Why is this product more expensive than this one, when they are the same thing?
Product development explanation
You head to your local tack shop to look for a particular item, in this case it is a mane thinning comb. You arrive at the grooming section and find the thinning comb, only to discover there are two pretty identical products at two very different prices.
Why is this?
Product Supply Chain
In this example we are using mane thinning combs. One comb is the tack shops “own brand” and the other is a “name brand” product. I will break down the product supply chain for each of these items to ideally shed some light on the cost differences.
Product A – Name Brand Item
Below is the typical chain at which a product moves from the manufacturer right through to the customer. As you can see, there are quite a few hands at which the product needs to move to get to the end user, each also needing their own cut of the cost.
So new let’s look at the typical costs of the product as it moves through the chain.
The manufacturer is the first part, they make the item and cost this up, for our example the cost is €5.87. The manufacturer needs to add their profit percentage and the average for manufacturers is about 5% (this can vary though). So, the manufacturer adds their 5% selling to the brand for €6.53.
The brand then needs to get their product into distributers or wholesalers to make sales. The brand then takes the cost (€6.53) and adds their %, which can average around 20%. They then sell their product to the wholesaler for €8.17.
The wholesaler then also needs to add their profit %, which can be around 30%. The wholesaler then sells the item to the retailer (tack shop) for €11.68.
The tack shop now needs to add their profit, which can vary, but generally around 40% (€7.79) plus VAT. This means the customer in the shop pays a total price of €23.95 for the thinning comb.
Now, this is just a general simplified version of what happens. When a brand gets a product in from a manufacturer, especially of it is from another country (China, India etc) they need to pay duty, taxes and shipping fees. So usually, the brand buys from the manufacturer with all that included before adding their profit. Also, VAT needs to be paid by the brand onwards down the chain, buy that’s a whole other system, I’ll get to another time!
Product B – Own Brand Item
Now let’s look at an own brand thinning comb product chain. From the image below we can see 2/5 steps have been removed from the supply chain. As you can image this has a big impact on price.
As before, the manufacturer makes the item for €5.87 and adds their 5% profit selling directly to the retailer for €6.53. The retailer now can add a very comfortable 42.5% profit (€11.35) plus VAT to sell to the customer for €13.95.
Due to the direct buying of the item from the manufacturer, the retailer makes a larger profit % from the “own brand” item than the one they bought from the wholesaler.
Why don’t all retailers do this?
This is a very simple answer, cost. Usually when tack shops buy from wholesalers there doesn’t tend to be minimum order quantities. If they only need 6 hoof oil tins or 5 body protectors, they can usually buy that (however there is often minimum order in cost, say €100 etc). If these retailers buy from the manufacturers, they need to buy 100’s of units, if not 1000’s. So, you usually only see own brand products appearing once the tack shop has a big enough operation to be able to order that many units.
Ideally this has cleared up any questions in relation to the supply chain and cost difference between products!