10 products with big markups
What an item really costs and what you end up paying for it can be very different. Here are several examples where that gap is substantial.
What an item really costs and what you end up paying for it can be very different. Here are several examples where that gap is substantial.
Setting the price
As I chatted with an acquaintance at the popular Italian restaurant he owns, our conversation was interrupted when he learned a customer had complained about a meal.
The waiter, feeling the diner was merely being finicky, resisted a request that the meal be removed from the bill. "Give it to them," the owner countered. "A plate of pasta costs me almost nothing. It is worth more in the long run to get good word of mouth than to worry about a few cents' worth of spaghetti."
His point was that the food itself wasn't the commodity, the experience was -- and the latter justified the significant markup on the meal.
When it comes to pricing, you typically pay what the seller thinks you are willing to pay. Aside from fixed costs -- raw materials, labor and overhead -- consumers are plunking down their money on perceived, not actual, value. For example: Gold, used for little more than jewelry, isn't really worth $1,600 or more an ounce because of scarcity or necessity. It is worth that much because buyers and sellers have negotiated that cost over time.
A huge decision for any company -- whether it sells food, electronics or clothing -- is pricing, but it is as much art as science. There is a hard number for what it takes to cover costs and scratch out a profit, of course. But great care is made to find the sweet spot for getting customers to pay as much as possible without driving them away.
Determining what a product "could" cost versus what it "can" cost isn't always a matter of gouging for profits. Companies need to factor in overhead, manufacturing and marketing when setting a price. People often complain about the high cost of prescription drugs, but drug makers have years of research -- as well as a limited time free of generic competition -- to account for.
The following are 10 products that have notable, if not the highest, markups.
The ink and toner you need to keep your computer's printer from being more than a paperweight are among the costliest substances you can buy -- many times more expensive than gold, champagne and gasoline.
Why so much? Printers share a common trait with video game consoles: Both are loss leaders. For the latter, your Xbox, Wii or PlayStation sells at a loss, with the makers recouping their investment from the markup on games. Printers may not have high-end graphics chips and the like driving up their baseline, but the ink they require nevertheless comes at a huge premium.
The website DataGenetics crunched the numbers and came to a shocking conclusion: Assuming a cartridge sells for $16.99, the 19 milliliters of ink it contains amounts to nearly $65,000 a gallon.
The popularity of bottled water has meant windfalls for the industry's big three, Nestle, Pepsi and Coca-Cola, as well as for brand names such as Poland Spring, Fiji Water and Evian.
The problem is that no matter how exotic the liquid within may be described, you are basically paying for the bottle, not what's in it. Tap water costs about $0.002 a gallon; bottled water sells at around $2 for a mere 16 ounces.
A big part of what accounts for the markup is that, according to Food & Water Watch, an advocacy group for affordable food and water, more than 17 million barrels of oil are needed each year in the U.S. to make all those plastic bottles.
The bottled water industry has passed milk, coffee and juice in number of gallons sold, putting it behind only beer and soda, according to the Columbia Water Center at Columbia University.
Odd as it may seem, cutting back on water may be part of the new, post-recession frugality.
"Until the mid-2000s, the U.S. bottled water market seemed unstoppable," says a recent report by Beverage Marketing, a research and consulting firm for the global beverage industry. "In 2008, however, the bottled water market suffered an unprecedented setback, and another, larger decline in volume occurred the following year."
Bottled water volume declined by 1% in 2008 and by 2.5% in 2009. Bottled water wholesale-dollar sales in the U.S. first exceeded $6 billion in 2000 and by 2007 topped $11.5 billion. But category sales declined to $11.2 billion the following year and to less than $10.6 billion in 2009.
No one is exactly going thirsty, however. BMC estimates that, on average, Americans still drink nearly 28 gallons of bottled water a year.
Depending on the seller, be prepared to pay at least 50% and as much as 200% over the appraised value of a diamond.
There are several reasons jewelry can be so expensive. First are the costs associated with the mining and extraction of precious metals and gems. Then there is a transportation overhead to consider, as well as the expertise of craftsmen. Finally, the jewelry store, located in a high-rent mall perhaps, has to hire staff and, as they say, "keep the lights on."
When it comes right down to it, though, diamonds and other jewelry cost so much because -- simply put -- they are pretty. An oversimplification perhaps, but the sparkle, prestige and "wow factor" of a little blue Tiffany box may push aside a buyer's worry about the price tag.
In most cities, the line at any given Starbucks, Peet's Coffee & Tea or Dunkin' Donuts runs deep nearly all day. Americans love coffee and adore tea so much they are willing to pay more than it costs to drink it at home.
A 100-count box of Lipton Tea can be had for about $5.99, roughly 6 cents a serving. Nevertheless, coffee shops and restaurants charge anywhere from $1 to $3 a cup hot or cold, and even more for specialty brands or herbal varieties.
Coffee prices can fluctuate due to the volatile commodities marketplace. But a decent cup of java will still cost only about 50 cents to make at home, while the average Starbucks, Peet's or Dunkin' Donuts pours you a $2 to $5 serving, depending on size, blend and add-ons.
Back in 2008, when the typical text message cost 20 cents for those lacking an "unlimited" plan, Dr. Nigel Bannister, a physicist who specializes in space research at the U.K.'s University of Leicester, determined that sending text messages cost nearly 4.5 times more than downloading data from the far reaches of space via the Hubble Space Telescope.
Comparing megabytes to megabytes, his calculation held true even with "conservative assumptions" about labor costs associated with the telescope transmissions.
"Hubble is by no means a cheap mission -- but the mobile phone text costs were pretty astronomical," he said.
That same year, U.S. Sen. Herb Kohl, D-Wis., then chairman of the Senate Antitrust Subcommittee, chided Verizon, Sprint, AT&T and T-Mobile in a letter to their CEOs for "sharply rising rates for its customers to send and receive text messages. . . . What is particularly alarming about this industrywide rate increase is that it does not appear to be justified by rising costs in delivering text messages.
"Text messaging files are very small, as the size of text messages are generally limited to 160 characters per message, and therefore cost carriers very little to transmit," he added.
At a related congressional hearing chaired by Kohl, he said various experts pegged the actual cost to carriers for facilitating a text message at a mere 0.3 cents.
The website GThing.net added perspective on the cost of texting. It compared a base rate of 20 cents a message with broadband costs and found that sending and receiving the 2,560 MP3 files on an iPod would be $1 of broadband usage -- but add up to $61,356,851.20 if transmitted at texting rates.
It should come as no surprise that a good bottle of wine has its cost multiply as it moves from the vineyard to your table.
According to the magazine Wine Spectator, an average restaurant can be expected to charge double what it paid for a bottle. An in-demand bottle can even fetch a 400% markup sold by the glass.
Liquor sales have always been a moneymaker for restaurants, boosting their bottom line in a way low-margin entrees can't always do on their own. High-end alcohol sales also carry a prestige factor that, in the eyes of many diners, makes up for what they are shelling out.
The markup will get you even if you BYOB. Restaurants that allow you to bring your own bottle routinely tag on a $10 to $25 corkage fee.
Sold in small but luxurious containers, perfume and cologne cost a lot more than the sum of their sweet-smelling oils.
Having as many as 100 ingredients in a fragrance is not unusual, but in many cases the recipe isn't why you'll pay 50% to 60% more than what it costs to make.
Blame Britney Spears, Katy Perry, Usher or any of the other famous faces who lend their star power to a fragrance line. Their involvement isn't necessarily the cost driver, but they are symptomatic of why prices are not lower: Buying a designer scent is indulging in a luxury and buying an "image" as much as a product.
When an item is already an indulgence, manufacturers and retailers alike have a lot more leeway when it comes to price.
Is $3,000 really the cost of a good night's sleep?
Anyone who has ever shopped for a new mattress can probably attest that finding a suitable one in the $1,000 range takes a fair bit of searching and haggling.
Retailers often hike the price tag 100%, and the markup is used in part to cover sales commissions. That markup also gives sellers the needed wiggle room to deploy a popular tactic -- big, colorful signs announcing 30%, 40%, even 50% off. Slight product variations and store-specific brand names make comparison shopping hard to do.
The website The Mattress Scam -- which, as the name suggests, is critical of the industry -- gives its own rationale: Sellers charge more because they can.
"When consumers are found in the mattress section of a department store, or in a dedicated mattress store, they are more likely to be serious shoppers than those found browsing in other stores," it says. "For example, many people all day long browse through electronics shops, clothing departments, sports stores and so on with no real intent of buying something. Nobody browses around in the mattress department. Nobody visits a mattress discount store unless they are going to be buying a mattress real soon. Mattresses are boring, ugly and not many people really know much about them. Shopping for a mattress is not fun, and many just (want) to get it over with as quickly as possible. A mattress is a mattress to many folks."
Looking good doesn't always come cheap.
The cosmetics industry is worth $50 billion in the U.S. alone. As with jewelry and fragrances, buyers pay 50% or more over wholesale costs because they have an affinity for a particular brand. The color, style and "label" attached to a particular facial, body or hair product adds as much to the price as the blend of oils, minerals and coloring.
The Stanford Graduate School of Business and the University of California at Santa Cruz conducted research into the pricing of movie concessions. Popcorn, for example, often sells at a cost that reflects a 1,000-fold markup compared with the cost of the kernels.
Among their findings were that by charging high prices on concessions, theaters are able to keep ticket prices lower.
The findings seem to suggest an answer to the age-old question of "whether it's better to charge more for a primary product or a secondary product ," the researchers said. "Putting the premium on the 'frill' items opens up the possibility for price-sensitive people to see films."
The researchers also point out that cinemas rely on concession sales to keep their business viable. Although concessions account for only about 20% of gross revenues, they represent some 40% of theaters' profits, they said. While ticket revenues must be shared with movie distributors, 100% of concessions go straight into an exhibitor's coffers.
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