Why are retail prices of electronics cheaper than wholesale prices?

March 30, 2006 11:17 AM

Why are retail prices of electronics cheaper than wholesale prices? How can anyone make money here?

The company I work for makes a cool electronic gadget that we retail online. We decided we could increase profits by selling other products alongside it - namely large capacity memory cards.

After the manufacturers directed us to their wholesalers, we noticed that Amazon offers every single product at cheaper than our wholesale price. I called the wholesale company and they agreed to give me an additional 5% off, meaning if we want to be competitive on price, we still have basically 0 margin once you include various fees (transaction, packaging, labor, etc).

By contrast, or other products (the ones we make and the ones we resell) provide a minimum 30% to maximum 70% margin. I know that's larger than we'd get for memory cards, but we're used to making some money.

Back in the 1990s (at a different company) we bought large volumes of computer components. We'd get a high volume price - for 10,000 or more units - and then compare the wholesale price versus a high volume computer retailer stores (now on the internet, back then in catalogs). The retail price would inevitably be cheaper by 10% than our wholesale price.

In 2002, we wanted to use a color screen. I contacted Sharp and was given a price on such a screen. When I asked for a sample, I was told none was available for about 3 months. They wanted me to make a $100,000 commitment without even seeing one. Finally someone told me it was used in the Nintendo portable game system that had just come out. I went to K Mart and bought one for about $1 more than I was told the screen alone would cost. The Gameboy had the screen, a computer chip, a memory chip and a free game cartridge. It was also built into a plastic case and sold through K-Mart (who had to make something on the deal). Yet all that added only $1 to the price.

There has to be some icing mechanism at work here but I have never figured
out how to access it.

Can someone please explain how this works? Or is there really just no way to make a profit here unless you're doing like a million units per year?

posted by b_thinky to computers & internet (26 comments total)

Here's another example:

I just bought a new computer. I called Bellevue and told them all the components I wanted. They came back with a price of $3,600. I told them I couldn't justify more than $3,000 and they told me that was less than their wholesale cost.

So I went to Newegg.com and bought everything I needed. The total price came to $2,430.
posted by b_thinky at 11:19 AM on March 30, 2006

This answer is easy. You're being lied to.

When a vendor tells you their absolute bottom wholesale price is X, and Amazon is selling it at retail for X - 10, someone is not being truthful.

The prices appear to be wildly fungible because vendors treat companies differently in order to maintain relationships. You will never get Amazon's price, because Amazon will sell a kajillion units over a kajillion years. Some of these prices are loss leaders, so the vendors can sell Amazon something else at a higher cost.

This dovetails nicely with the GameBoy example. Keep in mind that the platform is a loss leader for the game sales and licensing. It is deliberately priced at a loss for Nintendo, so Nintendo can sell you nifty games to play on it.
posted by frogan at 11:31 AM on March 30, 2006

It's all about the quantity discounts. Amazon and Nintendo are buying much much larger quantities of components than your company, therefore they're getting massive discounts.
posted by bshort at 11:34 AM on March 30, 2006

The Nintendo example may not be the best since video game companies often subsidize the cost of their game systems since most of the profit is made on game sales. Nintendo isn't too guilty of this, as I heard that the original cost to manufacture a GameCube was somewhere around $8 less than retail price. Sony takes a considerable loss on the PSP and Microsoft on the new Xbox, though.
posted by mikeh at 11:39 AM on March 30, 2006

Nintendo probably bought a million of those screens-- call them back and ask what the price would be if you bought a million.

Same with the memory cards. Tell them you are going to be buying upwards of 200k units and find out the price.
posted by cell divide at 11:43 AM on March 30, 2006

frogan, you sure you know what fungible means?
posted by fixedgear at 11:58 AM on March 30, 2006

The majority of what you buy from NewEgg is drop-shipped from the wholesaler (Tech Data or the like) with Newegg's contact information put on the label (an option the wholesaler offers). So not only are they at one of the highest discount rates because of their quantity but they don't bear any of the handling overhead.
posted by phearlez at 12:03 PM on March 30, 2006

I understand price drops with qty, but when I asked about purchasing 10,000 units the wholesale price was STILL higher than the resale price. We're talking about high 6 figure/low 7 figure contracts, and I can't get below the retail price?

It feels like I'm being lied to, but who can I go to that will tell me the truth?
posted by b_thinky at 12:15 PM on March 30, 2006

Who says you are being lied to? They are giving you a price that is higher then they give to those who purchase higher volumes. Why don't you understand what we are saying?
posted by parallax7d at 12:19 PM on March 30, 2006

You have to cut down the number of middlemen and/or buy more product.

I'll give you an example of the first (prices are representational):

When I did major appliance work one of the major manufacturers (known hereafter only as Nameless Major Manufacturer So I Don't Get Sued [NMMSIDGS]) machine's used a motor and clutch assembly to power their machine. Due to what I consider to be a design flaw 80% of the time it was impossible to separate the clutch from the motor without damaging the clutch. So to save our customers money (from reduced labour costs) overall we'd recommend replacing the assembly when a motor would blow.

At the time buying at "C" list wholesale from the manufacturer we could buy the motor for $99, the clutch for $149 and the assembly for $265. Buying the assembly actually saved money because it used to take 15-20 minutes to assemble the individual pieces. B list pricing was more expensive and plain List wholesale pricing was more expensive still. You had to purchase a certain volume annually to get B list and eventually C list pricing.

We got to jawing one day after noticing that the box a motor/clutch assembly was packed in didn't have NMMSIDGS's name written all over it despite the fact we were buying directly from NMMSIDGS's Western regional Depot and everything else we bought from NMMSIDGS did have their name stamped on the box. Our purchasing officer started phoning and faxing around (way before the web) and managed to track down the guys actually making the assembly. Because their minimum order was a three lifetime supply for us we passed this information onto another person we knew who owned a parts supply business. In exchange for supplying this information we could buy the assembly from him at his cost which was $89. Thats right, we could buy the whole assembly for less than what NMMSIDGS would sell us just the motor.

The kicker: Our PO went way back with a the guy who was now NMMSIDGS's Western Regional Parts Sales Manager (let's call him Bob). Bob was ultimately responsible for every part sold by NMMSIDGS from Thunder Bay to the Pacific. We'd get quarterly visits from Bob as he'd be passing through town. A couple weeks after our first shipment we get a visit from Bob. We were so proud of the price we were paying for the assemblies we had a big stack of them at the end of the parts counter with a sign offering them for sale for $149, the same price everyone else in town was paying for just the clutch from the NMMSIDGS.

Bob walks in, recognizes the box and thinks we're pulling a scam of some sort. His price on the assembly from NMMSIDGS North America before applying markup and distributing to provincial distribution centres is more than what we are selling them for retail.

By buying at the factory price we eliminated 4 markups. Factory to NMMSIDGS NA; NMMSIDGS NA to NMMSIDGS Canada; NMMSIDGS Canada to NMMSIDGS West; NMMSIDGS West to us.
posted by Mitheral at 12:26 PM on March 30, 2006 [1 favorite has favorites]

It feels like I'm being lied to, but who can I go to that will tell me the truth?

If you want to get a better price, you need to figure out how to pitch your purchase order as a strategic relationship, rather than just a simple customer order. Even though console makers take a (sometimes huge) loss on the consoles, the parts makers give them breaks, because they believe that they too will make up revenue in volume down the road. This allows them to invest in higher-volume, lower-cost production facilities in order to get the actual unit cost down.

Rather than talking to sales people, talk to senior management at your vendor. Convince them that selling to you will drive new revenue or open new markets for them.

You may want to look in to having your product built by a company like Flextronics. They handled production of the first vew revs of the XBox (until Microsoft took control of production and moved it from Flextronics' facilities in Mexico and Eastern Europ to China), and still make a ton of cell phones. They should have all the right vendor relationships to get the parts you need for your project at the right prices. For good measure, you should google around and find out who competes with Flextronics. An up-and-comming contract manufacturer might be more willing to deal with a smaller production run.
posted by b1tr0t at 12:30 PM on March 30, 2006

It's also possible that Amazon is selling the cards at a loss in order to support the sale of other electronic items on which they make a profit.

Selling loss leaders is a very common and sensible business practice. I don't know if that's what's going on here, but it's certainly possible.
posted by alms at 12:31 PM on March 30, 2006

Off-topic a bit, but contrary to what phearlez mentioned, Newegg doesn't do drop-shipping for most things - Anandtech actually had an interesting article where they toured one of the giant warehouses that Newegg has. (If you wanted to see what buying in bulk is about, this gives you some idea...)
posted by bemis at 12:32 PM on March 30, 2006

frogan, you sure you know what fungible means?

Second definition of fungible = interchangeable

The prices appear to be wildly interchangeable because vendors treat companies differently in order to maintain relationships.

Sentence still works. Step off, chump. ;-)
posted by frogan at 12:33 PM on March 30, 2006

Other things that can be going on:

1. Some companies use items like memory cards as loss-leaders to get people to buy higher ticket items from them. (the flip side is that other retailers make most of their profit off accessories like memory cards and cables)

2. Large companies can use aggressive supply chain and financial management to eek out profit and push down costs. For example, Amazon might be buying memory cards on 90 day terms, but when they sell them, they get paid by the credit card companies within, lets say, 2 weeks.

They then can earn a return on those funds for the 75 days until they have to pay their suppliers.

Companies that are aggressively working the gap between accounts receivable and accounts payable may also have incentives to sell commodity items at a loss because they may need liquidity to pay off accounts that are coming due.


As to your particular problem. You might see if you can work out a deal with someone who will drop ship memory cards for you and do what newegg and the like do on a smaller scale.
posted by Good Brain at 1:02 PM on March 30, 2006

You sure you know what "interchangeable" means, frogan?

I think the word you wanted is "variable."

If you say that Foos are fungible or interchangeable, it means that one Foo is the same as any other Foo. If you say that Foos are variable, it means that one Foo could be wildly different than another Foo.
posted by nebulawindphone at 1:03 PM on March 30, 2006

on preview, Bemis reminds me of what I already new. New Egg wharehouses and fullfills most of the products they sell. Still, the suggestion stands.
posted by Good Brain at 1:04 PM on March 30, 2006

This answer is easy. You're being lied to.

When a vendor tells you their absolute bottom wholesale price is X, and Amazon is selling it at retail for X - 10, someone is not being truthful.

Not not necessarily true. The wholesale price to a small retailer is usually about the same as a what a large volume retailer is able to sell an item for retail, at least in electronics, cameras etc. The large volume guy may be gettin volume discounts, or perhaps is selling grey market goods.
posted by caddis at 1:16 PM on March 30, 2006

I 'm agreein with Nebulawindphone here on the definition of fungible.

I know that some of the companies I work on the accounts of get much larger discounts than their similarly blue chip competitors. Building a relationship based on mutual benefits seems to be the key. (I know that sounds like corporate bullshit but that is what seems to work. Giving something in addition to a sales/purchase transaction gets you more bang four your buck...
posted by ClanvidHorse at 1:44 PM on March 30, 2006

phearlez, as an aside, Newegg has several warehouses and a very sophisticated shipping system. They did a writeup on it over at Anandtech a couple of months ago. When you order from them, it all comes in the same box.... unless it won't all fit in one box, anyway. No drop shipping. They're a good outfit, although far from the cheapest these days.

Wholesale companies tend to like large accounts. Assuming the product is good quality to start with, the more units they sell to a particular customer, the fewer problems per capita they'll have... small customers have more problems per unit, because each customer has to learn the product separately. Two wasted motherboards from customer stupidity is no big deal in an order of 100,000... but in an order of 100, it's enough to notice.

Additionally, the selling process involves overhead. Each customer requires handholding by a sales rep, and it takes almost exactly as much overhead work to sell a million units to someone as to sell them ten thousand.

So if you are a smaller customer, you just don't get the best pricing, because there's a hard cost to dealing with you. When they can amortize that cost over a vast number of units, they're much more willing to cut great deals.

Plus, those really big deals are probably going to the president or CEO, who have more power to say 'yes'. The salesdroids you're dealing with at lower buy levels can only say no.

To get the best pricing, you have to buy enough units to get the attention of upper management... if you're Amazon, that's no problem, but Joe's Custom Electronics will have a hard time.
posted by Malor at 2:07 PM on March 30, 2006

My wife used to work for a power supply company. They had large customers that would order 500,000 to 1,000,000 at a time and small clients with special project orders of 1,000 or so. The price difference for the same part at the two quantities could be as high as 100%. To quote her "An order of ten thousand is a drop in the bucket."

To give you an idea of the price difference between your 10,000 part order and Nintendo's. "As of September 2005, the Game Boy Advance series has sold 70.04 million units worldwide." Nintendo was clearly placing much larger orders than you were.

In summation, 10,000 is not a high volume order, so you shouldn't expect a significant volume discount. (The tone of this post is not meant to be snarky, though it may come off that way.)
posted by oddman at 2:26 PM on March 30, 2006

Who says you are being lied to? They are giving you a price that is higher then they give to those who purchase higher volumes. Why don't you understand what we are saying?
posted by parallax7d at 12:19 PM PST on March 30 [mark as best answer] [!]

Of course I understand the concept, but if I'm looking to buy hundreds of thousands of dollars worth of equipment here, and I could actually go to Amazon.com and buy it cheaper than what the wholesaler is offering. Doesn't this defeat the purpose of wholesale?

And for some reason, all wholesalers insist on hiring creepy and rude people. When I ask for their pricing, instead of giving me a set chart of discounts for specific quantities, they'll ask me stuff like "How many are you going to buy?" or "What are you looking to make?"

It feels like I'm buying a used car.
posted by b_thinky at 2:29 PM on March 30, 2006

When I worked for a wholesale company I had to be that creepy person. Basically, we had companies that had a contract with us to buy a certain amount of our advertising crap (books, pamphlets, samples, whatever) and they got much lower wholesale (for showing their commitment with their pocketbook) than small companies that couldn't afford that kind of relationship with us.

It really was gross. As someone who tries to support locally owned businesses, I felt pretty defeated.

On the upside, in this particular industry, a lot of the big companies who got better wholesale prices wouldn't bargain down from our printed retail (MSRP) and customers just assumed that they couldn't haggle anyway (because, well, can you, at most retail chains?), and most locally owned place's starting price, while giving themselves some profit, was nowhere near our extremely bloated Suggested Retail.

Unfortunately for you, places like amazon and Fry's Electronic really often do pass on their wholesale savings.
posted by birdie birdington at 3:15 PM on March 30, 2006

Of course I understand the concept, but if I'm looking to buy hundreds of thousands of dollars worth of equipment here, and I could actually go to Amazon.com and buy it cheaper than what the wholesaler is offering. Doesn't this defeat the purpose of wholesale?

I wonder. Given the costs of dealing with customers mentioned above, perhaps the wholesaler would prefer that you buy it all from Amazon. From their perspective, your order wouldn't cost them anything, and it would just bump up their next order from Amazon by a few percent. Their ideal situation is that they have one huge customer who buys their entire output.

I recall some story recently about some electronics company (Microsoft?) buying the entire output of some other company's factory (Samsung?). I'm sure that that deal was super-cheap for the buyer, and led to a few islands in Dubai for the sales team of the seller.

I guess the moral of the story is that the little guy is always screwed, even if he's not all that little but merely not the biggest.
posted by breath at 3:40 PM on March 30, 2006

I wonder. Given the costs of dealing with customers mentioned above, perhaps the wholesaler would prefer that you buy it all from Amazon. From their perspective, your order wouldn't cost them anything, and it would just bump up their next order from Amazon by a few percent. Their ideal situation is that they have one huge customer who buys their entire output.

There is so much truth to this statement that I can hardly stand it.
posted by davejay at 5:44 PM on March 30, 2006

Another trick for dealing with sales people in general - get into a conversation about the product. Show interest, but keep the conversation going as long as possible. Most of the time the sales rep will become more and more committed to making a sale. They will usually tell you more and more about the product, and might start to tell you about special deals. This doesn't work as well when the sales staff is busy, but can be extremely powerful on a slow day at the end of the month.

The larger the deal, the more this kind of negotiation becomes the norm. Purchasing an entire company can take months or even years of dialog.
posted by b1tr0t at 10:18 PM on March 30, 2006