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Developing & Bringing New Products to Market

Part 2: Pricing

by John Neugent

Tech articles | Commentary articles | Product Development series part 1 | Product Development series part 3

John Neugent probably knows more about bicycle wheels than anyone else alive. Maybe more about bikes as well. He's spent his life in the bike business, at every level. He now owns Neugent Cycling, a firm devoted to delivering world-class equipment at the lowest possible price. If you are in the market for a set of wheels, please, check out John's site. He really knows his stuff. —Chairman Bill

John Neugent

John Neugent

For most companies, the price is one of the most important features of a product because it has a huge influence on sales. The “no compromise” brands I mentioned in the last article apparently see price as a less important item. That may be true if you are building a rocket ship on a cost plus basis but in the real world features and benefits need to be competitive with the competition.

The best way to be competitive is to work from the customer price back. If you are primarily selling $20 retail items to consumers through distributors and retailers, it’s the consumer price that’s important. If you are selling derailleurs to bike makers it’s the bike maker cost that’s important. With major bike makers this can mean a few percentage points can make the difference.

Large companies that sell to bike makers generally work on gross profits in the range of 40%. In that 40% are the costs of engineering and development, the cost of actually making the product, and even the packaging required to get it to the bike company. The companies have other costs normally referred to as S,G, and A, or sale, general, and administration costs. These can vary but normally include marketing and all of the infrastructure it takes to run a business. Another way to look at it is that all of the costs associated with development and manufacturing are broken out into the cost of the product.

Therefore, if a large component manufacturer supplying to a bike maker has low, middle and high-end products, they can allocate development and engineering costs any way they want. High-end technology trickles down to the low end so the development costs are less, but they may want to make sure their high-end products sell well so could easily allocate some of the overhead to lower-end products. It’s here you see the real game since they need to be competitive at all price points, all of the time, most likely, being looked over by accountants who need to see an overall gross profit margin.

What are the numbers for aftermarket items? These are rough estimates but they will give you some indication of general margins. Bike shops generally work on 50% margins for parts and accessories (less on more expensive items and more on less expensive items) and 40% on complete bikes. Remember that the shop has to assemble and normally give some number of tune-ups to the bike, thereby reducing their profit margin. Distributors work on about 30% - which varies by price point and vendor.

Let’s run some theoretical numbers. Let’s say an item retails for $10. The dealer cost would be about $5 (50% margin), distributor cost of about $3.50 (30% margin) and a manufacturers cost of about $2.10 (40% margin). In that manufacturers cost, much of it could be for engineering and development so to actually make the product it could easily cost only $1. No one is getting rich here, these are the costs of their overhead and it’s a competitive world.

So how do these retailers from Europe sell into the retail US market at what is essentially distributor’s cost? Two things. They are essentially cutting out some layers of distribution, and are also subject to much different laws. Laws in the US, although complicated, essentially allow manufacturers to set their retail pricing. Laws in Europe often do not. So if a company can buy at less than distributor cost, they may be able to sell it at distributor cost and still make a good profit. And they are.

As a consumer you need to decide what’s important to you. Since I have been in business most of my life I have come to appreciate the value the stores and people I buy from give to me. If I go on a ride sponsored and lead by a bike shop guy, that costs him time and money I am willing to pay for. You can do it for free but I am not comfortable asking for something for nothing. It’s not who I am. Some people are happy to brag about getting things for free. I don’t want to be associated with any of them. On the other hand, there are also retailers who want you to be on the paying end, as in too-high prices, and I would avoid them.

Hopefully this is short enough to digest while at the same time giving you information to help you make decisions.

John Neugent was was one of the first to establish quality hand building in Taiwan around the turn of the century. He now owns Neugent Cycling, a firm devoted to delivering world-class equipment at the lowest possible price.