What level of price mark-up do you think is reasonable?

[Gingko]

(I would post this on another tea forum as well, but would like to post it here too as I can’t miss any insights from you guys! I’ve been thinking of this for a while, but I’m not sure if this is just a stupid question. As I’m not from a business background, I’m not exactly sure if the question make sense. So please let me know what you think, and let me know if you think the question can be asked in a better way! 🙂 )

I know this is a very abstract question, and price of a tea is not just determined by its importing price, but also many other factors such as packaging, customer service and shopping experience a seller can provide. So for this question, I don’t expect exact answers, but rather ball-park figures.

For example, if a tea is sold in retailer market of its home country (China, Japan, India… any far, far away country) for $50 per pound, what kind of price would you think is reasonable in US retail market?

The purpose of my question – I think people’s perspectives would be very helpful for vendors to make future business decisions. For example, if the operational cost for carrying a specific tea surpass people’s expected mark up range, then probably it’s a product to give up, unless it’s very unique.

I also think with the modern communication technology, it’s ever easier for people to gain valid information, and easier for people to learn prices of tea at the source, the export/import level and wholesale level. So it’s ever more important for vendors to understand people’s price expectations.

In addition, an interesting phenomenon that I’ve noticed in high quality tea market is, lower price is not always a good thing, as many people tend to think “you get what you paid for”. So it might be tricky for vendor to put the price within a range that doesn’t appear “cheap” and doesn’t sound “greedy” either.

Would love to hear what people think about this! Thanks!

[Jackie]

We shall ask our local tea economist: @xavier aka Teaconomics what he thinks! 🙂 Either way, good question. I for one do a lot of price comparison when I shop for unflavored teas which is most of the time. So, I get an idea of how much I’ll have to pay in the US for a particular tea. Since the cost of tea is pretty important to @peter and me, cost is a deciding factor. It’s not the only one though, because harvest date and customer service matter considerably too. I look at price first, then harvest information, and then take into account how efficient customer service is. My decision who to buy from is based on a combo of these three factors.
Unlike with flavored teas where markup is harder to compare between companies, pure teas are far more transparent. Not everyone wants to spend a lot of time researching what constitutes a good price for pure tea though. If I find a tea is very competitively priced, I don’t write it off as just “cheap” if I know the tea is good. I click on “add to basket.” I can see why many people choose to go into the flavored tea business, it is much easier to make a profit, because it is harder to compare what you’re getting for your buck.

[Jackie]

I would love more responses to Gingko’s topic. I’m thinking @yaya, you might have thoughts on this too, since you’re also a smaller (independent) vendor, who has had to make just such decisions.

[Anonymous]

I’ll start with a few comments to @jackie‘s answer:
While it may seem easy to compare the prices of unflavored teas online, I’d say it is mostly impossible to do so. The only cases where it is possible (within limitations) is with a ‘branded’ product like a specific pu-erh cake (the limitations come from the myriad of falsely labelled and fake products out there). How would you compare the price of, say a Yunnan Golden Bud from brand A and brand B? They might look similar on the product pictures but, on the wholesale market, might have a price difference of 100-400%. And just because brand A labels their product as super premium doesn’t mean that it actually is that.
You also might think that you’re on the safe side with teas from former British colonies that have the familiar “quality” labels such as SFTGFOP. Not good, either, since these labels firstly mean very different prices at different tea gardens and secondly, different batches from the same garden often carry very different price tags and are of very different quality.
The only way I see to solve this problem is to try out a few vendors that carry tea at price levels that you are comfortable with and see what they deliver. Then, build a relationship with these vendors since honest business is always built on trust. And trustworthy vendors won’t try to cheat their customers.

@ginko: This is of course the crucial question for any small business and especially for business that result from a passion for the product and a drive to share this product with others. As you mention, there’s much more to the cost (for the seller) of a product than the wholesale price. For many countries, the shipping cost for tea and especially teaware is a significant portion of the total cost. And labor, of course, is another big factor – although that’s the one hardest to put a value to.

In my opinion, there are a few different approaches to pricing and you should choose the one that you feel most comfortable with.
a) Look at your competition. At what they offer at what price, what selection do they carry, what quality and what target market do they have. Then compare their offerings to yours. If they are similar, and the target audience is similar, stay within their price range.
b) Look at your cost (total landing cost, i.e. product cost, shipping, taxes, packaging, etc.) and apply a uniform markup on your products. This markup often falls in a fairly broad range, anywhere from 30-150%, with 50-80% probably being the norm.*
c) Do adaptive pricing based on original wholesale price. Cheaper products can take a larger markup since the perceived final price is still cheap while expensive products couldn’t carry such large markups (i.e. markup your cheaper teas at 100% and your exclusive, very expensive teas at 20%).

It all depends on your personal approach to your business. I don’t think that option a) reflects your personality or your business, so it’s probably something between b) and c). I personally use a mixture of these. As with any labor of love, you need some products to keep the show on the road, those products which pay the bills. These are products that are relatively affordable and you can sell a lot of. Mark these up a bit more than you’d usually do, since the extra 1$ or 2$ won’t turn a customer away. But – and I think you might be a bit like me in this regard – it’s probably the more exclusive, unique and rare teas that are of real interest to you. These are often very expensive directly from the producer and can’t take much of a markup if you want to sell any of them. You’ll need to subsidize them with the ‘money-maker’ teas.

I have come across the conundrum with offering very high quality teas at ‘too low’ a price. While my intention was to make a special tea affordable for anyone to try, my pricing turned away these customers that were looking for a high-end tea (which it was) and misjudged the tea as a result of the low price tag. This is a problem I would rather not have to live with, since it feels wrong to me to markup a product beyond my comfort zone only to stand its position in a (price) comparison. But this situation is a result of our past shopping experiences and the the profit-maximizing strategies of many businesses.

I realize that I haven’t given you that magic number that you asked for, but I think it boils down to what you personally feel comfortable with.

* For anyone who thinks these numbers are on the high side: most resellers of big brands have markups of 200+%. Ever wondered how they make money with “Everything in store 50% off today” sales?

[Gingko]

Hi guys, thank you for the responses! There is a lot to digest and think about, so I may have more to comment later. Here are a few things I currently think of:

I agree with @yaya that it’s quite difficult to compare prices, or compare quality/price ratios, in general. I remember in The Story of Tea, the author, Mary Lou Heiss, based on their retail experience, mentioned that she saw products with price difference of several folds, yet the tea tasted the same to her. I could relate to this based on situation in China too. For example, a few years ago, a farmer in Long Jing Village showed me their selling receipt to tea companies for about $150 per pound, so I assume that was the floor bottom price. In that year, products of that level (or claimed to be that level) were commonly sold in the market of China for anywhere between $300 per pound to $1300 per pound. But then, if somebody bought two products at, say, $10 per ounce and $20 per ounce, it’s very hard to say if they are of the same quality level, or if the $10 one is even better than the $20 one. I guess similar situation happens in the US and other places too. So in recent years, I’ve heard a saying again and again, “Long Jing/Tie Guan Yin/puerh is a very deep pond to swim in” 😛 So I think what @jackie said about harvest information and communication between seller and buyer are quite important, and sometimes probably even more important than the price itself.

But when the market is somewhat chaotic, if a vendor could obtain a tea at near the floor bottom price, and sell it with reasonable mark-up, then it could be a good deal for the buyer. But then, as @yaya said, sometimes relatively low price may not please all buyers, as from time to time, I’ve heard people saying “it’s impossible to get (certain prestigious tea) at a price lower than $xxx” (more often than not, I’m amazed how people compute that $xxx figure :-P). In such situation, I feel exactly the same as @yaya said, “This is a problem I would rather not have to live with, since it feels wrong to me to markup a product beyond my comfort zone only to stand its position in a (price) comparison.” Also I feel I would like to use some product as a statement to prove “you don’t have to pay that much to get a good product of xxx”. But on the other hand, I don’t want my tea to get less respect than it deserves just because of its price. I feel the thought of “you have to pay at least $xxx to get a specific tea” exactly nurtures the high price trend of certain teas. But unfortunately it happens.

I’ve been thinking about this issue also because I’ve been a part-time seller all this time and probably will remain this way in foreseeable future. In some sense, I feel I benefit from this situation because I do have some financial freedom out of the business. The downside is, I will not be able to cover a lot of products and would rather focus on those that make the most sense. Similar to @yaya, carrying rare and unique teas is always important to me. Then it’s also important to adjust the inventory based on people’s needs and perspectives. You guys’ inputs are very helpful and thought-provocative. Keep them coming! 🙂

[Gingko]

@Xavier, that’s very interesting analysis and well illustrates how small businesses can manage to offer better deals than large companies.

On the other hand, I think large companies have the power to carry some tea of good price value simply due to the volume of tea they deal with. But it seems nowadays there aren’t many such examples of large companies.

The other day, another tea drinker was discussing with me on the possibility of bringing in more good green tea below $2 per oz. to the US. I feel it would be easier for a large company to do it, and maybe more large companies will do it in the future. If a large company can manage to sell 1000 lb. of certain tea a week, then by making $1 on each pound, they can make $1000 on one tea and make it a good section of their business. But for a small business that sells less than 5 lb. of a specific tea each week, it’s not worth all the hassles to go though sourcing, shipping, packaging issues to make the $5. But I guess it’s still up to the further expansion of tea market to get more large companies motivated to provide low price high quality tea.

[Anonymous]

Well, there is what the tea consumer thinks is reasonable, and what the tea seller thinks is reasonable. 🙂

One issue to consider is that many tea drinkers have a fairly unsophisticated understanding of tea. This does not necessarily change by having access to wholesale auction information. So it is not uncommon for consumers to either have unrealistically low price expectations for tea because they don”t understand what makes one tea more expensive than another tea, or to be willing to pay a good price, but without understanding what they are paying for, which can lead to good tea at a fair price being driven out by tea that takes shortcuts.

At a bare minimum, your mark-up has to cover your operating expenses. If it can’t, then either your operating expenses are too high, you have not used a mark-up appropriate to the level of demand, or the market is not large enough to be profitable without adjusting your strategy. A lot of this depends on market conditions. Different buyers look for different things in tea. In the Middle East, the appearance of the leaf is very important, despite the fact that leaf appearance is not always related to quality. In the United States, it is important that teas don’t become cloudy (creaming down) when cold, despite this being a sign of quality in British teas. (This is because most tea in the United States is consumed iced, and most consumers don’t understand why tea would become cloudy.) So you can take a tea of known quality, and have it be in high demand in one place, while in low demand in another.

There is also the issue of exchange rate. Do you value the tea at a fixed price, or by the percent of a consumers income that that price would eat up? US $50 is quite a bit of money in Indian rupees, for instance, and maybe is a bit less dear in the U.K., where the national minimum wage is £6.08 (around US $9.67) per hour.

This is certainly an interesting topic, and I look forward to hearing from others.

[Xavier]

Gingko said:
On the other hand, I think large companies have the power to carry some tea of good price value simply due to the volume of tea they deal wit

Economies of scale.

But when they are big, do they have the capacity to quickly react to changing market conditions and make the right buying decisions quickly?

[Robert Godden]

I try to add value. After I’ve done that, the market tends to indicate what value I’ve added.

[Gingko]

Thanks guys for your responses! I’m fascinated with the many different aspects of tea business reflected by your comments! 😀

@mbanu, I didn’t know the “cloudy when cold” is seen as negative in certain evaluation system, and that’s good to know! I think I saw some comments about “cloudy when cold” before and at that time I totally missed the meaning of it. For some Chinese black tea and puerh, “cloudy when cold” is a big compliment (meaning rich inner contents). So I probably misunderstood some previous comments that I saw about this phenomenon 😳

Another related topic I’ve been thinking is, recently, there has been more and more discussions on buying tea directly from a far away country where the tea is produced, such as China, Japan, India… I believe in the future, such type of buying will be more and more convenient – I, for one, started such type of buying long time ago. And now, with the convenience of internet, my purchases have extended to things like Mongolian cheese candies and Korean stationary 😳 So, I guess, a more and more prominent question (at least, for non-flavored tea) will be, why would a buyer choose a US/European seller over a “local seller” from tea producing countries?

Can a US seller provide better price than a local seller? – For a small number of my teas, I think I can. But definitely Not for most of my teas. ❗ And I guess that’s the case for most US sellers.

Then, can a US seller provide a price that cost the buyer less compared with if a buyer buys from a far away country and pay international shipping? (Well also need to consider US domestic shipping is more expensive now and not much cheaper than international airmails sent from some other countries…) And how many buyers would like to pay a higher tea+shipping from a US seller in order to get the tea faster and return it easily, if they don’t like it? Or are the cost issue and convenience issue important at all?

Once it also came through my mind that whether I should become a China-based seller. Not that I’m going to move to China soon 😉 But I thought of converting a good tea friend into my partner in China and shipping most of our orders from China. But eventually I gave up that idea and decided to remain a North America based seller 🙂 I believe there are benefits and challenges on both sides, and it could be fun either way 😀

[Anonymous]

@Gingko, really the only folks who see it as a bad sign are the iced tea blenders. 🙂 It’s just that iced tea plays such a large role in how tea is consumed in the United States that it becomes a noticeable issue in some circles. The mixed messages may have to do with the fact that the way it creams down is important. This has to do with theaflavins. Generally black teas that are high in theaflavins tend to be popular on the market. But how can one determine theaflavin content inexpensively? The answer is through the color of the “tea cream”, which is a mixture of caffeine, theaflavins, and other compounds. 😉

[Anonymous]

As for U.S. sellers, the key is in value added. The effective Stateside tea seller understands the tastes of their customers in a way that international sellers cannot. In the case of the customer who knows exactly what they want, the value added is in having someone else deal with customs (a very nice thing if you like Chinese teas), someone else to determine if the tea is pure and of a good quality, no potential language barriers, and quick responses to changing needs.

[Gingko]

Thanks guys for your responses and comments! Indeed, it’s important for all sellers/wholesalers/importers to think “what’s the value I’ve added to this product?”

[Author]

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