10 ms·

> The cost of building a consumer audio product is generally no more than 30% of retail. 30% COGS (cost of goods sold) is virtually a maximum for items sold at

> The cost of building a consumer audio product is generally no more than 30% of retail. 30% COGS (cost of goods sold) is virtually a maximum for items sold at mainstream retailers. There’s nothing wrong with this. These are standard ratios, not some dirty secret. The cost of goods sold is only a fraction of the costs that go into getting products all the way into the customers’ hands and supporting them (customer support, warranty replacements, lost shipments, fraudulent orders, etc.). That’s not even counting the R&D investment costs that go into making the product, as the post says. Salaries, warehousing, shipping, insurance, and all of the others costs of doing business add up. It’s not actually realistic to expect an entire company to be selling you a $300 product that costs them something like $250 to build. Every business in existence must build in enough margin to pay the people who do all of the work to make it happen and support it. If this seems shocking, consider that the COGS of software as a service products are much lower by comparison. Doesn’t matter, though, because you have to pay all of those expensive salaries to make it happen.

aaroninsf 4y ago
Used to work for a hardware manufacture that did small runs of professional AV products (runs in the thousands, costs in the hundred to thousands of dollars). The standard in the industry at this scale was and is 8x COG. That was what was required to pencil things out. At that ratio we were initially 5x cheaper than competing products in an niche that had a de facto duopoly. Which we disrupted. For a while.
leeoniya 4y ago
yeah, it's quite typical that wholesale = 2x COGS and retail = 2x wholesale. for high end stuff it's likely far higher. that $75 Intel AX210 WiFi 6e upgrade is likely a $5 part at wholesale in 10k quantities. upgraded op-amps for $100? probably $4 each on digikey or aliexpress (and thats already marked up from maybe $2 COGS)
- kube-system 4y ago
  Yeah, last time I worked retail, our prices by default were 2x our cost. People gasp when they hear that, but 2x wholesale doesn’t mean we were making bank. We were spending all that money on wages, utilities, the property itself, taxes, equipment, etc. If people think that charging $20 for a $10 widget is too much, they can fly to Shenzhen and buy it for $10.
- formerly_proven 4y ago
  You can buy those Intel cards (single quantities) for around 12-15 bucks at retailers.
wellthisisgreat 4y ago
yeah the person who suggests that COGs (or even BOM) should be more than 30% of MSRP cannot be taken seriously on any other business-related statements. That is shows a gross misunderstanding of the fundamentals of unit economics and electronics business models.
- butterNaN 4y ago
  Just to be clear for the people reading the comments only, the author of this article is not that person.
- rahimnathwani 4y ago
  For those who don't know the difference between COGS and BOM: - BOM includes only the materials. - COGS includes not only BOM, but also the variable costs to combine those materials into the final product (e.g. cost of manufacturing labor).
achow 4y ago
In contrast in 2021 Xiaomi's Cost of Sales (COGS?) was 82.3% of their annual revenue Source: 2021 Annual report https://ir.mi.com/static-files/b85f34c0-0010-4a8c-94b9-269d8cd4eca4 https://ir.mi.com/static-files/b85f34c0-0010-4a8c-94b9-269d8...
- alain94040 4y ago
  Cost of sales includes marketing expenses. Possibly also operations cost.
- refulgentis 4y ago
  Cost of Sales is not Cost of Goods Sold
  - ac29 4y ago
    In this accounting context, yes it is edit: source here, since other people are making the same mistake https://www.investopedia.com/ask/answers/112614/whats-difference-between-cost-goods-sold-cogs-and-cost-sales.asp https://www.investopedia.com/ask/answers/112614/whats-differ...
    - jhugo 4y ago
      To be clear, the OP discusses COGS in an electronics/manufacturing context, which refers specifically to the cost of manufacturing the product, and excludes things like marketing, logistics, R&D, salaries etc. It is not at all comparable to the Xiaomi Cost of Sales figure in GP which includes many things beyond the direct cost of manufacturing their devices.
      - tomnipotent 4y ago
        COGS is completely company-dependent, there is no universal exact definition so long as it can be verified to be GAAP/IFRS compliant (which is more art than science).
        4y ago
jiggawatts 4y ago
> There’s nothing wrong with this. These are standard ratios, not some dirty secret. There's a lot wrong with this, but not in a moral sense. For all his faults, Elon Musk made a good point about the space industry near the beginning of SpaceX. He asked a team of "rocket scientists" how much a rocket cost. They said something like $100M. Then he asked them to sum up the material costs. Sheetmetal, tubing, rivets, etc... They said something like $500K. Where did the other $99.5M get spent on, you ask? Inefficiencies such as having PhDs doing welding and riveting instead of hiring contractors with more experience. Even if you say you need aerospace-grade rivets, Boeing and co hire thousands of people with those skills at a much lower cost. Similarly, if you look at retail prices, the majority disappears into having staff stand around the store while there are no customers, lighting, cooling, retail shopfront rents, etc, etc... You're not paying for an "HiFi amplifier model X", you're paying for a "storefront in a shopping centre with a HiFi amplifier model X thrown in almost for free." This issue is most obvious when in some industries, returned items are simply discarded, because they're not even remotely the majority of the total cost! Repackaging and restocking the item would cost more than manufacturing it half way around the world and shipping it across an ocean. That's nuts. Even EBay and Amazon have only just started chipping away at this problem. There is still enormous inertia. For example, I recently purchased a flagship TV that costs $5,995 retail. Nobody had it for more than a $500 discount, including online stores that are just warehouses! The actual TV probably cost about $800 to $1000 to manufacture and ship internationally.[1] Where did the other $3500-$4000 go!? What's happened here is that traditional retail has forced the prices up, and then Amazon -- a near monopoly -- doesn't feel the need to compete on price because they win sales even if they're just a little bit cheaper. True competition would be if I could buy the TV for manufacturing cost +30%, not manufacturing cost x3. This won't happen while traditional retail is propping up prices and has no real competition. We need a "SpaceX" to shake things up. Unfortunately, Amazon wasn't it. [1] This isn't the cost of running the machines in a factory. It's everything up to the point of getting the goods into a cardboard box and on a ship. Design, profit, staff costs, material costs, energy costs, capital, etc...
- mc32 4y ago
  That other 3500 - 4000 is definitely not majority profit. If they could make better profit on your purchase they would, they really don't want to leave money on the table. MFG, shipping, handling, warranty, returns, accidents, fraud, R&D, operations staff, etc. It's not getting done by volunteers.
mc32 4y ago
Definitely agree. People who rail against this don't understand economics much further than my mom sold yard bird eggs for less than the corner store --corner stores are opportunist capitalists with no heart who take advantage of people. If they had to sustain a business I'm afraid they could not. Every wannabe post-capital economist should try to run a restaurant (profitably).
- Smoosh 4y ago
  Can I ask what a "yard bird" is in this context? Does it mean home kept chickens?
  - adolph 4y ago
    I would think so, but M-W doesn’t list a fowl: Definition of yardbird 1 : a soldier assigned to a menial task or restricted to a limited area as a disciplinary measure 2 : an untrained or inept enlisted man https://www.merriam-webster.com/dictionary/yardbird https://www.merriam-webster.com/dictionary/yardbird The OED apparently agrees: *"Mil.* A recruit, a newly- enlisted serviceman; also, a serviceman under discipline for a misdemeanour; one assigned to menial tasks. Also *transf."*First ex.: (late) 1941. The person who made this citation claims that comic strip “Barney Google and Snuffy Smith” made reference earlier. https://listserv.linguistlist.org/pipermail/ads-l/2014-June/133207.html https://listserv.linguistlist.org/pipermail/ads-l/2014-June/... https://en.wikipedia.org/wiki/Barney_Google_and_Snuffy_Smith https://en.wikipedia.org/wiki/Barney_Google_and_Snuffy_Smith
  - mc32 4y ago
    Yes: https://en.wikipedia.org/wiki/Yardbird https://en.wikipedia.org/wiki/Yardbird (3rd one on the list).
- barrysteve 4y ago
  In your restaurant experiment, are we allowed to use robots to make and sell food to the customer? Or will they walk out?
  - 4y ago
yieldcrv 4y ago
Profit isn’t controversial either way It doesnt need to be rationalized To consumers, anyway
tshaddox 4y ago
There's nothing wrong with it, per se, but surely if you're at all a proponent of a market economy for the typical reasons, you would like to see prices as close as possible to marginal cost.
- wmf 4y ago
  This is as close as possible because all the stuff that's not included in COGS also has marginal cost.
  - lambdasquirrel 4y ago
    Yeah... the COGS here is really not dissimilar to what it is across all consumer products, for the nerds out there who like to find out about these things. That's a pretty good indicator that this is the equilibrium.
js2 4y ago
> There’s nothing wrong with this. These are standard ratios, not some dirty secret. Nowhere in the original post is the word “dirty” or any implication that there’s anything wrong with the ratios. The OP qualifies their post with: > None of this is actually secret (it would be common knowledge for anyone employed in the industry) but isn't well-known outside of it. This audience has a lot of professionals in it so a lot of this might not be news to you. And after going into many things that factor into the retail price concludes with: > In that sense, a 3:1 retail to COGS price is arguably very fair or even low, especially for firms that do any R&D at all. I personally wouldn't say something is overpriced until you hit 10:1 or more. The quotes around “secret” are there in the first place to imply these aren’t actually secrets, much less dirty secrets.
- Razengan 4y ago
  Nowwhere in the GP comment is the word “outraged”. That’s your word. So, what, you wanted to be aghast or something and misrepresented the tone of the original comment with a selective quote and addition of the word “outrage”? Shit HN says. Sheesh. (This comment was a copy of the one above before it was edited)
  - js2 4y ago
    Okay. I’ve edited my comment for tone and to stick to the facts. I still think the comment I replied to misrepresents the original piece by quoting very selectively and adding the word “dirty”.
    - deleted 4y ago
      [deleted]
  - eyelidlessness 4y ago
    > Shit HN says. Sheesh Indeed. I read the article, then I read these three comments. The first one reiterates points that the article made but seemingly doesn’t recognize the article made them. The second does recognize that but with a combative tone. The third is just combative. Y’all can carry on as usual but none of that conflict was actually warranted.
NoraCodes 4y ago
> If this seems shocking, consider that the COGS of software as a service products are much lower by comparison. Doesn’t matter, though, because you have to pay all of those expensive salaries to make it happen. By definition, in a successful business, a significant amount of that markup goes to profit, not anything that's actually productive like salary.
- lukas099 4y ago
  Some businesses have very little profit margin; their strategy is to make up for it in volume. In fact, some of the most successful businesses (walmart) work this way.
- eru 4y ago
  How is profit any less 'productive' than any other expense?
  - Ma8ee 4y ago
    Removing any other expense will be detrimental to the business, that is, make it work less well. Nothing will happen to the business if the owners don't get any dividends.
    - foldingmoney 4y ago
      >Removing any other expense will be detrimental to the business, that is, make it work less well. Nothing will happen to the business if the owners don't get any dividends. I'd say two things. 1. A listed business wouldn't exist in the first place (or in its present form) if owners hadn't been enticed to put up capital in the hope of getting dividends. 2. The purpose of a listed business is to pay the owners, not to produce goods or services - producing goods or services is just a means through which to pay the owners.
      - v-erne 4y ago
        The ultimate goal and purpose of any economic system is to serve whole society - those people own anything because we as a society recognize that we are not able at present moment to build better system without their rent seeking behaviour. But this does not mean that they have some god given right to unlimited dividends from work of others. It all seems backwards (as in tail wagging the dog). And don't get me wrong - I know that their behaviour is just part of human nature, that our culture tries somehow to tame and this behaviour is no different from monarchs and aristocrats of old days, but it does not mean that this is the ultimate system and there is no metaphorical guillotine waiting for them all somewhere in the future.
thedebuglife 4y ago
From my own reading and experience, paying salaries still has less overhead.
brtkdotse 4y ago
I’m actually surprised it’s as high as 30%. Would’ve expected 10% tops. Reminds me of that Planet Money special where they made their own tshirts from scratch, as “finding a cotton farmer to buy cotton” from scratch. The thing that added the most cost was the transport from the dock in NYC to the store.
- Cthulhu_ 4y ago
  I'm sure manufacturing costs is like 10% or even less, but between the factories in e.g. China and the US or Europe, there's container transport overseas, import taxes and fees, and other such transportation and logistics overhead. I freqently find myself in a supermarket and think that the packaging for the products there was more expensive than the product itself. Plus the logistics.
  - School-Cotton 4y ago
    Shipping over the ocean from China to the US is very cheap.
- onemiketwelve 4y ago
  Ah damn, I just commented about planet money. Seriously, it was totally perspective changing. Anyone who even has a modicum of interest in econ/business, especially as it pertains to the topic here, should listen to the t shirt saga. It's excellent storytelling even for those who aren't economics nerds. Still have my squirrel t-shirt I bought to this day :) https://apps.npr.org/tshirt/#/title https://apps.npr.org/tshirt/#/title
buro9 4y ago
For most consumers I'm not sure COGS is something that they are aware of. The big takeaway from understanding COGS is using that to understand fast moving and disposable goods and merchandise. In the UK a recent (last decade) thing has been fast fashion, Primark and the like are leaders at this. It is possible to purchase a pair of straight leg jeans for GBP 12. Understanding COGS means you can quickly realise that the absolute maximum amount spent on materials and manufacturing is GBP 4. An awareness of COGS reveals to buyers unethical manufacturing, low quality, and essentially planet damaging goods and merchandise. On a more individual level, i.e. the Beats headphone example in the article, it can also reveal when you're being ripped off. Where what you're buying isn't the goods as much as it is the sticker on the side and the status. COGS may not be a secret to most people on HN, but they're an unknown part of the magic of how global commerce works to the majority of people.
- AussieWog93 4y ago
  If you're on Windows, alt-0163 inserts the £ character on a US keyboard. 0164 is €.
mrweasel 4y ago
> There’s nothing wrong with this. These are standard ratios, not some dirty secret. Standard, absolutely, but I think many are surprised by how much of that is profit for the company that sells the product to the consumers. I worked for a company that had 40-45% margins on most consumer electronics. Less than 40% and the buyers didn't really want to deal with it.
- samstave 4y ago
  *__exactly__* - If you have ever whore'd yourself out as a 1099 "consultant" <=== you're typically paid ~30% of bill rate... the company claimed all this "I have to pay insurance" bullshit - but if you are paid $50 an hour, the contract is likely $150 an hour... and the company's fat margins are within....
- golergka 4y ago
  Revenue, not profit. They have pretty huge costs of doing business, too.
TheOtherHobbes 4y ago
I used to be a naive DIY hobbyist who was outraged by how much more expensive commercial products were compared to the parts cost. But of course what you say is true. Electronic and software design, physical design, productisation, marketing, distribution, packaging, support, business premises, logistics, and backup business services (payroll, accounting) all cost money. Even a nominal markup of 40% may not be enough to cover those expenses. Selling at scale - even at small scale - is completely different to buying a bag full of bits and assembling them with a soldering iron. Having said that - audio and music are particularly susceptible to snake oil. Never mind all the cable nonsense, you can literally buy magic pebbles and boxes full of rocks to "improve" your audio. The people in those markets are either delusional or knowingly scamming their customers. At some point branding and market positioning become the biggest driver of perceived value, and spending $$$$$$ just to prove you can - under the pretext of "purer sound" - becomes an exercise in consumer narcissism. In the classic Veblen mode, the product being sold isn't the item, it's the consumer's perception of themselves. And some people will pay huge sums for that. Which is you can buy magic hifi rocks, magic watches that don't tell the time very well, magic handbags, and all manner of other trinkets, for very silly prices.
- chrismcb 4y ago
  Ironically a box of rocks will probably "improve" (well affect) your audio more than a cable will. As sounds does bounce off objects. That being said there are cheap, worthless cables as well. I'll pay a bit more for a cable where they connection won't fall off after two uses.
- onemiketwelve 4y ago
  I think that response is natural especially for anyone who builds things, software or otherwise. But my mindset completely changed after listening to a lot of economics stories on planet money. There was this dude who tried to make a simple toaster on his own, down to refining metal. None of us can make even the simplest consumer product, let alone an consumer electronic product economically. https://www.npr.org/2014/09/12/342138931/how-do-you-build-a-toaster-from-scratch https://www.npr.org/2014/09/12/342138931/how-do-you-build-a-...
akrymski 4y ago
By contrast products on Amazon have COGS closer to 10%
PinguTS 4y ago
Actually, that is what I learned over 20 years ago at the university while studying electrical engineering. Basic business class (and law) was part of the courses to get the diploma. The general rule of thumb was, that a product in parts and production shall not be more 30% of the final price of the product. If its more, it will be a money looser. With that 30% you have 30% for marketing and distribution, and 30% for research and development. Then there you have about 10% of overhead costs for all over. Then you can play with the numbers. If, like in consumer products, marketing and distribution goes up, you have obviously less either for R&D, which means less innovation or less innovative products, or less for production, which means less quality. That's what I learned for electronic products. Other industries maybe a little bit different. I think of these sometimes when I see a plastic box in the store for 10 bucks or so, and I know this plastics costs only a few cents in production in injection molding, of course not counting what the machine for the manufacturer had cost, what the production form cost and that it can only be used for a few 100 000 items before wearing out and so on.
- urthor 4y ago
  *loser.
greggsy 4y ago
SaaS is a different subscription model, not a one-off product sale. Odd comparison, unless I missed something.
softfalcon 4y ago
> None of this is actually secret (it would be common knowledge for anyone employed in the industry) but isn't well-known outside of it. This audience has a lot of professionals in it so a lot of this might not be news to you. They said none of this is a secret in the 3rd paragraph of the article.

aaroninsf 4y ago

Used to work for a hardware manufacture that did small runs of professional AV products (runs in the thousands, costs in the hundred to thousands of dollars). The standard in the industry at this scale was and is 8x COG. That was what was required to pencil things out. At that ratio we were initially 5x cheaper than competing products in an niche that had a de facto duopoly. Which we disrupted. For a while.

leeoniya 4y ago

yeah, it's quite typical that wholesale = 2x COGS and retail = 2x wholesale. for high end stuff it's likely far higher. that $75 Intel AX210 WiFi 6e upgrade is likely a $5 part at wholesale in 10k quantities. upgraded op-amps for $100? probably $4 each on digikey or aliexpress (and thats already marked up from maybe $2 COGS)

kube-system 4y ago
Yeah, last time I worked retail, our prices by default were 2x our cost. People gasp when they hear that, but 2x wholesale doesn’t mean we were making bank. We were spending all that money on wages, utilities, the property itself, taxes, equipment, etc. If people think that charging $20 for a $10 widget is too much, they can fly to Shenzhen and buy it for $10.
formerly_proven 4y ago
You can buy those Intel cards (single quantities) for around 12-15 bucks at retailers.

wellthisisgreat 4y ago

yeah the person who suggests that COGs (or even BOM) should be more than 30% of MSRP cannot be taken seriously on any other business-related statements. That is shows a gross misunderstanding of the fundamentals of unit economics and electronics business models.

butterNaN 4y ago
Just to be clear for the people reading the comments only, the author of this article is not that person.
rahimnathwani 4y ago
For those who don't know the difference between COGS and BOM: - BOM includes only the materials. - COGS includes not only BOM, but also the variable costs to combine those materials into the final product (e.g. cost of manufacturing labor).

achow 4y ago

In contrast in 2021 Xiaomi's Cost of Sales (COGS?) was 82.3% of their annual revenue Source: 2021 Annual report https://ir.mi.com/static-files/b85f34c0-0010-4a8c-94b9-269d8cd4eca4 https://ir.mi.com/static-files/b85f34c0-0010-4a8c-94b9-269d8...

alain94040 4y ago
Cost of sales includes marketing expenses. Possibly also operations cost.
refulgentis 4y ago
Cost of Sales is not Cost of Goods Sold
- ac29 4y ago
  In this accounting context, yes it is edit: source here, since other people are making the same mistake https://www.investopedia.com/ask/answers/112614/whats-difference-between-cost-goods-sold-cogs-and-cost-sales.asp https://www.investopedia.com/ask/answers/112614/whats-differ...
  - jhugo 4y ago
    To be clear, the OP discusses COGS in an electronics/manufacturing context, which refers specifically to the cost of manufacturing the product, and excludes things like marketing, logistics, R&D, salaries etc. It is not at all comparable to the Xiaomi Cost of Sales figure in GP which includes many things beyond the direct cost of manufacturing their devices.
    - tomnipotent 4y ago
      COGS is completely company-dependent, there is no universal exact definition so long as it can be verified to be GAAP/IFRS compliant (which is more art than science).
      - 4y ago

jiggawatts 4y ago

> There’s nothing wrong with this. These are standard ratios, not some dirty secret. There's a lot wrong with this, but not in a moral sense. For all his faults, Elon Musk made a good point about the space industry near the beginning of SpaceX. He asked a team of "rocket scientists" how much a rocket cost. They said something like $100M. Then he asked them to sum up the material costs. Sheetmetal, tubing, rivets, etc... They said something like $500K. Where did the other $99.5M get spent on, you ask? Inefficiencies such as having PhDs doing welding and riveting instead of hiring contractors with more experience. Even if you say you need aerospace-grade rivets, Boeing and co hire thousands of people with those skills at a much lower cost. Similarly, if you look at retail prices, the majority disappears into having staff stand around the store while there are no customers, lighting, cooling, retail shopfront rents, etc, etc... You're not paying for an "HiFi amplifier model X", you're paying for a "storefront in a shopping centre with a HiFi amplifier model X thrown in almost for free." This issue is most obvious when in some industries, returned items are simply discarded, because they're not even remotely the majority of the total cost! Repackaging and restocking the item would cost more than manufacturing it half way around the world and shipping it across an ocean. That's nuts. Even EBay and Amazon have only just started chipping away at this problem. There is still enormous inertia. For example, I recently purchased a flagship TV that costs $5,995 retail. Nobody had it for more than a $500 discount, including online stores that are just warehouses! The actual TV probably cost about $800 to $1000 to manufacture and ship internationally.[1] Where did the other $3500-$4000 go!? What's happened here is that traditional retail has forced the prices up, and then Amazon -- a near monopoly -- doesn't feel the need to compete on price because they win sales even if they're just a little bit cheaper. True competition would be if I could buy the TV for manufacturing cost +30%, not manufacturing cost x3. This won't happen while traditional retail is propping up prices and has no real competition. We need a "SpaceX" to shake things up. Unfortunately, Amazon wasn't it. [1] This isn't the cost of running the machines in a factory. It's everything up to the point of getting the goods into a cardboard box and on a ship. Design, profit, staff costs, material costs, energy costs, capital, etc...

mc32 4y ago
That other 3500 - 4000 is definitely not majority profit. If they could make better profit on your purchase they would, they really don't want to leave money on the table. MFG, shipping, handling, warranty, returns, accidents, fraud, R&D, operations staff, etc. It's not getting done by volunteers.

mc32 4y ago

Definitely agree. People who rail against this don't understand economics much further than my mom sold yard bird eggs for less than the corner store --corner stores are opportunist capitalists with no heart who take advantage of people. If they had to sustain a business I'm afraid they could not. Every wannabe post-capital economist should try to run a restaurant (profitably).

Smoosh 4y ago
Can I ask what a "yard bird" is in this context? Does it mean home kept chickens?
- adolph 4y ago
  I would think so, but M-W doesn’t list a fowl: Definition of yardbird 1 : a soldier assigned to a menial task or restricted to a limited area as a disciplinary measure 2 : an untrained or inept enlisted man https://www.merriam-webster.com/dictionary/yardbird https://www.merriam-webster.com/dictionary/yardbird The OED apparently agrees: *"Mil.* A recruit, a newly- enlisted serviceman; also, a serviceman under discipline for a misdemeanour; one assigned to menial tasks. Also *transf."*First ex.: (late) 1941. The person who made this citation claims that comic strip “Barney Google and Snuffy Smith” made reference earlier. https://listserv.linguistlist.org/pipermail/ads-l/2014-June/133207.html https://listserv.linguistlist.org/pipermail/ads-l/2014-June/... https://en.wikipedia.org/wiki/Barney_Google_and_Snuffy_Smith https://en.wikipedia.org/wiki/Barney_Google_and_Snuffy_Smith
- mc32 4y ago
  Yes: https://en.wikipedia.org/wiki/Yardbird https://en.wikipedia.org/wiki/Yardbird (3rd one on the list).
barrysteve 4y ago
In your restaurant experiment, are we allowed to use robots to make and sell food to the customer? Or will they walk out?
- 4y ago

yieldcrv 4y ago

Profit isn’t controversial either way It doesnt need to be rationalized To consumers, anyway

tshaddox 4y ago

There's nothing wrong with it, per se, but surely if you're at all a proponent of a market economy for the typical reasons, you would like to see prices as close as possible to marginal cost.

wmf 4y ago
This is as close as possible because all the stuff that's not included in COGS also has marginal cost.
- lambdasquirrel 4y ago
  Yeah... the COGS here is really not dissimilar to what it is across all consumer products, for the nerds out there who like to find out about these things. That's a pretty good indicator that this is the equilibrium.

js2 4y ago

> There’s nothing wrong with this. These are standard ratios, not some dirty secret. Nowhere in the original post is the word “dirty” or any implication that there’s anything wrong with the ratios. The OP qualifies their post with: > None of this is actually secret (it would be common knowledge for anyone employed in the industry) but isn't well-known outside of it. This audience has a lot of professionals in it so a lot of this might not be news to you. And after going into many things that factor into the retail price concludes with: > In that sense, a 3:1 retail to COGS price is arguably very fair or even low, especially for firms that do any R&D at all. I personally wouldn't say something is overpriced until you hit 10:1 or more. The quotes around “secret” are there in the first place to imply these aren’t actually secrets, much less dirty secrets.

Razengan 4y ago
Nowwhere in the GP comment is the word “outraged”. That’s your word. So, what, you wanted to be aghast or something and misrepresented the tone of the original comment with a selective quote and addition of the word “outrage”? Shit HN says. Sheesh. (This comment was a copy of the one above before it was edited)
- js2 4y ago
  Okay. I’ve edited my comment for tone and to stick to the facts. I still think the comment I replied to misrepresents the original piece by quoting very selectively and adding the word “dirty”.
  - deleted 4y ago
    [deleted]
- eyelidlessness 4y ago
  > Shit HN says. Sheesh Indeed. I read the article, then I read these three comments. The first one reiterates points that the article made but seemingly doesn’t recognize the article made them. The second does recognize that but with a combative tone. The third is just combative. Y’all can carry on as usual but none of that conflict was actually warranted.

NoraCodes 4y ago

> If this seems shocking, consider that the COGS of software as a service products are much lower by comparison. Doesn’t matter, though, because you have to pay all of those expensive salaries to make it happen. By definition, in a successful business, a significant amount of that markup goes to profit, not anything that's actually productive like salary.

lukas099 4y ago
Some businesses have very little profit margin; their strategy is to make up for it in volume. In fact, some of the most successful businesses (walmart) work this way.
eru 4y ago
How is profit any less 'productive' than any other expense?
- Ma8ee 4y ago
  Removing any other expense will be detrimental to the business, that is, make it work less well. Nothing will happen to the business if the owners don't get any dividends.
  - foldingmoney 4y ago
    >Removing any other expense will be detrimental to the business, that is, make it work less well. Nothing will happen to the business if the owners don't get any dividends. I'd say two things. 1. A listed business wouldn't exist in the first place (or in its present form) if owners hadn't been enticed to put up capital in the hope of getting dividends. 2. The purpose of a listed business is to pay the owners, not to produce goods or services - producing goods or services is just a means through which to pay the owners.
    - v-erne 4y ago
      The ultimate goal and purpose of any economic system is to serve whole society - those people own anything because we as a society recognize that we are not able at present moment to build better system without their rent seeking behaviour. But this does not mean that they have some god given right to unlimited dividends from work of others. It all seems backwards (as in tail wagging the dog). And don't get me wrong - I know that their behaviour is just part of human nature, that our culture tries somehow to tame and this behaviour is no different from monarchs and aristocrats of old days, but it does not mean that this is the ultimate system and there is no metaphorical guillotine waiting for them all somewhere in the future.

thedebuglife 4y ago

From my own reading and experience, paying salaries still has less overhead.

brtkdotse 4y ago

I’m actually surprised it’s as high as 30%. Would’ve expected 10% tops. Reminds me of that Planet Money special where they made their own tshirts from scratch, as “finding a cotton farmer to buy cotton” from scratch. The thing that added the most cost was the transport from the dock in NYC to the store.

Cthulhu_ 4y ago
I'm sure manufacturing costs is like 10% or even less, but between the factories in e.g. China and the US or Europe, there's container transport overseas, import taxes and fees, and other such transportation and logistics overhead. I freqently find myself in a supermarket and think that the packaging for the products there was more expensive than the product itself. Plus the logistics.
- School-Cotton 4y ago
  Shipping over the ocean from China to the US is very cheap.
onemiketwelve 4y ago
Ah damn, I just commented about planet money. Seriously, it was totally perspective changing. Anyone who even has a modicum of interest in econ/business, especially as it pertains to the topic here, should listen to the t shirt saga. It's excellent storytelling even for those who aren't economics nerds. Still have my squirrel t-shirt I bought to this day :) https://apps.npr.org/tshirt/#/title https://apps.npr.org/tshirt/#/title

buro9 4y ago

For most consumers I'm not sure COGS is something that they are aware of. The big takeaway from understanding COGS is using that to understand fast moving and disposable goods and merchandise. In the UK a recent (last decade) thing has been fast fashion, Primark and the like are leaders at this. It is possible to purchase a pair of straight leg jeans for GBP 12. Understanding COGS means you can quickly realise that the absolute maximum amount spent on materials and manufacturing is GBP 4. An awareness of COGS reveals to buyers unethical manufacturing, low quality, and essentially planet damaging goods and merchandise. On a more individual level, i.e. the Beats headphone example in the article, it can also reveal when you're being ripped off. Where what you're buying isn't the goods as much as it is the sticker on the side and the status. COGS may not be a secret to most people on HN, but they're an unknown part of the magic of how global commerce works to the majority of people.

AussieWog93 4y ago
If you're on Windows, alt-0163 inserts the £ character on a US keyboard. 0164 is €.

mrweasel 4y ago

> There’s nothing wrong with this. These are standard ratios, not some dirty secret. Standard, absolutely, but I think many are surprised by how much of that is profit for the company that sells the product to the consumers. I worked for a company that had 40-45% margins on most consumer electronics. Less than 40% and the buyers didn't really want to deal with it.

samstave 4y ago
*__exactly__* - If you have ever whore'd yourself out as a 1099 "consultant" <=== you're typically paid ~30% of bill rate... the company claimed all this "I have to pay insurance" bullshit - but if you are paid $50 an hour, the contract is likely $150 an hour... and the company's fat margins are within....
golergka 4y ago
Revenue, not profit. They have pretty huge costs of doing business, too.

TheOtherHobbes 4y ago

I used to be a naive DIY hobbyist who was outraged by how much more expensive commercial products were compared to the parts cost. But of course what you say is true. Electronic and software design, physical design, productisation, marketing, distribution, packaging, support, business premises, logistics, and backup business services (payroll, accounting) all cost money. Even a nominal markup of 40% may not be enough to cover those expenses. Selling at scale - even at small scale - is completely different to buying a bag full of bits and assembling them with a soldering iron. Having said that - audio and music are particularly susceptible to snake oil. Never mind all the cable nonsense, you can literally buy magic pebbles and boxes full of rocks to "improve" your audio. The people in those markets are either delusional or knowingly scamming their customers. At some point branding and market positioning become the biggest driver of perceived value, and spending $$$$$$ just to prove you can - under the pretext of "purer sound" - becomes an exercise in consumer narcissism. In the classic Veblen mode, the product being sold isn't the item, it's the consumer's perception of themselves. And some people will pay huge sums for that. Which is you can buy magic hifi rocks, magic watches that don't tell the time very well, magic handbags, and all manner of other trinkets, for very silly prices.

chrismcb 4y ago
Ironically a box of rocks will probably "improve" (well affect) your audio more than a cable will. As sounds does bounce off objects. That being said there are cheap, worthless cables as well. I'll pay a bit more for a cable where they connection won't fall off after two uses.
onemiketwelve 4y ago
I think that response is natural especially for anyone who builds things, software or otherwise. But my mindset completely changed after listening to a lot of economics stories on planet money. There was this dude who tried to make a simple toaster on his own, down to refining metal. None of us can make even the simplest consumer product, let alone an consumer electronic product economically. https://www.npr.org/2014/09/12/342138931/how-do-you-build-a-toaster-from-scratch https://www.npr.org/2014/09/12/342138931/how-do-you-build-a-...

akrymski 4y ago

By contrast products on Amazon have COGS closer to 10%

PinguTS 4y ago

Actually, that is what I learned over 20 years ago at the university while studying electrical engineering. Basic business class (and law) was part of the courses to get the diploma. The general rule of thumb was, that a product in parts and production shall not be more 30% of the final price of the product. If its more, it will be a money looser. With that 30% you have 30% for marketing and distribution, and 30% for research and development. Then there you have about 10% of overhead costs for all over. Then you can play with the numbers. If, like in consumer products, marketing and distribution goes up, you have obviously less either for R&D, which means less innovation or less innovative products, or less for production, which means less quality. That's what I learned for electronic products. Other industries maybe a little bit different. I think of these sometimes when I see a plastic box in the store for 10 bucks or so, and I know this plastics costs only a few cents in production in injection molding, of course not counting what the machine for the manufacturer had cost, what the production form cost and that it can only be used for a few 100 000 items before wearing out and so on.

urthor 4y ago
*loser.

greggsy 4y ago

SaaS is a different subscription model, not a one-off product sale. Odd comparison, unless I missed something.

softfalcon 4y ago

> None of this is actually secret (it would be common knowledge for anyone employed in the industry) but isn't well-known outside of it. This audience has a lot of professionals in it so a lot of this might not be news to you. They said none of this is a secret in the 3rd paragraph of the article.