Only the Duties automatically scale with inventory cost.
like the top-of-thread poster, I get that there are overheads. I don't understand why overheads seem to scale with the cost of purchasing the inventory.
One of your biggest risks is that you end up the hook for stuff that you can't sell. That severity of that risk scales with price of goods, so your margins have to have a component that scales with price of goods to cover that risk.
Another way to think of it, is that history has shown that a ~65% product margin is the band where most businesses succeed and capital returns are best realized. I know that's not a very "sexy" answer, but a lot of realities are driven on access to capital which is driven by your margins and how it compares to other companies that are also seeking capital.
So it's less that costs scale, and more that you manage your business to keep margins at a certain band.
But that's the ultimate average number. If you group businesses by stocking costs and materials costs and labor costs and sales costs you'll probably see significant differences.
Most businesses will have very different cost distributions, because no two businesses are the same (even if two companies do the same thing). But there's still pressure on what your margins are expected to be by existing and potential investors, in no small part because of expectations of returns based on risks of the business and it's capital management strategy.
And is less an "average" number and more of a benchmark to aim for. It's perfectly possible to run a business on a 55% margin, but investors have options and whether it's VC or traditional bank loans this number is going to come up and be a distinguishing factor on cash availability.
Products don't sell themselves. It takes people, planning, and effort to run a business.
If I'm doing $Y this year, and next year I want to do 2x$Y, costs will actually increase superlinear to revenues. The goal of every company is to reach a point where revenues outpace costs, but business doesn't work that way and things are rarely predictable and many successes are rarely repeatable.
If you're a retail business, it costs money to maintain a lease and storefront not to mention hire and manage employees. You also have overhead to deliver product to each individual store, and shipping isn't free. Nor is the coordination of deciding what product to ship to what store, because maybe they have different weather and one place sells more of a certain category.
Maybe you're selling online, so you have to invest in performance marketing. Or you're sending catalogues through a 3rd party vendor. Reaching new customers is expensive.
Maybe you decide to invest in in-house manufacturing, which requires many millions in upfront capital expenses, equipment acquisition, and expensive ERP integrations with machining and scheduling software.
Actually running a business is hard, and there are many variables that come up. The best you can do is try and maintain a consistent margin, and manipulate the many different levers available to do so. Maybe that's opening new stores, or closing poor performers. Maybe it's laying off staff. Maybe it's expanding into new categories, or cutting your loss on categories that didn't work out. Maybe your staple product that was driving the core of your business for years is quickly loosing steam, and you have to find alternatives.
> duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots
Only the Duties automatically scale with inventory cost.
like the top-of-thread poster, I get that there are overheads. I don't understand why overheads seem to scale with the cost of purchasing the inventory.