The recent thread, Side-Job??, touches on a subject I've lived and worked with for 45 years, How much margin, no I mean how much profit is enough for a transaction to be acceptable? When a reseller decides what price they will set for their product at what point is the buyer agreeable to/willing to, or not, pay. Be it new or used product the equation and valuation perceptions are the same.Every person survives by taking in more then they give out. Somehow someway the person must come away from their interactions, often enough, to not wither away. (Dieters know this even if they can't/won't put it into words).There are a few ways to determine what a product must sell for so the seller keeps their head above water, as there are ways that the buyer decides whether the value of said product is valid enough to agree to pay what's being asked.

The most common method talked about for the seller goes something like this- The seller's initial cost of the product plus the overheads to bring that product to the buyer plus any profit that the seller deems needed. (Note I separate the profit from the cost of doing business, their combined amount is what we call margin). At your typical LBS the cost of doing business is around 40% of the retail price. Add in the needed profit and you see why retailers margin is what it is.

Another method is to determine what the market will bare and subtract the profit and the cost of doing business to end up with what the reseller has to pay for the product to, again, stay afloat. This method is what's going on when some say "I make my money when I buy" (a backwards view in some peoples' minds but perfectly valid a method). I think this method is what many non taxed resellers (non retailers rarely claim their businesses on their taxes) use.

For the buyer it's a bit less formulaic. Here emotion/ego can enter in a greater degree and these aspects are very hard to quantify buy do affect the buyer's views just the same. Can the buyer pay the reseller the price and feel they got fair value for their money? So in the end the buyer's process is much the same as the sellers, perhaps less structurally considered but it's still an assessment of cost VS value.

For as long as humans worked in social communities these issues have existed in one form or another.

My 45 years, the different shops I've worked in or owned (Bike One in Cleveland for 15 years), have given me quite the opportunity to watch how these competing groups (resellers and buyers) work together (or not). I feel that the perception of value has shifted a bit over these years, certainly the advent of international communication and distribution (first it was mail order and now on line) has added to the mix to a degree that wasn't present when I started this work back in 1973. I find vastly more reseller/buyer situations these days where the value/price is questioned then was the case back then. This isn't right or wrong, just what we have "evolved" to. So the question as to how much cost is too much is one we, as resellers, deal with daily.

So I put this out here. How much profit is acceptable to agree to? As buyers we make this judgement all the time. Is that mocha, egg mic whatever, micro brew. What's your idea of what profit (not margin) that's Ok to you for your reseller to earn when dealing with you? Andy

I might have titled this thread as "How Much is Enough" or "Will You Let Me Eat".

I try to answer it like this:

Given that we are now living in a fragmented society, where way too many people have lost touch to what is a common desire, die another day, people in general are less and less willing to see the viewpoint of the other person and hence are unwilling to support other people to survive (as part of an executed transaction of goods or services). Sorry, there is no clear answer (anymore). We as a society are not progressing forward, we are definitely going backwards, way backwards.

It is just a sad moment of time to have to ask this kind of question.

What? People have been greedy and ruthless since the beginning of time.

With products available in good supply and at low prices, the profit for only the sale will be low or even zero. Reasonable profit comes from the value-added services like immediate availability, installation, adjustment, or repair support. On the other hand, there seems to be a value on exclusivity, so if you are lucky enough to join that Rapha-esque club, you may have it made.

Anytime I sell something, which isnt often, I am just trying to get rid of something or get it out of my way. This means getting what ever I can get for it just to get rid of it. If I am lucky, I get back more than I am into it, that is rare though. If I didn't sell unless there was profit in it for me, I would probably never sell anything.

Waiting for the perfect buyer to come along with the perfect offer assuring a good profit margin for me means taking lots of time with the sale, lots of relisting on cl and ebay, lots of emails etc. Time is more valuable than money. Sell it cheap, move on quickly.

This approach is very typical of most Craigslist, individual E-bay and local flea market sellers. "I just want that thing out of my house and any money I get is a bonus". Retailers obviously can't survive doing business this way unless they are the buyer of the items in question and get them at very attractive costs and then "flip" them for an acceptable profit.

Andy has asked the question every business owner has had to ask at some point in time. It will mean the difference of life or death to the business. There is another thread on this site addressing the close of Niagra bikes. Tons of comments about how they will be missed as they always had the lowest price (such loyal customers!) Niagra must not have addressed the profit margin question or missed something really big if they did. Their pricing scheme probably cost the company its life.

When someone remarks "Business is about making money" it is most often misunderstood and vilified as an insensitive statement, but it is real and direct to the point. Profit margin is required to stay alive and the business is in the business of making money, regardless of the company's "mission" or "vision" statements of feel good BS.

When I was in the retail end of the biz full time the national average bottom line profit for bike shops was 4%. They ain't getting rich, folks, and I remember our competitors did what they could to undersell us. Well, we are still around, and only one of those competitors has stayed alive, and no longer undercuts on pricing. Funny how that works, huh?

The value in my opinion is set if the buyer can honestly gauge the truth in the sellers words. The seller's attitude goes a long way & it means a lot when the buyer can be backed by the clerk when something needs to be addressed after the sale was made (warranty claims, services, other applicable terms/conditions) .

More times than I care to remember, whether from my own experiences or seeing other's, a bicycle is bought & the retailer says a lot up front & shines the best they can with assumed promises (tune ups, adjustments) but then later when the customer has a need for a tune up, the store always tags in an associated invoice for things "not covered" . It's one thing to make the customer aware before doing the work or tossing on parts, but that rarely if ever happens. The shop assumes the customer will pay up no matter what & just racks up the invoice with things surprising the customer at the time of picking it up.

No one should work for free or eat the cost of parts, but it goes both ways. The customer should not be assumed they will pay for something that was not agreed to upfront. Too much fine print.

Private sales is a totally different situation. If you're relying on selling used parts/bicycles & are not a legitimate business, then maybe look into opening up a business or jumping ship of the side-work before it sinks your livelihood?

You appear to mix accounting and economic theories, but here's how it works in free markets*:

An economic equation: Required return on investment + risk premium + apportioned future replacement of assets used + fair compensation for owner's labor + tax on income = required minimum pretax net profit. All of that is earned, BTW.

An accounting equation: To pretax profit add opportunity costs + fixed and variable costs + cost of goods sold + embedded and other taxes (all of those apportioned to each product and service) and you have approximately the selling price. If the market will pay more then there is opportunity to earn additional profit. If the market will only pay something less, then the product or service is not sustainable.

*In free markets each party to a transaction values what they get more highly than what they give, thus no outside force creates the market but many obstruct it.

Buyers rarely know how much a business earns in profit, how much profit is in any product's price, how much it should be, whether there is any profit or not, or even what profit is.

Here's a test:
1. How much gross profit does the average retailer make on a gallon of gasoline?
2. How much profit does the producer make on a gallon of gasoline?
3. How much is the combined local, state, & federal tax on a gallon of gasoline?

It's always more than I have. Don't know if that helps, but my dad went bankrupt because he wanted to fix cars and pump gas instead of selling beer and hot foods with gas. I'll always be proud of the road he took though.

+100 I often wonder how many of those who consider profit "immoral" are willing to work for no salary? Where do they think their income comes from?

"The government."

It's an awful time to be a seller of anything, unless it's some cutting edge product that no one else can get.

These are great times for the consumer though. I can go to Walmart right now and buy a 5 pack of brand new t-shirts for like $10. It almost doesn't pay to even wash them any more, just buy another pack!

Wouldn't you wash the new ones before wearing?

I think in quite a few industries, it's not just the final transaction between the end user and the store that matters. There is also the question of how much margin has been applied by people in between the manufacturer and the retail outlet. In certain industries *cough* (or countries), the margin that the retailer is getting may be quite low, and the price might STILL be too high for me to pay.

I sit here icing my feet/knees after helping my friend and boss move their house today, usually I do this only after riding a bunch. Aging sucks in both one's health and the lacking of keeping up with the times. Since my posting skills also suck this follow up suffers in format. Here's some of my thoughts on the more interesting replies so far.

#2 Termv-Very good reply. Speaks to the heart of my question even if it would have had a failing grade for less critically thinking teachers (who had given this assignment) from not directly answering the question. Thanks as you got my vote.

#4 Hoopdriver- Another good reply and still no real answer.

#7 TiHabanero- The first reply to give a number. The 4% profit for the year end is what my shop saw plus/minus the varying nature of weather and economics of a local area. And how can I argue with someone who honors hot peppers in their handle (that's CB radio talk for name).

#9 Anklework- I think we're on the same page WRT the forces at play in business, even if the terms we use are different.

#13 Colnago Mixte- I assume this is satire. As even the government has to offer a positive cost/benefit ratio that the masses like. The comment about Tee shirts shows the commoditization of some goods, for better or worse.

#15 Quiglesnbits- Good comments if outside the control of the reseller or the buyer.

Thanks all for the time you took. It heartens me to hear many share my concerns. When I posted this I tried to not let my opinions seep through, I wanted to get you all to think and not merely react. (a quality that seems to be missing in our national intercourse these days). I had considered the subject line to be something like "just let me eat" but questioned the ability for many to get the reference.

I suspect this thread will wither on this vine soon enough. If I got one out here to ponder on their position in the world system I've done my job. Thanks again. Andy

I've noticed the B&M stores will charge more for the very same item that can be bought at the tap/click of a button in the comfort of one's home, & should you still decide to toss the B&M business the bone to make a sale, the biggest let down is they too will need to order it for you, for that same item costing you more from the B&M store. I'd much rather save myself some hassle & the transportation logistics by ordering it myself online, especially if it is also saving some money & I wouldnt even need to put pants on.

Would I be wrong to think; having the product readily available could greatly impact the sale when it comes to being an average consumer?

I posted the means to calculate and validate the answer to: "How much profit is acceptable to agree to?" That does not make it easy, or something you will like.

I run a side business, selling a specialized gadget that I manufacture, not bike related. Granted, I add value to the product by assembling it, so it's not like being a retailer of ready made goods. I can add up what I pay for the parts that go into a gadget, and how much I sell it for. I try to keep the ratio somewhere above 4x, and preferably 5x. I suspect that anybody who tries to undercut me at this rate, is probably not considering all of their costs.

A retailer approached me to sell my gadget, and we realized that there was no middle-ground price that would be worthwhile for both of our businesses. So I continue to sell direct to the consumer myself.

I think it's hard for anybody to guess how much profit a business is making. It's different than mark-up, because a business has a variety of costs, including labor. I'd say it's "fair" if the business is paying a decent wage. Unfortunately, wages have stagnated in the US for decades. I don't see a good solution to the declining-wage problem that doesn't involve fairly extensive redistribution, which I support.

Some businesses have phenomenally low margins, such as supermarkets and gas stations. Others, very high. It's hard to be in any business where consumers are doing aggressive price comparison shopping.

I think that you're looking at the wrong end of the equation.

To me, the key is to start with the expected selling price. Subtract labor, parts and profit and that will give you what you can afford to pay for a bike.

While relating to other industries is easy to do it isn't a direct transfer as mentioned. Each industry (and step along it's chain from material sourcing to final product) has it's own business models and cost/profit structures. Since the OP asked about the last step of distribution to the retail customer I consider these tangents interesting but of no value in this thread. Andy

I've been selling on the internet now for close to 20 years. I'm low-volume, low-overhead, and everything is made to order. So I know all of my fixed costs, material costs, etc. In all but a very, very limited number of instances, I do not distribute to resellers.

Because I long ago crunched the numbers-- my profit margin has historically hovered around 67%. Some items a little lower, some higher. Shipping is usually one of my biggest costs-- packaging, labels, tape, and of course the shipping charge itself-- I have some $35 items where shipping accounts for 20% of the total.

The only flex I'm willing to make would be to reduce the per-unit cost to a reseller, so long as that discount falls within the overhead; for instance, if a $50 item costs $8 to ship and I can sell a lot of ten to a reseller, I would have about $70 worth of wiggle room in pricing the lot, not having to pay to ship individual units to individual customers. But resellers traditionally want to carry a margin around 50%, so I'd have to sell them a lot at a per-unit price that would likely drop below my per-unit profit selling individually. I'm not going to cut my own margin so a middleman can scrape a profit.

I found that the number had to get up to around 20 units-- at that point, I could knock 12-15% off of the net price and still make money, just in the savings from the packaging/shipping. But most of the sellers I've been in contact with want a grab-bag assortment, and not 20 of one thing. It's just easier on me all around to sell direct to the customer. Now if I were moving hundreds of items a month, sure. But I work in a small niche.

In Economic theory, there is difference between a good and a commodity. Both are products that fit a desired need. The distinction between the two is that a commodity is generally considered qualititavely the same so that one can be exchanged for another.

With the ubiquitousness of the bicycle and availability of good working condition used bikes, for most consumers, I think a bike is considered more of a commodity unfortunately.

Commodities, barring extreme upsets to the market, generally have very low margins.

This is much like in the IT hardware business. Computers, laptops, servers etc have largely been commodified so that margins in the hardware is minimal (5% or less, sometimes even sold at cost) and any profit is made through any value added services (i.e. software, support) and is partly why IT sales try to talk in "ecosystems".

This is similar to what I see with the LBS.

You are the OP.

I still stand behind my posts in the OP's thread.

Duh. Perhaps I should have used the lower case "op" to better describe the original post and not the Original Poster. Like I said, interesting comments if a bit off topic. (Not atypical for this medium though). Or maybe it's that I am royalty and speak of myself in the third person . Andy (who only does that after his sign off)