Question for manufacturers: building in margin

[SumpinSpecial]

Hey there,
I have approached a few suppliers about selling their products in my shop and been told that certain products they make can't be made available through a wholesale relationship. I totally respect their position so I'm not asking for ammunition to argue with them. I just want to understand it better.

I understand margin and the difference between wholesale and retail prices. I know the manufacturer has to get a profit, the wholesaler/distributer needs to make a profit, and the retailer (me) does to. So I have the fundamentals. What they've told me is that a product costs too much to manufacture and they haven't been able to build in enough margin for a retailer to also profit. I guess this is a "what the market will bear" kind of situations, but... ?

Say you have a widget that costs $10 to manufacture.
The manufacturer sells it to customers for $15.
They can also sell it wholesale for $12 so that I can sell it for $15, but that would cut their margin so I understand why they don't want to do that.

Or they can sell it wholesale for $15 and I would mark it up to $17.

Why do they think that last sentence scenario is unworkable so decline to sell it wholesale at all?

[vangogh]

Just a guess, but maybe they've found people won't pay $17 for the product. It's possible they've tested the price and $15 is as much as people will pay. Another thought is that there are added expenses for them to sell wholesale. I don't know how they sell the product now, but it's reasonable to think they might need to hire additional staff to deal with wholesale sales.

It's also possible they aren't being completely honest and they have some other reason for not wanting to sell some products wholesale and they say the reason is margins because it's easier for them to say that.

Again, just guesses, but I thought I'd throw a few things out there.

[SumpinSpecial]

In most cases, these are small companies, so you could be right about staffing and other costs. On the other hand, they've all agreed to work with me on some products but not all. Like one bird perch company said I could sell window perches but not their stainless steel perches because they cost too much to make. So... maybe it's that they found they don't sell at the higher price.

[turboguy]

My guess is similar to Vangogh. I would expect that the best price they can do on it is $ 15.00 and that they think it would be unfair to sell it to you for $ 15.00 and have you resell it at a higher price if someone can buy it direct from them for the $ 15.00. If they will sell them retail for $ 15.00 they would probably be willing to sell them to you at that price as well but that would not leave you in a good competitive condition.

[Fulcrum]

When looking at margins throughout the supply chain, keep in mind that each layer needs a 40-50% gross margin to remain healthy. The problem is that the price increase exponentially when more layers are added in.

Ex:
Manufacturing cost = $20
Manufacturer minimum selling price (50% margin) = $40

Distributor cost = $40
Distributor selling price (40% margin) = $66

Retailer cost = $66
Retail price (50% margin) = $132

By selling direct, the price of a product can be reduced by up to 70% and the manufacturer is still hitting target margins without being forced into the "race to the bottom". My guess is, this is where your manufacturer is unwilling to build in more margin.


... but not their stainless steel perches because they cost too much to make.

I know this is an example, but it's an easy one to work with.
Stainless steel is expensive, but there are tricks to reduce and minimize the manufacturing costs.
Let me ask a few questions here.
1) How much would you need to sell in order for the manufacturer to get material costs down?
2) Would the manufacturer be willing to allow a production expert to help streamline the workflow?

I've been working through all of these since I started my business. Around 3 years ago I rotated one machine 90 degrees and reduced product travel by 4 steps (15-20%). Last September I moved my shop and the new layout has reduced travel to 1.5 steps between stations on average. Throughput time has been reduced by almost 50% which has allowed me to maintain pricing rather than increase them due to an almost +40% increase in material costs (gotta love those exchange rates). A further bonus to this optimization is reduced worker fatigue at the end of the day and less mistakes.

I hope this gives you a better understanding of the thought behind pricing structures and some basic manufacturing.

[SumpinSpecial]

It does, thank you.

Another reason why I won't argue with them: my sales volume is eensy so I have no leverage with which to make them find efficiencies. :)