Let’s take a phone merchand for example. Let’s say that he sells the phones for 500$, but his income from a phone is 50$ because they are sold 450$ from the factory. So, if just ONE phone isn’t sold, he’d lose 450$, and he’d need to sell 9 phones (450÷5) just to come back to the starting point.
This question also works for any kind of merchandizing, including food (which becomes unsellable after a few days unlike phones).
So how do they make profit of it ? I’m confused
This post is the same as a post I made 1 hour ago that corrects some words, sorry for my bad english.
In: Economics
You’re right that a 10% margin [margin being the percent of sale price that is profit] would be utterly unsustainable. Traditional merchants DON’T function on a 10% margin for exactly that reason.
The standard margin for stores is generally something like 30-70% depending on what they’re selling, where, and a few other factors.
There are merchants that have smaller margins, but they generally get around the issue by either:
1) Not ordering anything until after they’ve already sold it.
This is most commonly seen in the form of “dropshipping” nowadays, where the retail outlet never even touches the stock, they get the manufacturer or distributor to send it directly to the customer. [Amazon got started by doing this, and using “loopholes” in the implementation of wholesalers’ websites to make it work, pretending to make wholesale orders when they were actually making retail ones.]
2) Having a “sale or return” agreement with their wholesaler – wherein if they don’t sell something, they can send it back [or send proof it’s been destroyed, in some cases such as newspapers] and get their money back – so things they don’t sell don’t actually impact their bottom line.
Sometimes they have stocking deals with the manufacturer where unsold product gets returned and reimbursed.
Sometimes they do have to eat it, which is why stores generally dislike carrying large inventories of slow-moving items.
They don’t just buy and re-sell goods, they have sales contracts with each product manufacturer where they’ve negotiated a price and the details for what happens to unsold inventory.
An unsold iPhone probably does go back to Apple. An unsold carton of expired eggs is probably just written off as a loss.
Some brands do have outlets for their not-immediately-perishable food that’s slightly beyond the “best by” date – there used to be a store near me where Pepperidge Farm dumped all their slightly old inventory for cheap.
To add to the other answers at the other end of the scale you have massive volume. Tesco, a UK supermarket usually has about a 3-4% profit margin. But they sell £70 billion worth of goods and most of those goods will cost under £10.
You’re maths is correct, which is why many merchants compensate by having a much higher markup on goods than the 11% that is 50$ on 450$, perhaps they will sell for 650$ instead, making a much more healthy $200 profit per phone, and needing to sell fewer to make a profit. This is especially the case on expensive items where you will likely not sell large numbers.
For your example of food, I read somewhere that the markup on food in most restaurants is something like 60-70% over the cost of raw ingredients, so even if there is a lot of food wasted, as long as you sell enough you still make a healthy profit (which is still needed to pay things like rent, wages, etc).
Alternately, if you want to sell at a lower markup as in your example, you need to gauge the market carefully, and know or predict well how many items you can actually sell. Many merchants have indeed been bankrupted by bad predictions and buying too much stock that they cannot sell enough of. This is a valuable skill that separates good merchants from bad ones.
On certain items, coming from trusted retailers, some companies have a buyback policy where they will buy back unsold stock after a certain length of time, but this is very field specific to certain industries I believe, I think booksellers and publishers do this.
Alternately, the high price items like phones or electronics are used to get you into the store, where you may buy them at a low price where they barely make a profit, in order to get you to also buy a lot of other cheaper items which have much higher profit margins. Printers are famous for this, selling the printers at a loss, and then selling you the ink you need to use it for a ridiculously high % markup
Two things…
1. Sale or return – merchant only pays for items that they actually sell, not for stock.
In this case there is no 450$ to the factory unless you sell for 500$ – so every sale is 50$ profit.
Failing that –
2. profit margins – you make enough per item that you still make money even if you don’t sell out.
* Buy 100 phones at 450$ each = 45000$
* Sell 95 phones at 500$ each = 47500$
* Have 5 phones remaining = 2250$
* Total Profit is 47500$ (revenue) – 45000$ (cost) = 2500$
* Net Profit is 4750$ (profit from 95 phones) – 2250$ (cost of unsold inventory) = 2500$.
So you made 2500$ even with 5 unsold phones….plus you could still say sell the remain 5 phones at a discount or something – because importantly at this point whatever you sell them for it is pure profit.
So say $300 each, that would be 5 * 300$ = 1500$.
Which would make the Total Profit 4000$ rather than 2500$
The important detail missing is that an unsold $450 phone isn’t a $450 *loss*, because you still have the phone. Maybe you can return it to the manufacturer – a lot of goods are “sale or return” for retailers – and recover the $450, or maybe you can still sell it for $450 or $400 later in the year, recouping most or all of that cost. Selling at $400 is a $50 loss, so overall you’re still $400 up on that batch of phones.
The worst outcome is if that handset gets broken or stolen from the store, so can’t be sold or returned at all. Too small for insurance, so the whole profit from the batch of handsets is gone.
The big thing is that when you hear things like “stores operate on 10% profit margin” that is for the entire operation, not the individual items for sale.
The individual numbers will vary depending on the type of store, but the average retail store is about 50% product cost, 40% operating expenses, 10% profit.
So stores are buying things for about half and what they are seeling them to you (again this number varies depending on the item).
A lot of good points here, but there’s a more basic one, too: he can lower his prices to cut those losses. Say, for example, the new model phone is coming out in a month and he wants to get rid of his old stock before interest really drops, he might sell them at cost, or even lower. Better to lose $25-50 on a phone rather than $450.
Third party phone sellers in particular make a bulk of their money on “attachments” – cases, screen protectors etc
Contractual agreements can (and are) created between wholesaler and vendor to insure that the vendor does not lose money on unsold merchandise. This is how the wholesaler convinces the vendor to take a chance on selling their product.
Larger vendors (like walmart) DO NOT operate on a 10% margin because they are able to use economies of scale to vastly lower their per unit cost and thus a failure to sell all of the product is not as costly.
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