How Are Products Priced, Anyway?

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You ever wonder how much money a manufacturer makes on a $100 product? How much of that goes to the fly shop? Outdoor gear is expensive, after all, so it’s a fair question.
Generally speaking, retail markup in the outdoor product industry is between 40% and 60%. That means a product you see on the shelf in a fly shop for sale for $100 probably cost the shop between $40 and $60 to buy themselves. Meanwhile, the manufacturer has to make money, too, and that means that whatever price the fly shop paid has been marked up significantly over the manufacturer’s cost to make the product. How significantly? Well…


Manufacturing costs vary widely (in fact one might say they range from “a little bit to quite a bit”) but a healthy figure that would keep most manufacturers in business is between 40% and 60% profit on any given product (in other words, the same markup as the fly shop’s). If you do the math backwards, that means a $100 product that has been marked up (by 40%) twice would cost the original manufacturer around $36 to “make.”
Breaking down what goes into that manufacturer’s cost is way harder, however. Manufacturers not only have to buy the raw materials for their products, then pay people to assemble them, but they must also design the products in the first place, market them, and ship them around the country (or world).
I’ve read some breathless estimates on fishing forums that the raw materials and labor in a $500 fly rod might cost as little as $25 or less. Larceny! Highway robbery! Grand theft fly rod!
It’s important not to get too worked up about a raw materials figure, though. Every fly rod has development costs. Every fly rod has shipping and marketing costs. And while it might be nice to always pay wholesale by ordering directly from your favorite retailer, it’s also nice to have a fly shop to go to for advice, instruction, and last minute tippet sales.
Based on the minimal number of fly shops who actually turn a profit in this country, and the dwindling number of manufacturers, it’s pretty safe to say that no one’s getting rich in fly fishing (especially right now). So when you see a $500 fly rod and feel that frisson of sticker shock run up your spine, keep in mind just how many people are surviving on that little shaft of graphite, and just how many competing pressures are at work in setting that price.
Do fly fishing gear prices make sense to you? Let us know in the comments section!

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  • robert morselli

    Zach,
    re: do fly fishing gear prices make sense to you?
    My short answer is: yes, gear prices generally make sense. That said, there is no question in my mind that some companies charge way too much for their stuff.
    Let’s take rods, as an example…
    There are companies (St. Croix, Mystic, to name just a couple) that design, manufacture, market and sell their top-tier rods in the $400 range. I fish these rods (and many other brands) on a regular basis and they not only stand up to but often best other rods at twice the price.
    Hardware is often cited as a culprit (fancy reel seats, line guides, engraving, etc) that turns that average rod into an expensive item, but I have much difficulty believing that hardware alone (OK, maybe a little more labor, too) can account for a whopping three to four-hundred dollars extra on a single rod purchase.
    I can’t help but be annoyed when I see rods that are priced right through the stratosphere. What all of this means is that many items are fairly priced, but many others certainly aren’t.
    I’ll stop short of naming names and taking companies to task only because I’m intelligent enough to understand that some consumers are fine with paying extra for a degree of exclusivity – there’s nothing wrong with ordering up that Ferrari – but much of the marketing hype for rods (and reels) has managed to hoodwink consumers into believing that there is some real, material justification for a $795 rod. There isn’t.
    Oh – and if you think that fancy rod prices have something to do with being made in the US – as opposed to lesser-quality offshore manufacturing (although this point is certainly arguable) – then think again: the two companies mentioned above DO make their hi-end stuff right here in the good ol’ US of A.
    Robert

  • this article has triggered a rant

    “And while it might be nice to always pay wholesale by ordering directly from your favorite retailer, it’s also nice to have a fly shop to go to for advice, instruction, and last minute tippet sales.”
    What do you mean “pay wholesale by ordering directly from your favorite retailer”?
    And I think “it’s also nice to have a fly shop to go to for advice, instruction, and last minute tippet sales” is too weak. Last minute tippet? Is that the only thing you buy from local shops? That might be one reason so many shops are struggling. I think the spirit of the piece is good, but I think the point needs to be made more forcefully. A good bit more forcefully.
    Advice, instruction, touching a reel, casting a rod, talking about the local water, what flies to use, access, these are the reasons to buy from a local shop. I have customers come into my shop constantly who talk talk talk, buy one small thing or don’t buy anything at all, then actually have the %$#&@ to tell me that they can get the bigger item online for cheaper, hahahahah! Isn’t EBAY great!?!? I want to smack them. The extra money you pay at an independent fly shop, which often isn’t that much more money, is going to the experience of shopping live and in person. And as long as the shop employees are kind, friendly, and knowledgeable, that extra money is very well spent.
    Here is a specific example that happened this past Saturday: guy comes in, he’s learning to tie flies. He asks for a half hitch tool and I say we don’t carry them, but here’s a whip finish tool and let’s sit down and I’ll show you how to use it blah blah blah. We sit down and I have him whip finishing in about 10 minutes. He’s smiling, I’m smiling, his flies are going to be better now. He says he’s getting really into fly tying. I look hopefully back at the giant wall of fly tying materials. He’s interested in tying flies for smallmouth. He asks if we have any good intro books on tying, particularly bass flies. I pull down Clouser’s Flies book from the shelf and say this is the one. Great photography, great flies, great instructions, from arguably our nations smallmouth expert. I tell him a little about the Clouser minnow, variations on it, why it’s a good fly etc. Now this book is a hard back and it’s not cheap, I think around $50. He says he can find it cheaper on Ebay or somewhere else online and says thanks and walks away having spent $2.95 on a whip finisher. I spent a half hour with him, the margin on that whip finisher (50% as you point out) didn’t come close to paying me my wages, he spent $3 not only for the tool, but for a lesson on whip finishing, some good information about the Clouser minnow, and a tip on which book to get.
    Try doing that at Sierra %$#@! Trading Post.
    Also, margins on books and boats are usually below 40%, oftentimes well below it.

  • this article has triggered a rant

    Robert- I don’t know about St. Croix, but in fact Mystic does not make their rods in the USA. I still think they are freaking awesome rods and I think they are a good deal compared to other rods on the market.

  • Michael

    Having spent one career in retail, none of the supply cost and profit picture is new comes as any surprise. I do believe that the price is only what one pays, it’s value one receives.
    When one visits a local knowledgeable friendly fly shop one usually goes there to discover something of value. If you recieve value, you should be sure that the fellow on the end of providing that value is paid for it in some way. nIf you don’t your a moocher. There are plenty of moochers in the world. Don’t be a moocher. Retailers can’t say no to moochers, and they can usually spot one pretty easily. Just be sure you don’t start to see all of your customer’s as moochers, that would be a big mistake. The shops that stay in business and prosper understand this all to well. Focus on value, not on price and always be fiercly competitive where ever you can be. Hey, let’s hit some water and see if we can fool a fish into raising to our fly. Now that’s a value no one can put a price on!

  • Paul Clark

    This may be splitting hairs, but markup is the percentage added to the shop’s cost. So if a product sells for $100 and the markup was 40%, then the cost was $71.42. Likewise if the markup was 60%, then the cost was $62.50. So if the markup is 40-60%, then the cost is about $62 to $71, not $40 to $60. Makes it look a lot more reasonable. Maybe markup is defined differently in your source. Great site! Thanks.

  • Tyler

    Isn’t the cost of a product or service determined most significantly by how much someone (or more precisely enough someones) are willing to pay? Manufacturers should not be chided for producing high priced equipment any more than the retailer should be scolded for selling it.
    I suspect that the mere fact that a high end market exists helps those of us who buy midrange equipment every bit as much as it helps the manufacturers and retailers—we benefit from product development, albeit a year or two later, and those who make and sell the stuff benefit (I presume) from higher profit per unit sold.
    The bottom line is that everyone in this sport/industry needs each other. And I think there is a legitimate place for Sierra Trading Post and eBay. The problem is not price gouging, it’s not alternative retail outlets. The problem appears to be a fragmented and largely inefficient effort to reach consumers.
    How many local fly shops do email marketing and education? Not enough. How many manufacturers and industry trade groups help educate fly shop owners on reaching their customers via the internet? I don’t know, but I suspect not enough. Equipment manufactures, retailers, magazine publishers, and commercial online entities all have skin in the game, as does the consumer as soon as he makes a purchase. Those with the most to lose need to lead the effort to create sustainability and profitability across the board. Everyone can benefit or we can all lose.

  • Zach Matthews

    Paul –
    You make a good point. I think the explanation in the original post still applies, but clearly math is not my strong suit. Thank you.

  • leslie

    Duh? Look at theories of capitalism in a democratic society. It’s all a game in which the manufacturer predicts the behavior of the wanting consumer to forecast market viability and profits. Those who can make it on a larger scale make profits. Smaller (local) endeavors have a smaller market and less profit. To this end they must charge a higher price to survive. It is less about quality and more about market share.

  • http://www.just-reels.com Jim Willims

    I think part of the problem with the original blog entry, Zack, is that the 40%-60% markup you mentioned really refers to that much MARGIN. The margins on most fly fishing gear tend toward 40-50%. When retailers place early season orders, pay their invoices immediately, and order in quantity, they can often increase their MARGINS to 60% or very close to it. It’s a simplification, I know, but a 50% MARGIN is the same as 100% markup.
    And yes, Mystic rods are made in South Korea.

  • JimH

    Zach, your numbers are fine, it’s your terminology that may be causing some confusion. A fly shop typically works on a 40% margin, not markup. A $100.00 item with a 40% margin cost the shop roughly $60.00. Sounds pretty decent in theory but in practice you almost never net out a 40% margin. By the time you pay shipping charges, liquidate discontinued models at cost or less, or have some items stolen you’re fortunate to hope for a margin in the mid 20’s.
    As for moochers, what about the guy who comes in your shop weekly, sits down and reads all the new magazines, looks through all the tying books to get new patterns to try then walks out having purchased nothing? Ha! People are strange critters; ya gotta love em.

  • Zach Matthews

    Aha – that’s helpful, JimH. Thank you guys for the insight. I have heard some stories about fly shop theft and how quickly a thief can do a lot of damage. I won’t repeat how here on the net, but it’s a scary no-brainer.
    Zach

  • Tim Arscott-Mills

    One useful lesson of economics is that price has nothing to do with the costs of production. Price is determined by the consumer’s willingness to pay. High end fly-rods cost $500+ because consumers believe they are worth it — the reasons why may range from genuine performance differences, large disposable incomes on the part of buyers, ego, placebo effects, and so on. The only relevance of production cost to this equation is whether or not the manufacturer can make a profit at the price the market is willing to pay. Given that several rod manufacturers have been in business selling $500+ fly rods for a long time, I think the answer to this question is yes … and we shouldn’t begrudge them for it because ultimately WE, the buyers, set the price.

  • Greg Kemp

    I was going to comment , but Tim Arscott-Mills says it all anyway . As my father used to say ( A man with a business diploma from Harvard ) . You charge as much as the market will stand .
    Having said that I am glad some manufactures provide good hardworking quality rods at realistic prices . Ive gotten over the hype , maybe they are better rods at the top end , but the percentage of improvement is way out of proportion to the price difference. Most performance problems are from the operators .

  • David Holmes

    In fact, a more general observation regarding equipment and its “worth” (and perhaps one worthy of a separate blog string) might be this, and goes beyond the question of whether the $800 rod is, in some sense, “better” than the $400 rod:
    Success in fly fishing is RARELY, if ever, attributable to quality or price of equipment, once you’re past the few examples of shlock or inappropriate gear out there.
    Skill, experience and knowledge, both of specific waters and relevant fly fishing techniques, are far more important to angling success, a fact that can be verified by the following thought experiment:
    You’re required to bet your net worth on which angler will have more success (defined as a higher catch rate on a random day, on the same water):
    Angler A has really great (and therefore expensive gear) but only average knowledge and skills.
    Angler B has average equipment but outstanding knowledge and related skill sets, directly relevant to the fishing challenge before him or her.
    Any question as to on whom you’d bet the farm?
    Kind of gives some sense of proportion to a discussion of whether more expensive gear makes an objective difference in fishing success (aside from simply feeling good about having Ferrari-level gear), does’t it?
    Personally I have $800 rods and $300 rods (and some $100 ones.) I really enjoy my high-end rods but I’m under no illusion that they have any direct or objective effect on my success rate in fly fishing.

  • Ken Shepard

    Forgetting the price of your gear, if you go into a fly shop for information of any kind, you should always pay for what you get. The guy who walked out after being taught a skill he needed, would not like to work & not be paid for it. I tell people to buy something (local flies) when you get info on fishing a new area (maybe saving you hours). Enough said, always share what you know as others helped you.

  • Mikefishillinois

    Author makes good points but gets a D or F in markup math. The markup percentage goess on top of the cost. For example mfgr’s cost $50 plus 40% = $70 dealer’s cost. $70 plus 40% = $98 dealer’s price. This seems to be a lot. But as pointed out the dealer has to cover rent, light, payroll, etc. It has to be tuff with all the competition from Giants like Cabela’s and Orvis and E-retailers. Owner operated shops are dropping like canaries in a coalmine around here.

    • Crashq

      While the author may have used the wrong term (markup), he gets and A on how the products are priced. The wholesale price of most high end fly rods and reels is 60% of the retail price. This means that the markup is 40% of the retail price or 67% of the wholesale price.