How do retailers make money?

I bought a pair of running shoes from a local store. I like the shoe but not the color, so I looked online for alternatives. I found the same shoe--with a color I do like--for the same price, but direct from the manufacturer. So I'm wondering does the local store somehow buy them from the manufacturer for less? Otherwise, how do they make money on the sale? I would think after shipping costs they would even lose money!

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  • Anonymous
    1 decade ago
    Favorite Answer

    Short story

    You are not paying the manufacturer the same price that a retailer pays. There is a HUGE discount in unit price to companies buying in lots of like 100 of the same shoe.

    Also the shipping costs, in terms of each shoe, are MUCH lower when shipping a whole bunch, than in shipping just one pair.

    Details

    I worked for a retailer & a distributor & a trucking company in my career so I know some of what's happening.

    I have also been involved in ordering some supplies for where I work as a computer geek.

    First off there is a heck of a lot of competition, so retailers need to constantly rethink strategies to make money ... figure out how to do same stuff at lower costs, find products that will sell better, avoid having a lot of stuff eating store shelves that is not selling (money invested in product that is not getting good speed return)

    The manufacturer sells to some distributor, which has a warehouse in a major city. This product is moved in a container the size of an entire tractor trailer, using fork lift trucks to load & unload ... unit cost for shipping is the lowest possible. Maybe the trailer travels part way on a rail car.

    When semis run around the country carrying many different products, they usually travel at least 1/2 empty ... that if if you open up the back, it is not packed to the gills with the same product, but different products arranged so that the trucker can get to whatever when making various stops. Also the flow of product is not even. It is not unusual for a truck to go 500 miles totally empty because there's more product coming from one city than going there, so periodically an empty truck goes there to pick up the slack. This adds to shipping costs to the people who are doing small lots.

    Those shoes you bought ... you were probably paying 10 times as much for shipping, as is paid unit price on same shoes, by some company that has a truck trailer jam packed to the gills by product just for that company.

    Most manufacturers realize that the volume of sales are through the retailers, so they do not want to sell at a price that will undercut the retailers, and thus put the retailers out of business.

    Typically the price you pay for something at a retail store is at a 15% mark-up. Let's suppose you paid $ 11.50 ... the store probably paid $ 10.00. The manufacturer will have a reccommended selling price, but cannot enforce it, because that would be price fixing, but the discounts to retailers are based on that recommended price.

    While the retailer bought for $ 10.00 that was not from the manufacturer, it was probably from a distributor, that gets tho truck filled to the gills & puts in warehouse, then sells smaller lots to various retilers. That distributor gets a bigger markup ... they may have paid $ 7.50 for what is being sold at the retailer for $ 11.50.

    Now Sam's club and Walmart's are like distributors due to the volume the do, so they are paying the cheaper price, and able to pass the savings on to the customer. This is what drives out of business a lot of mom & pop small stores.

    The shoes that are sold in USA are probably manufactured in China, with the US manufacturer being a "front." The goods made in China can be shoddy, so they need to be inspected at the "front" then arrangements made to repair them before they go into retail.

    The truck trailer shipping cost is peanuts compared to the cost of the container in slow boat from China.

    I used to call around to all our people to ask about their computer paper needs ... one place didn't need anything for months ... I asked how they had succeeded in reducing their printing.

    They said the local Office Depot carried the same kind of paper & they just went there when they needed some ... I checked prices then went to my boss on this.

    I showed him the prices we pay direct from the paper manufacturer, the prices at Sam's & Office Depot.

    By ordering in bulk from the manufacturer, and specifying recycled paper, our unit cost for a carton of paper was 1/2 price at Sam's & 1/3 price at Office Depot.

    I have been told the reason they do this is convenience ... they don't have to sweat the 5 day lead time when we order more from Uarco, they just see they running low & get another carton that same day.

    Now granted the cost of one carton of paper is not a big deal, but this practice over X months means that we are paying _____ I spelled out how much more money we were paying for paper, because one location was now buying it retail.

    If this same strategy gets used on other supplies, such as ink for printers, I could see a dramatic rise in our cost of supplies.

    It is not my call, but I suggest you review whether the trade-offs here are worth it.

    The boss put his foot down on people buying stuff retail for convenience. It was just too expensive when we had already researched the cheapest ways to buy supplies for our company.

    I was doing tech support for one of my co-workers & said "what's this?" "Why are you using this brand name of surge protector?" Turns out someone had gone to local Sears store and seen a surge protector there at what seemed like a low price, and used it in the office.

    Again, I showed my boss a collection of articles from PC magazines and Consumer Reports about tests on "surge protectors" that were really extension cord strips with no true protection ... approx 1/3 of the brand names in the retail market are fraudulent ... and we have employees going out and using petty cash to buy these fire hazards, and install them all over the company.

    Here is a list of brand names that passed all the tests, and are available locally ... I used to buy these ONLY until I was told this was not my job any more. I just want you to be aware of this, so that when the place catches on fire, you know I warned you about the danger.

    This led to a corporate inventory of what we had installed labeled "surge protectors" replacint those that had flunked the tests in the computer magazines.

  • 1 decade ago

    the reason for this is because retailers buy in bulk for cheaper pricing and usually sell for twice the price. so the shoes may have cost you fifty bucks where they got them for twenty five and they made twenty five off them. the manufacturer also sells them at that price so they can make their money as well and still be able to give the retailers theirs great deals. i hope this helps. this is always a confusing topic...

  • Gary
    Lv 5
    1 decade ago

    Manufactuers give discounts to retailers. Then retailers mark up the goods to recover their original cost and make a profit.

  • Anonymous
    5 years ago

    No. The obviously dont. Its just like when my mom brings home clothes from the mall and shows us the tags saying: "$75.00" Then "$45". And im like cool, then she's like, and then it is 50% off! So that is like $22, almost a 1/4 the cost of the original price. this happens so much i finally concluded that it only costs probably 10 dollars to make those "$75" pants. EDIT: Not really an edit, but i want to add something. If a walmart is trying to gain popularity in your area then they are willing to sell things below their cost is to make to drive other competitors out of business.

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  • 4 years ago

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  • 1 decade ago

    yes,some l store buy them for less, but majority of store just lease the space to the manufacture and get percentage of every sell

  • 5 years ago
  • 1 decade ago

    the manufacturer is giving them discounted price especially in bulk orders

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