When I first started distributing natural foods in 1978, I called on a retailer in the LA area. They were among the first of the “farmers market” type stores that are so popular today.
I showed him a half-gallon apple juice I was distributing that was produced by a company in L.A. This same company also produced a private label half-gallon apple juice for a large grocery distributor.
He didn’t need to buy what I was selling because he was already buying directly from the apple juice producer.
He explained his “go to market” strategy (that term wasn’t invented until way past 1978) as follows.
He bought the half-gallon apple juice from the grocery distributor for $1.20 and sold it for $1.49 making a 20% profit margin. The apple juice he was buying directly also cost $1.20 but, since he was buying it directly and didn’t have to pay a distributor’s markup, he was selling it for $2.49, which was the suggested retail price.
“And so, I am making an average profit margin of 35%,” he said.
I pointed out that his theory only worked if he sold an equal number of bottles at $1.49 and $2.49, which was definitely NOT the case when you looked at his shelves. He was selling A LOT of the $1.49 apple juice…..and not much of the $2.49 apple juice.
They were out of business soon thereafter.
That was one of the first games I learned; you can’t take profit margin to the bank.