The Life Cycle of Products

NEW YORK (MainStreet) – It may surprise you to know that anything you buy does not begin its life on the store shelf, and it does not end when you bring it home. It travels a long and winding path, and along the way it can go through numerous price changes, all the result of feverish behind-the-scenes negotiations.

The path from the manufacturer to the retail store is fairly straightforward at first glance: The manufacturer makes a given product at a certain cost, and thousands of them are sold wholesale to large retailers at a slightly marked-up price to ensure profit margins. The retailer sells it to consumers at an additional markup to secure its own profit – often at a manufacturer’s suggested retail price.

But this seemingly simple process is fraught with negotiation on numerous points.

Marked Up

First, the actual development of a product is often a collaborative process between retailer and manufacturer. No, Apple isn’t consulting Best Buy when it determines specifications for the new iPhone, but a large clothing retailer may work with manufacturers to determine exactly what sorts of dress shirts it will be getting – and, in the process, minimize how much it will cost to buy those shirts wholesale.

“A retailer will go to a vendor and say, ‘This is what I’m looking for, I want to offer a shirt in this price range,’” says Daniel Butler, vice president of retail operations for the National Retail Federation. “If I want that extra button, it adds a dollar. Pleats, another dollar. The cost of raw materials drives the cost of manufacturing it.”

That manufacturing cost is obviously the biggest factor in determining how much the manufacturer actually charges the retailer for the product – the wholesale price. But it’s not the only factor. Butler, a 26-year veteran of the retail industry who spent years negotiating such deals as a buyer, notes that larger orders will necessarily bring down the per-unit cost, just as buying in bulk at Costco will save you money in the long run. Retailers can also bring down the costs by offering manufacturers prime placement for their products.

“Vendors will negotiate for space and location,” he explains. “Retailers will set a premium for the best location.”

As a result of the myriad factors that must be negotiated during the buying process, it’s hard to put an exact figure on the markup a manufacturer will ultimately charge the retailer at wholesale. Much depends on the proficiency of the negotiators involved. The type of product matters, too.

“Every industry is different,” says Marshal Cohen, chief retail analyst at the NPD Group, a market research firm. “In electronics and footwear, the margins are lower. In apparel, the margins are higher.”