Sunday, 27 October 2013

The Hobby Market: Selling Direct

So in the 4 Party System I walked through the various tiers of the hobby market and how each tier adds a layer of cost to the price the consumer pays.

So what would happen if the manufacturer sold directly to the consumer only?  Stress the ONLY part here.

The biggest change in a manufacturer to consumer approach is the level of stock and so in turn investment that the manufacturer has to do.

If the manufacturer was still to create 500 units for sale then they need to confident that they would make a quick return through Direct Sales to consumers.

Let me break that down -

So the manufacturer still spends £2,500 on producing those 500 units.
Do they continue to sell them at the RRP that was previously used?  Definitely worth exploring.

At £17.50 per unit - To reach a break even point on that £2,500 investment the Manufacturer would need to sell 150 of the 500 units.  Which is a pretty amazing mark up but what has to be remembered is that the Manufacturer is now dealing with individual Customers (potentially 500 of them) rather than a few select Distributors or Retailer (<50?).  This adds a management overhead around storage and distribution and of course means it's down to the Manufacturer to sell all 500 of the products directly.  Well I suppose they could only sell 200 and make a gross profit of £1,000 but why create 500 then?  Other than to get the production price down to £5.

At £7.50 per unit - This brings a different dynamic.  To get to a break even point the Manufacturer has to sell 335 of the 500 units.  This is the same markup we used in the example previously of 33% except in that scenario this was selling the product to a Distributor.

But if the product is £7.50 rather than £17.50 they'll sell loads more!  Right?
Hmmm, maybe.  I mean sure selling more of the product because of a lower price is likely but we're talking about moving from selling 150 to 335 to break even.  That's double the sales to make the same amount of revenue.  Why would you do that?

In the scenario where the Manufacturer only sells to the Consumer there's definitely an element of price elasticity available to the Manufacturer when setting the "RRP".  The balance has to be between the overheads of managing the fulfillment, achieving profitability to re-invest into the business and of course setting a price that the product will actually sell at.

If an equivalent product sells at £20 then why would you sell at £7.50?