Retail Mark-up & Distribution
I found this article very interesting in that a Model Railroader was surprised about the retail mark-up within the 40-50% range. Ever since I can remember it has always been this. I also found some of the other responses to this article very interesting.
I am a currently small manufacturer in the Model Railroad Industry and one of the main goals of my company is to keep costs down and provide the highest quality product to customers at a very reasonable price. I also produce my products here within the United States.
Here is how it breaks out basically. A manufacturer prices a product for resale (suggested retail price) and has to take into consideration the 40-50% retail mark-up plus the additional 15-20% that distributors charge for handling their product. Now the net value the manufacturer gets from the suggested retail price is approximately 40% of what the product sells for.
The 40% that the manufacturer gets covers a broad spectrum of what goes into producing that product. Here is an example of what goes into producing a product that is cast for example. First there is product research, product design (engineering), master and or component part creation, mold creation, pre-production casting, master part and or mold modification and re-run of mold(if part does not conform to design), final pre-production of part, proofing of component/product in assembly, assembly instructions, packaging design, packaging of product. Additional costs are that of tooling, raw material inventory, final product inventory, labor, operation overhead and so forth. This is just an example of what that 40% covers.
Now I just recently went to one of the local hobby shops in my area and presented my products to them. They were impressed with the quality of the products stating they were of the highest quality available and that my suggested retail value was below what current products sell for.
I informed them I was not using any distributors and that provided a lower then average cost to the customer. I was then informed that they would not be able to carry my products due to the fact it would create another order process for them to go through other then the distributors they currently deal with. I was amazed at the short sightedness of this.
Even with a computerized inventory system and re-ordering process they could not take the few minutes it would to create another order and place it. On top of that, they didn't even take into consideration of additional unique offerings available to a potential customer and sales from that customer plus added repeat business. They tried to convince me to sell through distributors but I informed them that my pricing would have to rise accordingly and I do not believe I could (being a small manufacturer) could support a possible 10,000 piece order of each product at my current size of operation.
I am not the only manufacturer in this position that has come across this. It happens more frequently then not. The only way this will change is if the Model Railroaders themselves ask their Hobby Shops to carry these products that us small manufacturers produce here in the United States.
Until this happens, my products, and many others, can be purchased through our websites.
Now, it was stated in one response that an individual shuns the Internet as much as possible and then admits he does buy on-line. The Internet will not replace the Local Hobby Shops. In fact many of the Local Hobby Shops have a site on the Internet to sell their products. Another note also is that the costs of an internet based store has a some of the same costs that a regular retail store has in respect to processing orders. Sometimes this cost is even higher for a internet based business. A legitimate operation will have ability to process credit cards on-line, and will carry an SSL Certification for their Secured processing of orders. These certifications do not come cheaply either.
Another thing I find interesting is the Model Airplane Hobby Shops that I know of do buy from independent manufacturers that do not sell through distributors. Interesting how different some philosophies are in yet a very similar type of industry. I do enjoy flying my RC Planes also besides my love of Model Railroading.
I look forward to comments about my response to this article.
