Q-6. Are Your Profit Margins High Enough to Be Profitable?
Here is something to think about. If you sell your product directly to consumers through your website, you can be profitable at a lower price than when you sell to retailers. However, if you want to sell through internet affiliates, retail stores, direct response TV, direct mail or catalogs, you need to price your product to allow for distributors to buy and resell it to their customers. For example: If your suggested retail price is ten dollars your cost of goods to manufacture should be one dollar. Here’s why.
If your suggested retail price is ten dollars, retailers will buy the product from you at a wholesale price of four to five dollars depending on their profit desires and market power. Distributors will buy from you at up to 50% off the retailer’s wholesale price of five dollars, making your price to distributors around two-fifty or three dollars. That leaves you only a dollar fifty to two dollars gross profit on your one dollar cost.
Typically you will sell products to all three levels. You can sell directly to the consumer at a ten dollar retail price. You will sell to the retailer for five dollars and to the distributor at two dollars and fifty cents. That’s why you need such a high profit margin to be profitable enough to grow your business. Even if you license your idea instead of starting your own company, your licensee will want the same profit margins that you need to be profitable.