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 math is correct but on average markups are much much higher than 10% in most cases. I work in the furniture industry and it’s mind blowing the markup most retailers put on pieces.
For example, most retailers I’ve seen are marking up large pieces of furniture 400-600% this is before accounting for shipping, which is very very expensive. However, at the end of the day most of these stores are at least tripling their money but usually more.
As other have pointed out margins usually are higher than 10%, but especially in phone sales retailers might sell the phone with even lower margin, if that sale leads to auxiliary purchases, such as screen protectors, cases and service plan, where the margins are much more healthy for the store.
Adding to what others have said, some retail stores used to be able to charge a fee to get a manufacturer’s products on their shelves. Additionally, promotional staff/salesmen are often paid for by the manufacturer to, to sell their specific goods.
On the goods manufacturer’s end, such costs would have to be built in to the product’s price. Actual raw materials, labour and transport costs must be a fraction of the final retail price (or even the wholesale/”factory” price) otherwise the manufacturer wouldn’t be able to turn a profit. Outsourcing manufacturing (to China or wherever) has certainly helped drive down costs for manufacturers since… The end of World War 2, probably.
Well, that’s why they push warranty, services, cases, etc on you. Those have good margins
For food, the margin is higher. They’re selling you a sandwich for $12 that takes $4 in food to make.
You’ve just discovered why the employees push the acceories and replacement plans so hard. The profit margins on items like phones and laptops can be so thin, the only reason to carry them is to jelp increase the market for accessories, which have much higher profit margins. I was years ago when I worked retail I was once told by the store manager it’s better not to sell a laptop than to sell a laptop without convincing the customer to also buy accessories on the same transaction.
Loosely speaking, products are sold with a considerably higher margin than you mentioned. A $500 retail price means a $250 wholesale price. So, if a product doesn’t sell, you keep cutting its cost until it does sell, and *usually* you can at least break even.
So then you might ask: why don’t wholesalers just undercut retailers and sell stuff directly at much lower cost? Well, they *do* sometimes. That used to be an untenable approach because retailing required buildings and sales staff and so on. Now, everybody buys things online, so retailers are under assault on two fronts — the wholesalers themselves are getting into the retailing business (online, on their own sites, on Amazon, and on sites like Temu), *and* retailers (like Costco) are getting closer to becoming wholesalers themselves. If you’re a storefront retailer in a mall for example, that means you’ve got intense pressure right now.
The phones sale just gets the customer in the door, it’s the accessories they actually make money on. Things like cases, screen protectors, and all that stuff cost like a $1 to make but they get sold for $40.
Also it’s rare that big items just fail to sell. That’s why sales happen. Might not make money but you lose way less. You want something to sell that isn’t selling at its current price, you lower it until it does.
And some items (especially returned ones) can get offloaded to secondary stores (Ollie’s bargain outlet is a big one. There’s many.) to sell. Same thing as first paragraph applies. You’re not selling it for a profit but you’re minimizing losses.
Volume, you are correct if he doesn’t have sales but assuming the merchant thinks he can sell many of these items then he probably took out a loan to buy the initial phones. Taking you example, lets say he takes out a loan for $4500, buys 10 phones and then sells them all, he now has $5000, he makes a small payment on the loan of say $100, buys 10 more phones for $4500 and pockets the remaining $400 as profit. He then does this over and over again. This is a very simple example and their is a lot more costs and things that go into it but this explains you question.
This was described in a book “store wars: Battle for mindspace and shelf-space”.
Yes, retailers operate on rather thin margins. How do they compete with manufacturers in terms of financials? Because its not about the profit its about return on capital.
Most of the time retailers have varying favorable terms with suppliers: they pay 90-120 days after they sold an item.
Retailer sells 90 phones for $1000 = $90000 before they pay a single dollar to supplier. This allows them to “sit” on mountains of cash. So as long as your profit margin is positive, you are good.
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