Shop Cost, Distributor Markup, Retailer Markup, and List Price
A door manufacturer looking to work with distributors and retailers wants help figuring out how his production cost tracks through multiple markups to a realistic retail list price. April 21, 2011
Question
My question relates to the standard percentages used by distributors and retail lumber yards when figuring their price points. To come up with a list price I am first charging for shop time and materials. I then take that number and add 25% for a distributor markup. I then add another 40% for the retail markup. Does this sound about right? I think I found some information on here before about this subject, but couldn't find it this time.
Forum Responses
(Business and Management Forum)
From contributor M:
65% markup after your own margin sounds very high. It is hard to discuss what the markup to retail might be without knowing your cost to manufacture and production capacity. If I can produce 15 kitchens a month and you can only make three then our percentage markup will be very different.
From the original questioner:
I am going for fairly high production. Just to clarify, I'm looking into using a distributor for my product, so the retail stores will have to buy my doors from the distributor and then add their own markup. I don't want to advertise a price on my website that is lower than what the retailers could sell for. Using the formula described above, I come up with a list price that is the same or slightly lower than what I have found on the internet for a similar quality product. I just want to make sure it is reasonable to assume that these percentages will keep the distributor and retailer happy enough to want my product.
From contributor F:
You need to know the discounts you are offering off of retail to figure out the markup. If your customers are purchasing on a discount from a retail price then you adjust the price to match the discounts so you net what you want. Your markups end up in a retail discount of slightly less than 27% and a distributor discount of 22%. That seems tight for retail.
From the original questioner:
What types of markups do distributors and retailers typically want in the building supply industry? According to my math, I am offering the doors to distributors for 43% off of list and retailers would purchase from distributors for 27% off of list, allowing them a 40% markup.
From contributor U:
I am just wondering - are you looking to have this distributor distributing 100% of your product? If that is the case, don't advertise any pricing at all, sell your product to the distributor for what you need to in order to generate your required profit and don't worry about the rest. If your costs to produce the product are competitive, the distributors/retailers will be able to add whatever markup they require in order to make their money and still be able to sell to the end user. If you are looking to a high volume distribution model, I don't think you want to be bothered with the walk in who wants to buy three doors, or anger the distributors/retailers by offering a direct sale to consumers that undercuts their pricing. Of course take this all with a grain of salt, I may totally be misinterpreting what you were asking for.
From the original questioner:
Contributor U, you understand exactly my business model. My website's purpose right now is to attract some attention before I talk to the distributor so I can show them there is interest in my product. I thought about not including pricing but it always bugs me when I go to a website that has no pricing. I was trying to show pricing that would be able to be beaten by the retailers who will eventually be selling my product. List price seems be always more than what is actually charged at the retail level. I am not really looking to sell retail at all. I'm just trying to generate some sales in the meantime so I can show the distributor that people are willing to pay list price for my product. Sounds like you are suggesting this might be a waste of time and I should simply start talking to the distributor I have in mind.
From contributor U:
So you are thinking something along the lines of being able to tell the distributor "I generated x amount of sales at price y, I can supply the product for you to distribute at 0.55y"? Might not be a waste of time to show sales potential, but it may be just as expedient to first tell the distributor "Here's what I can sell my product to you for." If you know your costs, you should be able to generate an accurate number for him. If the dist. doesn't bite at that price, then marketing them yourself to show sales potential would be a logical next step. Bear in mind, I am a cabinetmaker, not a business guru.
From the original questioner:
Thanks for all the responses, I have sold just under 100 doors over the last two years to a couple different local retailers and a few custom doors direct to consumers. I know what I need to charge in order to be profitable. I also know that similar quality doors are retailing for about 80% over what I need to charge. I was under the impression that retailers in the building supply industry typically markup their products 40-50%. I was also under the impression that distributors have lower markups since they are dealing in volume and don't have as many costs as a retail establishment.
I guess I'll talk with the distributor and ask them if my prices will allow a sufficient markup for their retailers. I wanted to at least figure out if I am in the right ballpark so as not to waste their time but I guess they are the ones that will have the definitive answer. Thanks again for all your help. I'm still open to more responses.
From contributor S:
You are correct in gathering as much information as possible before talking with possible customers. This does increase your knowledge and you will certainly sound more professional. The final wash will be in actually talking with the people who will be buying your product. Don't burden yourself too much thinking you have to have all the answers up front, you can learn a lot from talking to the people you wish to sell to. We once had a sit down with a 20 store chain and they encouraged us to go up on our price about 10%. They wanted our product, but also wanted us to make a profit and stay in business so we could deliver the goods. Usually it goes the other way, but discussions and price adjusting proposals are a part of getting into a distributor relationship with someone.
From contributor U:
Actually Contributor S, I think your anecdote may not be as rare as you think. Over a decade ago I had a small company that did primarily outdoor woodwork. My main customer was extremely pleased with the timeliness and quality of my work, but after a half dozen or so jobs, he pulled me aside and told me I should start charging him more. I had known this guy to be a real cheapskate, so I was floored. His explanation – “good trades are hard to find - you are a good one, I don't want you to go broke - then I'll have to find someone else to do this for me." He was expecting to pay a certain amount for the woodworking, I was way under, and instead of simply raking me over the coals for a few months, he helped me out and we had a mutually beneficial working relationship for years.
From contributor F:
Office furniture is often sold from the manufacturer to the dealer. The dealer shows the list price of $1 to the end user and takes the 50 then 10 off list to pay the manufacturer. If they really want the job or it’s big the manufacturer offers a larger discount like 50/10/5.
From the original questioner:
Thanks Contributor F, I think I understand. So with the $1 retail price, the retailer would subtract 50% then 10% and pay .45 to the manufacturer? Then 50/10/5 would be another 5% off the .45 to get to .43?
From contributor F:
Yes.
