The first article gives me pause. Here’s why. In lower cost areas of the country, the realtor commission is 7%. In my high cost area, it runs 4-5%. There is a certain cost floor because it takes time and money to market a house. But it doesn’t scale linearly with price.
Why should retail markups scale linearly? Why can’t the retailer charge $300 (instead of $550) for the pants and make up the difference in volume?
This is a running debate among consumers and manufacturers but manufacturers really shouldn’t be pointing any fingers (nor should consumers because everyone likes signaling) when they stand just as much to gain. Consider: if retail mark ups should not scale linearly, then why should the contractor and manufacturer scale their wholesale pricing linearly? They can make it up on volume too so it is rational to assume they’re avoiding unwanted consequences. Manufacturers have no problem justifying wholesale pricing based on linear scale so the debate could be reduced to one party not having as comprehensive an understanding of the retail cost floor (theft, fixtures and amenities, higher rents etc).
Another issue is merchandising and display. A retailer needs a spectrum of pricing on the floor and product selection is broken down into percentages. x% at the low end, x% at the middle and so on. Available floor space for display is divisible by x dollars per square foot with each price category expected to pull in x dollars for the space it occupies on the floor. Therefore, you will find higher display density of lower priced goods within a range of floor space as compared to higher value items. For example, low cost tee shirts will be folded and stacked in cubbies (there are a lot of those) but tailored blouses (fewer of these) will be hung on racks (comparative space hogs) but each price category pulls their weight for the floor space it is “renting”. Still higher priced items may be an island all to themselves. Higher value items also cost more to sell because of security (anti-theft tags, security cameras etc).
There’s the matter of enforcing price points too. I don’t think it is fair for retail to be considered the responsible party for keeping prices at a certain level because the manufacturer takes anticipated retail mark ups into consideration when they price their items. And how. They know exactly who they want to hang with so they must be comparable to those brands in quality and pricing (the value equation). Assuming retailers could painlessly slash 50% of their costs across the board, pricing wouldn’t change until the gamut of pricing related behaviors of manufacturers (and consumers) changed too. Which is not to say a segment of the market hasn’t but it’s not a market everyone wants. Particularly not this maker of $550 chinos. And then, we couldn’t feel as smug about not needing to signal $550 pants if they weren’t so costly. :)
Manufacturers are also accountable in ways retail is not because manufacturers can legally refuse to sell to retailers (pdf) who will not enforce the suggested retail price. This is a common strategy used by manufacturers to maintain the perceived value of their brand. It may seem counterproductive but on the other hand, many retailers will not buy from a manufacturer if they don’t enforce price points. More so these days than ever before. Retailers are wary of people who will come into the store to try on products (items become shopworn, a loss to the store) but who will then buy the item on the internet at a lower price. If price points are enforced, then free-riding is reduced; they may as well buy it at the store. This is just one reason that internet retailers have problems picking up lines. Manufacturers are wary that internet retailers won’t enforce price points and end up cannibalizing their brick and mortar stores who will then stop buying from them. One hand washes the other; it’s the anti-trust paradox. It is all so very complex.
Thoughts? Opinions? Why shouldn’t retail prices scale linearly? Perhaps a better observation is why aren’t realtor commissions scaling commensurate to other parts of the country? I’ll pass on what I think those reasons are -having flogged this for all it’s worth- but don’t let that stop you.