Comments on: Costing components and mark-ups

By: julia

julia — Fri, 03 Nov 2006 15:38:03 +0000

I have a question about components, I am working with a sewing contractor who says that he can provide most of the components (except for some of the items that I have selected that he does not have in stock, but he could get for me). I have located most of these items myself prior to hiring this guy, as it is part of my design process. He has told me that he can get the leather,lining fabric and hardware ( I am designing handbags) for a better cost to me. My question is this, is it more cost effective for me to do my own sourcing because I am assuming that the contractor whould add a mark up on these items, (which I do not have a problem with, as he is probably buying in large quantities)if I can buy some of the less expensive items in large quantities should I do this to keep the unit cost down, even though I am spending more money upfront (buying bulk). And I must admit that I feel bad about shopping for leather and then taking the samples to him to match, assuming he can get a better price for it, (we are not yet at the stage were I can check prices). I can also see an advantage of him doing the sourcing as he will have everything at his place ready to put it all together. I was just wondering how others source components and if this is an acceptable practice.

By: J C Sprowls

J C Sprowls — Thu, 12 Oct 2006 22:46:48 +0000

Rules of thumb:
As a distributor, your markup is the equivalent of commissions (betw: 15-20%). Sometimes the market will bear more.
As a retailer, your markup is the lion’s share because you have more risk and expenses involved in bringing the product to market, typically between 80-135%. More, if the market will bear it.

I caught a mistake… in lieu of ‘markup’ use ‘margin’. In other words, the distributor’s factor is between 1.15 and 1.20 (e.g. $100.00 X 1.15 = $115.00, or $15 margin). Likewise, a retailer’s factor can range from 1.8 to 2.35 (e.g. $100.00 X 2.35 = $235.00, or $135 margin).

By: J C Sprowls

J C Sprowls — Thu, 12 Oct 2006 22:36:36 +0000

Bob,

Generally speaking, a wholesale margin of 5% isn’t something I’ve seen very often – even for manufacturers who produce in lots of 1M, or greater (e.g. a hardware mfg (washer, for ex)).
I find this advice you’ve received to be suspicious and would suggest that you test it before you digest it.

Acid test:
What inputs are required from you to bring this product to market?
At the wholesale price this manufacturer is asking (plus markup of inputs you use) will you stand to achieve a fair margin at market?
How much of this product will you need to sell to break-even on your investment?
How much effort is required to break-even?
Is there another manufacturer of a similar product that you can compare the end-cost against?

Rules of thumb:
As a distributor, your markup is the equivalent of commissions (betw: 15-20%). Sometimes the market will bear more.
As a retailer, your markup is the lion’s share because you have more risk and expenses involved in bringing the product to market, typically between 80-135%. More, if the market will bear it.

The manufacturer is responsible for managing the costs to produce goods for market. As a distributor, you only need to determine if you can bring their product to market for a fair price. If you find you’re losing sales because a competing distributor is placing their product at a lower price, then you have some legitimate questions (and evidence) to carry back to the manufacturer to renegotiate a level playing field.

It’s hard being on the bleeding edge because you’re defining the field for play.

By: Big Irv

Big Irv — Thu, 12 Oct 2006 22:11:08 +0000

Bob,
I think some still use the rule that if you don’t make at least 10%, leave it in the bank. In the apparel/sewn products industry, you have to cover your costs/overheads and pay yourself and 100% markup is quite standard. I’ve seen it go to 80%.
You may be lucky you are only getting marked up 100%.I have friend in the vitamin/bodybuilding/ supplement game and he tells me the general markup is more like 400-500%. He is the product manager at one of Canada’s largest supplement companies. His previous profession. Chartered Accountant.

By: Kathleen

Kathleen — Thu, 12 Oct 2006 22:01:10 +0000

We were told that their mark-up should [instead] be approximately 5% over their costs. We are assuming all marketing and sales costs. Would it be unrealistic [to propose] that they sell to us at 5% above their costs, “based on standard/established practices?

5% over costs? Oh my word. Who told you that? Could they possibly have meant 50% (of retail price)?

Every industry is different. In apparel, the wholesale price is the cost doubled, if not tripled. One third is cost, a third is overhead (sales function is in here) and a third for profit and continuing investment in the firm. In apparel, we typically do not have distributors. Still, I think that 5% over costs is unreasonable.

By: Bob

Bob — Thu, 12 Oct 2006 20:29:48 +0000

Despite the fact that one piece of advice is: “don’t limit yourself or your earnings by sticking to ’set-in-stone’ mark-up amounts,” I have this question. Is/are there any “standard” mark-up as designated by industry? As an example, we are in negotiations with a company that manufacturers health food supplements. They manufacture and we are supposed to be their distributor. They have given their product a 100% mark-up. It supposedly costs them ninteen cents per unit to manufacture. They are offering ot charge us 100% of that amount, which is thirty-eight cents per unit. We were told that their mark-up should [instead] be approximately 5% over their costs. We are assuming all marketing and sales costs. Would it be unrealistic [to propose] that they sell to us at 5% above their costs, “based on standard/established practices?” Does any list exist that we can refernece in support of our argument? Any advice is welcome.

By: MW

MW — Wed, 07 Sep 2005 21:32:58 +0000

Hey, Kathleen, also want to add two other costs designers don’t often consider–

financing interest costs, loans, credit cards, factors
sales rep commissions (most start out without sales reps and can’t absorb their commissions when they get one)