The 50/20 rule

steveinaz

I was reading an article the other day (can't remember the source) but an industry "insider" was talking about profit margins on speakers. He stated the rule of 50/20; which says: The speaker is sold to the retailer at 50% under MSRP ($1000 speaker would be $500 to the retailer), and the cost of manufacture is typically 20% of the wholesale cost ($100 on a $500 wholesale speaker), as a general rule of thumb. Interesting.

Huck344

That makes sense. I have a friend who manufactures hi end car amps. His wholesale price is just under 50% of the retail price. . . But, his cost is about 60% of the wholesale price.

TECHNOKID

I had a manufacturer rep offering me to be their exclusive retailer in my area and with the pricing he suggested to me, the 50/20 rule makes a lot of sense.

thuffman03

You have to remember that in most cases, not on this or other audio forums, most people might buy 1 or two sets of speakers in their lifetime.

My Father still has a set of KLH's from the 1960's as a case in point and would still be using them if I did not buy him a new set of speakers.

So with that thining manufacures and retailers need to get the most profit they can out of a set of speakers because they most likely will never see that person agian.

Hilbert

Very interesting. So if a manufacturer were to sell speakers internet-direct, he could knock 25% off the retail price, and still just about double his profit margin. But he wouldn't have BestBuy etc flogging his products for him. I wonder if anyone at Polk HQ is losing sleep over this sort of calculation.

hearingimpared

If that is true, and I believe it is, then one should always be able to negotiate a discount on their speaker purchase.

danz1906

Very Interesting!

phipiper10

Interesting. Wonder what is considered "manufacturing" costs. Does it include shipping from China, facility overhead, R&D and advertising etc or literally parts and labor to produce?

Presumably if everything is included in that 20%, on those margins more companies would be applying price pressure to be very competitive and reduce and their cost to consumers and move up in volume. They could still be very profitable applying a 50/30 rule and if done right could increase overall revenue.

steveinaz

I doubt that R&D and advertising would be included in the 20% figure.

TECHNOKID

Hilbert wrote: »

Very interesting. So if a manufacturer were to sell speakers internet-direct, he could knock 25% off the retail price, and still just about double his profit margin. But he wouldn't have BestBuy etc flogging his products for him. I wonder if anyone at Polk HQ is losing sleep over this sort of calculation.

If not greedy, a manufacturer can even choose to pass the savings onto their customers. One example that comes to mind is Fluance speakers, mostly internet sales and very few retailer representation (the few that ever sold Fluance complained about their poor profit margin).

hearingimpared wrote: »

If that is true, and I believe it is, then one should always be able to negotiate a discount on their speaker purchase.

Since I've slowly started to upgrade my electronics about 2.5 years ago, never have I paid MSRP and always negotiated for better than store price with great success.

treitz3

I have been privy to see how these numbers work for a manufacturer who's speakers I am assisting with in design [not Polk]. Though I will not talk about it, there are many more aspects involved that are not included in these figures. It also can vary slightly or greatly depending on the manufacturer, quantity built and the level of speaker sold.

steveinaz

It would certainly explain the occassional huge discount sale where you wonder "how can they make any money at that price?"

DaveHCYJ

Hilbert wrote: »

Very interesting. So if a manufacturer were to sell speakers internet-direct, he could knock 25% off the retail price, and still just about double his profit margin. But he wouldn't have BestBuy etc flogging his products for him. I wonder if anyone at Polk HQ is losing sleep over this sort of calculation.

I doubt they are. Personally I wouldn't have bought my Polks if I hadn't had a chance to walk into Best Buy and hear them myself. There was definately a moment of "wow these sound way better than I could have imagined speakers sounding compared to my htiab".

They might pick up some bargain hunters going the internet route, but I think overall they would lose more customers.

Another way to look at it is that having these speakers sitting in all the brick and mortar stores is sort of like free advertising. On top of that free advertising there are huge efficiancies in distribution.

Erik Tracy

Profit margin helps to recoup the engineering & design cost, pays for facility overhead (lease, lights, energy, equipment leases, etc), and employee payrolls.

I'd have to see the numbers behind the scenes before I'd cry 'foul' for MSRP or manufacturer mark ups.

shack

treitz3 wrote: »

I have been privy to see how these numbers work for a manufacturer who's speakers I am assisting with in design [not Polk]. Though I will not talk about it, there are many more aspects involved that are not included in these figures. It also can vary slightly or greatly depending on the manufacturer, quantity built and the level of speaker sold.

Bingo!

steveinaz wrote: »

It would certainly explain the occassional huge discount sale where you wonder "how can they make any money at that price?"

The huge discount sale is often at or below cost to move inventory. Old/stale inventory is a big problem and needs to be moved off the balance sheet. Cash flow is king and drives this sort of thing.

Erik Tracy wrote: »

Profit margin helps to recoup the engineering & design cost, pays for facility overhead (lease, lights, energy, equipment leases, etc), and employee payrolls.

I'd have to see the numbers behind the scenes before I'd cry 'foul' for MSRP or manufacturer mark ups.

Until one can sit down and look at the financial statement of a mfg. or retailer to understand what is happening one is "just blowing smoke out their ****" (or speculating) on what is happening.

steveinaz

The post wasn't meant to be an "AH-HA! CAUGHT YA" moment of discovery or anything, I just found it interesting. People are not in business to give away products--it just kind of sheds some light on actual production costs---IF (big IF) the 50/20 is an accurate represenation of what goes on in the majority of the industry. This is all certainly speculation, one article, one mans opinion does not a fact make.

Imagine the mark up on automobiles...sheesh.

BeefJerky

shack wrote: »

The huge discount sale is often at or below cost to move inventory. Old/stale inventory is a big problem and needs to be moved off the balance sheet. Cash flow is king and drives this sort of thing.

True. In addition, let's not forget about what they call "loss leaders." It may not necessarily be old or stale inventory, but simply something they sell at ridiculously low prices to get folks in the store. They're hoping that those people will by other things such as accessories for said product. This is particularly common around Black Friday and Christmastime.

Midnite Mick

I have read before that the cost of a speaker is about 10-15% of retail....so your numbers are about right.

sdcfan18

I work for a major retailer that sells Polk as well as many other brands. While I'm not pretending to know the exact margins, I can tell you that if you ever pay MSRP on speakers, you're paying too much.

nguyendot

The numbers are correct in terms of percentage as a whole. I worked at Best Buy and their systems will tell you what their cost is, and generally it was 30-40% of the retail.

Let them make their money. If you get a better deal cool, but they have the right to charge what they want, they did the work and put out the product.

Midnite Mick

This is pretty standard across the board for all products, not just audio. Retail markup is generally around 100%...some niche industries much, much more. It costs money to run a retail outlet.

nooshinjohn

There is only 2-3% mark up in new cars... Used cars are where you get the screws put to you.

treitz3

nooshinjohn wrote: »

There is only 2-3% mark up in new cars... Used cars are where you get the screws put to you.

Then the 3% hold back most folks don't know about, dealer incentives, dealer markup [beyond the Moroni sticker], financing, accessories [such as the usually BS undercarriage protection] and the list goes on.....;)

janmike

nooshinjohn wrote: »

There is only 2-3% mark up in new cars... Used cars are where you get the screws put to you.

So, on a $30K new car the profit is only $600-$900. How on earth would a sales guy survive?

nguyendot

janmike wrote: »

So, on a $30K new car the profit is only $600-$900. How on earth would a sales guy survive?

By selling used cars.

Car dealerships exist for the used, not the new.

Dad can sell a $70k Escalade new and make $100 because there is no margin in it, but sell a $7k Buick and make $2000....

multiply that by 18-25 per month and it's not a horrible living.