Your margins aren’t low, just wrong
“We cannot go to China, we tried, and we cannot match the margins” or is it that you missing something?
This is something that I for a long time didn’t understand, as price & margins is always relevant and important, but seldom a showstopper. Furthermore, we even work with profitable companies that are working in single digest margins (“or less”). Now don’t misunderstand me, the price to consumer is very important and competitive, and a large topic.
Last week, I had the luck to sit down with a few investors from different funds and fin-tech related areas, after talking with them I it hit me.
There is a key variable that we should take into consideration when presenting the product to potential distributors or resellers… time.
As a reseller, distributor or other that will sell your product, in a simple formula it's like this:
“Price” – “Cost of Product” – “Cost of Sales” = “Profit”
These are usually the variable we use to get a product on the shelf of a reseller. You can have a high price, its cheap to buy in the product and our brand is good, so you don’t need to spend too much effort to sell the product.
However, what many misses, especially when it comes to China, is how fast the product will sell. In other words, how fast will you turn your stock around into cash again. As the return over time is more important than return on a single transaction.
A simplified example would be:
If you can turn around your stock valued at 10,000 Euro 3 times in a year with a 10% return or a single time in a year with 30% return. The profit would be as follows.
10,000 x 1.1^3 = 13,310 -10,000 = 3,310 in Profit 10,000 x 1,3 = 13,000 -10,000 = 3,000 in Profit
The profit from the first example would be 3,310 Euro and the second example 3,000 Euro. That is a 310 Euro difference, which is 10.3% more profit, something that anyone would be happy about.
In other words, the formula from before should be:
(“Price” – “Cost of Product” – “Cost of Sales”)/ “Turn Around Time” = “Profit over time”
If you can show the reseller why and how they will turn around your product fast, and even better back up you claims. Then you will be in a much better position to when talking about the price and margins.
If you want to know more or learn how we work to achieve this, schedule a call or drop us an email.