There was a discussion recently, initiated by Luca Turin on his highly appreciated blog, on pricing of perfumes, with some discussion echoes online, such as on Now Smell This -for instance. Links at at the bottom of this post.
Here, well, here follows a contribution on my blog. I am not sure whether it is particularly interesting to most perfume consumers: I learned over the years that consumers want to be told how luxurious the contents of a flacon are and how many roses found their way into there. But then: I am Swiss and we Swiss tend to be down to earth, sometimes. So: Let’s talk numbers here, and not flowers.
To help understand, let’s clear the terms first:
Distribution: A sales model where a producer sells to a third party, the distributor. The distributor then sells to stores, retailers, etailers and does the marketing, the communication in the market, sometimes through agents. It is important to take note that a distributor takes the risk of buying products that might not sell.
Retailers, etailers: These are stores selling to end consumers directly. Either buying from a producer directly or from a distributor. The retailer/etailer again takes the risk of buying products that might not sell. And retailers/etailers have high operation costs (salaries, rents, infrastructure).
Producer: It is the maker of things, very often it is actually a network of companies and the end result is a packed and ready to sell product. The producer takes the risk of buying inventory , in perfumery it is 6-12 months lead time, which means the producer invests now into products that are sold in 6-12 months time, and the producer has the risk of investing work/overhead into the production of a product that might not sell and has to be discarded or discounted at the end of the day.
Margin: That’s the difference between how much a party paid for a product and for how much it is sold to another party.
Profit: That’s what is left from the margin if you subtract all costs that occur to make the sales. For instance: costs for production, for shipment, rent, electricity, fees, certification costs, insurance, …There’s profit before taxes and after taxes, but let’s keep things simple here.
Now let’s look into the numbers.
First things first: Distribution determines the retail price because at the end of the day a producer needs a profit. Why do you -as producer- want to go for a distribution model? There might be markets that you cannot serve directly. You might aim for higher numbers of sold products allowing you to buy larger numbers of inventory and hence taking avantage of economies of scale (the more inventory you buy the cheaper it gets). Or you might simply not have the resources to talk to all retailers bilaterally, directly.
In perfumery, the regular model is: a coefficient of 4.5 to 5.5 goes to the distributor. This means: A product that is sold in stores for 135$ US: the distributor pays the producer 135$ divided by 5.0: 27$.
Now let’s put this into perspective with production costs. (I use European prices here. You can source in China, too. I do so, too, but where feasible I try to source from here, Europe)
A semiautomatically produced flacon, made in Europe, costs somewhere betweeen 3.5 $ and 6$ , not landed (meaning without transport and taxes), depending on how many you buy and where you buy them. If you happen to have a packaging that is not just a cheap cardboard box: Production costs in Europe are maybe 2-5 $.
Then you need labels, pumps, caps: Add another 2-3 $.
All buying prices above: No blingbling, not fancy gold decoration.
Add whatever amount you want for the perfume.
Then add work to the equation: Sourcing, scent production, dilution, filtration, bottle filling, crimping (fixing the pumps on the flacon), labelling, putting things into the packaging, cellophaning, and doing the paperwork like dealing with authorities, preparing shipping papers.
And now you do the math.
Ideally, the margin should be somewhere around 50% of the distribution price. And ideally, the profit should be higher than 50% of the margin.
Here my thoughts about all this: It would be easy to just say “don’t do the distribution”. But – at least for me- there are good reasons to be present in markets that only work through distribution. Or in other words: You cannot survive these days by selling niche/haute perfumery/low volume perfumery in the US, UK and Germany only. You need a larger client base.
I can “afford” to offer a scent like air du désert marocain for 135$ these days because I have a mixed model where I also sell directly to clients and each of these direct sales makes a difference. I can also sell it at 135$ because I do most of the production myself (not everything, though), because I am blessed and know how to use photoshop, and illustrator, because I dare to deal with a lot of regulation issues without the help of external consultants, because I do all the logistics myself, because I am working in Switzerland with a liberal tax and regulation regime, and because I do not pay myself a salary that truly compensates for 60 hour working weeks, because I made a strategic decision to be there where I am with my pricing (there’s a price to pay for a luxury positioning), and because I love doing what I am doing.
The very moment I sell my company, prices will double.