There's a good video from EEVblog (EEVblog #887 - The Economics Of Selling Hardware) where he suggests a MINIMUM of 2.5 x COGS. But I think that was assuming directly selling to customers and passing the cost of shipping to the customer.
Know the owner of a failed restaurant. He said you aim for 25% for food but usually it ends up around 33% no matter how hard you try. This was for a single non-chain restaurant.
Someone else about to close a business down for a physical product. He was boutique sized, because of competition from factory made higher volume, he could never get above 2x COGS, and it has been a hard grind that is now losing money instead of the narrow margins he'd had for a while.
Cousin is a restaurant manager in the bay area. He mentioned that the margins are so thin in the business that one or two "bad" nights can literally ruin the balance sheet for the entire month.
I don't have to imagine - Australia has a much higher minimum wage than America and we still have plenty of restaurants. Maybe their margins are just better. Maybe that one particular restaurant would go out of business and others would continue, maybe they'd raise their prices along with their competitors.
Speaking as an Australian living in the US, it's a little bit different. Australians are used to the higher price of food, have been trained not to expect table service, have a rigorous set of laws around underpaying trainees and teens, have endemic "under the counter" wage fraud to avoid taxes and the minimum wage, and don't feel morally obliged to tip their expensive waiters and waitresses.
Maybe if America slowly increased the minimum wage at inflation + 10% each year, it would end up in the same place as Australia. Right now, US social rules and expectations are set up around a low minimum wage, and doubling that minimum wage overnight might rock the boat a lot.
> Australians are used to the higher price of food, have been trained not to expect table service, have a rigorous set of laws around underpaying trainees and teens, have endemic "under the counter" wage fraud to avoid taxes and the minimum wage, and don't feel morally obliged to tip their expensive waiters and waitresses.
Woah. One of these things is not like the other ones.
(As an Aussie, though, the tipping thing just seems weird. It's nice to tip a little for really good waitstaff, but if doing so means they get a pay cut on their hourly wage then that's bogus. Paying your staff poverty rates because you expect them to live off tips is like paying your police force poverty rates because you expect them to live off bribes.)
It's actually sort of related. Because US waitstaff get so much of their pay in tips, the industry commits fraud by under-reporting them, while in Australia the industry actually pays its staff, and so commits fraud by under-reporting hours and headcount. I'm sure prices will rise a bit until everyone figures out how to rip off the taxman again.
> A waiter literally works for you during the meal you tip for.
As a European I would say that US type waiter works against me. When I'm trying to eat my meal, I don't need some stranger to come to my table every two minutes to ask me "how are you?", "is everything ok?", "do you need something more?". It's just annoying. I can't eat, I can't talk personal talks with friends, when someone is around me trying to annoy me all the time. I can't raise my head or look around because the waiter would come to annoy me again. And in the end, that annoyance comes to your table and expects 15-35% of the price for the annoyance "service" he gave you during the lunch?
Sorry, but when I'm in restaurant, I just want to order food or drink and be left alone. If I need something I'll raise my hand and wait. What's the issue in waiting for a guy to come, he's a waiter after all ;) If the waiter comes quickly after I raise my hand (usually to pay the bill) I would round the bill to the next full €, and that's it.
That's why in Germany you have 3-5 times less waiters serving the same number of people in restaurants, they are paid a livable wage, and you pay what you see in the menu, without a need to add 50% for VAT and service tips.
That is the same opinion I have voiced here before, my experience with waitstaff in the US was atrocious, I really wasn't prepared to be interrupted every 2-5 minutes by the waiter doing a tour around the tables and asking if I need something else, if everything is ok. Even more because it feels like I'm being rushed.
In one specific instance I had finished my meal and was pondering on getting dessert or another beer, talking to my friend, the waiter came over to ask if we wanted something else, I said "not yet" and 2 minutes later had the check on my table.
I really didn't have any great experiences in the US on a sit-down restaurant, the food was nice but the service is always too much on your face. I understand that it's done because of American's social norms but even coming from a Latin country it felt way too much. And way too fake, my feeling was always that this behaviour was for the tips, never for a genuine care on how I'm being served.
I know how it works in Europe, I'm European. Why should it work like we want it to all around the world? Haven't we exported enough of our culture? USA is a different place, let it be.
I'm not an European (as stated on my other comment, I'm Brazilian) and was also quite bothered by servicing in the US.
I wish there was a way to signal that I don't want to be bothered but even when I voiced this feeling to a waiter in NY he was still coming around unasked.
What's wrong with exporting best practice? Underpaid waiters bugging customers on the expectation that with enough extra coffee they might get their aspirational wages paid, customers who have to calculate the cost of their meal plus service charge... in what world is that efficient?
Restaurateurs - just pay your staff properly, waitstaff - don't bug the customers; there you go - european advice for free.
I guess this is a perfect illustration of the difference in perception, because I wrote that thinking "the waiter works for the establishment (for pittance) and you tip (bribe) them for better service (nicer treatment).
And you think that a human alternative to conveyor belt is worth more than the current minimal wage?
You got the whole thing wrong, and you managed to insult every waiter and waitress in the process:
A waiter does so much more than that. They generally take care of you - they help you to choose your places to your liking, undress, seat, they recommend food based on their expertise and clever judging of their client, and so on - they generally take care of you, and that can and is (and should) way more complex than being a human conveyor belt.
The actual argument is whether this job is a job done to the customer or to the restaurant (because it can be thought of as a whole package service or their image).
Americans think that the waiter will help a client more if the client is the person who pays them - literally, with actual cash changing hands.
Other people don't. I'm from such country and sometimes it leads to horrendous results, however most of the time it's OK - yeah, "OK", never great, so I definitely can see the point the Americans have.
Overall, IMO there are places where human staff is appropriate (fine dining places, brewery, upclass cafe...) - tipping is appropriate here. Of course there are places where the point is to obtain a plate and eat everything as soon as possible so you can be gone - but IMO people shouldn't serve the plates at these places.
They don't do any of that. Waitpeople aren't magical happiness-producers, they're just pleasant and make sure your glass is refilled and ask if you need anything. Which would just be my Australian experience talking if it hadn't been exactly the same when I was in the U.S. Waitstaff aren't magical concierges of euphoria, they're just nice and bring you more coffee.
As you say, the real difference is whether the waitperson is an employee of the restaurant who is paid by them to look after you, or whether they're an independent contractor who resells the kitchen to you at the table as a service. The service produced is generally the same, IME, but in the U.S. model you have to negotiate with two different contractors while each is trying to push the costs onto the other. Ugh.
Cute metaphor. But waitpeople can't actually set their price. They don't say "You want more coffee? How will that affect my tip?"
In a tip economy they are what they are - poor supplicants begging for your scraps. They have no power over the kitchen nor much over you, since they get their feedback after they've made their 'pitch' not before.
1. They can't choose a place to your liking, because they are assigned to specific zones of the restaurant. At best, you can request the host/hostess for a particular location, at which point your waiter is selected for you by virtue of your location.
2. They don't . . . undress you. You may be thinking of a brothel, not a restaurant. This claim is probably the most bizzare.
3. Again, it is generally one of the host staff that does the actual seating.
4. If asked for a recommendation, at best you'll get what they prefer eating, or a generic "what's popular" suggestion. In no way do they judge their client (On what? They just barely met you!) and immediately recommend that you'd love the lobster bisque because . . . your hair is brown.
I think I'm used to visiting different sort of places than you do (but I don't mean snob places, most of the ones I frequent are affordable for a working university student).
>2. They don't . . . undress you. You may be thinking of a brothel, not a restaurant. This claim is probably the most bizzare.
I'm not native english speaker. What is bizzare about waiter taking your coat and carrying it to the coatroom, "helping" you off it in the process? It's act of courtesy.
Let me rephrase: the waiters are the customer facing employees of a restaurant. They are no more working for the customer than a till worker in a shop is, or a help-desk employee is. Therefore, the onus is on the restaurant to provide compensation for their time, not on the customer.
Except in a free market, the customer is free to compensate the waitstaff at will. Which enables tipping whether we want it to or not. And motivates the waitperson to behave differently than a simple employee.
Minimal effect on the business directly because the costs just get included in the formula to determine how much they're going to charge for the meal. As it's a statutory change, everyone's costs go up so everyone's prices go up.
There's ancillary effects of course but not in the way you're suggesting.
No diversion of consumption to home-cooked meals (single or multi family)? No marginal restaurants fail? No reduction in tipping? No reduction in add-ons to meals? (apps, drinks, deserts) No reduction in staffing count, hours, or benefits?
It would seem unusual if “prices just [went] up” without any other changes to the overall system.
That doesn't tell us much without knowing what standard of living you think everyone deserves, and for what level of effort. And if I'm more kindhearted than you and think that everyone deserves a standard of living twice as high for half as many hours, what then?
#1 is definitely true but #2 is only true if most of your customers make the minimum wage. Since we're talking about less than 4% of hourly workers[0] (so excluding everyone making a salaried wage which is going to be almost everyone reading this and everyone they interact with professionally), it's extremely unlikely that a majority of your customers make the minimum wage even if we're talking about a fast food franchise.
A well known Dutch chain restaurant owner once said "They're eating me poor, but drinking me rich".
Good waiting staff is worth their weight in gold. Knowing when to ask if the customer would like an extra drink is an art. On a side note: I never get the 'free refill' policy in the states. Why would you give something away that has a 300% margin...
For drinks that get free refills the initial sale means more than the refills. It literally cost 1c to provide the drink and you sold it for $3.00 (that's the 300% margin). Who cares if you spend another 1c to provide a free refill if that would be the difference in the customers mind on whether they should buy the drink initially or just have water or OJ (something that has negative margin, or a very low margin).
I'm kinda curious where the rest all goes. Seems like there's a market opportunity to streamline operations & improve efficiency if 80% of the purchase price of a product goes into things that are not the product.
5x the cost to manufacture, which would not include product development, not to mention sales, failed products, cost of returns or fixing defects, office rent, testing, certification, support, and on and on and on.
There is a market opportunity and many people capitalize on it. Amazon is full of things like this. Generic items or barely designed items with your brand stuck on them, built by somebody found on Alibaba and shipped to the consumer. They're fantastically cheap, the margins are much thinner, and the products range from adequate to terrible.
It's terribly difficult to build a high quality product people will want for many years (no new design costs) which you don't have to market or do anything with and can just manufacture and sell for a tiny profit. When it is done you'll usually find it as a small very specialized family type business which hasn't sold out yet.
But still, most of those things are one time costs: product development, failed products, fixing defects, certification. once you have completed those things, you can keep selling the successful product for decades right? especially now that the pace of innovation is slowing down. I mean just look at the clothing industry: a t-shirt today is the same as it was 10 or 50 years ago, right?
I would imagine things are super high tech and new, would need some iteration in their first 5 to 10 years, but after that, I don't know.
the costs that scale with each good sold is: Support, cost of returns, Sales, marketing, etc.
Constantly amazed at folks who don't appear to have any relevant experience pretending to educate folks who clearly do. You managed to list 4 things before punting to "etc." and 3 of them were lifted from the parent without modification. Can you explain how the only thing you added, marketing, scales per good sold? Why is "fixing defects" a one-time NRE and not related to the volume of product produced?
But who can forget the stellar recent hardware companies like Fitbit, Jambox, Sonos, and Pebble all of whom waited a minimum of 5 years before bothering to introduce a second product.
Name something built by a hardware startup in the recent past or imaginable future which would be designed once and built for 10 and 50 years exactly the same.
Jenkins valves. Same cast iron gate valves for a century.
Ad from 1924.[1]
Current product brochure.[2]
Jenkins used to advertise that one from a 19th century water main had been removed because the line was being re-routed by a water utility. The valve was cleaned up and put on display, and after a while, when everybody was tired of looking at it, it was put back into inventory and went back into the ground, probably to serve another 100 years.
It also says that will be built almost the exact same for the next 10 to 50 years. In this case I would consider recent past everything going back to around the start of the 20th century.
Unless you're selling paperclips, it's never that easy. There's always constant work to be done with any reasonable complex modern product, especially if digital.
I, too, think that industrial designers, PM's, engineers, DFM experts, labor that actually produces the thing, 3PL, packaging experts, marketers, salesfolk, shipping, a dozen required professions I'm still forgetting, and retailers shouldn't see a dime. Buncha greedy jerks trying to horn in on my money I'm paying for a bunch of unprocessed plastic and raw sand.
Yes, totally true. And this very reason "good goods" don't survive on the market for long.
The need to just make any money at all, means that you have to import cheap goods from China, unless your competitive advantage will worth more than that 5x margin ones get from "cheap sh*t." And you will never ever get this for any non-high tech (which implies easy to manufacture) consumer product.
Price anything at professional grade. For example, a heavy duty professional microwave can cost well over $1,000, but you can run it 20 hours a day for years.
Thanks to my former restaurant owner friend for this example.
> There are plenty of direct-to-consumer brands now thriving with around 50% to 60% gross margins, i.e., selling at 2x-3x COGS
Mature ones, sure. Unless you plan on financing growth pretty much exclusively out of the middle of your cash flow statement, however, you'll need a wider margin as an upstart.
We are tentatively at 3x COGS for a hardware product we are about to launch in Q1 2019 and the margin feels incredibly tight. We may go to 3.5 - 3.7x COGS.
Pricing is scary. But people have subsequently told me they would have paid $85 per board for my product. I charged $20 and it sunk me. $85 would have meant a small manageable launch that was well funded. Instead I went $100k in debt. Be sure you’ll hve enough to cover unexpected issues. Are you over optimistic about production targets, setbacks, etc? My time estimates were way too optimistic which compounded the price issues.
I’m obviously biased from my bad experience, but do be mindful to do due diligence on pricing, delivery, and costs. Well, my other issue was that I didn’t know how to do those things and I ran out of time.
That's an insane ratio. Maybe makes sense for consumer markets and sale through retail channels, but not in general. Your competition will eat you alive.
This. If you're doing hardware, your price needs to be minimum 3x-5x the COGS.
If you think you're going to win some market by pricing with lower margins, like 1.5x-2x, you're setting yourself up for failure.
Interestingly, the same rule holds for restaurants: food input costs should be no more than 20-30% of the meal price.