuits (Hypothetical)Chain from Biscuit brand (the OEM), Super stockist, Distributor, Kirana shop to the customer, showing what each step receives and keeps or earns. Goods move down the chain (solid arrows) and money moves up (dashed arrows). Hypothetical numbers.Biscuit brand (the OEM) · 3.5. 3.5 Own-brand manufacturer (the OEM): You make, or have made for you, products sold under your own brand.Biscuit brand (the OEM) · 3.5gets ₹76: pays its own costs from itSuper stockist · 1.4. 1.4 Super stockist or C&F agent: You work one step closer to the company, for a whole region.Super stockist · 1.4keeps ₹4 (4% of ₹100)Distributor · 1.3. 1.3 Wholesaler or distributor: You buy in bulk and sell to other businesses (shops, hotels, offices) rather than to final customers.Distributor · 1.3keeps ₹5 (5% of ₹100)Kirana shop · 1.2. 1.2 Shopkeeper or retail stockist: You buy goods, keep them in your own shop, godown or online store, and sell them to final customers.Kirana shop · 1.2keeps ₹15 (15% of ₹100)CustomerCustomer pays ₹100pays ₹76pays ₹80pays ₹85pays ₹100
  • Kirana shop sells at ₹100 and buys at ₹85: ₹100 − ₹85 = ₹15. It keeps ₹15, which is ₹15 ÷ ₹100 × 100 = 15% of what the customer paid. Because it sells to the customer, this is also its margin on its own selling price.
  • Distributor sells at ₹85 and buys at ₹80: ₹85 − ₹80 = ₹5. It keeps ₹5, which is ₹5 ÷ ₹100 × 100 = 5% of what the customer paid. As a margin on its own selling price: ₹5 ÷ ₹85 × 100 = 5.88%.
  • Super stockist sells at ₹80 and buys at ₹76: ₹80 − ₹76 = ₹4. It keeps ₹4, which is ₹4 ÷ ₹100 × 100 = 4% of what the customer paid. As a margin on its own selling price: ₹4 ÷ ₹80 × 100 = 5%.
  • Biscuit brand (the OEM) receives ₹76, but has to pay for its material, making, freight and advertising from it: ₹76 ÷ ₹100 × 100 = 76% of what the customer paid.
  • Check: ₹76 + ₹4 + ₹5 + ₹15 = ₹100.

Hypothetical A ₹1,000 two-wheeler spare part

Where the money goes: A ₹1,000 two-wheeler spare part (Hypothetical)Chain from Tier 2 supplier, Tier 1 supplier, Vehicle brand (the OEM), 3S dealer to the customer, showing what each step receives and keeps or earns. Goods move down the chain (solid arrows) and money moves up (dashed arrows). Hypothetical numbers.Tier 2 supplier · 3.3. 3.3 Component supplier (Tier 2, then Tier 1): You make parts that go into another company's product.Tier 2 supplier · 3.3gets ₹200: pays its own costs from itTier 1 supplier · 3.3. 3.3 Component supplier (Tier 2, then Tier 1): You make parts that go into another company's product.Tier 1 supplier · 3.3earns ₹280 (28% of ₹1,000) before costsVehicle brand (the OEM) · 3.5. 3.5 Own-brand manufacturer (the OEM): You make, or have made for you, products sold under your own brand.Vehicle brand (the OEM) · 3.5earns ₹270 (27% of ₹1,000) before costs3S dealer · 2.3. 2.3 3S dealer (sales, service, spares): You sell the brand's products, service them in your own workshop, and stock its genuine spare parts, all under one roof.3S dealer · 2.3keeps ₹250 (25% of ₹1,000)CustomerCustomer pays ₹1,000pays ₹200pays ₹480pays ₹750pays ₹1,000
  • 3S dealer sells at ₹1,000 and buys at ₹750: ₹1,000 − ₹750 = ₹250. It keeps ₹250, which is ₹250 ÷ ₹1,000 × 100 = 25% of what the customer paid. Because it sells to the customer, this is also its margin on its own selling price.
  • Vehicle brand (the OEM) sells at ₹750 and buys at ₹480: ₹750 − ₹480 = ₹270. It earns ₹270, which is ₹270 ÷ ₹1,000 × 100 = 27% of what the customer paid. As a share of its own selling price: ₹270 ÷ ₹750 × 100 = 36%. It earns this before paying its own costs, such as making and any other material, so it is not profit.
  • Tier 1 supplier sells at ₹480 and buys at ₹200: ₹480 − ₹200 = ₹280. It earns ₹280, which is ₹280 ÷ ₹1,000 × 100 = 28% of what the customer paid. As a share of its own selling price: ₹280 ÷ ₹480 × 100 = 58.33%. It earns this before paying its own costs, such as making and any other material, so it is not profit.
  • Tier 2 supplier receives ₹200, but has to pay for its material, making and freight from it: ₹200 ÷ ₹1,000 × 100 = 20% of what the customer paid.
  • Check: ₹200 + ₹280 + ₹270 + ₹250 = ₹1,000.

Two things to notice. First, the shop or dealer closest to the customer often earns the biggest trading margin in the chain (₹15 of ₹100 for the kirana against ₹4 and ₹5 for the traders before it), but it also carries the shop, the stock and the credit. The makers' shares can be bigger, but makers also pay for material and making out of them. Second, a long chain (four steps for biscuits) leaves each trader a thin slice, which is why distributors live on volume and fast stock turns. See margins and markups and effective margin for dealers.

3. How do you move between levels?

Businesses rarely jump straight to the top. They climb, using what they learned on one rung to reach the next. These are four common climbs. They are not the only ones, and the ladder's numbers are not a strict order: a licensee (Level 4) may be climbing into manufacturing at the same time.

How do you move between levels? Common climbsFour common climbs between sub-levels: From shop to dealership: Shopkeeper or retail stockist to Wholesaler or distributor to Authorised dealer (sales); From job work to your own brand: Job worker to Contract manufacturer (including ODM and EMS) to Own-brand manufacturer (the OEM); From trading to making, through a licence: Importer, exporter or trading house to Technology licensee to Own-brand manufacturer (the OEM); From your own brand to your own R&D: Own-brand manufacturer (the OEM) to Technology licensee to Own R&D and patents.1. From shop to dealership1.2 Shopkeeper or retail stockist: You buy goods, keep them in your own shop, godown or online store, and sell them to final customers.1.2Shop/ retailerTrader1.3 Wholesaler or distributor: You buy in bulk and sell to other businesses (shops, hotels, offices) rather than to final customers.1.3Wholesaler/ distributorTrader2.2 Authorised dealer (sales): You have an agreement directly with the brand to sell its products in a territory, following its rules on display, prices, stock and targets.2.2AuthoriseddealerDealer2. From job work to your own brand3.1 Job worker: You carry out a process, such as machining, plating, heat treatment, printing or stitching, on goods that belong to someone else, and charge for the work.3.1Job workManufacturer3.2 Contract manufacturer (including ODM and EMS): You make complete products that another company sells under its own brand; that brand is the OEM.3.2ContractmanufacturingManufacturer3.5 Own-brand manufacturer (the OEM): You make, or have made for you, products sold under your own brand.3.5Own brand(OEM)Manufacturer3. From trading to making, through a licence1.5 Importer, exporter or trading house: You buy goods from other countries, sell goods to other countries, or run trading branches in many cities.1.5Importer/ exporterTrader4.1 Technology licensee: You license a technology developed by a laboratory or institute (such as a CSIR laboratory, an ICAR institute or an IIT, directly or through NRDC) or by a company, Indian or foreign, and make and sell the product.4.1LicenseeNew products3.5 Own-brand manufacturer (the OEM): You make, or have made for you, products sold under your own brand.3.5Own brand(OEM)Manufacturer4. From your own brand to your own R&D3.5 Own-brand manufacturer (the OEM): You make, or have made for you, products sold under your own brand.3.5Own brand(OEM)Manufacturer4.1 Technology licensee: You license a technology developed by a laboratory or institute (such as a CSIR laboratory, an ICAR institute or an IIT, directly or through NRDC) or by a company, Indian or foreign, and make and sell the product.4.1LicenseeNew products4.3 Own R&D and patents: You develop your own technology and protect it, usually with patents.4.3Own R&D +patentsNew products
Each arrow is a common next step. Tap a box to read about that sub-level.
  1. From shop to dealership: 1.2 Shop / retailer → 1.3 Wholesaler / distributor → 2.2 Authorised dealer. A shop that starts supplying other shops grows into a wholesaler. A wholesaler that has shown it can stock, sell and collect in a territory may be appointed a distributor by a company, and is then in a good position to apply to become a brand's authorised dealer.
  2. From job work to your own brand: 3.1 Job work → 3.2 Contract manufacturing → 3.5 Own brand (OEM). A job worker that buys its own material and delivers finished parts or products moves into contract manufacturing. A contract manufacturer that learns design and builds its own way to reach customers can launch its own brand.
  3. From trading to making, through a licence: 1.5 Importer / exporter → 4.1 Licensee → 3.5 Own brand (OEM). An importer that knows a product's market can license the technology to make it in India, from a laboratory, an institute or a company, Indian or foreign, and then sell it under its own brand. It needs factory skills (Level 3) as well as the licence.
  4. From your own brand to your own R&D: 3.5 Own brand (OEM) → 4.1 Licensee → 4.3 Own R&D + patents. An own-brand manufacturer can start with licensed technology, then improve it, build its own product and engineering team, and in time develop and patent technology of its own.

Not sure where you want to go? Take the self-evaluation, which suggests a level and a sub-level that fit what you want and what you can commit.

4. Two example chains

Two everyday products, followed from raw material to the customer. They are generic: real companies organise their chains in many ways.

A packet of biscuits (FMCG)

A packet of biscuits (FMCG)Mind map of a packet of biscuits moving from commodity makers to the biscuit brand, then through a C&F agent or super stockist, a distributor and a kirana shop to the customer, with a contract manufacturer making for the brand.Flour, sugar and oil makers. 3.4 Commodity or bulk manufacturer: You make a standard product with your own process and materials and sell it to many buyers at the market price.Flour, sugar and oil makerssub-level 3.4Biscuit brand (the OEM). 3.5 Own-brand manufacturer (the OEM): You make, or have made for you, products sold under your own brand.Biscuit brand (the OEM)sub-level 3.5Contract factory. 3.2 Contract manufacturer (including ODM and EMS): You make complete products that another company sells under its own brand; that brand is the OEM.Contract factorysub-level 3.2Super stockist or C&F agent. 1.4 Super stockist or C&F agent: You work one step closer to the company, for a whole region.Super stockist or C&F agentsub-level 1.4Distributor. 1.3 Wholesaler or distributor: You buy in bulk and sell to other businesses (shops, hotels, offices) rather than to final customers.Distributorsub-level 1.3Kirana shop. 1.2 Shopkeeper or retail stockist: You buy goods, keep them in your own shop, godown or online store, and sell them to final customers.Kirana shopsub-level 1.2CustomerCustomeringredientsrecipepackspays for packsbrand's stockcaseson creditone packet
The brand may make the biscuits itself or pay a contract factory to make them to its recipe; either way they are sold under the brand's name. From the brand's depot, a super stockist buys the stock and supplies distributors. Some brands use a C&F agent instead: it holds and dispatches the brand's stock without buying it, for a commission, and the distributors pay the brand. Distributors supply shops, often on credit. Money comes back up the same chain.

As a list

Level 3: Manufacturer

Open the manufacturer page

Level 1: Trader

Open the trader page

Outside the ladder

A two-wheeler part

A two-wheeler partMind map of a two-wheeler part, such as a brake assembly, moving from raw material makers through a job worker and Tier 2 and Tier 1 suppliers to the vehicle brand, then through its 3S dealer to the customer, with a second route through spare-parts distributors and shops.Steel and material makers. 3.4 Commodity or bulk manufacturer: You make a standard product with your own process and materials and sell it to many buyers at the market price.Steel and material makerssub-level 3.4Tier 2 supplier (sub-parts). 3.3 Component supplier (Tier 2, then Tier 1): You make parts that go into another company's product.Tier 2 supplier (sub-parts)sub-level 3.3Job worker. 3.1 Job worker: You carry out a process, such as machining, plating, heat treatment, printing or stitching, on goods that belong to someone else, and charge for the work.Job workersub-level 3.1Tier 1 supplier (assembly). 3.3 Component supplier (Tier 2, then Tier 1): You make parts that go into another company's product.Tier 1 supplier (assembly)sub-level 3.3Vehicle brand (the OEM). 3.5 Own-brand manufacturer (the OEM): You make, or have made for you, products sold under your own brand.Vehicle brand (the OEM)sub-level 3.53S dealer. 2.3 3S dealer (sales, service, spares): You sell the brand's products, service them in your own workshop, and stock its genuine spare parts, all under one roof.3S dealersub-level 2.3Spares distributor. 1.3 Wholesaler or distributor: You buy in bulk and sell to other businesses (shops, hotels, offices) rather than to final customers.Spares distributorsub-level 1.3Spares shop. 1.2 Shopkeeper or retail stockist: You buy goods, keep them in your own shop, godown or online store, and sell them to final customers.Spares shopsub-level 1.2CustomerCustomermaterialjob workbackjob-work chargesub-partsassembliesaftermarketvehicles, sparesfitted
A job worker processes the Tier 2 supplier's own material, sends it back and is paid a job-work charge; under GST the goods stay the owner's. The Tier 1 supplier sells assemblies to the vehicle brand, which sells vehicles and genuine spares through its dealers. Where its contracts allow, a parts maker may also sell replacement parts through distributors and spare-parts shops (the aftermarket).

As a list

Level 3: Manufacturer

Open the manufacturer page

Level 2: Dealer

Open the dealer page

Level 1: Trader

Open the trader page

Outside the ladder

What this means for you

  • Know your neighbours on the map. The businesses just before and after you decide your prices, your credit and your stock. Treat them as part of your business.
  • Follow the money back. Wherever goods move one way, money has to come back the other way. The slower it comes back, the more of your own money is stuck. See Cash before profit.
  • Watch who holds the brand. The OEM, the company whose name is on the product, sets the rules for its suppliers upstream and its dealers downstream. See OEM or commodity manufacturing for the suppliers' side and what a dealership gives and costs. An app that brings your customers does the same for a small seller: see new platform micro-businesses.
  • Climb from where you are. Each level stands on the ones below it. A new product still has to be made well (Level 3), sold through a network (Level 2), and run with cash discipline (Level 1).

Start with the level closest to your own business: Level 1: Trader, Level 2: Dealer, Level 3: Manufacturer or Level 4: New products and services. Words you don't know? See plain words.