Retail, VAT and Margins

[Ethan1981]

Hi, im new to the forums in regards to posting but ive found a lot of useful info on here in the past.

I'm going to wholesale a product, selling to independant retailers.

My question is about the margin i advertise and tell the retailers that they can make by selling my product.

I'm not VAT registered so if i sell my product to a retailer at £5.50 thats all they pay. If the RRP is £8.99, i presume the retailer still pays VAT on the sale, so essentially they are selling it for £7.49, am i correct in thinking this?

So they will make £7.49-£5.50 which i think is around 22%?

Does this sound right? Or would i ignore the VAT so i can tell them they make £8.99-£5.50 which i think is around 39%?

Obviously i want the margin to look attractive but i dont want to mislead.

Many Thanks

 

[Scalloway]

The retailer will charge VAT on the sale you your mark up needs to be on the price net of VAT.

 

[JMRidley]

As a retailer I wouldn't buy something for £5.50 that only has an RRP of £8.99. Have you thought about not having a RRP? Your current pricing structure is likely to put retailers off whereas if you don't have an RRP it's up to retailers to decide if they think they can sell at a price with a good margin (of course retailers can ignore your RRP anyway but in my experience stating an RRP does tend to set the pace re pricing).

 

[Ethan1981]

Yeah the prices are not set in stone i just needed a figure to use as an example really.

The category of product im selling generally has quite low margins and the retailers that sell these will be used to a lower margin than other things they may sell. That said the rrp mentioned above is on the low side anyway and is competitive with online prices. I wouldnt be trying to compete with online prices when approaching retailers.

I do need to get the price right tho as im going to retail it myself online, and obviously wouldnt want to undercut any retailers that do want it, wouldnt be a great start.

Its quite difficult to get the balance right. As a retailer would you buy a product that you have to sell at say £10 when you know the supplier is retailing it at £9?

I have to compete online when retailing myself but i know i need to provide a worthwhile margin for a retailer.

 

[Chris Ashdown]

The only thing that matters to you is how much profit you want to make

Few retailer's will work on less than 30 percent markup, more normal 50 percent or much higher

I would suggest you visit some retailers in you field of interest and talk to them about the product a nd what they feel the retail price should be
Prices are funny things you can walk into Halfords and buy a gps for the car for undr a 100 pound yet car makers often sell them at over 1000 pounds fitted into a car

 

[Ethan1981]

Yeah obviously i want to make as much profit as possible. Ive been in general grocery retail for quite a while so im used to working with margins from 4-6% on things like tobacco upto 40%+ on drinks etc...

The product i have now isnt really available as such (in this form) from anywhere else so i kind of have a bit of "power" when it comes to pricing as i have no competitors (Yet)

I'll find a happy medium i guess, luckily i know a retailer in the market so i guess product trials will discover the price i need to be at.

 

[Rhyl Lightworks]

I wouldn't think of a mark up of less than 300% on non-genuine electrical spares, and 200% on genuine ones. On small appliances a mark up of 50 to 75% is acceptable. I wouldn't deal with a non-VAT registered company either.
Perhaps the high mark up is because we've got no competition in this area of North Wales.

 

[Ethan1981]

Im glad im not in the electrical spares business then, unless i was a retailer in which case it sounds like id be laughing all the way to the bank.

Interesting point about not buying from a non vat registered company though? Why is that? What difference would it make to a retailer if their supplier was vat registered or not?

 

[Pish_Pash]

Just a quick bit of input...if you approach the trade to sell to them as non VAT registered it doesn't get you off to a very good start. bearing in mind selling wholesale normally means large volume & lower margin, then any decent wholesaler that has sellable products will quickly trigger the modest threshold which makes VAT registration mandatory.

So the fact that you aren't VAT registered is going to pretty much show everyone that you've not got much turnover (hardly gives off the sense of success & 'in demand' wares)

Also if you intend selling to the trade, then being VAT registered means you can claw back the VAT on your purchase of stock...so your 'acquisition' cost will drop by a fair amount which you could pass on to the trade buyer. (i.e. more margin for them will likely tempt them in)

I think the general rule of thumb is if 1. you are selling to the public...try & avoid VAT registration for as long as you can, whereas if you are 2. selling to the trade from Day 1, it kind of lends itself to going VAT registered on Day 1.

 

[Ethan1981]

Yea i totally understand that, but any supplier with a new product is going to have zero turnover just like i do at the moment. I am still waiting for the first delivery of stock so have made no sales at all as yet.

Obviously when the time comes i will be VAT registered, whether that be if the turnover reaches the threshold or if i receive significant interest from trade customers. As most of my business initially will be retail im going to hold off for as long as possible.

I've been trying to think of a way to appeal to both customers though. I thought maybe my other half could register as a sole trader and import a part of my order for me (say if i order 5 pallets of stock, i take 4 and they take 1) that way i could sell my 4 pallets to retailers as a vat registered individual/company and the other pallet could be sold to the end user by a non vat registered individual.

Would there be anything wrong in doing this?

Obviously all money would be kept seperate but it still ends up in the household pot i guess.

 

[Rhyl Lightworks]

I agree with this almost completely. One point I would question is if you are mainly selling to the public, you should not be VAT registered. Although most of the public do not understand VAT, I still think it pays to be VAT registered, for the few that do understand it and it gives a good impression to all if you are. Maybe my turnover is too great.

 

[Pish_Pash]

I agree with this almost completely. One point I would question is if you are mainly selling to the public, you should not be VAT registered

I was looking at it from a pure maths perspective.

I buy a product for £5.00 & sell it for £10.

Not VAT registered ...profit = £4.00

VAT registered ...profit = £3.33

....so if you are talking about maximising profit, then if selling to the public (who by & large have no interest in VAT 'ins & outs') ...it's better to not be VAT registered.

As a footnote to all this, I started off not VAT registered & then triggered the threshold midway through my year....the switch was chaotic (from a paperwork perspective) & the time sump is something I never want to experience again - if I was starting again, I'd just bite the bullet & go with being VAT registered right from the start

 

[Mister B]

Why, oh why, would you not set your prices so as to reflect being VAT registered? If you create demand at a VAT free price, what will happen to that demand when your prices have to go up by 20%

Far better to start as you mean to go on. You don't have to register for VAT, or charge VAT, (as long as you're below the threshold,) but you can set your prices higher as if they were VAT inclusive. Then you simply trouser the extra profit at the same time as testing market elasticity for the higher price. (Important though to state that the prices do not include VAT.)

Mister B

 

[Pish_Pash]

Why, oh why, would you not set your prices so as to reflect being VAT registered? If you create demand at a VAT free price, what will happen to that demand when your prices have to go up by 20%

Because you can trigger more business by being able to have your prices lower (& more business is what most companies need in the early days!). I set out with 'halfway house' prices (i.e. prices set midway between what I'd price at non VAT registered & what I 'd have to price at being VAT registered) ...I bagged more profit being not VAT registered & took the hit on the chine when I went VAT registered (i.e. prices stayed where they were...I didn't increase them)

 

[Mister B]

Because you can trigger more business by being able to have your prices lower (& more business is what most companies need in the early days!). I set out with 'halfway house' prices (i.e. prices set midway between what I'd price at non VAT registered & what I 'd have to price at being VAT registered) ...I bagged more profit being not VAT registered & took the hit on the chine when I went VAT registered (i.e. prices stayed where they were...I didn't increase them)

So, you went higher than the VAT free price and took the hit? Nothing wrong with that. And what happened to your sales?

Mister B

 

[Ethan1981]

Yea thanks for the responce Mister B, i agree with what your saying but i know that selling at retail price has a very good margin for me and i'd be happy absorb the vat cost when required and still be making a healthy margin without increasing prices.

 

[Mister B]

In that case, situation perfect

Good luck with the project.

Mister B

 

[Raw Rob]

Its quite difficult to get the balance right. As a retailer would you buy a product that you have to sell at say £10 when you know the supplier is retailing it at £9?

No chance. I was actually looking at a potential product this morning, RRP £1.85, on sale on the producers website for £1.60. Plus they are selling a mixed case of 20 for £20 on their website, the wholesale price for a standard case of 20 is £22.95. There not a chance in hell that I'll be retailing that product!

 

[Pish_Pash]

So, you went higher than the VAT free price and took the hit? Nothing wrong with that. And what happened to your sales?

Mister B

Impossible to say, because I priced them at that from the start (had no sales trends to compare against), I then expanded by selling on other marketplaces...so my sales were in a state of flux - fortunately, back then I had no competition, so had a bit of an open goal & could price them at what I could get away with!

 

[Deleted member 59730]

Because you can trigger more business by being able to have your prices lower (& more business is what most companies need in the early days!).

One of the biggest fallacies for small businesses. What you want is the greatest profit. Sell 1000 items at profit of £1.50 or 2000 items with a profit of 75p? Twice as much work with 2000 items. Twice as much costs

 

[Ethan1981]

No chance. I was actually looking at a potential product this morning, RRP £1.85, on sale on the producers website for £1.60. Plus they are selling a mixed case of 20 for £20 on their website, the wholesale price for a standard case of 20 is £22.95. There not a chance in hell that I'll be retailing that product!

Exactly, very bad idea to undercut your retailers. It's more important than people think to get the price correct from day one, taking into account any possible future wholesale deal and any future vat liability.

 

[CompuGlobal-Hyper-MegaNet]

So they will make £7.49-£5.50 which i think is around 22%?

not read through the replies in detail except to check that this hasn't already been pointed out:

You need to sack your calculator!!
£1.99 of £7.49 - you can instantly see it's > 1/4
It's a margin of 26.6%
or a mark up of 36%
(margin uses sale price as base, mark up uses cost price as base).

 

[Ethan1981]

not read through the replies in detail except to check that this hasn't already been pointed out:

You need to sack your calculator!!
£1.99 of £7.49 - you can instantly see it's > 1/4
It's a margin of 26.6%
or a mark up of 36%
(margin uses sale price as base, mark up uses cost price as base).

Haha yea thanks for that. I'm not sure if that was just a typo or if i had a meltdown at some point yesterday, either way im blaming the calculator and it has now been sacked!

 

[mhall]

Hang on, you will be selling it cheaper than me when you sell it online?

That alone would make me walk away. There is no way I will ever be in competition with my own suppliers.

 

[Ethan1981]

Erm...nope i dont think i said that. I think i said its important to get the price right from the start in order to AVOID that!

 

[Deleted member 59730]

Are you looking at it the right way round. I have always worked on (cost of production) x 4.

Then make your product worth it.

 

[rsccford]

I was in a similar position a couple of years ago and not VAT registered. Getting suppliers and retailers of any note to take you seriously requires VAT registration. Remember that the majority is claimed back, it's not too much accounting hassle unless you sell abroad. The HMRC have actually been very helpful too. Also once youve set your price with VAT taken into account youre done from the word go, rather than a 20% price hike. Good luck

 

[mhall]

. As a retailer would you buy a product that you have to sell at say £10 when you know the supplier is retailing it at £9?
.

No.

and the VAT registration is also an issue. If you are not VAT registered it tells me your turnover is less than £81k and I will make a judgement on whether or not you will be able to support me based on that. You can register for VAT with no turnover at all and, purely from your own marketing point of view I would recommend that unless you are selling just to Joe Public.

 

[Pish_Pash]

and the VAT registration is also an issue. If you are not VAT registered it tells me your turnover is less than £81k and I will make a judgement on whether or not you will be able to support me based on that. .

wot I said...

So the fact that you aren't VAT registered is going to pretty much show everyone that you've not got much turnover (hardly gives off the sense of success & 'in demand' wares).

I was lucky in my early (pre VAT) exploits ... I still sold a bit B2B, but frankly I was embarrassed saying "erhm I'm not VAT registered"...I might as well been saying"I'm new to this business melarkey & I'm trying to save a few pennies by ducking VAT registration for as long as I can ....basically I'm a tight wad, but you must try not to laugh & take me seriously"

I'm now VAT registered (which surprisingly made me feel pucka & legitimate, as opposed to a something akin to weekend Ebay seller! The extra VAT admin is actually little overhead...& I sell over the world - it took a while to get slick, but it's just like most things when you've not done it before.

 

[CompuGlobal-Hyper-MegaNet]

In addition to looking like a substantial outfit, the advantage could also be that if all your customers are VAT registered, it makes no difference to them, but you are able to recover the input tax on your purchases and expenses.