Analysis of hypothetical transaction

Frameset	Wholesale	Shipping	Total cost	Mark up	Retail	Profit
FWT MCR-01 2011	700	-	700	200%	2,100	1,400

This transaction is based on the 2011 version of the MCR-01. This frame weighs about 1,100 grams for a 53 cm frame. Features include internal cabling for brakes and shifters; braze on front derailleur, BB 30 bottom bracket, integrated seat post, painted finish and logo. There are also options for the front fork. To obtain a wholesale price of $700 implies a large order of more than 30 framesets. Integrated seat post frames are slightly more expensive to ship and a paint finish increases the cost of the frame. The mark up of 200% puts the retail price at $2,100 per frameset. This is 30% below the retail price of a 2010 Fuji SST and Cervelo S2. Profit per frameset is estimated to be $1,400 per frameset, before commission paid to the IBS (if the sale originates with the IBS). 

Components	Wholesale	Shipping	Total cost	Mark up	Retail	Profit
Components	1,200	20	1,220	45%	1,769	549
Saddle	80	10	90	50%	135	45
Stem	60	5	65	50%	98	33
Handlebars	100	10	110	40%	154	44
Pedals	180	5	185	35%	250	65
Tubular tires - pair	80	5	85	50%	128	43
Carbon tubular wheel set	870	50	920	50%	1,380	460
Total	2,570	105	2,675	46%	3,913	1,238
Retail price of bike					6,013	2,638

The company does not build up bikes; it is the job of the IBS to work with their customer to determine the customer’s choices for components and wheels. This gives the customer choice and avoids the situation where the customer pays twice for component upgrades (once for the existing parts in the bike when it comes in and again for the upgrade). It creates the opportunity for the IBS to develop the relationship with the customer; it also gives the IBS the opportunity to make money on components, provide discounts or use up any inventory of parts and wheels that are lying around the shop from previous years. It gives the IBS more flexibility and an opportunity to promote its expertise.

The example above estimates the wholesale cost of all components and wheels to be about $2,570. This would cover the cost of a high quality package: SRAM Red group, a light stem and some good pedals, a standard racing saddle and handlebar, a good quality pair of carbon tubular wheels and some standard tubular tires. Factoring in the shipping costs that the IBS would have to pay brings the total wholesale cost to $2,675 for the IBS. The IBS marks up these items on average about 46% (The mark up for items less than $1,000 is typically higher and can be anywhere between 40-50%. Items that cost more than $1,000 wholesale can be marked up anywhere between 30-40%. It is up to the IBS to decide.) The mark up covers the labor for putting the bike together, overhead and materials. The price that the consumer pays after the mark up for components and wheels is about $3,900. The consumer pays $2,100 for the frameset. Total price of the bicycle is about $6,000. 

Frameset retail price	6,013
IBS
Revenue
Components	3,913
Frameset commission	420
Total	4,333
Cost of goods	2,675
Gross profit	1,658
Margin (%)	38

The IBS generates about $3,900 in revenue from the sale of components and wheels. If the IBS convinced the consumer to purchase the frameset (if the IBS places the order on behalf of the consumer), the IBS is paid a commission which is 20% of the retail price of the frameset (0r $420). Adding the commission, the IBS generates about $4,330 in revenue. Gross profit on the transaction is $1,658 per frameset or a margin of 38%. This is better than the gross margin on selling a completely built up bike (estimated at around 33% by the National Bike Retailers Association). Also, the IBS never takes delivery of a frame that it is not sure it can sell, thus its cash flow improves and its inventory risk is lower.

Company
Revenue	2,100
Less: commission	420
Net revenue	1,680
Cost of goods	700
Gross profit	980
Margin (%)	58

The company generates $2,100 in gross revenue on the transaction. After factoring in a commission of 20%($420), net revenue is $1,680 pre frameset. Gross profit on the transaction is $980 per frameset or a margin of 58%. If the transaction originates with the consumer (where the consumer orders the frame directly from the company and has it sent to the nearest IBS that is an agent of the brand), there is no commission paid to the IBS. Net revenue is $2,100 and gross profit on the transaction is $1,400 (gross margin increases to 67%). The company is sharing the profits with the IBS, but is also rewarded for taking on inventory risk.