Alloy rims, continued

When we price a wheel product, we have a pretty standard formula wherein we put in all the costs, and then add on a nearly fixed amount which is the amount we know we'll need to make doing this worthwhile if sales are good. This convention is somewhat unique, in that most businesses follow a margin model. To do it by margin model, you input your cost of goods sold and multiply that by 1.65 (which gives you a 40% margin, which is generally considered to be the minimum healthy retail margin), then add on direct labor, and that's your price. 

The problem we've found with the margin model is that it doesn't work. 

The issue is that lower cost builds get underpriced, and higher cost builds get overpriced. We can only build so many wheels, answer so many emails, take so many phone calls, print so many shipping labels, pack so many boxes, and provide so much after-sales support in a week. So we really only have "x" purchase slots available in a week. Whether you're buying a set of HEDs with Chris King hubs or a Powertap (the price apex of our alloy builds) or this week's feature build (the lowest price build we do), the costs we incur and the care we put into turning that pile of parts into your wheels is exactly the same. Our inventory is nimble enough, and we have enough inventory turns, that the carrying cost for an expensive HED rim isn't that crazy different from a less expensive Kinlin rim, and the same is true of hubs. Spokes sit in huge bins waiting to be cut and threaded precisely for whatever build they're going into.

To turn this into a simplified word problem, let's say wheelset A has parts (rims, spokes, hubs, nipples, skewers, rim tape, box) that cost us $100, and wheelset B has a $1000 cost for the same parts. In both cases, our direct labor is the same (which we'll call $100). Using a margin model, wheelset A would sell for $265, and wheelset B would sell for $1750. To keep simple things simple, I will simply say that we need much more than $65 over parts and labor to sustainably sell alloy wheels, and we need much less than $650 over parts and labor to sustainably sell alloy wheels. 

Keeping the simplicity going, we have "x" number of build slots available per week. In order to keep the lights on, pay insurance, etc and make an acceptable income for ourselves, we need to charge "y" per build slot to come up with a weekly net that accomplishes those goals. That's the best and fairest way we can envision doing it - it's the lowest price that makes this business a valid and viable pursuit. 

What does this have to do with alloy rims and wheels specifically? Brands that sell alloy wheels as complete units need much more than our "y" per set sold. The dealer for sure needs that 40% retail margin - at least - to keep the store open and things stocked on the shelves. And the brand needs something like "y" to do their work, but probably more because bean counters. By the time the brand is done with sales programs and incentives (remember, shelf space is a competitive game and if you want to sell bikes from the big three, the big three want you selling their accessories - wheels included - too, so the dealer has very finite capacity to stock and sell different wheel brands) the gap between MSRP and the dealer's cost could well be in excess of that 40% number. But there is often a discounting game which erases the dealer's extra margin. 

My somewhat more complicated point there being that if you want to be in the business of selling alloy wheels through a dealer channel, then selling component rims at a price that's going to work for independent wheel builders is a huge challenge. The component prices are so transparent. You as the consumer see that rims have an MSRP of $250 a set, and the hubs have an MSRP of $400 a set, and the spokes cost $120 for the lot of them, and so a built wheelset price of somewhere between kind of $770 and $820 makes sense. A comparable wheelset (almost always with a less attractive hub option) for $1300 on the dealer floor becomes a bit of a head scratcher. 


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