Friday, 25 October 2013

The Hobby Market: 4 Party System

So the hobby market works in mysterious ways or more precisely that's how it may appear to the consumer. Let me turn back that curtain and give you a view of what goes on behind the scenes of the hobby market.

So as a consumer you buy a hobby product from a retailer and 99% of the time that's all you need to know.
As a retailer you sell that product to consumers and buy it either from distributors or (particularly in the wargames category) the manufacturers themselves.
As a distributor you sell that product to retailers and buy from the manufacturers or in some cases buy from other distributors worldwide to bring that product to your market.
As a manufacturer you sell that product to distributors, retailers (as I say particularly in the wargames category) and on occasion directly to the consumer.

What does all that mean then?  It's all about money surprisingly enough, for each layer or "party" involved in the end to end transaction there is an amount of money allocated to that product.  Aligned with that money element is a quantity which as you move down the tiers listed above the quantities involved increase.  Taking a fictitious example moving from Manufacturer to Consumer and fabricating the margins that exist for simplicity it looks something like this.

The Manufacturer
Manufacturer creates a new product for market and the cost of production is £5.
The Manufacturer produces 500 units of this new product and sells them in bulk lots of 100 units per lot at a Sell Price of £7.50 per unit.
Total potential revenue is £3,750 which would give a Gross Profit of £1,250 for the Manufacturer based on those 500 units all selling.

The Distributor
Distributor becomes aware of new product from Manufacturer and arranges to buy 100 units of the product for onward selling to Retailers.
The Buy Price for the Distributor is £7.50 per unit and they order 100 units for a total Buy Price of £750
The Distributor then sets their sell price at £11.50 which is approximately a 35% markup.
Total potential revenue is £1,150 which would give a Gross Profit of £400 for the Distributor based on those 100 units all selling.

The Retailer
Retailer is contacted by Distributor (or in some cases Manufacturer) and orders 10 units of the product.
Distributor (and Manufacturer usually) agree what the Recommended Retail Price is for the product and set it at £17.50.  This enables the Retailer to apply approximately a 34% markup onto their Buy Price.
The Buy Price for the Retailer is £11.50 per unit and so 10 units is an investment of £115 with a potential maximum Sell Price of £175.  This would give the Retailer a Gross Profit of £60 based on those 10 units all selling which as I've said is roughly a 34% markup.

The Consumer
Consumer buys product from Retailer for £17.50.

So a product that costs £5 to produce in turn has to sell for £17.50 to give each party a slice of the action in the region of a 34% markup. As I've said above this example is based on fabricated margins each time to represent the nature of the beast.  In reality the margins are different across the tiers but as a model this explains how these things work.

Now each of these tiers has an overhead above and beyond the acquisition of the product itself which is where the markup has to be sufficient to
a) cover those purchase costs
b) cover all other overheads that business has
and
c) enable an element of profit to improve each business in the chain

So the question is what?
Why doesn't the Manufacturer just sell direct to the Consumer?  They could charge more than £7.50 per unit and make a healthier profit.  This is true but will they shift 500 units?  Keeping in mind that to go into production they had to produce that many for economies of scale.

The tiered system has flaws but it also has a number of key benefits.  But that's for a different post I feel.