Common Cents: Why is Everything So Expensive? (May 26, 2009)

Filed in Gather Money Essential by on May 26, 2009 0 Comments

Chances are you’ve noticed that the price of goods has skyrocketed in the last ten years, to the point where you feel gouged over every loaf of bread. Unfortunately, your income probably hasn’t increased along with it. Where do these price increases come from? Is your local grocer merely trying to squeeze a few extra pennies from you, or is there a deeper reason? In other words, Why Is Everything So Expensive?

To answer that question, we need to start by understanding how goods get from their point of origin to their final destination. Whether it’s a New Jersey tomato or a shiny laptop, everything you buy travels great distances to get from its basic components to the products you love. Here’s how it works:

Supplier. A supplier makes individual parts of an item, such as individual chips that are not meant for an end user, but are commonly used by manufacturers to build their products. Because parts may be cheaper in certain locations, an item ‘manufactured in the United States’ may still use parts from China, Korea, or the Dominican Republic. Typically, manufacturers go with the lowest-priced materials and components that meet their standards for quality – and if it’s cheaper to ship in a product from overseas than to make it here, many companies will.

Manufacturer. A manufacturer takes materials acquired from suppliers and turns it into an actual product, whether that product might be a shiny GPS unit or a batch of vanilla wafers. Manufacturers sometimes also act as their own suppliers, with a department or division responsible for these operations (for instance, a cereal company might manage a corn growers’ collective.)

Distributor. A distributor is responsible for bridging the gap between manufacturers and retailers – some manufacturers handle this themselves, but many larger manufacturers sell their products to regional distributors. These distributors, in turn, sell these goods as needed to retailers and resellers.

Dealers, Retailers, and Resellers. A retailer, in turn, manages a storefront or other outlet that sells products directly to end-users, while resellers typically negotiate directly with end-users. Dealers, meanwhile, do a little bit of both – stocking and selling products directly, while still having the ability to cut a deal for particularly large purchases. In particularly complex cases, there may be multiple levels of retailers or resellers involved as companies purchase from and resell to each other in order to get what they want to their customers.

End User. Whether it’s a massive corporation or an individual like you, products eventually find their way to an end user – someone who intends on actually making use of the product. Barring resale of the item, this is where the supply chain typically ends.

If you look at the number of layers involved, you can see how prices can quickly add up. All businesses are in business to make a profit — and considering they have to pay their employees, they typically have to charge a reasonable profit margin in order to keep things running smoothly. Depending on what profit margins are assessed at each level, a price can go up rapidly. Let’s look at a simplified example. This assumes that each link in the supply chain assesses a 20% profit margin, and each link charges a flat $10 to ship to the next:

MegaOmniCorp is a supplier of a variety of computer components which are used to assemble a laptop. The total cost of the supplies is $200. MegaOmniCorp has a 20% profit margin, so when selling these parts to a manufacturer, they charge $250 for the parts, plus $10 for the freight costs.

ManufactuCorp is a manufacturer of laptops and laptop accessories, among other things. They take the assorted parts and assemble them into a functional Manus laptop. To pay for their costs, they take the $260 they paid for the parts, add a 20% profit margin (increasing the price to $325), and add $10 in shipping costs to ship it (likely along with many other such laptops) to a distributor.

CompuTech is a distributor of computers and computer components, and sells products from ManufactuCorp and other manufacturers to interested retailers. They purchase the Manus laptop from ManufactuCorp, add their 20% profit margin to the $335 price tag (increasing the price to $418.75), add $10 for freight shipping, and ship it to retailers.

ValuMart is a retailer that sells anything and everything their customers might want to purchase, offering one-stop shopping and low-priced goods. They purchase the Manus laptop for $428.75, then mark it up 20% to meet their costs — so that an end user like you can walk in and purchase it for the low price of $535.95.

Of course, this is a gross simplification of the process, but as you can see, the value of goods can change dramatically from the point of supply (MegaOmniCorp) to the point of sale (ValuMart) – starting at $200, it went up to $535.95. If a supplier decides to raise prices (because the goods themselves have gotten more expensive, for example), this price increase will be felt at every point down the line, and dramatically change the final outcome.

Let’s say that the aforementioned supplier’s costs increased by $50, to $250. Assuming all profit margins remained the same, they would charge the manufacturer $322.50; the manufacturer would charge the distributor $413.15; the distributor would charge the retailer $526.45; and the retailer would charge you $658.05; a $50 change at the supplier end results in a $120 price increase at your end.

Likewise, if the cost of shipping increases, prices increase dramatically across the board. Let’s say that the supplier’s costs are set at $250, but due to a gas shortage, the cost of shipping at each stage increases from $10 to $20. The supplier charges the manufacturer $332.50; the manufacturer charges the distributor $435.65; the distributor charges the retailer $564.60; and the retailer charges you $705.75. An increase of $10 in shipping per business results in almost $50 more on the already hefty price tag.

So what can you do about it? Shop, shop, shop around. While corporations and other large buyers tend to get the best deals of all, it never hurts to look beyond retailers when shopping for big-ticket items such as electronics. A distributor may have an online site that can afford to ship to you for free and still beat retailer prices, because they have a closer relationship to the manufacturer. A manufacturer may be willing to sell directly to your business if you order enough products to justify it. Manufacturers that do not directly sell to individuals may be able to recommend distributors that offer better-than-average deals. Retailers often act to undercut each other, and the Internet makes it easier to find the best prices on the products you want. Some retailers and distributors can offer advice regarding objects of comparable quality and value – information you can use to broaden your search and possibly get a much better deal for your dollar.

“Why is everything so expensive?” You’ve already seen two basic examples — increases in shipping costs, or increases in supply costs, can dramatically alter the price an end user such as yourself pays. Many items formerly sourced overseas are now becoming more expensive due to increases in shipping costs or supply costs. Now more than ever, it’s important to carefully consider your options when trying to get the best deals, and an understanding of the supply chain can help make sense of those otherwise irrational price hikes, and give you an idea of where to go when you can’t stand to pay retail prices.

Austin Cushing, Money Correspondent:
Austin’s column, Common Cents, published twice monthly to Gather Essentials: Money, is focused on life below the poverty line and other topics that are of importance to those living paycheck to paycheck.

Austin Cushing is an eccentric writer, consultant, programmer, poet, photographer, and Microsoft-certified database administrator, currently working as an IT consultant. He writes from personal experience and personal opinion, and enjoys finding the humor in even the darkest aspects of the world. In addition to his column, he maintains Gather groups on a diverse range of topics, from gaming to political discourse, and manages a number of popular Gather groups.

You can find all of Austin’s Common Cents columns at http://commoncents.gather.com. Keep up with Austin’s other postings and Gather activity by joining his Gather network — just click here and select the orange “Connect” button on the left-hand side of the page.

Food for Thought:

Do you think we would be better off if we could buy more products directly from the manufacturer, as opposed to through retailers? In an age when practically anything can be shipped practically anywhere, what purpose do you believe the retailer serves?

About the Author ()

I am a programmer, a poet, a writer, and a creator, seeking enlightenment in the world.

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