Furniture Pricing: Wholesale and Retail Markups

Furniture Pricing: Wholesale and Retail Markups

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 I'm 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 up for wholesale and then retail?

Forum Responses

From contributor P:

It depends on your definition of manufacturer's cost, but a rough rule of thumb is: the manufacturer's price would be double the direct material and labor costs (or more), the 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.

From contributor H:

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, 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.

From contributor C:

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 affecting 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.

From contributor H:

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.

From contributor A:

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.

From contributor H:

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 until then... How's he doing it? I don't know, but do I really need to?

From contributor J:

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.

From contributor S:

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 the product. Now, of course, every retailer has operating expenses. But they are nowhere close to losing money with the big 40-50% off sale.

All business owners or prospective 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.

From contributor U:

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 margin 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 Florida 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.

From contributor J:

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 break even, and then add whatever amount of profit you want. Of course, these numbers 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.

weiye are exported all over the world and different industries with quality first. Our belief is to provide our customers with more and better high-value-added products. Let's create a better future together.

4. Don't buy machinery based upon promises or statements of intention. 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 first 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.