you're thinking cost-plus in a value-based pricing world, which means you're essentially viewing this backwards. it's not so much why aren't the chinese shoes cheaper, but how is the excess value created by the lower cost being exploited in the supply chain?
the price of the shoes will always be set by the (retail) market, and that market seems to be saying (roughly) that the price of shoes (idealized for the sake of argument) is $50, whether made in china or the US. the chinese shoes, being $15 to make, allows more value to be captured and distributed along the value chain, providing crucial flexibility and resilience for operations, distribution, and marketing. the american shoes costing $30 to make means it has less value to capture and less supply chain flexibility. the chinese shoe distributor has more margin to work with to outcompete the domestic shoe through the 4 P's of marketing (price, product, place, promotion).
(this is the kind of stuff you learn in an mba program, specifically, marketing & strategy classes)
Why isn't the 5 dollar African made shoe adding enough value to be a player in a more expensive market?
Are we sure the market has settled for $50 or is made in America worth and extra $10/15 dollars?
The supply chain with additional transportation and others costs would push the price to $20 per hour in China compared to $30 an hour. A tariff of $10 on imports would equalize the price. Would that push the market price to $60 for the shoes from China and would that push the American price to $75? Or would the Chinese shoes sell still sell for $50 forcing profit down or would they need to drop to $40 to set the market lower?
> "Why isn't the 5 dollar African made shoe adding enough value to be a player in a more expensive market?"
that's too underspecified to provide a good answer in this context. perhaps it's poor market fit, lack of cheap logistics, or merely racism. or something else entirely, it's hard to say.
> "Are we sure the market has settled for $50 or is made in America worth and extra $10/15 dollars?"
the $50 was assumed/asserted to make the discussion simpler. of course in a real market you'll have a variety of price-quality tradeoffs to choose from, which is the market trying to capture all the surplus value it can. for sure, some folks will pay extra for an american label.
> "The supply chain with additional transportation and others costs would push the price to $20 per hour in China compared to $30 an hour. A tariff of $10 on imports would equalize the price. Would that push the market price to $60 for the shoes from China and would that push the American price to $75? Or would the Chinese shoes sell still sell for $50 forcing profit down or would they need to drop to $40 to set the market lower?"
in the short term, the market price wouldn't be swayed by mere changes in costs (including tariffs). raising prices changes consumer behavior (i.e., price elasticity), which dampens the ability of the firm to make such unilateral changes. perhaps through advertising/lobbying/public relations, shoe companies can change the perception on what a fair market price is for their shoes (and thereby raise prices without negative affects on sales), but that's a different effect beyond simply costs changing. longer term, market participants may drop out due to unprofitability, which would change supply, and as a result change the market price through the lack of lower-priced alternatives.
you sell shoes at the highest price the market will bear (actually a range, given price discrimination techniques), and then adjust the 4 P's in response. the market price is dynamic and part of the function of marketing is keeping tabs on it.
It costs money to sell shoes. You have duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots. And if you're manufacturing original designs, you also have a year-long lead process, manufacturing obligations and scheduling, sample management, maybe even material procurement.
The cost of the shoe ends up only being a third of overall costs. I'm also not going to sell everything, but I still need to keep buying inventory to keep the machine going.
If I don't sell the product at least 3x what I paid for it, there's no way I can maintain sufficient capital to keep a business running and hedge against risks.
My wife is a fashion designer, and development is a huge component. She begins developing garments like 1.5 years ahead of delivery.
The steps are generally: Choose and order fabric, design a garment, have a patternmaker make a pattern, have cutter cut the fabric for a sample, have a sewer create a sample, fit it on a fit model, adjust pattern, cut, sew, fit, adjust, cut, sew, fit, wash and dye the fabric to understand shrinkage, have a grader create the size grading, send pattern and sew-by sample to factory, have them make a sample, fit, adjust pattern, and have them make another sample, fit (this can repeat a few more times until the factory gets it right).
Chinese factories “bury” the cost of development when providing prices. Suffice to say that creating samples and shipping sample garments back to the US in order to check that the factory is making it to spec (multiple times) can extend development times many more months and greatly increase costs (keep in mind you are paying US designer salaries during this extended dev). Money can eventually be saved depending on the scale of your business. At least with garments, Chinese production is not a guaranteed money saver, though from my observation the overall logistics of garment making are not well-understood by business owners so they just shove it all overseas without fully understanding what they’re getting into.
I bucketed it into "year-long lead process" and sample management.
> Chinese factories “bury” the cost of development when providing prices
My last company manufactured original designs in Italy, and quality aside still had all the same logistical and operational overhead as working in China. Factories still hide a lot of the technical details of product design, such as grading or digitization. And even if you have that sophistication, each factory uses different equipment and processes so vendor-delivered digital artifacts can rarely be used as-is (and many vendors are working with multiple factories).
> Chinese production is not a guaranteed money saver
Sourcing material is hard work. Finding suppliers, implementing internal IT software and processes, coordinating with factories, storage, and changes to COGs accounting. There's a lot of risk to own this process and managing it's impact on the supply chain. Everything is fun and games until you run out of buttons.
My wife specializes in US domestic dev/production, and uses separate contractors for each step, and all her contractors are down the street (figuratively). The factories are only putting the final thing together. And she sources fabric and buttons and stuff herself. She’s a designer, not a production developer, yet the companies she freelances with lately never seem to understand that they need to hire prod-dev people, so she ends up doing it. To the business owners, it probably seems crazy complicated vs just going to a (more expensive) “full package” factory where you neither understand nor own the process, but they bust it out. But the benefit of her method is that she can more easily switch to different contractors and factories. Full package places sometimes don’t even release patterns to you if you ask!
The “button problems” usually arise a couple years later when they say “hey let’s use our leftover buttons from the previous season. We should have x of them left.” Then someone forgets to count them and some months later it’s discovered that there aren’t enough, nor enough time to place another order.
Are the products you have experience with garments/shoes or something else?
> yet the companies she freelances with lately never seem to understand that they need to hire prod-dev people, so she ends up doing it
Absolutely. This seems to be a trend, and a lot of fashion designers I know have learned how to work with a factory or factory agents to get technical product design details communicated. Full-stack fashion.
It's also great to have a technical designer in the process so you don't end up with surprises like 20% margins because of exotic materials or three-month delays because of accessory availability issues. You end up with one person that knows how to create and design appealing products, and another that anchors them in the reality of the business and "steers" them towards options with better margin outcomes (who in turn is probably working with people in procurement and delivering technical specs to factories).
> But the benefit of her method is that she can more easily switch to different contractors and factories
Every businesses dream. I live in Los Angeles where this happens a lot in "smaller" batches downtown, which is always cool to see. It's a shame we've lost this ability on a state or national level.
> Are the products you have experience with garments/shoes or something else?
Almost exclusively shoes, and a little bit of everything else (handbags, some apparel and jewellery). It was a very humbling experience, learning how little I knew about design and manufacturing and that software was just an enabling force (not necessarily a driving force). Supply chain problems are hard.
We’re in LA, too. Lots of the contractors are in NoHo. And also downtown and City of Industry, etc. I work remote but we can’t move out of here because of her work! And yeah, she works in smaller batches.
She’s very resourceful: of her strategies for finding new contractors is to listen for the sounds of sewing machines in buildings and then knock on the door. It’s like a weird hidden economy. And they basically didn’t shut down at all during the pandemic.
She made shoes for fun recently with a guy in North Hollywood. One person operation, decades of experience, and his skills are absolutely incredible. He should be a star, but instead he’s just laboring alone in a little box way out in the valley.
Only the Duties automatically scale with inventory cost.
like the top-of-thread poster, I get that there are overheads. I don't understand why overheads seem to scale with the cost of purchasing the inventory.
One of your biggest risks is that you end up the hook for stuff that you can't sell. That severity of that risk scales with price of goods, so your margins have to have a component that scales with price of goods to cover that risk.
Another way to think of it, is that history has shown that a ~65% product margin is the band where most businesses succeed and capital returns are best realized. I know that's not a very "sexy" answer, but a lot of realities are driven on access to capital which is driven by your margins and how it compares to other companies that are also seeking capital.
So it's less that costs scale, and more that you manage your business to keep margins at a certain band.
But that's the ultimate average number. If you group businesses by stocking costs and materials costs and labor costs and sales costs you'll probably see significant differences.
Most businesses will have very different cost distributions, because no two businesses are the same (even if two companies do the same thing). But there's still pressure on what your margins are expected to be by existing and potential investors, in no small part because of expectations of returns based on risks of the business and it's capital management strategy.
And is less an "average" number and more of a benchmark to aim for. It's perfectly possible to run a business on a 55% margin, but investors have options and whether it's VC or traditional bank loans this number is going to come up and be a distinguishing factor on cash availability.
Products don't sell themselves. It takes people, planning, and effort to run a business.
If I'm doing $Y this year, and next year I want to do 2x$Y, costs will actually increase superlinear to revenues. The goal of every company is to reach a point where revenues outpace costs, but business doesn't work that way and things are rarely predictable and many successes are rarely repeatable.
If you're a retail business, it costs money to maintain a lease and storefront not to mention hire and manage employees. You also have overhead to deliver product to each individual store, and shipping isn't free. Nor is the coordination of deciding what product to ship to what store, because maybe they have different weather and one place sells more of a certain category.
Maybe you're selling online, so you have to invest in performance marketing. Or you're sending catalogues through a 3rd party vendor. Reaching new customers is expensive.
Maybe you decide to invest in in-house manufacturing, which requires many millions in upfront capital expenses, equipment acquisition, and expensive ERP integrations with machining and scheduling software.
Actually running a business is hard, and there are many variables that come up. The best you can do is try and maintain a consistent margin, and manipulate the many different levers available to do so. Maybe that's opening new stores, or closing poor performers. Maybe it's laying off staff. Maybe it's expanding into new categories, or cutting your loss on categories that didn't work out. Maybe your staple product that was driving the core of your business for years is quickly loosing steam, and you have to find alternatives.
