Monday, December 7, 2009

How do these guys turn a profit?

Here's a Real Life Story ™ for you armchair economists out there. In a way this is also relevant to WoW so that's why I'm throwing it out there.

My old wristwatch died out on me and I wanted to buy a new one. I won't mention any brands or models here but my old watch was a digital solar and I wanted a more elegant one so I set my sights on an analog solar. I also wanted something special so I chose a watch with a titanium case.

The manufacturer listed the watch at a recommended price of $300. I wasn't expecting to buy it at this price anyway so I checked my favorite online shopping site but they only had the steel version for about $110. Looking elsewhere on the web I found a site which sold all kinds of watch brands and they listed the watch I was looking for at $180. This was considerably more than the $110 steel watch so I looked elsewhere.

On eBay I found a decent store with very good reviews that was selling this watch for a $160 Buy Out Now but it also had a Make an Offer option. So I offered $120. I wasn't expecting the offer to be accepted. After all, there's a big difference between $160 and $120 for a $300 watch. When my offer was accepted I was very surprised.

Here's my dilemma.
- Watch starts at $300.
- Sites sell it for $180.
- eBay vendors sell it for $160.
- this particular eBay vendor accepts to sell it for $120.
- he offers free UPS shipping which should be another $10.
- he has to pay eBay fees which could be another $10.
- he probably has to pay Paypal fees on account that I paid with an e-check, who knows how much commission this will cost him.

Balance: the seller probably makes under $100 for that watch.

Here are my questions:
- How much profit does this guy actually make by selling watches for such a low price?
- Related to the above, how much does the watch actually cost him?
- How many watches does he have to buy in order to get a volume discount?
- If there's a volume discount, I can't imagine it being for quantities lower than 100 pieces, which would mean the seller needs to invest a huge amount in stock, considering that he's selling many other models from many other brands. Is that feasible? We could be talking about tens of thousands of $$$ here.
- What's the actual price for which the manufacturer (or another intermediary) sells these watches to my seller?
- Related to the above, what would be the actual cost for the manufacturer of the watch for a timepiece that is made not only from an expensive material (titanium, heh heh Titanium) but also uses a fairly advanced technology and is also elegant enough to be mistaken for a much more expensive device?

As you can imagine, I'm not expecting anyone to come forward and say, yes, watches such as this one cost the manufacturer X amount and so on. I'm very curious though as to what the secret is behind these good deals. How do these sellers manage to survive, yet alone make a hefty profit?

From all my WoW-economics experience I can assume a few things. For example I can imagine that the seller has a pretty low margin per each watch sold but he makes up through volume. This store had thousands of buyer reviews and they also sold $3000 Rolexes (or is it Rolexi? :). If I were to make a WoW analogy, I would liken it to the glyph or jewelcrafting market where some crafters base their profits on high volumes at low margins per item sold.

I can also assume that the seller has access to some sort of cheap supply but what baffles me is that there's only one manufacturer so why would they sell this $300 watch to distributors for $50 or so? The difference to WoW is that in WoW there are many suppliers of raw mats and manufactured goods that compete against each other. It's easy to find a farmer, for example, who will sell you a stack of Icethorn for 10 gold instead of buying it from the AH for 15 gold.

It is certainly possible that the manufacturer actually sells these watches to distributors for, say, $50. The distributor then sells them to actual sellers for, say, $60 and the seller then passes it on to me for $120 minus his profits. In the end the seller still makes $30 or so per $200-$300 watch. That's the only scenario that makes sense to me.

But then if the manufacturer can sell these watches to distributors for $50, what the hell are their costs to manufacture said watch? $30??? The mind boggles.

In conclusion dear friends, am I really off base here? Are my theories sound or complete science fiction? What does the economist in you think about this situation? How about some (made-up) numbers? I would rest easier at night if I had at least a clue to this mystery.


Anonymous said...

Perhaps this is a counterfeit or stolen watch. Or maybe this particular seller has some "grey market" stock.

Vikt said...

^----- it's either fake or stolen, that's how you make profit on it. Do a search on there for Oakley's, Gucci, old Jordan's, etc. - counterfeits for everything.

Stephen said...

I am very sure about that watch seller is getting lots of money by selling these watches online. And that is how a smart business is done. Isn’t it?

Darth Solo said...

Guys, don't make me shit my pants! I bought the damn watch now. Thing is, reputable sellers such as Amazon have these watches for major discounts and I doubt they are fake. The one I got sure as hell isn't fake. I had a fake Rolex once and even though it is expertly made, you can still tell on close inspection. This one, not so much. If it's fake then I'm the Queen of England :)

@Vikt may have a point... it could be stolen but that means the particular eBay store has hundreds of stolen watches from lots of different brands... I dunno. Personally I feel like I got a good deal.

Darth Solo said...

Oh, BTW, besides looking 100% legit, on very close inspection, it also has the original display case with manuals and warranty, etc.

Unknown said...

its probably a bulk stock item.

Mr. Menagerie said...

Slave China Labor!


They are hugely over priced/marked-up to begin with ;)