The Supplements Layer Cake
A little off topic here, but kind of related to our post about starting a supplements business, I thought I would post this extract from Wikipedia about setting prices, as it seems to resemble the pricing structure in the supplements industry…
A Technical Look at Pricing, Resembling the Supplements Industry
“According to neoclassical price-determination theory and game theory, the independence of suppliers forces prices to their minimum, increasing efficiency and decreasing the price determining ability of each individual firm. However, if firms collude to increase prices loss of sales is minimized as consumers lack alternative choices at lower prices. This benefits the colluding firms at the cost of efficiency to society.
One variation of this traditional theory is the theory of kinked demand. Firms face a kinked demand curve if, when one firm decreases its price, other firms will follow suit in order to maintain sales, and when one firm increases its price, its rivals are unlikely to follow, as they would lose the sales’ gains that they would otherwise get by holding prices at the previous level. Kinked demand potentially fosters supra-competitive prices because any one firm would receive a reduced benefit from cutting price, as opposed to the benefits accruing under neoclassical theory and certain game theoretic models such as Bertrand competition.”
Profit Margins for new Supplements Sites
That’s right, you start a supplements business, set your prices, feel upset at the low profit margins, then see other sites selling cheaper. You reduce your prices, virtually eliminating profit to match other sites, then you see other sites selling cheaper still. To match their prices you would make a loss. The only way you can increase your profit margins is to increase sales volumes to get better prices from the manufacturers, but that is never going to happen when other more popular sites are cheaper. Like in my other article about starting a supplements business, I’m not saying it’s impossible, but you need to be realistic about your expectations.
Over time, the industry is becoming ever more saturated and since the recession, profit margins are getting squeezed from every angle in terms of shipping, VAT, merchant fees, packaging, etc. and it would be a massive task for anyone to start from scratch and compete with the biggest sites.
I’m not trying to falsely put people off launching their own site here, I’m simply trying to help like minded people. We receive 2-3 emails per week from individuals replying to our other post (link above) saying they have “a plan”, are extremely dedicated, know SEO, etc. and ask various questions, stating that they are going to go for it no matter what, all believing they will succeed. At least they take our comments on board and consider things they may not have even know existed.
The Supplements Layer Cake
The supplements industry resembles the analogy made to the drug suppliers in the film Layer Cake in that there are higher and higher levels of companies, from the biggest US Manufacturers down through major importers, smaller importers, supplements companies, smaller supplements companies, supplements shops and finally dropshippers. They all want a slice of the profits, with the biggest profits at the top of the cake… collusion springs to mind! We are at a good place in the Supplements Layer Cake, somewhere in the middle and we therefore welcome newcomers to the industry, as after making initial contact, some of them go on to order their supplements from us, or even dropship through us… “It doesn’t mattter. It’s all profit” – Ray Liotta, Goodfellas.
Regards,
Martin, Promart Supplements
