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Production cost of components?

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Production cost of components?

Old 03-05-08, 10:08 PM
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Production cost of components?

What is the marginal production cost of something like a DA crankset or derailleur (i.e. labor and materials only, not average cost including stock of capital or RD)? Has anyone worked in the industry? The retail price of a crank is ridiculous. Precision optics, mechanics, and electronics don't even cost that much - I can't imagine that a bike part should.
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Old 03-05-08, 10:20 PM
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Here's the thing, a manufacturer like shimano has to pay for more than just production.

A big chunk of your change goes to pay the teams of engineers and designers that worked out all the details of the crank for the better part of a year.

Then, there's money for creating the tooling. Cold forging anything is very expensive initially, so you're paying for that.

Then there's the labor in the manufacturing and packaging and all the other people that work at shimano.

That still leaves the marketing department and all those teams they sponsor, and the company still has to make a decent profit to continue expanding.

That's all just shimanos cost. Now they sell a batch of cranks, maybe several hundred or more to a wholesaler like QBP. QBP then distributes them around to warehouses, paying for the shipping. They then fill thousands of individual orders for shops, by hand, and ship them to all the shops. They too have a marketing department and office workers, accountants, etc and still need to pay profit.

Then there's the retail outlet that sells to you, which has a higher or lower overhead depending on whether it's a shop or just some guys basement and a website.

The markups are typically 80-120% each step, so say the actual manufacturing cost (not everything else) for the cranks are $100. Then Shimano sells it to QBP for $200 a piece, QBP turns around and sells it to the stores for $350 and they sell to you for anywhere from $400-600.

This is why a place like probikekit, which buys large quantities directly from manufacturers and OEM packaging can actually charge less than what shops pay and still make decent profit margins.

That's what you're paying for. Most electronics and optics manufacturers don't change tooling as often or require as much design work as bike crap. They also tend to manufacture things at much larger scales. Shimanos crank production pales in comparison with say a resistor manufacturer which pumps out hundreds of thousands of items.
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Old 03-05-08, 10:22 PM
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I know this doesn't directly answer your question, but one of the first things I learned when studying economics is that all value is perceived value. DA cranks, like everything else in the world, cost what they do because that's what people will pay for them.
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Old 03-05-08, 10:33 PM
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Originally Posted by Hocam
Here's the thing, a manufacturer like shimano has to pay for more than just production.

A big chunk of your change goes to pay the teams of engineers and designers that worked out all the details of the crank for the better part of a year.

Then, there's money for creating the tooling. Cold forging anything is very expensive initially, so you're paying for that.

Then there's the labor in the manufacturing and packaging and all the other people that work at shimano.

That still leaves the marketing department and all those teams they sponsor, and the company still has to make a decent profit to continue expanding.

That's all just shimanos cost. Now they sell a batch of cranks, maybe several hundred or more to a wholesaler like QBP. QBP then distributes them around to warehouses, paying for the shipping. They then fill thousands of individual orders for shops, by hand, and ship them to all the shops. They too have a marketing department and office workers, accountants, etc and still need to pay profit.

Then there's the retail outlet that sells to you, which has a higher or lower overhead depending on whether it's a shop or just some guys basement and a website.

The markups are typically 80-120% each step, so say the actual manufacturing cost (not everything else) for the cranks are $100. Then Shimano sells it to QBP for $200 a piece, QBP turns around and sells it to the stores for $350 and they sell to you for anywhere from $400-600.

This is why a place like probikekit, which buys large quantities directly from manufacturers and OEM packaging can actually charge less than what shops pay and still make decent profit margins.

That's what you're paying for. Most electronics and optics manufacturers don't change tooling as often or require as much design work as bike crap. They also tend to manufacture things at much larger scales. Shimanos crank production pales in comparison with say a resistor manufacturer which pumps out hundreds of thousands of items.
+


Originally Posted by bonechilling
I know this doesn't directly answer your question, but one of the first things I learned when studying economics is that all value is perceived value. DA cranks, like everything else in the world, cost what they do because that's what people will pay for them.
= Truth
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Old 03-05-08, 10:37 PM
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By production cost, I meant just materials and labor, and not fixed costs (capital and machinery, research, development). As far as engineers and designers go, you'd think that electronics and optics (especially optics) would spend far more than a bike components manufacturer would. The rest of the process you describe - with retailers, distributors, etc- is present in some form or another in almost every industry. And cold forging can't possibly be as expensive as grinding a lens or applying optical coatings.

For electronics, I see your point about quantity, so that's understandable. But I still get the feeling that Shimano is charging a significant markup from its marginal cost, perhaps 10x more. I'm trying to understand whether that's due to a relative lack of competitors (pretty much just SRAM, FSA, and Campy.), a really high marketing costs because Shimano has to sponsor teams, or my underestimation of the expense of making aluminum. Does anyone have figures?
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Old 03-05-08, 10:46 PM
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Or is it just because of inflated perceived value? That would be really disappointing.
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Old 03-05-08, 10:56 PM
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Originally Posted by scr660
For electronics, I see your point about quantity, so that's understandable. But I still get the feeling that Shimano is charging a significant markup from its marginal cost, perhaps 10x more. I'm trying to understand whether that's due to a relative lack of competitors (pretty much just SRAM, FSA, and Campy.), a really high marketing costs because Shimano has to sponsor teams, or my underestimation of the expense of making aluminum. Does anyone have figures?
Learn to embrace the free market bub. You don't want to pay the price, shop elsewhere...you are the market, you are in control.
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Old 03-05-08, 11:04 PM
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As mentioned already most of the costs are not due to manufacturing. I don't think electronics is not a great comparison as ther market size is increasing exponentially and allowing manufacturers to leverage economis of scale. Whereas I heard on the "Cycling Roundtable" podcast that the growth road cycling is currently at a very low level post the Armstrong factor. The average age and disposable income of a road cyclist has gone up however.

Originally Posted by scr660
Or is it just because of inflated perceived value? That would be really disappointing.
Spend enough time here or go to weight weenies and you will be very disapointed. These boards do not represent reality, it's more of a support group of like minded addicts, like an AA meeting where there is a free bar and everyone encourages each other to drink!
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Old 03-05-08, 11:17 PM
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Originally Posted by timmyquest
Learn to embrace the free market bub. You don't want to pay the price, shop elsewhere...you are the market, you are in control.
More like you are a really really really really really small part of the market.
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Old 03-05-08, 11:17 PM
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Originally Posted by canthidefromme
More like you are a really really really really really small part of the market.
So?
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Old 03-05-08, 11:22 PM
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Originally Posted by timmyquest
Learn to embrace the free market bub. You don't want to pay the price, shop elsewhere...you are the market, you are in control.
That's part of the problem. There's not enough competition, and they all charge the same price. When I think of the things I could buy for the price of a decent crankset, I cry a little, on the inside.
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Old 03-05-08, 11:23 PM
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Originally Posted by scr660
That's part of the problem. There's not enough competition, and they all charge the same price. When I think of the things I could buy for the price of a decent crankset, I cry a little, on the inside.
Shimano, SRAM, FSA and Campy aren't your only options...
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Old 03-05-08, 11:25 PM
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Originally Posted by timmyquest
Shimano, SRAM, FSA and Campy aren't your only options...
What other companies are out there?

Anyways, I am actually curious about the subject. I don't know much about what goes into making a crank.
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Old 03-06-08, 12:00 AM
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Originally Posted by Hocam

The markups are typically 80-120% each step, so say the actual manufacturing cost (not everything else) for the cranks are $100. Then Shimano sells it to QBP for $200 a piece, QBP turns around and sells it to the stores for $350 and they sell to you for anywhere from $400-600.
While there is a lot of truth in the rest of the post, these numbers are waaaaaayyyy off.

I can say, with a very high degree of probability, that there is not a shop on the planet that gets anywhere near those kinds of markups (80-120%) on high-end bike parts. 28-30% is more like it.

Which is why I don't stock high-end parts. It's a poor investment.
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Old 03-06-08, 12:07 AM
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Originally Posted by BikeWise1
While there is a lot of truth in the rest of the post, these numbers are waaaaaayyyy off.

I can say, with a very high degree of probability, that there is not a shop on the planet that gets anywhere near those kinds of markups (80-120%) on high-end bike parts. 28-30% is more like it.

Which is why I don't stock high-end parts. It's a poor investment.
Cost to my LBS last year for a 105 shifter was $95, i think he wanted $140 for it (and he gave me his price on accident).
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Old 03-06-08, 12:43 AM
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Speaking as a manufacturer the fixed and variable costs associated with production mean little to nothing int he overall equation.

Optics and electronics are probably one of the worst comparisons you can make.

I work in fabricated metal products - including machining and fabrication of forged parts as well as cast.

I make powertrain components for lots of different big guys out there. Suffice it to say that my fixed and variable cost components for the parts that I produce bare little to no resemblence to any "price" that any end user pays.

What's more is that my costing and cost structure do nothing to set the "price". In well run and managed markets cost and price are completely un-related. We have gone down this path many times on this forum, so I'll try to keep it short....

People that complain about what they have to "pay" for manufactured parts and then say something along the line of "well how much does it really cost to make it, etc" are fairly naive about the way things work, and just don't understand much about manufacturing, distribution, or retail.

Price and cost are unrelated - as they should be.

Next time you're in the area stop by and I'll give you a tour and explain it.
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Old 03-06-08, 12:47 AM
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Originally Posted by Psimet2001
Next time you're in the area stop by and I'll give you a tour and explain it.
Be careful, i may take you up on that.
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Old 03-06-08, 12:55 AM
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Originally Posted by timmyquest
Cost to my LBS last year for a 105 shifter was $95, i think he wanted $140 for it (and he gave me his price on accident).
Most retail environments I have functioned in operate in the 18%-100% gross margin range.

Most heavy industrial fabricated parts gross margins are in the 5%-80% range. The higher the volume the lower the gross margin tends to be.

Bicycle retail is definitely on the low side of what would be considered "normal". In your example above the guy "makes" $45 off of your sale in gross profit. Now....how long did he work with you on the sale? How many employees was he paying to be in the shop at the time. How much doesn his rent come out to? How much electricity was consumed? What was his freight bill on the order? How much did he have to pay someone to place the order, receive it, reconcile the invoice, pay the CC company their fees when you whipped out your plastic, the bag supplier for the bag he put it in, register company for the register he used, paper tape and ribbon for the receipt.....etc.....

At then end of all of these added expenses (commonly referred to as "Operating Expenses or Other Operating Costs") most Independent Bicycle Distributors will develop a 3%-5% net earning. So....some quick math and it looks like he's going to be called a crook for trying to charge $140 and if he makes the sale he'll get to put the net $7 back into his business in the form of additional inventory that someone will eventually want a discount on.

Great business model isn't it?


EDIT:...and again keep in mind that Shimano has been trying to prevent leakage of contribution margin for it's distribution channels by policing distribution violations in pricing, etc (ever see the Shimano Authorized Dealer stickers and banners....ever wonder what that means?)...meaning that this example is probably one in which the beginning contribution margin was higher than standard.
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Old 03-06-08, 01:01 AM
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Who cares about markups, the only thing that matters is what we pay. The bike shops probably buy from a distributor who in turns buys manufacturer direct. So there's probably around 10-45% markup each way before it ends up in the end consumers hand. I am guessing though that Sram Red shifters which retail for $550 cost Sram less than $60 to make in material/labor cost.
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Old 03-06-08, 01:12 AM
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Originally Posted by Psimet2001
Most retail environments I have functioned in operate in the 18%-100% gross margin range.

Most heavy industrial fabricated parts gross margins are in the 5%-80% range. The higher the volume the lower the gross margin tends to be.

Bicycle retail is definitely on the low side of what would be considered "normal". In your example above the guy "makes" $45 off of your sale in gross profit. Now....how long did he work with you on the sale? How many employees was he paying to be in the shop at the time. How much doesn his rent come out to? How much electricity was consumed? What was his freight bill on the order? How much did he have to pay someone to place the order, receive it, reconcile the invoice, pay the CC company their fees when you whipped out your plastic, the bag supplier for the bag he put it in, register company for the register he used, paper tape and ribbon for the receipt.....etc.....

At then end of all of these added expenses (commonly referred to as "Operating Expenses or Other Operating Costs") most Independent Bicycle Distributors will develop a 3%-5% net earning. So....some quick math and it looks like he's going to be called a crook for trying to charge $140 and if he makes the sale he'll get to put the net $7 back into his business in the form of additional inventory that someone will eventually want a discount on.

Great business model isn't it?


EDIT:...and again keep in mind that Shimano has been trying to prevent leakage of contribution margin for it's distribution channels by policing distribution violations in pricing, etc (ever see the Shimano Authorized Dealer stickers and banners....ever wonder what that means?)...meaning that this example is probably one in which the beginning contribution margin was higher than standard.
Yeah, i was just posting the one example i could. Not sure the guy is a crook...he is a bit odd though. Nice guy, i just don't like buying from him. I guess that goes down as the marketability of your personality . I figure it's key to any business.

I actually thought that price to be a bit high for him. Apparently he did too because he gave the price to me over the phone as a quote for a price to me only to realize he was reading the wrong column .

FWIW, i bought it. The weather was awesome and i didn't have time to wait
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Old 03-06-08, 07:10 AM
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Originally Posted by scr660
That's part of the problem. There's not enough competition, and they all charge the same price. When I think of the things I could buy for the price of a decent crankset, I cry a little, on the inside.
Or you could buy a Nashbar closeout 105 Crankset for $59.95. It had to go through all the same steps as the DA to get from a billet of aluminum to you, and can you really tell much difference once it's installed, has dirt on it, and you're riding down the road ??
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Old 03-06-08, 07:50 AM
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Originally Posted by scr660
i.e. labor and materials only, not average cost including stock of capital or RD
You can't do that. You cannot exclude selected areas of overhead and then accuse a company of overcharging for their work/product. It all gets added into an expense column unless Arthur Andersen does your books.
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Old 03-06-08, 07:58 AM
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As a professional economist, I don't even know where to begin in correcting all of the nonsense being spouted in this thread...So instead I will just sit back and enjoy it.

You know, it's kind of interesting: each day I am bound by the laws of physics -- why, just this morning, gravity made it more difficult for me to get out of bed -- and yet I don't believe that I have any special understanding of physics. Yet, people believe themselves to understand economics simply because they have handled money and/or worked in business -- experiences shared by most of the world's population.
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Old 03-06-08, 08:03 AM
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Originally Posted by Coyote2
As a professional economist, I don't even know where to begin in correcting all of the nonsense being spouted in this thread...So instead I will just sit back and enjoy it.

You know, it's kind of interesting: each day I am bound by the laws of physics -- why, just this morning, gravity made it more difficult for me to get out of bed -- and yet I don't believe that I have any special understanding of physics. Yet, people believe themselves to understand economics simply because they have handled money and/or worked in business -- experiences shared by most of the world's population.
Thanks for your input! Must be lonely at the top.
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Old 03-06-08, 08:31 AM
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Originally Posted by Coyote2
As a professional economist, I don't even know where to begin in correcting all of the nonsense being spouted in this thread...So instead I will just sit back and enjoy it.

You know, it's kind of interesting: each day I am bound by the laws of physics -- why, just this morning, gravity made it more difficult for me to get out of bed -- and yet I don't believe that I have any special understanding of physics. Yet, people believe themselves to understand economics simply because they have handled money and/or worked in business -- experiences shared by most of the world's population.
Please, enlighten us and bring us from the economic dark ages oh professional.
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