What’s a fair employee discount?

Here’s an interesting question I thought I’d field to you (with permission of course):

Our sewing contractor asked me today about their employees wanting to buy our products for personal use. What’s a fair price? Would 55% off retail for first quality and 75% off for seconds (with cosmetic flaws) be reasonable? We are thrilled that they are interested in buying our products, and if they have firsthand experience using them — our manufacturing quality will benefit. Is the 55% off price too high, and should I sell them at cost instead? Or is it reasonable to ask them to pay close to wholesale, so we can cover our overhead costs without taking a loss on those? (I have no idea whether this is just a handful, or dozens of products over time.)

I want to treat their employees well, since they’ve made huge contributions to our finished product. Meanwhile we’re sending out press samples like candy — it seems stingy to make employees at our contractor pay for them when our PR agent is giving so many away. But I’m curious if there is a standard protocol for this type of request, and whether I’m getting myself in trouble long term if we offer them much below wholesale.

I had a question and she amended her response with this:

We discussed this last night and decided to offer them for much less than wholesale to people there — basically close to cost, and for first quality goods only. We aren’t trying to make money on them… and we are thrilled that they are personally interested in our product.

I have mixed feelings about this. It’s one thing to get warm fuzzies from consumers or buyers who buy your products but quite another thing when the people you’re paying, want to pay you. They’ve seen a lot of products and been around the block and if they really wanted to, could produce them for themselves so I understand wanting to reward their integrity. That said, I think the proposed discounts are overly generous. My work experience has been limited to established manufacturers but the best discount I remember was maybe 25% off retail. That in addition to the semi-annual employees only sale to get rid of drops and wonky prototypes and even those sold for about the equivalent wholesale price.

For my part I’m leery about discounts especially these days. What if the contractor’s employees decided to sell them on eBay and in effect, compete with you? What kind of controls would be in place? I’m torn about selling seconds but it seems wasteful not to. On one hand, they’re perfectly serviceable. On the other hand, if they’re sold on eBay (presumably the value based on first quality) consumers unfamiliar with your line may think these seconds represent your standard quality level.

What do all of you think?

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  1. bethany says:

    When I worked for a women’s contemporary brand, everyone who worked for the brand got anything left over after shipping for the wholesale cost. It was pretty awesome!

  2. Vesta says:

    We offer our employees 40% off wholesale. It’s more than cost, but deep. We can’t pay them the highest salaries, but this is one way we can reward them with a little perk. Can’t speak to guidelines, as we’re such a small company, so I know exactly why they’re buying each item (gifts or personal or whatever).

  3. CLF says:

    I think 25% off retail is incredibly stingy–an insult, frankly. Anybody can get that, whether they work in the business or not. Clothes always go on sale. You can always limit the number of items they get to buy per month (or year) at a discount if you’re worried about reselling. Most people just want stuff for their friends and family. Lots of companies give generous discounts to the people who make their products. It’s good business.

    Close to wholesale gets my vote. Otherwise people will just feel resentful. Give a generous discount or don’t bother at all.

  4. becky says:

    I just got passes to the employee store at a major sportswear manufacturer. My friend who is an employee said the discounts are at least 50-60% off retail.

  5. Kathleen says:

    I think 25% off retail is incredibly stingy–an insult, frankly…Clothes always go on sale.

    These aren’t clothes but an expensive patented engineered product with performance issues. Iow, this manufacturer is on the hook for significant liability, a cost not being passed on with the discount. This isn’t a cheap off-shore product made with cheap labor that is so easily discounted.

  6. av says:

    I would really look at why they are interested. Is it possible the employees can turn around and sell the items on ebay for a large profit? That may be the real reason there is interest in the product. Especially if it is a specialized item.

    If not, I would give a deep discount but limit the quantities per person.

  7. Alan says:

    Our policy is to sell to employees and employees of contractors at 50% off wholesale. I like our employees to use our products, it says their proud to be a part of the company. Second, it basically eliminates employee theft because the risk is too high for such a small monetary benefit. “Might as well pay $20 for a beautiful kids coat than get fired over one Andrew Jackson. Heck, the pre-tickets we put on show it retails for $100.” We ask that employees only buy for their personal use or for gifts and if the program is abused it is a cause for disciplinary action. I find that a handful of employees love the program (I swear one grandmother only works for me so she can buy the clothes!) I think if voice your concern about re-selling, people will respect your wishes and thank you for generosity. As for seconds, we sell to employees at 75% off wholesale for personal use or employees can make in kind donations to charity like food and homeless shelters and churches. The donations really empower employees and make me feel good! Good luck, this was a great question.

  8. Richard_C says:

    What about first at cost and a limit for the next 3-5 at 50% retail? The first assumed for personal use, and a limit possible resale abuses.

  9. Teresia says:

    I am in agreement with Alan. Give big discounts, however I feel that limits of purchase are important. Also, it would be nice to have an agreement to not sell on eBay. I hate eBay’s policies over all and just sell junk without my lable on it. It is better to black out lables on 2nd’s and samples, so people know in resale that it is not 1st quality, to save the company’s reputation.

  10. Milena says:

    My brother works for a huge yoga wear company, and he told me that they don’t allow employees to take any seconds out the door. If by any chance someone really wants to wear them, the logo has to be eliminated somehow and the tags taken out. They also don’t charge their employees any money for these. Basically they want no association with defects and low quality.
    Sounds like a good policy to me with regard to seconds… it also instills a quality standard with employees, and I think they will in turn regard the products and company with more respect. I know it certainly worked with my brother. He was given a new women’s sweatshirt that had a slightly malfunctioning zipper, which he was going to cut up and use the material to sew something else… I asked if he would just give it to me to wear instead, and he refused unless I consented to have the logo mutilated. And I was like, “aw, come on, no one would know!” But he was very adamant, and I was surprised by how well their company training was working on him.

  11. J C Sprowls says:

    Actually, I think Milena’s reference makes the most sense for me, because it appeals on many levels. It’s not without flaws, though. I mean, how many people wouldn’t deliberately FUBAR once in a while if it meant they could guarantee a freebie in the size they wanted? Still… as long as the amount of seconds were within tolerance, I see no compelling reason to over-manage it.

    A safeguard against questionable behavior, though, is to provide the teams with weekly incentives for improvements to the QC scores. For example: if a pod reduces the defect rate from 4% to 3% on a given product type, reward everyone in the pod $50, a gas card or a monthly bus pass. Don’t forget to reward the QC person, too – we want to keep them honest.

    In some manufacturing facilities (e.g. Samuelsohnn) the brand label isn’t sewn into the garment until after QC. In this particular example, the order of operations (i.e. ops model) supports the sorting process for 1st and 2nd quality garments just prior to labeling and shipping.

  12. J C Sprowls says:

    I do like the side benefit of being enviro friendly. But, that’s not my primary compunction. To an employee that uses public transit, a bus pass is highly valued. It’s a matter of making the reward meaningful.

    To go with that: I think it’s important to personally distribute awards to each employee, look them in the eye and say ‘thank you’. I don’t believe in a monthly feel-good ceremony where everyone gets an award for being a human being. Yuk! I find it much more effective to walk up to the person’s workspace, in plain sight, and make it known that their contribution is appreciated.

  13. Kathleen says:

    I’m posting this comment I received from Kathy R via email. I asked her to post it and she said she would but it’s been since the 23rd and she hasn’t gotten around to it. Here’s Kathy’s comment.
    I just read the post on FI and thought I’d give you a point of view from outside your industry — my background is accounting, 30 years as a CPA, an auditor, business analyst and advisor to companies in various stages of development. I didn’t want to post on FI since I’m not part of the trade, but I have a couple of points I’d like to share.

    Employee discounts are a good thing for all the reasons your contributors mentioned. There is a point on the price scale that is a win/win with the employee being treated better than the best customer, and the employer being compensated a fair value for the out of pocket cost of production.

    Selling at cost is too generous because in most cases cost is understated – very few companies have full absorption costing; selling below stated cost does not provide adequate reward for the risk associated with running the business. Your example of product liability issues is a perfect example of a cost related to the product but not included in the “cost” of item. The goal should be to make the employee feel special and treating them better than the best customer by offering product at less than the wholesale price certainly does that; the right price is somewhere greater than manufacturing cost but less than wholesale. The benefit to the employee is equal to the opportunity cost of selling the item to a customer for full wholesale or to the employee for discounted wholesale without costing the employer anything out of pocket.

    Seconds are a problem for any business with very few options – diverters will take the merchandise and you may have some control over how it is sold, but a better option is to offer it to an informed group of consumers who can judge the quality and make an informed decision to buy….your employees. They will know that they are getting seconds, understand the reason for the downgraded status and more than likely be happy to have an opportunity to buy at a good price. You may chose to sell seconds to employees below wholesale and below the discounted wholesale you offer to employees for first line goods but you don’t need to discount below diverter price since diverter pricing usually entails buying large lots of mixed goods. Employees can be given first choice of QC failures so that they get the best of the rejects.

    One final thought – the tax code allows a charitable deduction for the cost of goods given to a qualified charitable organization. However, if the company manufactures the product and provides it to a charitable organization that uses the goods in their charitable work, the donor is allowed to deduct the cost plus ½ the gross profit that would have been earned. This is not a common deduction, but it is legal. For example, if we have a clothing manufacturer who donates to the Salvation Army product with a cost of $1000 and a normal wholesale price of $1900 and the Salvation Army sells the clothing in their store, the deduction would be equal to the cost or $1000. On the other hand, if the SA distributes the clothing through a homeless shelter to needy recipients of their services, the deduction would be $1450. Giving to charity is a good thing, and if you can find a charity that needs your product to perform their charitable services, you have an ideal match.

  14. Anir says:

    The Salvation Army near me sell Target rejects. I wonder if they also distribute the goods to their clients?
    Thanks for such an informative post Kathy R. Please don’t be shy about posting info like this we can all use.

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