Shining some light on cost and profit  

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I came across this post when I was looking for methods of making silk flowers over the weekend. The woman writing is outraged at the "profit" that is being made on flower pins. Of course, I respect the fact that she's explaining how to make them for a fraction of that. But is Nordstrom's price anything to be outraged about and is anyone really raking in huge profits? The norm in the retail industry is that retail price is between six and twelve (yes, twelve) times the price of manufacture. Here's why - sorry, it's long but it needs to be -

If you sell via a distributor (not just a wholesaler, but a distributor with a sales force who will actually sell your work into shops) then this is how it works. Let's take a retail price of $60 for an item.

Firstly, there is sales tax. Let's assume it's around 10%, it's far more in many places, so the 60% is actually about $54 plus sales tax (approximately - I'm rounding things up for clarity).
Wholesaler discount - between 45% and 55% (depends on quantity usually). At an average, $27 paid to the distributor. Many retailers demand a bigger discount.
Distributor cut - 15% of price paid. 15% of $27 is $4.20.
All in all, the payment to the maker is approximately $22.80.

Out of this, the maker has to pay -

  • Shipping to the distributor/s - say $0.50 per item (varies a lot of course)
  • Marketing - again, huge variations, but let's say it averages at 3% or so - i.e. a bit less than $2 per $60 item. I actually think this is on the low side when you take into account all the time as well as money that needs to go into effective PR and marketing.
  • Losses and returns - this tends to take off 10% at least. Unfortunately a lot of stuff gets damaged with all this transit and storage between maker, distributor and wholesaler. It's normal to just hit the maker for this if it's damaged before it actually gets to the retailer.

So the maker gets around $18. That means that their cost, including their actual production costs, shipping and import duties if the goods come from abroad, their own salaries, rents etc, should not be more than $9 as you need to allow about a 100% mark-up on basic production cost. This is because generally the reality is that there will be losses like "seconds" - with factory goods you have to allow around 5% of these - and also things that simply don't sell or aren't popular, go out of fashion, have to be discounted etc.

In conclusion - on an item that sells for $60, the maker is lucky to make around $9 profit if their total manufacturing costs (including their own salaries, overheads etc, but not including marketing which I've costed separately) are $9. In other words, no outrageous profits are being made. Particularly if you consider that profits on some successful items have to cover losses on the things that just don't take off. In other words, the maker is very unlikely to get anything like all of that $9 as actual profit that they can put in their pocket - after tax.

If you are planning to make a living from design and production - of whatever - please be aware of these kinds of figures. Amazingly many people aren't and think that if they can make something for $10 and retail it for $20, that's great. Actually, it's not viable if you are working via conventional sales channels. I understand that at the outset it's virtually impossible to get costs low and keep quality high - even the most basic six to one production/retail ratio probably can' t be done until you are making thousands, not dozens, of items; and as we all know from some of the awful mass-production quality out there, it's not easy even when you are large.

So what do you do? Well, there are ways of managing all this nonetheless. I'll say more about them in the next post.

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