What does it really cost: the biggest profit margins

What does it really cost: the biggest profit margins

We all have an idea about how much want to pay for our new phone or how much we are willing to spend on this new perfume. However, do we have any idea of what the real value of these products is? What does it really cost to make these products?

Smartphones

We will start with a company that everybody knows, Apple. They just launched the iPhone 6 and iPhone 6+. Everybody knows that Apple products are relatively expensive in comparison with competitors. But what is the real value of the new iPhone? And is this larger than its competitors?

To make a long story short, the estimated value for the labor and parts for the “normal” iPhone 6 with 16GB is between the 200 and 247 dollar. The selling price of the iPhone 6 is between the 649 and 849 dollar without a contract. Apple charges the customers with a 100 to 200 dollar price tag to upgrade the memory to 128GB, however it only costs Apple 47 dollar to upgrade the memory. This price marginmight sound ridiculous but let’s compare this to the competitors.

To build Samsung’s Galaxy S5 it will cost them around 256 dollars. The device sells around 660 dollars. So the profit margin is slightly smaller than the iPhone 6, since the costs are slightly higher but the selling price is slightly lower. But still, the price margin is roughly in the same range.graphs
Most other high-end smartphones also have a cost price between 200 and 260 dollars. Their average store price is between the 600 and 700 dollars. Operating expenses for a smartphone will be around 62 dollars and there will be a wholesale to retail markup around 70 dollars. This means that almost 50% of the price of a smartphone is profit margin. Although Apple has the largest profit margin, it is relatively not that much higher than the main competitors. However, you will still pay more for the brand when you buy an iPhone in comparison of other phones.

 

Profit margins

A gross profit margin of 50% for a smartphone might sound ridiculous but it is not extraordinary. Nike has got a gross profit margin of 43%, Porsche of 50%, Levi Jeans of 52% and even McDonald’s has one around 40%. So yes, a hamburger can be cheaper than 1$. And like most people know by now, higher prices do not stand for higher quality. The specs for an iPhone are most of the time the same as the main competitors. However, none of these margins come close to the profit margin of perfumes…Mid Image2

For perfumes the profit margin can be up to 90%! The liquid in the bottle is only 3% of the price. The rest of the price goes into the packaging, overhead costs and mostly into the marketing. So if you pay 70 dollar for your Armani, Hugo Boss, Gucci or Guess fragrance, you will only get a liquid that is worth 2$. Of course you need a bottle so in total you will get something of a value of 6 dollars.

You might wonder how it is possible that some companies have that big of a profit margin. There are three main reasons for this. First, there can be a focus on intellectual property. This means that a company invests in research & development and is therefore able to produce a patented product that is superior or different than its competitors. Secondly, there can be a very high barrier of entry because of e.g. economics of scale or contracts with suppliers and distributors. Thirdly, most of these brands spend a lot on branding and advertisements which make it possible to sell products for a far higher price than relatively unknown competitors.

The numbers provided in this article prove how valuable marketing is and how much it is worth to be a brand leader. People will compare prices to what they are used to pay instead of what the real value is of a product.

Further Reading

http://www.dailyfinance.com/2012/05/22/celebrity-perfume-cost-breakdown/

http://recode.net/2014/09/23/teardown-shows-apples-iphone-6-cost-at-least-200-to-build/

 

Sources

http://www.dailyfinance.com/2012/05/22/celebrity-perfume-cost-breakdown/

http://recode.net/2014/09/23/teardown-shows-apples-iphone-6-cost-at-least-200-to-build/

http://recode.net/2014/04/15/teardown-shows-samsungs-galaxy-s5-costs-about-256-to-build/

http://www.forbes.com/sites/tristanlouis/2013/09/14/the-real-cost-of-a-smartphone/

http://www.digitaltrends.com/mobile/iphone-cost-what-apple-is-paying/

http://www.quora.com/What-is-the-reason-for-high-profit-margins-in-software-pharmaceuticals-industries

The board of Asset | IB&M

The board of Asset | IB&M

Asset | International Business & Management is a study organisation of the economic faculty at Tilburg University. The board of Asset | International Business & Management is responsible for the daily functioning of the organization.
The board of Asset | IB&M


3 thoughts on “What does it really cost: the biggest profit margins”

Leave a Reply

Your email address will not be published. Required fields are marked *


Shares