Margins-or how much is enough-industry types please chime in

Discuss light weight issues concerning road bikes & parts.
glepore
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by glepore

I'm in the midst of a n+1 build. I'm retired, so I sorta watch what I spend on bike stuff, even if I have way too much. I have recently developed a love for Power saddles, and have a legit s works that's going on two years old on a bike in the stable. Want another, but they're still way over $200 new and near that used. On a whim, I go off to aliexpress, and sure enough, recently somebody started to produce knockoffs-first just the composite/alloy (200g) at under $40 shipped and now, believe it or not, a full carbon version, S works weight, in any color I want, for under $45 shipped. So Specialized is essentially marking these up 500% to a)cover their indirect costs and b) protect their brick and mortar guys.

Ok, I get that Specialized has an investment in IP, and marketing, and that they're entitled to compensation. And before someone chimes in, I was a liability attorney, so I get the cost of that that ali sellers don't have, but for saddles its minimal and sworks carbon saddles have a well documented history of failure anyway.

Its not just Specialized-Trek got 500 bucks for Bontrager bars that are indistinguishable from $80 grey market, and Time $300 for pedals that Costelo does for 80 (granted there's greater liability concerns with pedals and bars). And don't get me started on Carbonsports-if the market wasn't tiny, those wheels should be under 2k all day long, and I ride Lightweights (used).

So, my question is, what is a "fair" profit in your estimation? I'm willing to pay for the aforementioned IP and marketing and liability insurance, do I need to pay "keystone" on parts to support my lbs (or the manufacturers that protect them) where I wrench on my own bikes and essentially am forced to support those who can't /don't?

What is your personal threshold?
Cysco Ti custom Campy SR mechanical (6.9);Cannondale SS Evo Di2 7970 (5.79); Willier Cento Uno Air Di2 9070 (7.0); C40 Mk2 DA 7800 ; Anvil Custom steel Etap;1996 Colnago Technos Record

by Weenie


ichobi
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by ichobi

So what is a fair margin for a Porsche? Are they 100x better than a Prius to justify that margin? Companies can price however much they desire, doesn’t mean we have to buy top of the line stuff no? By design and by pricing those Lightweight and S-Works are sold in much lower quantity than their cheaper offerings, so it’s natural that they are priced much more.

If there are demands for s-works level component they will keep producing it, which apparently there are just like there will aways be Arabians of oil wealth who keep buying a Bugatti or two. If you disagree with their pricing you can elect to not buy them. But just dont price compare them with a cheap none-branded copy which essentially put no money in liability, r and d and all the rest that goes with producing new technology.
Last edited by ichobi on Sun Jan 07, 2018 6:14 pm, edited 1 time in total.

spartan
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by spartan

specialized have great designers but their manufacturing is mediocre. cost of marketing is huge sponsoring athletes(sagan)/teams. the consumer is paying for this not the cost of engineering/manufacturing. they do offer a great warranty :)


spec quality control
https://www.youtube.com/watch?v=eYJRLs0axrE

canyon x-rays every fork to ensure no voids. specialized cannot be bothered.
Current Rides:

2017 Giant TCR Advanced SL 0 DI2 9150

stormur
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by stormur

Manufacturers QC varies, a lot. Some check random product, some check EVERY product. Some won't even bother.

Canyon x-rays JUST fork... not frame. Why ? Legal/financial liability. They do what they MUST at lowest possible price. If random check shows frequent issue appearance, then this may be a "solution" ( :mrgreen: ) to limite future "damages" ( they care just about PR and €, it hasnothing with engineering/delivering better product. This is just as good as it must be.

1€ spent on promotion of the product gives waaaaay more return than 1€ spent for engineering.

What I observe is quality going down with raising annually prices.

Best vote is by wallet ;) My money won't go to certain brands for certain reasons.

What cycling business try to convince us to is that we receive a lot for a lot of money. Problem is that's not truth.

I wrote it aready somewhere while ago : if high end carbon racing boat would be priced same way as cycling stuff is, instead of 60-100.000$ it would cost way over milion.

Point is that with increasing prices, and/ or charging extra for "extra features" ( like "editions", blabla -works, hymoods...) client do not receive really extra value & quality.
It's still made in enormously large series in far east at outsourced manufacturer with same "quality" as low end products from this line, made even by same people.

Margin in cycling industry is around 500% ( manufacturer production cost vs wholesale price ) . Enormous considering quantity.
Insane considering quality.
There plenty of room for improvent in that matter, but again 1€ spent on marketing.... ;)

Engineering cost : good engineer annual salary is below 100k€ . How many of them you need to design frame.. 2-3 ? And looking at many designs, engineers were cheap, not good :up:


To make long story short : cost of engineering in frame price is ... marginal.

How it really goes shows story from automotive; long time ago some cars exploded in certain situations killing everyone inside. Adults, kids, elderly. EVERYONE. No one ever survived such accident.

Guilty was rear light and fuel tank electrial wiring.

Financial department of manufacturer gave to managing board two calculations : 1.how much it will cost to fix issue preventing future accident ( eliminating ) and 2. how much it will cost to pay compensations for death and legal/ marketing cost to "swipe case under carpet" ... 2nd option appeared to be MUCH cheaper ( families still burning in their cars ! ) so management decided to pay compensations as more financially efficient solution.

Conclusions are all yours.
Go to Heaven for the climate, Hell for the company.
Mark Twain


I can be wrong, and have plenty of examples for that ;)

bm0p700f
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by bm0p700f

I dont make 500% on anything. all the comments above are option without fact. Can we have fact that i firms opinion. Way to many opinions about these days. Opinions possibly need a license.

Ultimately prices are set at what people are willing to pay in any sector. If a profit can be made then the product will make it passed the first year. If not no profit results then the product is dropped.

That really is all there is too it. There is no such thing as a fair margin. There never has and there never will be. In fact that kind of thinking leads to poor profits. It is those products that make money that bankroll everything else. For me it's wheels. Without wheels, the shop would fold as there is sod all money in retailing parts after costs are taken into account.

All those that comment in this Manor don't think like a business and it if you are running one you are not making as much as you possibly could and that's the name of the game. It's not meant to be fair. Expunge that thinking right away.

stormur
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by stormur

No, you don't indeed. MRSP difference to what you pay is avg 100% ( you pay 5 charge mrsp which is 10 ) . I wrote in particular about MANUFACTURERS MARGIN. Reading with understanding can be so difficult ...

Quote :"Margin in cycling industry is around 500% ( manufacturer production cost vs wholesale price ) "

It does it look more understandable for you ? :mrgreen: or you just trolling ?

I have files ( accidentally received cc email ;) ) which shows how much certain manufacturer pays for 1 frameset loco EU , MRSP is not a secret, same as shops margin - pretty common knowledge. So if anyone has opinion without supporting it facts... it's you.

BTW what you as a shop pay in comparison to big players is another story ( CRC can sell -still making nice money- cheaper than you have to pay as tiny fish in veery big pond ). -> era of LBS living from selling goods it's coming to be over.

With one I have to agree with you : prices are on max level which people are still eager to pay. Or other factors are totally irrelevant.

Quality, uniqness, heritage... those are just and only hype. It's sport equipment. Just and only.
Performance difference ( to not mention quality ) between 2nd from top and top end frame do not justify difference in money. Same applies to cost of material ( fancy shmancy carbon, which no one really can check is it there or not ;) ) and manufacturing.

Naturally you can not agree with me... "fighting" with obvious has long history... :lol:
Go to Heaven for the climate, Hell for the company.
Mark Twain


I can be wrong, and have plenty of examples for that ;)

wingguy
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by wingguy

glepore wrote:
Sun Jan 07, 2018 2:05 am
So, my question is, what is a "fair" profit in your estimation? I'm willing to pay for the aforementioned IP and marketing and liability insurance, do I need to pay "keystone" on parts to support my lbs (or the manufacturers that protect them) where I wrench on my own bikes and essentially am forced to support those who can't /don't?
First, it's really impossible to say without breaking down all the elements in the supply chain. I don't know what markup the distributors and bike brands are retaining but I know the bike shop side of things reasonably well. The general consensus is that a normal independent LBS needs an average gross profit per item of around 20% (after sales tax) just to stay in business, let alone be decently profitable. Since the normal shop markup on bikes and high end parts is between 35 - 40% after tax it doesn't really leave a huge amount of wiggle room across the board before you're starting to get into trouble with your overheads. Obviously if you don't care about LBSs disappearing then this doesn't matter, but it's a good illustration.

Secondly, do you want any innovation or are you happy with the bikes we have now staying the same forever? Specialized invented that Power saddle that you love. Without the extensive and ongoing R&D of their BG program the Power, its imitators and its knockoffs would not exist. Those IP thieving Chinese pirates on AliExpress would never have invented it themselves and they will never invent anything better. They will never do anything that improves the quality of the equipment we have available in this sport. What's that worth to you?

wingguy
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by wingguy

stormur wrote:
Sun Jan 07, 2018 7:06 pm
No, you don't indeed. MRSP difference to what you pay is avg 100% ( you pay 5 charge mrsp which is 10 ) .
It's not 100% on average anymore. Not in my country anyway. Clothing and helmets are an exception (can be up to 120%) along with really cheap shit (can be 200%) but quality branded parts and components hardly ever see 100% anymore, more like 75 to 80% . I get very excited if something I would want to put on my own bike has a 100% markup :lol:

glepore
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by glepore

wingguy wrote:
Sun Jan 07, 2018 7:17 pm

Secondly, do you want any innovation or are you happy with the bikes we have now staying the same forever? Specialized invented that Power saddle that you love. Without the extensive and ongoing R&D of their BG program the Power, its imitators and its knockoffs would not exist. Those IP thieving Chinese pirates on AliExpress would never have invented it themselves and they will never invent anything better. They will never do anything that improves the quality of the equipment we have available in this sport. What's that worth to you?
That last sentence hits my intent exactly. At what point do I say f it all, that margin is too much? I am certainly willing to pay something for the development of the product and the research, but after 3 years in the market is 500% ( and that's an actual, not a made up number) a fair price? It's a question, not a statement. And we're assuming their thieves, who knows who actually owns the molds and ip after x years? Do you?

Yes, I do want the lbs to survive, but given the exposure of retail generally, they'll need to reinvent as a service business. They might have to downsize their physical space, or go mobile or whatever, but I don't think they're going to survive on retail. Its not their or my fault, its the Bezosization of product distribution and its not something we're going to stop.
Cysco Ti custom Campy SR mechanical (6.9);Cannondale SS Evo Di2 7970 (5.79); Willier Cento Uno Air Di2 9070 (7.0); C40 Mk2 DA 7800 ; Anvil Custom steel Etap;1996 Colnago Technos Record

cyclenutnz
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by cyclenutnz

Most of the high end products are not high margin, there just isn't room for that as there are too many hands touching the item.
Only way to make high margin is to own your factories, which is very uncommon - FSA, Giant, Merida, SRAM, Shimano...
Or to be Canyon, they don't own factories but they're making much higher margin by going direct.
For everyone else:
Factory cost + factory margin
In the case of frames - ship from China to Taiwan for painting
Paint & build cost + build factory fee
+Trading agent fee (only a couple of %)
+bike brand margin
+ shipping to country for sale
+ duties, inspection etc
+ Distributor margin
+ retail margin

The retailer needs to price in labour, support, overheads etc - makes only a couple of percent profit on a bike
Distributor needs to price in cost of capital (offering terms to stores in order to get product out there) and support
Bike Brand has to pay for R&D, QC, Insurance, Marketing, Mould costs and hopefully make some money. A top end bike will run 500k-1mil in R&D and 50-150k in mould costs if there is a decent size range and made at a good factory.

If we look at TT bikes there is little point in other brands trying to compete with Cervelo - it costs so much to be in the game and most brands have very low unit sales. For normal road bikes the small guys can't get close to the amount the big 3 are spending on R&D, so most of the new tech trickles down from them (even if it first had to flow up from a niche builder with a good idea but poor distribution).

There is a massive cost difference between well done carbon and poorly done. I wouldn't take an Aliexpress saddle as a great indication of what a good saddle costs.
Doing clever things with Alloy costs a lot too. Often without a massive benefit - it's just the difference between trying to make the best product possible or an OK one.

Most of what you pay for with bike parts is the distribution network, but it's a bit of a necessary evil. Distributors fund the industry.
http://www.speedtheory.co.nz
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Vermu
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by Vermu

You all should learn to calculate margin correctly.
The chain is the biggest issue ie se what Canyon has been doing.

Now I dont know what the margin for cycles is, but the thing with LBS heavy industry is that everyone needs their cut to make a living.
Factory does the design and finds manufacturer, lets say the frame costs 200 to make. Manufacturer needs 40% margin to pay wages and make profit in the proces and sells it forward for 333.
That would be 40%. The thing that comes next is the biggest.
Who ever designed the frame need to cover for marketing expenses, r&d, tech support...
So if it were me I would charge for 70% from the continental distributor and price goes to 1111.
Now distributor runs logistics and again some wages and local sponsoring, so they ask for 40% margin and now the price is Up to 1851.
Local guy want his share 30% and we are at 2645 some currency.

Sure you can always charge for the brand but biggest problem is the chain that is in between customer and the one that made the frame. Some say that in some brands the price is far from what you are getting for your hard earned money.
But remember that in drug industry developing new product may cost shitloads of money and may never be a product that can be sold to public.
I know harsh example and pharma industry is not a best example in many other codes of conduct. But still r&d and making the product known costs a lot.
For me paying for some big S saddles the price is acceptable due my butt.


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kulivontot
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by kulivontot

Engineers work in manufacturing too you know... It's not like they pass a CAD file and some magic Chinese elves run off and make these frames without any other input.
I feel like this is a very generalized discussion that actual involves many layers of business details that are entirely opaque to the consumer.
That said, I am sick of paying an extra 80% at the LBS to have them give me attitude about custom orders, know less about the technical details, and ultimately order the wrong part and take longer than it would take to order the exact part number from an online overseas distributor.
I am happy to cut out that margin, Canyon has the right idea.

wingguy
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by wingguy

glepore wrote:
Sun Jan 07, 2018 7:33 pm
That last sentence hits my intent exactly. At what point do I say f it all, that margin is too much? I am certainly willing to pay something for the development of the product and the research, but after 3 years in the market is 500% ( and that's an actual, not a made up number) a fair price?
3 years is not a very long lifespan for a saddle at all... and the people who designed it are still working for Specialized and stil getting paid. They're designing the next thing and the next thing. And as alluded to above, they're probably doing a heck of a lot of work that will never result in a sellable product but that still has to be paid for before they get to the next thing that actually works well enough to go into production.

As to what is fair, you'd just have to know how much money the companies are are making. Outside of Giant, Trek, Spesh and Shimano is there anyone in the cycling industry who is genuinely obscenely wealthy? I don't know.

I would say that from what I've seen is that particularly over the last 5 years the cost of like for like high quality parts and components has gone up by around 15 to 25% on average in the UK. Part of that is our own stupid fault with the post-brexit currency crash, but even accounting for that it's a big hike, far in excess of wage growth. The pricing of high end parts in 2012 was a lot more accessible for normal people than in 2017, that's for sure.

bm0p700f
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by bm0p700f

Reading with understanding stormur is such an insulting comment. 100% margin well not on everything I buy but on some products I make that. They bank roll everything else that is essentially sold at cost. Manufacturing is not a high margin business in general. The hubs I use are made by an Italian company. Given what I pay there margin can't be big. They just make lots of them so it all adds up. I buy rims oem pretty cheap but my price reflects the storage costs and the huge dent in cash flow stocking them. Specialised is no different. They out source manufacturing but buying all the product cost money it has to come from somewhere. Therefore they don't make 500% and I don't know where that comes from. Company actual margins are alot less so higher margins on some things keep then afloat.

Again things sell for what people are willing to pay. If you charge less your a fool. EBay carbon parts are cheap because no one will pay more for them. If those ebay retailers could charge more they would.

Branding is powerful and well branded products attract a premium. The cost if sale and what it cost to make are only linked by what people are willing to pay. Branding make the price people are willing to pay a fair bit higher than the cost of manufacture. It takes time to build a brand so that money is earned.

One of the carbon rims i buy is used in a roval wheel. The difference in price between my wheel and the roval wheel is down to the strength of roval brand and the extra link in the distribution chain. Quality has no bearing on price either but it can increase costs. Quality is part of the brand image as most if us have no idea what qc is actually done or what it even means. It is just a word that helps increase price on some cases in other cases the cost is real.

If I want to get my own alloy rim made the due cost is 10000 usd and min 1000 rims a month. So while the resulting rim may only cost 20 usd ex works by the time it ends up in shops it would be £90.

No one gets rich in cycling not even shimano. They make money for sure but not apple levels if money. That is a an example if a product where the brand name command a premium and people pay it. Apple has what 180 billion usd in cash or something daft like that. Good on them as well, as making money is what business is about.

I bet (1p) one person complaining here owns something apple. If you think large margins are in fair give away your apples.
Last edited by bm0p700f on Sun Jan 07, 2018 9:49 pm, edited 1 time in total.

Mr.Gib
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by Mr.Gib

I am not an economist although I occasionally play one at a university. Contemplating what is an appropriate margin is a pointless exercise. Despite the many factors that go into such decisions, ultimately it is a market driven decision at any level of the supply chain. The correct answer to the question of margin size is simply the size that is the most profitable. The people that operate these organizations have a duty to the owners to be as profitable a possible. Failure to do so should result in their replacement by others who will seek to maximize profit.

Different industries and markets differ in the how big margins can be based on the balance of power between buyers and sellers. Many parts of the bicycle industry are not particularly competitive. Read Michael Porter if you wish to understand this in depth.
wheelsONfire wrote: When we ride disc brakes the whole deal of braking is just like a leaving a fart. It happens and then it's over. Nothing planned and nothing to get nervous for.

by Weenie


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