You just got back from buying a brand-new pair of sunglasses at your local boutique. Here’s a question: who pays the sales associate’s salary? If your answer is the boutique, you are only half right. The sales associate’s salary may come directly from the boutique’s bank account, but that money came from you and your fellow customers.
The reality of retail is that consumers ultimately pay for everything. That could be both good and bad, depending on your perspective. How so? Let’s try to figure it out by unpacking how retail actually works.
Retail Costs Money
Operating a retail business costs money. Let’s start with product. Your favorite boutique purchases wholesale sunglasses from a distributor like Olympic Eyewear. There is the first cost of doing business. Now, the boutique also has to pay employees. There is another cost. Now add monthly rent, insurance, utilities, office equipment, etc.
In order for the boutique to make money, all of those costs have to be covered by sales revenue. Maybe you paid $100 for your sunglasses. When the boutique adds all of their costs together, they may spend $75 to get those sunglasses into your hands. Their profit is $25. The remainder of the money you spent covers their costs.
Retailer Pays Wholesaler
For the purposes of our illustration, let us assume that the sunglasses went from manufacturer to wholesaler to retailer. Let’s assume there is no distributor involved. What does this mean to the boutique? It means they are paying the wholesaler’s costs just like you paid their costs.
Let’s say that same pair of sunglasses you paid $100 for cost the retailer $25. The wholesaler paid $5.00. The remaining $20 covers the wholesaler’s costs and provides a little bit of profit. But where does the retailer get the $25 to make the purchase? Ultimately, from you. The boutique owner fronted the money, but you reimbursed them with your purchase.
Wholesaler Pays the Manufacturer
Finally, we follow your new pair of sunglasses back to their source. Thanks to the wonders of mass production, the manufacturer is able to produce a pair of sunglasses for just $.25. The wholesaler pays $5.00, leaving $4.75 to cover the manufacturer’s costs and earn a little profit. But remember:
- The manufacturer’s costs are covered by the wholesaler
- The wholesaler’s costs are covered by the retailer
- The retailer’s costs are built into the price you pay.
When you trace the money from your retail purchase all the way back to the manufacturer, you discover that a certain percentage of the price, along the entire supply chain, goes to cover the costs of doing business. In the end, you end up paying everyone’s costs. You end up providing everyone’s profit.
Cheap Prices Nonetheless
You can choose to see this in a negative or positive light. From a negative perspective, you might feel it is unfair that you have to foot the bill for everything. But from a positive perspective, it’s amazing that we enjoy such cheap prices on most retail products despite how the system works.
Bear in mind you can buy a good pair of sunglasses for less than $25. That is amazing, given how much is involved in the supply chain. We owe that to mass production and cheap raw materials. If not for both, that same pair of $25 sunglasses could easily cost $1,000 or more.
The reality of retail is that consumers ultimately pay for everything. That’s the way it is; that’s the way it has always been. The final player in every supply chain is the one who covers everyone else’s costs.