Publish 4 December 2021
Before calculating your ROI, you must know your COG.
Your friend asks with interest about new products in your online store. After an alluring description, he responds: “I want one. What’s your cost?” While you may focus on the word, “friend,” My focus is on the phrase, “your cost.”
Bringing a new product to market takes time designing, engineering, manufacturing, outsourcing, shipping, packaging, and/or warehousing. Wholesale cost either requires cash up front or purchase with interest. So the question is not, what is your cost but what is the retail cost.
A wholesale unit cost might be $5. Add packaging, amortized development, e-commerce transaction fees, and shipping. This can increase cost of goods (COG) to $7.25. But if you buy 100, initial expense is $725. This is really the cost for the first one. Debt decreases as more units are sold. You add margin to account for the fact that products are not selling every minute of each day. So the price might be set at $15.
It is exciting to sell the first one. You might exclaim, “I made $15.” Not really. Subtract that from COG and you are still $710 in debt. You break even after selling half your inventory. Offering discounts or sales might move more units but it takes longer to materialize a return on investment (ROI).
To offer shoppers a wide selection, you may have dozens or hundreds of products in which you make similar investments. Friends are not doing business owners a favor by purchasing products at wholesale. The best way to help a friend is to ask what is the retail cost, and add a little tip.
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