If merchants only get a small amount from what they sell, then how do they make profit if one or more of their product isn’t sold ?

Question

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

Answer 1

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