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the price of things

There was a discussion recently, initiated by Luca Turin on his highly appreciated blog, on pricing of perfumes, with some discussion echoes online, such as on Now Smell This -for instance. Links at at the bottom of this post.

Here, well, here follows a contribution on my blog. I am not sure whether it is particularly interesting to most perfume consumers: I learned over the years that consumers want to be told how luxurious the contents of a flacon are and how many roses found their way into there. But then: I am Swiss and we Swiss tend to be down to earth, sometimes. So: Let's talk numbers here, and not flowers.

To help understand, let's clear the terms first:
Distribution: A sales model where a producer sells  to a third party, the distributor. The distributor then sells to stores, retailers, etailers and does the marketing, the communication in the market, sometimes through agents. It is important to take note that a distributor takes the risk of buying products that might not sell.
Retailers, etailers: These are stores selling to end consumers directly. Either buying from a producer directly or from a distributor. The retailer/etailer again takes the risk of buying products that might not sell. And retailers/etailers have high operation costs (salaries, rents, infrastructure).
Producer: It is the maker of things, very often it is actually a network of companies and the end result is a packed and ready to sell product. The producer takes the risk of buying inventory , in perfumery it is 6-12 months lead time, which means the producer invests now into products that are sold in 6-12 months time, and the producer has the risk of investing work/overhead into the production of a product that might not sell and has to be discarded or discounted at the end of the day.
Margin: That's the difference between how much a party paid for a product and for how much it is sold to another party.
Profit: That's what is left from the margin if you subtract all costs that occur to make the sales. For instance: costs for production, for shipment, rent, electricity, fees, certification costs, insurance, ...There's profit before taxes and after taxes, but let's keep things simple here.

Now let's look into the numbers.

First things first: Distribution determines the retail price because at the end of the day a producer needs a profit. Why do you -as producer- want to go for a distribution model? There might be markets that you cannot serve directly. You might aim for higher numbers of sold products allowing you to buy larger numbers of inventory and hence taking avantage of economies of scale (the more inventory you buy the cheaper it gets). Or you might simply not have the resources to talk to all retailers bilaterally, directly.

In perfumery, the regular model is: a coefficient of 4.5 to 5.5 goes to the distributor. This means: A product that is sold in stores for 135$ US: the distributor pays the producer 135$ divided by 5.0: 27$.
Now let's put this into perspective with production costs. (I use European prices here. You can source in China, too. I do so, too, but where feasible I try to source from here, Europe)
A semiautomatically produced flacon, made in Europe, costs somewhere betweeen 3.5 $ and 6$ , not landed (meaning without transport and taxes), depending on how many you buy and where you buy them. If you happen to have a packaging that is not just a cheap cardboard box: Production costs in Europe are maybe 2-5 $.
Then you need labels, pumps, caps: Add another 2-3 $.
All buying prices above: No blingbling, not fancy gold decoration.
Add whatever amount you want for the perfume.
Then add work to the equation: Sourcing, scent production, dilution, filtration, bottle filling, crimping (fixing the pumps on the flacon), labelling, putting things into the packaging, cellophaning, and doing the paperwork like dealing with authorities, preparing shipping papers.
And now you do the math.

Ideally, the margin should be somewhere around 50% of the distribution price. And ideally, the profit should be higher than 50% of the margin.

Here my thoughts about all this: It would be easy to just say "don't do the distribution". But - at least for me- there are good reasons to be present in markets that only work through distribution. Or in other words: You cannot survive these days by selling niche/haute perfumery/low volume perfumery in the US, UK and Germany only. You need a larger client base.

I can "afford" to offer a scent like air du désert marocain for 135$ these days because I have a mixed model where I also sell directly to clients and each of these direct sales makes a difference. I can also sell it at 135$ because I do most of the production myself (not everything, though), because I am blessed and know how to use photoshop, and illustrator, because I dare to deal with a lot of regulation issues without the help of external consultants, because I do all the logistics myself, because I am working in Switzerland with a liberal tax and regulation regime, and because I do not pay myself a salary that truly compensates for 60 hour working weeks, because I made a strategic decision to be there where I am with my pricing (there's a price to pay for a luxury positioning), and because I love doing what I am doing.

The very moment I sell my company, prices will double.

Links:
Luca Turin's blog
Now Smell This Perfume

35 thoughts on “the price of things”

  • Thanks for that Andy. Not sure if I took it all in, only been awake for 90 minutes, and it is Sunday morning. Have a great day my friend.

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  • Thanks Andy, for his enlightening, differentiated reporting! It shows clearly what the price of a fragrance means, specially for small companies like we. I would like to add that the creation of a perfume comes usually as a long process, i my case it can last up to two years ... The idea and the work that goes into a creation is therefore also part of the price. That's with all design products so - originality has its price. Also, I can produce only in small quantities, which is very expensive. Finally, the customer decides whether he will prefer to buy cheap mass-produced goods or high-priced originality. The same people who get excited about perfume prices, are happy for a designer T-shirt made in China or some outrageously expensive wine questionable provenance, to pay huge sums without batting an eyelid! Sometimes I ask myself whether I better change the sector…

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    • sometimes I wonder, too dear Vero. But then: I still feel that I can make a change and a contribution. So: Stiff upper lip and on we go :-) And read the comments below, dear: We really do make a difference. This is nice.

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  • Well said Andy! You have confirmed and spoken out. There are niche companies that exist and who are not taking the public for a ride on price as generalised by our well repected Luca TURIN.
    I as a perfume lover believe that the "proof is in the pudding" or as the industry goes " the proof is in the juice". Unfortunately with the new wave of new niche houses entering the market you have to step back and ponder, after smelling their new offerings , the reasons as to why their house was created and continues to exist.
    We love this business and consider the perfume world as the best business to be in EVER!
    My only downside is that I would want other perfume houses too reflect through alot more "trial and error" putting a lot more thought into the juice before rushing into a launch of a new perfume because they feel they have too because they feel market pressure.
    Illustrated by Luca Turin's blog on the shear numbers of perfumers so called recent artistic creations.

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    • Thanks for your comment, dear Kim
      To be honest: The perfume world was even better 10 years ago. A lot has changed. But if I speak to friends in pharma, banking, farming... I guess I can be very happy to be in this business (which so often does not feel like a business... to me at least)

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  • I enjoy reading Turin's reviews and thoughts, but I like to keep perspective in mind: for someone such as he, who can analyse and criticise a perfume with such ease, I find it *interesting* that I have yet to smell a Luca Turin perfume... Food for thought.

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    • Luca Turin is not a perfumer but a perfume critic as well as a scientist. But I do remember reading somewhere he did create or co-create a perfume or perfumes for Fragonard at one time though his career as a perfume critic had already been launched by then.

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    • I think, Pelicano, that these are different worlds. Like me : I am not a perfume critic (although sometimes I am tempted) and for a good reason. I do not have photographic memory like Luca has and I have not the right perspective to do so. I guess it works the same way for perfume critics, just the other way round....

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  • Your openness and honesty is something I have not seen in any other perfume brand. Maybe that is what Swiss quality of 'being down-to-earth' is!

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  • I have no problem at all paying higher prices for beautifully executed fragrances from smaller companies. You shed some light on what I knew in a general sense-the high cost of working on a smaller scale. I wish that Turin had made some distinctions between large and small companies. Further distinctions that affect pricing can also be made, I'm sure. I am most irked by two trends: 1. the ever increasing prices in the "luxury" market, typically lines found in the high-end department stores/boutiques and 2. the ludicrous prices in the new niche houses that Kim Charles mentioned above. These "pop-up" lines are simply riding the coattails of established lines that do the same thing, only better, and usually, at lower prices.

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    • Good morning, Melissa. Thanks. Yes. I agree with Kim's line about the pop-up lines, too. But then: Time will tell :-)

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  • A very good reality check on manufacturing and production costs. I had a foray into retail and into the production of herbal remedies years ago. It is in the past tense, because the profit margin was pathetic. People can do well in the business, but it takes a lot of really, really low pay time to get the system up and running and good distribution. I have tremendous respect and admiration for people and businesses who stick it out and offer great products. All those little things like getting the labels printed right on on straight, and on time....so many little steps to the final presentation. Too many people think the full retail cost of the product goes directly to the manufacturer, or with just a tiny deduction for being on a shelf in a store. Your description is a good reality check.

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  • Robert Herrmann 2. October 2016 at 23:10

    Thank you Andy for this! It really helps break it down. I come from 5 generations of European shopkeepers, and myself have been in retail for 30+ years. I remember bringing in a new line of ceramics to my (then) gallery. One of my friends asked "why are you charging so little for these? You could mark them up at LEAST 4X" All I could think of was why would I ask for the moon if it meant standing on the back of the artist? The profit I made was sufficient. I look at niche perfumes that way as well, willingly paying more to help support a perfume artist who works so hard to provide me with something so luxurious. With the big conglomerates, I question the need to decrease the ml. size (50 to 30), yet up the price by almost double. I get that they're all about the bottom line, but it makes me wonder why they don't keep the product priced ro be accessible to the folks who really love it, who in turn can potentially drive future sales through word-of-mouth? The accessibility of the Tauer range (especially Tauerville) just makes me love the brand all the more.... and sharing the information with my perfume buddies feels like a gift to share.

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    • Maybe, Herrmann, because they do not care about the perfume buddies. Maybe their target is just different.
      I like your line "the profit I made was sufficient" : In a world of more and more and more and greed that line of yours stands out!

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  • Hi Andy, I was about to write something similar on my own blog for the same reason, so I'm delighted you did this. I also read Luca Turin's post and while I think he always makes a good point, that one probably needs a bit of extra context.
    This year I did some calculations for a course we ran at our place, for all the people who want to come to me for advice on set up a perfume brand, believing that they are about to earn a fortune.
    (My advice is usually, "For goodness sake, don't do it!" ;-) )
    If one make a fragrance without any of the higher priced materials, using a standard bottle, not a bespoke design, then one can get the costs down to $10 a bottle as long as one produces at least 200,000 of them.

    My first run is usually around 50.
    50 bottles not 50,000.
    I might only sell 30 of those in a year. So that means no profit on this fragrance, just a cupboard of bottles which will probably sell eventually. Some sell more.

    The reason I haven't written the blog post yet is that I also do 60 hour weeks.

    For that course, I also made a list of all the other things you have to pay for if you're thinking of making perfume for a living. We added them all up, calculated the profit per bottle and worked out how many bottles needed to be sold to pay for it. People turned pale and started to change their minds. I'll probably publish it.

    The profit per bottle doesn’t magically go into the perfumer's pocket. If only! Sometimes I wish a big company employed me, and that every single day didn't involve some kind of financial juggling, risks, decisions...
    Then again it wouldn't be half as much fun.

    Every time someone says - usually talking about Iso E Super - "I could make perfume for $10 a bottle and sell it for $100!" I say, "Who to?" Because the hard part isn't making it, it's getting it to the point where someone is able and keen to buy it.

    I am not a fan of bling, but I begrudgingly admire the PR and marketing skills of those who are able to wrap their fragrances in myth, legend and sparkles and keep a straight face while charging $3000 a bottle. Their customers are not buying perfume, they are paying for status. (Like the people who bought the $999 app "I Am Rich" which did nothing but appear on their phones announcing that they were rich.)
    You can't stop rich people doing daft stuff with their cash.

    If I want to stay in business - which I do - I need to pay the rent, wages and bills and to make a big enough margin to fund some time to make new things. I like using interesting materials, some of which are expensive. I can't make perfume for $10 a bottle and I can't keep prices under $120 for 100ml.

    Without you, Andy, and everyone else who has contributed their trade secrets here, I think the world of scent would get very boring. I hope there are enough customers with a fondness for small batches of imaginative fragrances at reasonable prices, who realise that we are not taking advantage of them by charging enough to keep us going.

    Reply
    • A lovely day to you, Sarah! And thanks for your detailed comment that adds a lot of perspective to what I have written in the post. And yes: I will keep your line in mind "I could make perfume for $10 a bottle and sell it for $100!" I say, "Who to?" Because the hard part isn't making it, it's getting it to the point where someone is able and keen to buy it.
      That is so up to the point, too! Thanks.

      Reply
  • Phyllis Iervello 3. October 2016 at 2:50

    Andy, I have purchased your perfumes from the time you started creating them. I am so pleased that you have never changed despite your success...you are still personable, make every customer feel special, spend time answering questions and emails, all the while still creating beautiful fragrances for all of us to enjoy at reasonable pricing. And I would have to say...a spray of one of your creations is very beautiful and much longer lasting than two or three sprays from other perfumers. Keep being real and keep on producing your beautiful creations.

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    • Good morning Phyllis! Yes, I remember. You were "there" right from the start. You know: After having worked for some many years in a office (think tie) environment: I am so glad that I can live in my little simple bubble without having to worry too much about formal stuff. In that sense: Promised... I'll stay real.

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  • I am really happy to read this and the comments from other respected artisan perfumers. When I read Turin's post my gut reaction was "No way is $120 for 100mls a fair price for a quality indie perfume." Maybe for an average mass produced department store scent or a pop-up insta-faux-niche scent, but not for the quality I get from Tauer Perfumes. I also noticed the perfume you chose for the photo on this post - this is the richest, most opulent Tauer I own and you have said before how expensive the raw materials are for this scent. Thank you Andy for your personal touch and your commitment to offering your beautiful creations at reasonable prices your loyal customers can afford.

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    • Tara: I am pretty convinced that Luca Turin did not think about niche when he wrote his post.
      And: Yes, I chose this picture, because it was 1. at hand (I packed some Le Maroc last week) and 2. because I could never produce this fragrance for a price that would allow me to sell it for 120$ in Italy or the US. I am glad you mention this ,too.

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  • Hi Andy!

    I appreciate your thorough explanation and sharing with us inside look into perfume business. I will be getting soon my Master's in Accounting so all this "numbers" talk is very exciting to me :-D. But on a serious note, I do understand very well everything you said and your point. I never thought that your prices were too high: on a contrary, the quality and density of materials for the retail price point speak of your generous nature. I buy some of the raw materials myself for therapeutic reasons/medicinal value and know how expensive they can be. I especially appreciate the Flash series - as perfume lovers we can only wish that perfumers were a little more cognizant of the state of financial affairs of their fan base. You are one of the very few.

    Personally, I don't think you have to worry about us, perfumistas, accusing you of greed, ever! Next time I want one of your amazing creations I will make sure to get straight from your website. :)

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  • Hi Renata! I am not worried about my perfumista friends, indeed. Thank you!

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  • Dear Andy, thanks for this candid and marvellous post.
    I'm discussing it here (SOTD is Une Rose Chypree) with my husband. He is an entrepreneur and is asking why the distributor takes so much of the margin in your business. Is it a power position?

    Reply
    • Dear Hamamelis; good question. But the answer is rather no. Of course, there is a power position in the sense that without distributor some markets are a no go zone. Like Russia.But generally speaking: No, it is not the distributor's power position but it is justified by the costs of operation. In Italy, for instance, the distributor works with agents who visit perfumeries but a lot of the communication with the retailers still is through the distributor, so is the bookkeeping, invoicing, the distributor carries the risk of not being paid, the distributor provides marketing material for the perfumeries, does training, pays shipment costs, registers the products with authorities, and the list goes on.

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      • Thank you for clarifying! It just shows how complex this whole process is, high handling and I suppose in comparison to selling a bottle of good wine ;-) low volume, especially niche.
        I will report back to my husband who finds this side of perfume very interesting but who also has learned to use his nose and picks out notes very accurately!

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  • A net profit (or even pre-tax) margin of 25% is actually really high. Most companies hover around 5-10%, and while it's not directly comparable beauty giants such as Estee Lauder have a profit margin of ~10%. And I assume that you as a producer have some profit as well, so the net profit margin overall is even a bit higher than that. To me these kinds of margins are excessive, but if it's what the distributor demands there's not much a lone producer can do. And I totally understand why you'd want to utilize a distributor. But it kind of testament of a mono-/oligopoly situation among fragrance distributors that these margins are sustainable. Maybe I should go into business ;-)

    Anyhow, I just recently caught a whiff of Lonestar Memories as my first experience with your scents and I found it absolutely terrific! Looking forward to sampling some of the other creations in the future.

    Reply
    • Hi John
      I am glad that Lonestar Memories made a good first impression.
      About Esthee Lauder. Even they have, if they want to sell Malle, or Le Labo through a retailer or etailer, to give a margin of 50% to the retailer. I do not know about department stores, though. But I know that small brands usually loose money or make no profit when selling through department stores. Why would they nevertheless do it: because it is some sort of marketing. To get into some department stores brands have to pay money upfront. Just to get in there. ...Imagine!

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  • A really interesting, enlightening and honest discussion. Thanks Andy. I also appreciate Sarah McCartney's openness too. I'm launching my own small-batch artisan brand next year and I'm not taking the road of outrageously inflated pricing - because I believe that is a bubble that, like all bubbles, will eventually burst. And that will sort the genuine from the fakes in this business ... who think artisan perfumery is about bling, or big heavy metal caps ... However, what I've found interesting is that certain retailers have said my pricing should be higher, otherwise consumers won't believe it's good quality. And yes, making money is far from easy ... but that doesn't stop me wanting to give this my best.

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    • Thank you, Nick S. Actually, this is very much true: Price is one of the key parameters by which the consumer judges quality. There's not much we can do about it but try to communicate what quality means in the end, but it is pretty futile, to be honest.
      But in the end, I guess, we all have to stay loyal to what we believe and stand for....

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      • Agreed - and I think in the end people can 'smell' what's fake. Or done cynically just to make money. People aren't dupes ...

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    Reply
  • There seems to be a miscommunication here about distributors earning the most margins.

    The correct information would actually be that the largest margins are given to the Retailers/Etailers/sellers to final consumer.

    Having worked in a Producer company and a perfume distribution company respectively, I would like to use a round figure of $100 for a 100ml perfume at retail. (Please note, this is relative to mainstream perfume brands not "niche")

    * Retailer sells at $100 ( with a 2.5 - 4.0 coefficient) depending on the brand in question
    * Distributor sells at $33 ( assuming the retailer gets a 3.0 coefficient)
    * Producer sells at $20.

    In this scenario, the retailer takes care of freight charges. The distributor manages sales & marketing following guidelines provided by producer; distributor might also employs local agents to manage retailers. The producer provides the distributor a marketing budget for the year.

    In all the retailer gets the largest margin because they own the greatest overheads (staff, retail points, etc)

    Reply
  • I did indeed not communicate how much goes to the retailer, but just focused on distribution and production. The retailer usually gets coeff 2- 2.5. Like you said. And like I said: producer sells at 20 (in your numbers).

    the retailer gets the largest margin for cost reasons, and risks, and other factors, but this is another discussion. thanks for your contribution. Best regards,

    Reply

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