xqwisit

The other day a group of us (not all riders) were sitting around and chatting about life, work, economy etc... and a discussion arose about how the cost of goods has gotten so high. One of the riders in the group piped in about cost of bikes. Now we all know most bike MFG have sourced there bikes overseas (mainly Taiwan/China) in order to keep costs down. I'm not enirely sure but I'm going to assume that is where most components are also made (maybe not same factory but nearby). So how much does it actually cost to make a aluminum or carbon fiber bike? Yes there are different qualities of carbon and aluminum but when all said in done what is the cost? (lets take away the research and develpment, advertising, endorsements etc...). This can be anything but since this is a bike forum lets keep it on track with bikes. We see "knock off frames" on ebay for a few hundres dollars that look similar in geometry/design to name brand stuff... is the quality going to be that much of a difference?

Now I guess the other part is that when these bikes come off the assembly line and get painted etc... do they get shipped to Cannondale US or Specialized US for them to look over for quality before being shipped out to retailers?

I'm one of those that feels you get what you pay for BUT where do you draw the line? Since I'm a female I can relate to a real Gucci purse than a fake one. Same can be said about real shoes to fake ones.

Here is the kicker... one of the gentleman that was sitting with us piped in and had a few choice words that we as americans pay too much etc... etc... and then another chimed in and told him he was one to talk considering he was riding a fancy BMC bike that probably cost $5k. He then turned to us and said his bike actually cost him $800 and he had bought/shipped it from Taiwan and it has not given him any problems in over 2 years. To the naked eye (I'm a newbie) I was surprised as were others and two of the guys actually got up and went to look at his bike to look for "defects" or bad workmanship and couldn't find any that was not normal to the bikes they had that they paid thousands for.

Wondering what others thoughts are regarding ACTUAL cost of a bike frame. I know I'm intrigued.

Phantoj

The price of food and gas has gone up, but the price of most consumer goods has stayed pretty flat.

Ten years ago, I bought a 105-level Caanondale for about $1300. What does a 105-level Cannondale cost now? Never mind that the modern technology is quite a bit better.

datlas 

Cost (to manufacture) and Price are two separate things.

JoelS

Actual cost to manufacture? Does that factor in R&D costs? What about the cost of the machinery needed to make the product? How about the shipping of the raw materials to the factory and shipping the finished product out? Some small profit margin for the factory, for the sourcing company (otherwise they won't be able to come up with new stuff or even stay in business)? Salary of the folks that work in the factory, designed the product, sell the product, etc?

That's just a small snippet of some of the stuff that's built into the final cost of a product. I'm sure there's a lot more.

It's not such a simple thing.

sced

This is completely true. Often there is no connection whatsoever. I'm a ME and have worked and consulted for 30 years in many different manufacturing industries. Sometimes the only difference between two products that retail for vastly different prices is the label.

I found this to be interesting.
https://www.neuvationcycling.com/media/Videos/Value.swf

EDIT: just notice that the video's numbers are the same as the BMC example in the opening post - HAH!

gregf83 

Fortunately, there are public companies that make bikes (i.e. Cannondale) and publish their gross margins. Obviously, they don't break it down in detail but it gives you a reasonable idea of the range of margins you can expect. As it turns out the margins are reasonable (40% as I recall) and in line with other competitive businesses.

Bottom line: No large bike manufacturers are buying bikes for $800 and selling them for $5000.

DScott

Exactly. So, given that the guy with the $800 BMC is obviously spewing a load of crap, doesn't it makes you wonder why people feel a need to lie about such things?


FWIW, the human body supposedly has about $4.50 worth of chemicals in it, but if sold for parts, it'd fetch about $45 million, give or take...

What's it really worth?

sced

Go ahead, live in the matrix. 40% ~ average for all products. Luxury product margins are much, much higher to support low unit sales...just like the guy said.

Psimet2001 

I have had some great thread debates on this exact thing over the years. This is one thing that people just can't seem to gain a grasp of in terms of what that really means.

The premise of this is that most people are taught the basics if they ever have any education or training when it comes to business. They are routinely shown basic models as "cost plus". hen they learn about things like "brand value" in marketing classes and they never connect the two.

The reason for this seems to be (IMHO) that as Americans (generally speaking) and as American cyclists (more specifically) we somehow feel that we are at a great disadvantage in the negotiation of the price we have to pay for the goods in our sport/hobby. This is probably because somewhere in our heads we don't think that a "bicycle" - what was once a toy of our youth - should cost us more than a month's pay....let alone multiple month's pay.....so we tend to think that something is amiss

We resort to the idea that "Cost Plus" pricing is the only "fair" way to price something....I'll get back to this....will split over a couple of posts.
The best illustration I ever hear for it would be the following:

DScott

But, Rob... doesn't a high end bicycle get made very cheaply in China or wherever, and then just magically appear at the LBS, carrying a HUGE profit for the greedy bastards trying to unload it on the gullible?

LBS owners: the new robber barons...

kleinboogie

Which is why everybody can't run a business. Cost plus is also why so many businesses struggle or go bye-bye.

Psimet2001 

So then we come to "Market Pricing". This is basically the idea that the company walks into the market and finds out what the value of the item that they sell is. They then price it accordingly.

Many things factor into this price- brand value, perceptions, etc. As American cyclists we tend to think that this method is the root of all evil. This is equivalent to "stealing" money from us....totally disregarding the fact that the price was based on the price the market seemed to want to pay.

In most of this industry the reality of pricing is the following: the actual prices are a combination of both - cost plus and market pricing.
Cost plus puts most of the competitors into the same bracket price wise and then the differentiation in price results as market pricing based on perceived value. This is how we arrive at price points.

If the nature of the issue is that people want to pay less for high end bikes....well..... *continued*

jrobe

"(lets take away the research and develpment, advertising, endorsements etc...). "


... you could add employee salaries, benefits, building rental, utilities, shipping costs, etc., etc..

But why do you think you should take away these things. How would you run a business without these things?

DScott

It's magic. Duh.

I blame J.K Rowling.

StanSeven

There are so many other costs to consider, it's amazing. There are R&D, including all the engineering, prototype development and testing; contract work including shopping for the best deal on finding a manufacturer; transportation from overseas; import duties; advertising including sponsorship; warehousing and distribution; warranty; LBS costs and mark-up.

Psimet2001 

The biggest issue is the number of middlemen in the supply chain. The US distribution system is something that needs to disappear - IMHO. This would be the big supply houses that support the LBS - invisible to the majority of consumers but responsible for a great deal of the cost inflation on behalf of the LBS.

The taxes, Import tarrifs, shipping, and other overhead factors involved with getting material from where it is made to where it is used can easily double the price that was paid to the manufacturer for the material to begin with. Ask me how I know . This is why a lot of people try to do things similar to me and then fail.

Most businesses selling the volume of material that is being sold by LBSs have to establish a 30-50% GROSS margin in order to cover operating expenses. Think about it:

How many bikes do you have to sell if you have to pay $1000-$4000/month in rent, utilities, buy inventory, consumables and supplies, signs cards and advertising so that you can end up clearing a "modest" salary for yourself after only clearing a 30% gross margin? Let's use these numbers: If you have NO employees and you can find a way to sell $300,000 worth of bicycles and accessories in a year that would mean the following:

1. You'd have to sell about $6k/week every week throughout the entire year. Don't sell anything 1 week in jan and you now have to sell $12k in one week the next week.
2. You'd gross $90k to pay for everything.....taxes, registrations, accountants, utilities, rent, financing, bank fees, credit card fees, etc....
3. Leaving - most likely - about $40k a year for your salary.

That's less than probably all but the students who are on here make.
That's no health insurance.

You've probably paid about $15k in shipping during that time as well.

Now....how many shops that you have seen are selling that much in the off months - meaning they have to sell a ton in the on months - do it with ONLY the owner. For every person's salary you add...just take that off of the salary "you" were going to make doing it alone.

So......30-50% margins are not only appropriate but downright mandatory in order for most businesses at this kind of volume level to stay in operation.

Now - is that your (the consumer's) fault? No - of course not. Businesses must adapt and change......

.....but if any of you reading this are the kind of people that think, "hey - this shops is stealing from me. i pay like DOUBLE what it cost them to get that part. They don't even have any decent employees who know anything and they're always too busy to take the time to give me decent customer service. the owner must be a jag...." well....then you just might be pretty ignorant (meaning not really knowledgeable about what's going on).

Seattle Forrest

Without research and development, the bike never would have been invented, and it would cost $0 to produce one, because none would be produced. You can't figure the actual cost of anything while ignoring it's R&D. Even the cavemen who invented spears paid for R&D in terms of precious time that could have been spent gathering. It's a lot more true of bikes than spears, that you can't build something until you know what you're going to build, and how.

W Cole

Compare the complexity of a 600cc motorcycle and a high-end carbon bicycle. They sell for about the same. The motorcycle has an engine with titanium valves, an ECU, a computer controlled variable length intake tract, a computer controlled exhaust backpressure valve, a transmission, a magnesium subframe, a titanium exhaust, front and rear suspension with adjustable high/low compression, rebound, and sag, etc. etc. The bicycle doesn't even come with a computer.

Whether bicycle manufacturers are greedy, inefficient, or have less economies of scale I don't really know. But I do know their products are very overpriced.

Grumpy McTrumpy

I don't think bikes are overpriced. Lots of things are overpriced, but bicycles are not among them.

High-end home audio, that's overpriced.

Psimet2001 

to clarify on something I was starting to get at but never finished - it is the number of middlemen that need to be eliminated. All of the businesses along this chain need to drive the same sort of numbers (albeit at different scales) in order to support their structure. This has the effect of doubling the cost of the product at each touch.

By shortening the Value Stream - achieving Lean principles (the systematic elimination of waste ) the distance between the source and the customer shortens....making the costs to the supplier less. Sometimes this can translate into lower prices for the consumer but in reality is allows the supplier to get BACK to decent profitability allowing them to keep their employees and systems in place - albeit the middlemen have to lay off......

....but hey we want cheaper bikes right?

All of the big names have direct to customer web applications on the books, designed or in place. It will just take the movement of the first big name for them to all move. Then the LBS structure as we know it will crumble/re-invent itself. Schwinn anyone?

Psimet2001 

Definitely not overpriced. the seemingly apparent "Engineering" complexity of an item is meaningless. Both products are assemblies made up of parts that all have journeyed through a multi-stage sourcing process. the motorcycle's components are almost always produced in larger volumes, etc allowing for some economies of scale at the component level but they all are still sourced transported, etc. - the majority of the cost of any manufactured product.

It's always been the people and the gas that are the most expensive part of anything made - especially at this level.

patentcad

Old Jewish joke:

Q: Why did God create the Goyim (non-Jews)

A: Somebody had to pay retail.


That would be me.

coasting 

OP is right to mention gucci. Bikes at the high end have become luxury items. When you are talking about luxury items, production cost has no bearing on the pricing. If people are willing to pay, then the price is right. As far as I can see, bike customers have the mentality that expensive is good and brands have value. They wait for bikes on order, sometimes months. If anything, the pricing can go up.

W Cole

"Seemingly apparent engineering complexity" is meaningless, yes. Actual engineering complexity is very meaningful. Are you saying that a bicycle is just as complex as a motorcycle?

slowandsteady

there really is no significant difference in the cost of goods between the hybrid cruiser type aluminum frame and a higher end road bike frame. But you aren't paying for cost of goods. You are paying for:

R&D
Administrative costs
Labor costs for manufacture
Shipping
Raw materials
Marketing
IT
Finance department
Sponsoring programs
Etc.....


The company decides to set a price point for each of its products so that the company overall makes a profit. They know that the recreational cyclist will not pay more than ~$500 for a bike. So they price those accordingly. They do know that higher end cyclists and racers are far more willing to pay through the nose for the latest and greatest, shiniest, lightest, and fastest bike, so they price those accordingly. Let's not kid ourselves by thinking that the frame technology is so advanced. The basic geometric design of a bike has not changed in over 100 years. Yes some of the materials have improved, but the bike manufacturers didn't initiate those changes, some geek at MIT probably did.