May. 13, 2024
A heated, but detailed, discussion of cost and pricing practices in the furniture trade. April 24, 2006
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Question
I am a designer and am trying to get a line of furniture manufactured. I have heard conflicting reports on what the standard markup is. If it costs a manufacturer $10 to make the product, how much do they mark it up to me? Then what do I mark it for wholesale and then retail?
Forum Responses
(Business and Management Forum)
From contributor P:
Depends upon your definition of manufacturer's cost, but a rough rule of thumb is: manufacturer's price would be double the direct material and labor costs (or more), retailer's price would be double the manufacturer's price (before discounts). Commissions to you would probably be some small percentage of the manufacturer's price, unless you are acting as the retailer, in which case you can (and should) charge whatever the market will bear. If you are retailing, familiarize yourself with the concept of inventory turns, as it will give you some insight into how discounting works.
First off, you should attend some business and accounting classes. A manufacturer charges what he needs to cover his overhead and material costs and what he needs as a net profit to grow his business. The wholesaler does the same. The retailer does the same.
And by the way, when you buy from the manufacturer... you are then the wholesaler when you resell the product. The person you sell to then marks it up to cover his cost, etc. He then retails it to the end user, aka JQ Public. The markup of each person in the chain varies. It varies by product, varies by costs associated with bringing it to market, and the geography and what any local market will bear.
I know what I should charge based on my costs for our product in our market. Hit the books or pay a good CPA and learn what your business is about. It's the only way you will have control of it. And it's the only way you'll stay in business long term.
The thing about pricing is that it so much depends on what kind of work you do, what your reputation is in your area, and what your target market is. I try to balance my costs against what my present market will bear, and it seems to be a constantly shifting equation. What it boils down to is that if I get orders from 80% of my quotes, my price is too low. If I'm getting 10 to 20% of my quotes, too high. This changes from year to year due to economic conditions and other factors effecting my customers. It's more like being a surfer than a mathematician.No one here can give you the answer you are seeking. We don't know your location, your market, overhead, material costs, etc. There is no industry standard that applies across the board. If everyone in the supply and demand chain knew how much their supplier marked up their products, the system would not work. It's not knowing that creates competition and that's what drives business and individual creativity in finding new ways to make business more profitable.Are you a furniture designer? What level of production are you seeking? Do you have a niche product, or a commodity item?
Know your cost - you can't sell for less. The "rough rule of thumb" is good info too. If your product is a winner, you can increase the mark until you reach some equilibrium between supply and demand. I have a table manufacturing business. If I have a new design, I talk to the retailers about the concept, design, and ultimately price point. They understand the end user, so for me they are insight to what the market will accept. I will make prototypes for placement on their floor, and take a calculated chance. I'm leaving so much out, but your question is difficult to answer without knowing the wants and needs of your business.
I don't know what the standard markup is, but most furniture used to sell to the retailer at 50/10/5 or 50/5/5/5 off of list.As for markups, I have a large furniture retailer near me that is advertising a sale at 50% off and 18 months to pay, no interest or payments due till then…? How's he do it? I don't know, but do I really need to?I am a large wholesale furniture manufacturer. I like to get a 3-4x gross material cost markup. Notice I said "like." If you want to play the wholesale game, you won't be able to tell the customer what the cost will be. Furniture is a predetermined commodity market. If you can't play the game and give the goods at the price the retailer wants to pay, they will simply bring it in by the boatload from China.
I commend you on wanting to design furniture. Please take my advice, though. I have been bankrupted twice by customers (retail chain stores). The last bankruptcy was 5 years ago, when a major retailer was "too busy" to tell me that they were going to stop carrying 98% of our product line in their stores because they were "changing directions." This was 6 months after they told me I was going to have to expand to get shipments to them faster. New building, leased machines, no money, no fun. Bypass the middleman and try to get your product directly to the consumer.
The products that I carry to supplement our custom work, including shipping, roughly cost me 32-38% of MSRP. I generally resell (retail) this for 1.5 to 2 times my costs. 1.5 to designers up to 2.0 for homeowners, or 20-50% off list price. Other cabinet retailers I know of personally, who only sell others' products and do not produce their own, charge 2.0-2.2 times their costs or 15-30% off MSRP. On some lower end lines, they sell for full MSRP or almost 3 times cost.
The only reason I charge as low as 1.5 markup is because most of my expenses are already paid for on my custom side and my overhead is very low to sell this other product. In addition, these designers do almost all the sales legwork. I just need to clean it up and place the order.
You have to take these things into consideration. Sales events with huge discounts are nothing but PR and marketing ploys. A huge sale with 50% off in bold letters on a big sign draws the customers in because of perceived savings. Reality is they are paying almost twice the retailer's raw cost of product. Now, of course, every retailer has operating expenses. But they are nowhere close to losing money with the big 40-50% off sale.
Now with that aside... All business owners or perspective owners must understand exactly what their operation costs are or will be and set goals for profits, not salary based on their individual market scenario. After paying all operating costs including your own salary and benefits, your business should generate a minimum of an additional 20% on top to remain viable or worthwhile, in my opinion.
It sounds like in your particular situation, you have a manufacturer doing this for the first time. I believe it is up to the manufacturer to do the legwork to come up with what the market will bear and create their own MSRP, so you too will be able to offer "sale pricing of 20-40% off" and still make a handsome profit. If the manufacturer is unable or unwilling to come up with price points on their own, you need to work together and do market research. Make sure all parties involved through the chain can make money first before setting it all up with no plan and be destined to fail.
All that really matters is what the market will bear. To put things in perspective, I have a family member that owns a consignment store. In addition she sells a line of new jewelry. Her markup on consignment stuff is 50-100%. Her markup on the jewelry is... hold your hats, fellas... 700%. That's right. Rings and necklaces that cost her $20-$50 she sells for $140-$350 a piece. Guess what? She has a sign above the glass case that says 25-40% off.
Buyers never think "how much profit is this person making on me?" They just want to know they are getting what they want and think they are getting a great value. A very smart and successful executive I met told me everything it takes to be a success in business in one sentence. He said: "Make a good product and market it as the best." If you do that, you can pretty much charge as much as you can within reason.
I empathize with you regarding the bankruptcy. To this date, I have only a couple of delinquent accounts. That must have been tough.
I have to disagree with your last statement about bypassing the middle man. Although you get a healthy mark on your product by selling direct, the retailers provide the manufacturer with a buffer; real sales, no walk-ins or tire kickers. I concentrate on making, they concentrate on selling.
Having said that… I know it's normal practice for manufacturers to establish a retail price, but I don't - I let the retailers set it. Again, they know their cost, the end user, and what the market will bear. Economics in diverse geographic areas will determine how much to charge. Some of the niche tables that we produce have marks ranging from 2 to 3.5. Notice I said niche. Commodity tables have very little latitude for exceptional markups.
My family has been in retail for about 20 years. Trust me when I tell you that nothing infuriates a retailer more than a manufacturer suggesting what the retailer should sell their product for. I don't care what they sell it for. We made a product, the retailer bought the product, we got paid according to our terms, everybody is happy.
Scenario: I make a table in Florida, ship it to a Fl. address, and shipping is a small percentage of the total cost. The retailer marks up x2. Same table, now shipping to California. Freight is now a larger percentage of the total cost. The retailer has to (or should) mark up to compensate for this.
So how am I able to predict what the retailer should sell my product for? This is not the core focus of my business. 5 years ago folks were paying 5 figures for a plasma screen TV. Now, if you buy an iPod, you get one for free! Just kidding.
You're right... if you couldn't tell, I'm still really bitter. Let me see if I can offer some more constructive advice based on experience and learning the hard way. I do want to comment on something you mentioned. You said that nothing infuriates a retailer more than telling them what to sell the item for. My bitterness stems from the reverse. Retailers would tell me "we'll pay you $50 for this table," which they would in turn sell for $149.00. On the table, the gross cost of raw materials was about $26 based solely upon raw board footage input, no waste, etc. That left a gross profit of $24 to pay for overhead. On the other hand, the retailer had a gross profit of $100.00 to cover their overhead. Also, if anything was wrong or not 100% up to par, they would of course return it for credit. So not only would they limit and define my profit margins, they would also place all the financial risk on me.
1. Know exactly what it cost you to produce an item. Not just materials, but labor and all your fixed overhead. Be very prudent with labor estimates. If you can make something in 10 minutes, don't assume an employee will be able to, or want to do the same.
2. Don't back down from your prices. Know what you need to get to breakeven, and then add whatever amount of profit you want. Of course, these number will have to be reasonable to the market. For instance, nobody would ever pay $1000 for a cord of firewood that sells everywhere else for $150 - you have to be reasonable.
3. If you get your price, then you don't have to worry about what the retailer sells it for. If you're paying your bills on time, employees are paid well, you make a nice salary, you're doing something right.
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4. Don't buy machinery based upon promises or statement of intentions. Be cautious even if you have a contract, as you would need a lot of money to enforce it. I had a retail chain tell me that they would buy 120 each of 7 different sized bookcases a month. They required a PTP machine, and of course the 1st order had to be shipped in 2 months. Don't be rushed. I wasn't able to do my homework, and as a result, an unscrupulous supplier sold me a 4 year old machine for the same price (I found out later) that a brand new machine would have been. Not only that, the lease rate he got was terrible... 18% APR, and back then I had great credit. That retailer's first order ended up only being 50 each of 5 sizes. They discontinued that product line 2 years later.
5. Don't go after the big boys. Focus on smaller independent retailers. They will demand excellent customer service, and of course they will want a fair and marketable price from you. But my experience has been that they won't hang you upside down and beat you with a stick to shake every last penny out of you (again, a little bit of bitterness!).
6. Everybody thinks that their competition is the huge companies. From my experience, that just isn't so. Those companies generally have an experienced management staff, and a leadership role in the industry. They generally won't take crap from customers, and they define the terms and price of sales. The guys you have to worry about are the ones who work out of barns (no overhead), don't pay taxes, hire under the table help, don't follow OSHA guidelines, etc. They are the ones who will do whatever they can to undercut your price.
7. I am still passionate about manufacturer to consumer sales, but it is a hard practice to implement. If you are able to do so, you will be more financially secure than going through middlemen. The market can always change and your designs might not be in style, but at least you won't have to wonder if your customers will screw you to save a penny. Again, smaller customers place more value on relationship, with price being #2. They might not stop buying from you to save 2%, but if you're charging 25-50% more than equal product out there, you will be in trouble.
Going into any business is a big risk. Know your costs - control your expenses. I had two of my established, largest customers tell me one year they were going to increase their purchases by over 100% each. I didn't want to lose either and had that foolish gleam of making big bucks. We set out to plan for that level of production; we had only about a 2 month lead time 'til we had to start shipping! We put in $120K of new equipment, rearranged the plant flow, hired some additional people and started training. You guessed it - a bigger company bought out one customer and we didn't get any more work from them, and the other decided the money wasn't there for their expansion plans. We survived because we hadn’t gone too deeply in debt, but it was a year of losses. Be careful!Here's the rule of thumb my father used:Total manufactured cost, including overhead: $10Wholesale price: $20Retail price: $40
Usually wholesalers and retailers work off of margin, not markups. So if you want to talk their language, it goes something like this: "This widget will sell like hotcakes at $40 each, and you get a 50% margin."
Over the years, I have observed numerous pricing structures, and you should be prepared to offer or negotiate different terms and pricing such as are needed to close the deal.
Examples of such items would include:
1) warranty, how long, what it includes
2) quantity price breaks (the more you buy, the better your margin
3) annual or quarterly rebate if quantity orders apply
4) sales assistance
5) free samples
6) consignment samples
7) marketing materials (i.e. free brochures or web placement)
In short, when you approach potential buyers for your product, walk in with more than just price and product as your offering. This will help you enormously in closing business and in maintaining your margin.
The process of doubling cost to retail price is known as keystone pricing in the retail market. It is the simplest, and general safe method of determining price.Thanks to everyone for such an in depth answer to my question. Everything that has been said has been helpful and will factor not only into my pricing but my approach as well.I do find it a little hard to answer some of the "what do I charge?" questions. I just turned 29 and have 10 years in the business. I learned by hard knocks and hard work. I know my fixed overhead cost and break it up based on the number of employees I have with a 25% addition per man for production loss. This gives me a true cost on my manufacturing cost per man per hour, then I add on my profit. This has worked and in three years, we have grown from a 3000 sq. ft. shop to a 25,000 sq. ft. shop. By knowing my real cost, I can make better judgment on pricing. As far as my retail sales, I take my cost, add my profit for manufacturing and double if I sell retail. Works for us. Bottom line is if you do not know your cost at the manufacturing level, you can not figure a good retail cost. I have seen many small shops talk about how much work they have and how much money they are losing, but they never seem to be able to figure actual cost. If you charge 30.00 an hour but it cost you 29.00 to make it, then you lose, but you can not see this if you do not even know that it cost 29.00 an hour to make.I broke down my processes into units, and I timed these units over a period of a month. For example: Sorting stock after delivery: 1.5 hrs/delivery; preparing F/Frame stock, etc... I ended up with a book full of numbers, times and invaluable information. I plugged that into the jobs I finished that month and took a look at my margins. It was 53%. Things aren't coincidence - do the work yourself, it will streamline your processes and improve your bottom line. My gross margins are 47% before expenses (after materials). Does not include installation or delivery.
Comment from contributor B:
Here are a few rules of thumb I would suggest:
1. Don't compete with your buyers, whether retailers or distributors.
2. Prices are determined by the buyer.
3. Your minimum selling price should be 2x materials plus labor.
4. Decision makers without the profit motive are destructive to profits.
5. Start-up competition keeps us all healthy.
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