Friday, July 11, 2008

Balloons, Popcorn, and Snow Cones

A Little about Cost Markups: What do Balloons, Movie Theater Popcorn, Snow Cones and Starbucks Coffee have in common? They, along with Cotton Candy and Fountain Drinks are on the list of

the Consumer Products with the Highest Markups

But what is a “Markup?” and "What does this mean to us?" Markup, or Margin, is a marketing term for the price that a business puts on a product above what it costs to produce and deliver the good, usually determined as a percentage. In other words: the part that is straight profit.

Certainly there are more expensive items than coffee, cotton candy and popcorn --like porsches, condominiums and golf resorts-- so what makes these items special? What kind of a markup would cause such a big deal?

How about this: No matter what a company sells, their price is a combination of two numbers: the cost of making and transporting the good they are selling (COGS) and the margin of profit (Markup).

COGS + Markup = Price

COGS is a set cost determined by the various expenses, fixed—such as overhead and insurance, and variable—such as raw materials and employee wages, that go into producing the product. Companies can do very little to affect this aspect of price, or at least that’s how I see it from the marketing side of the fence. The second part of price, however, the markup, can be shifted easily—this has no basis other than the price your customer is willing to bear.

For most consumer products, the average markup ("Retail") is about 30%. For commodities --sugar, soap, pillowcases-- markup is closer to 10%. But for "Premium" products --retail items aimed at the very rich, or the very demading (this is where we talked about Porsches, but also includes watches, Italian shoes, and vodka)-- markups often approach 200% of Cost. And then "Ultra Premium" --products called by names like Mikimoto, Piaget, and Alfa Romeo-- enjoy 400 and 500% markups. People gladly paying $750,000 for a car that costs around $20,000 to produce. For more on this, here is a great link.

But these don't touch the 99.9% profit margins of the products mentioned above-- the less than 1/50 of a cent that it costs to produce the .5 grams of a latex balloon that is filled with a burst of helium valued at 1/80 of a penny and sold for $3.00 at fairs and circuses across the US. This equates to a 1000% markup above COGS. Similar equations can be run for cotton candy, snow cones, your super-value bucket at the movie theater and your double iced caramel machiatto.

Imagine paying a 1000% markup on your car or your next burrito. That would be a $20,000,000 Altima or an $850 dollar Carne Asada bowl.

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