OTF knives

[Aragon]

If your theoretical manufacturer has $50 in parts and $75 in labor you don't have a $125 knife. You have a $125x1.10x1.3x2 knife or $350. The manufacturer makes only 10%, if they're lucky, in the knife industry (often 7% is realized)...

Your "1.10x1.3x2" equation is less and less valid these days. In more and more cases -- be it Walmart or online sellers, the distribution tier has either been slashed or completely eliminated. The retail sales price you show of 286% of cost of goods sold is largely a fantasy today. If you were to buy something at say Wal*Mart today, the retail sales profit would be well under 15% of COGS. Even smaller/higher quality brick-and-mortar retailers sell at prices far below the example you offer. That's a huge difference and it blows a hole in your example.

This thread reminds me of discussions about AR-based rifles/carbines at the peak. Most knew they would eventually drop but there was some tense discussion on just how far they would drop? They have dropped drastically as more production has come on-line driven by continued high demand. Something similar would take place for OTF knives if there was ever a huge demand.

 

[Aragon]

Dupe...

 

[Aragon]

That is a problem HSO I agree. Just saying it can be done. It has the switch on the side rather than top, otherwise pretty close. Parts in the mechanism a little cruder but beefy , just saying I don't understand why an automated machine shop could not turn something out for about $50 in parts and spend another $50-75 handwork and painting and assembly.

I think the answer is volume/demand which is influenced both by laws and public perception. The impact to sales by laws are obvious. The impact to sales by the "outlaw quality" (so beloved by some) of OTFs is far more subtle.

While a high quality, mid-priced OTF would be gobbled up by some, that market would still be tiny compared to those for knives without such constraints.

I suspect if there was sufficient demand (and fewer laws), a company like Cold Steel could develop (with or without outside help) and import an OTF of excellent product quality for a very favorable price.

 

[rbernie]

If you were to buy something at say Wal*Mart today, the retail sales price would be well under 15% of COGS. That's a huge difference and it blows a hole in your example.

A 15% COGS only happens for goods with very high retail velocity or which drive floor traffic (and act as a catalyst for the purchase of higher margin goods in the process). That is pretty much NOT the definition of the market for OTF knives. On average, most retailers (lacking WalMart's infrastructure cost control abilities) are still relying upon COGS of 32% or better just to break even. The items with the lowest velocity (e.g. those that are most 'boutique') commonly carry a 50% COGS both to help offset the lower margins in the higher velocity products and to compensate for the lost opportunity in having capital invested in these lower velocity goods.

Moreover, Direct Store Distribution (DSD), or cutting out the distribution chain, is commonly agreed to by the manufacturer and retailer to lower the cost to the retail chain and to reclaim some margin for the manufacturer - it's never a case of 'all of the potential distribution margin goes to the retailer as a cost savings'. DSD is also only viable when the retailer has adequate inventory velocity to be able to commit to order quantities that make it worthwhile for the manufacturer to eliminate their distribution chain and focus on that specific retailer. Again, I don't see the market for OTF knives supporting that business model.

I don't have a dog in this fight specifically, but as someone that runs a business - I don't see a way for the math work out in your favor.

 

[Aragon]

A 15% COGS only happens for goods with very high retail velocity or which drive floor traffic (and act as a catalyst for the purchase of higher margin goods in the process). That is pretty much NOT the definition of the market for OTF knives.

Wal*Mart's actual profit margin (as a percentage of COGS) is on average actually around 3-4% I suspect their "lower velocity" stock is still well under 15%

I used Wal*Mart as an extreme example in response to the 286% model offered by someone else.

You suggest that Wal*Mart doesn't fit the market for OTF knives, yet this entire discussion is about high quality, low priced, high volume OTFs. I therefore suggest it does.

On average, most retailers (lacking WalMart's infrastructure cost control abilities) are still relying upon COGS of 32% or better just to break even. The items with the lowest velocity (e.g. those that are most 'boutique') commonly carry a 50% COGS both to help offset the lower margins in the higher velocity products and to compensate for the lost opportunity in having capital invested in these lower velocity goods.

I'm not at all sure that's true of "most retailers." Interesting you have yet to mention the literal removal of the distributor tier in many markets. I think I see it down below...

Moreover, Direct Store Distribution (DSD), or cutting out the distribution chain, is commonly agreed to by the manufacturer and retailer to lower the cost to the retail chain and to reclaim some margin for the manufacturer - it's never a case of 'all of the potential distribution margin goes to the retailer as a cost savings'. DSD is also only viable when the retailer has adequate inventory velocity to be able to commit to order quantities that make it worthwhile for the manufacturer to eliminate their distribution chain and focus on that specific retailer. Again, I don't see the market for OTF knives supporting that business model.

I never said it did...

Cutting out the distributor has a profound impact on costs and therefore prices. The one thing you fail to mention is that junking the distributor tier has also been made possible in part by new sales tools (ex. the Internet) that didn't exist in years past.

I don't have a dog in this fight specifically, but as someone that runs a business - I don't see a way for the math work out in your favor.

Well, you make some assumptions that you cannot back up with hard data. I agree that OTF knives will probably never generate huge numbers due largely to laws and how non-aficionados often negatively view them. But that's just my guess -- I haven't done any hard market research, nor have you.

What I will stick by is the terribly archaic nature of the 286% model offered and the "gold plated" tolerances offered in an attempt to justify an end price.

 

[rbernie]

If you have such insight into the market for OTF knives, why are you not in the business and busy printing money?

 

[hso]

I therefore suggest it does.

WalMart's focus is on very low price point knives far below the retail price of your proposed product. They're literally priced outside of their target market.

Even more important is that they also won't sell automatic knives at any price point because of the federal restriction on interstate commerce in automatic knives.

Coincidentally I've had an exchange with their product development manager who was responsible for their $4 "tactical" folder sold since this past holiday sales season on the quality and safety issues of the $4 knife and related to their Chinese manufacturing QC.

Your retailer customer is going to be the same as those selling Benchmade autos, not WalMart.

The one thing you fail to mention is that junking the distributor tier has also been made possible in part by new sales tools (ex. the Internet) that didn't exist in years past.

Knife manufacturers don't sell to the public unless they're selling seconds or they've made a proprietary deal with a retailer to handle MSRP level sales (you can make some special "build your own" purchases at the manufacturer site, but those are ghosted by a retailer as well). The public buys from retailers that either buy at prices based on volume from the manufacturer or through a distributor. The only thing that the internet has done is allow retailers with low overhead and willing to make low margins to sell to the public across the nation after having bought from the manufacturer or a distributor.

 

[Aragon]

If you have such insight into the market for OTF knives, why are you not in the business and busy printing money?

I focus on higher margin manufacturing, that's why...

 

[Aragon]

WalMart's focus is on very low price point knives far below the retail price of your proposed product. They're literally priced outside of their target market.

Even more important is that they also won't sell automatic knives at any price point because of the federal restriction on interstate commerce in automatic knives.

Coincidentally I've had an exchange with their product development manager who was responsible for their $4 "tactical" folder sold since this past holiday sales season on the quality and safety issues of the $4 knife and related to their Chinese manufacturing QC.

Your retailer customer is going to be the same as those selling Benchmade autos, not WalMart.

I agree that WM wouldn't deal in OTFs due to the different laws impacting them. I suspect if the laws didn't exist, they would. I suspect OTFs would appeal to the typical WM customer -- at least those that frequent the sports goods section of their stores.

Knife manufacturers don't sell to the public unless they're selling seconds or they've made a proprietary deal with a retailer to handle MSRP level sales (you can make some special "build your own" purchases at the manufacturer site, but those are ghosted by a retailer as well). The public buys from retailers that either buy at prices based on volume from the manufacturer or through a distributor. The only thing that the internet has done is allow retailers with low overhead and willing to make low margins to sell to the public across the nation after having bought from the manufacturer or a distributor.

Some most certainly do -- right here on the good old Internet. More importantly though many sell directly to retailers, cutting out the middleman waste.

The Internet has allowed some retailers to sell a great deal more and in turn buy a great deal more -- directly from the manufacturer.

 

[JohnKSa]

Some most certainly do -- right here on the good old Internet.

Which ones?

The ones I know of off the top of my head charge higher prices than if you buy from a retailer unless you're buying seconds from them. Which agrees with the part of hso's quote which starts after the part you highlighted.

 

[hso]

Some most certainly do -- right here on the good old Internet.

You can special order some things like build your owns at Buck or get seconds from Cold Steel or buy from high end shops like Busse, but if there are major manufacturers that you can buy below MSRP please provide the links. You'll only see MSRP pricing and those sales go through a separate company (taxes drive a lot of the reason, but the volume of sales are the biggest factor). Manufacturers can't "afford" to annoy their real customers, the large volume retailer and distributors. A thousand knives sold to a thousand individual internet customers doesn't produce the margins selling 100 to ten dealers.

Please cite the manufacturers like Benchmade, Buck, CRKT, Spyderco, etc. that sell standard production product directly to the public vs. KnifeCenter, A.G. Russell, BladeHQ, etc.

 

[JShirley]

Don't you dare try to speak for me. That's terribly bad form.

hso spoke for himself*. What would be bad form is calling him out on something he hasn't done, since you have a reading comprehension challenge. Don't.

John



*

Originally Posted by hso
Not quite. I don't think

 

[danez71]

Your "1.10x1.3x2" equation is less and less valid these days. In more and more cases -- be it Walmart or online sellers, the distribution tier has either been slashed or completely eliminated. The retail sales price you show of 286% of cost of goods sold is largely a fantasy today. If you were to buy something at say Wal*Mart today, the retail sales profit would be well under 15% of COGS. Even smaller/higher quality brick-and-mortar retailers sell at prices far below the example you offer. That's a huge difference and it blows a hole in your example.

This thread reminds me of discussions about AR-based rifles/carbines at the peak. Most knew they would eventually drop but there was some tense discussion on just how far they would drop? They have dropped drastically as more production has come on-line driven by continued high demand. Something similar would take place for OTF knives if there was ever a huge demand.

Totally different forces at work. AR pricing "at its peak", as you mentioned, was largely due to demand out stripping supply and a un-healthy dose of emotions.


HSO business model is far more accurately stated than yours.

I suspect, that you being a mechanical engineer lends to a different understanding of COGS, logistics, supply chain management on and on.



Just as an example of the %'s of mark up.

Lets take something thats well documented in Joe Average retail world; a product that was on Shark Tank. Its a product that used to repair holes in screens (screen doors)


At 27:25 in the video, they state that it cost them 31 cents to make out of their garage. They had sold 750 units at the time of their sales pitch. https://www.youtube.com/watch?v=AxBXQOso1RE


Lets double that for a 2 pack to 61 cents. Now lets double that again for a 50%GM (gross margin) to $1.22 for the manufacturer to stay in business.

I'll double that again to $2.44 because they were in their garage and most likely wasn't really a COGS amount.



So we're at $2.44 for a 2pk at the mfg level after doubling the 'price' 3 times


Just for fun, lets say ALL logistics are FREE.


That product sells for $6.98 for a 2 pk at Home Depot and $18.16 for a 6 pack on QVC.


That equals in excess of ANOTHER 280% mark up ON TOP of the everything else when it hits the consumer self.

And that doesn't even take into account the economies of scale going from 750 units to hundreds of thousands of units or that I made all of the logistics free.


That falls right in line with what HSO proposed.



A retailers COGS is NOT their 'landed product cost'

Per the IRS

Introduction

If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. However, to determine these costs, you must value your inventory at the beginning and end of each tax year.

This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you.


If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. For more information, see chapter 2.

Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42


Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. These lines are reproduced below and are explained in the discussion that follows.



35 Inventory at beginning of year. If different from last year's closing inventory, attach explanation
36 Purchases less cost of items withdrawn for personal use
37 Cost of labor. Do not include any amounts paid to yourself
38 Materials and supplies
39 Other costs (Added my me: Such as administration, building, electricity, insurance, logistics etc etc etc )
40 Add lines 35 through 39
41 Inventory at end of year
42 Cost of goods sold. Subtract line 41 from line 40.
Enter the result here and on line 4

Again, COGS isn't a product 'landed cost' (delivered to my dock).



Now, you could deflect and say 'that's Shark Tank... not the real world'.

But it IS the real world. They have no motivation to disclose such a dramatic 'cost vs sales price'.



ETA: As I stated in the OCTrainers thread, Since 01-03-1990, my primary responsibility since that time has been sourcing/procurement/supply chain management primarily in the manufacturing of electronics and electro mechanical products. While ,most of it has been in high end industrial/military/aerospace, I did work for a company that manufactured products sold in retail including Home Depot and ACE Hardware (all things hydroponics. Our own designed, and manufactured over seas, branded timers, ballasts, lights, for example. Yes, Home Deport sells hydroponic stuff.)

 

[JShirley]

you being a mechanical engineer lends to a different understanding of COGS, logistics, supply chain management on and on

It may also be the time to mention that I am a logistics officer myself. I oversee maintenance and logistics for for an entire Army Reserve battalion, including 110 vehicles and all gear for 5 companies.

As far as internet knife pricing, I can tell you that some internet companies sell some knives for less than wholesale- meaning the online retailer has very low overhead, and depends on high volume to make any money at all- and gets special pricing from the manufacturer. (Some of these companies appear to be making up the difference by shipping and handling charges, so they might actually be about breaking even on the price, and making all their net profit on shipping charges about 100% higher than actual shipping cost.)

John

 

[rbernie]

We need to deconflict the notion of margin and profit. When a retailer asserts that they have a low single digit 'margin', that commonly does not mean that their gross margin (income minus cost of goods/labor, however measured) is single digits – it means that their profit margin (after tax and after paying infrastructure/G&A costs - usually called Net Income or Return On Sale) was in the single digits.

Well, you make some assumptions that you cannot back up with hard data. I agree that OTF knives will probably never generate huge numbers due largely to laws and how non-aficionados often negatively view them. But that's just my guess -- I haven't done any hard market research, nor have you.

We can fix that. Since Walmart was used as a comparison, let's do the research:

http://www.marketwatch.com/investing/stock/WMT/financials

In 2012, for example, Walmart showed Sales of $446.95B with $335.13B in COG (including depreciation and amortization). That's not a single digit margin or even the 15% margin that you suggested. It's a 33.3% gross margin (meaning that it measures the gap between COG and income but before deducting the costs associated with doing business), which is what I tried telling you in post #54.

Of course, as danez71 made clear - the labor costs to staff the stores is included in that $335.13B cost. That means that the actual costs associated with the products on the shelves has to support a gross margin far greater than 33.3%, or else there wouldn't be enough margin to cover the labor and still wind up at a 33.3% overall COG. In other words, if labor is $100B of that $335B COG, then $235B was the actual material cost to generate $446.95B in sales.

So, when averaged across their entire span of products, even the mighty Walmart cannot stay in business if they can't sell their goods at a 50% gross margin or better (difference between the cost for Walmart to buy and the price that the consumer paid) just to wind up at 33.3% margin between income and COG after labor is included in the costs.

By the way - of that $111.82B in gross profit, over 75% was needed just to pay the General & Administrative (G&A) costs of keeping the lights turned on and the doors open and the payroll system working. Walmart's G&A rate is just over 19% of gross revenue and over 25% of their COG. They couldn't even keep the stores open with no staff and empty shelves on 15% gross margins.

 

[cdk8]

I was impressed by the Trodon and the Makora as well.

I had a so/so experience when I purchased an early production Trodon with the 2-tone black blade coating and red body. It was a double edged spear point and whenever the blade deployed, you could hear a ringing inside the body for a few seconds. Only the blades with the black coating seemed to do this, and it only affected some models. IIRC the coating material was different from what had been used on the QD Scarab and HALO. I sent it to Microtech twice, and both times it was returned to me with the same annoying sound it had before. Every time I would open the knife it was like I had my own personal sound effects that said, "hey, I've got an erection!"

Part of my frustration is because of what Microtech can do versus what they choose to do. The double-action Terzuola is IMO one of the finest folding knives ever made, and the best double-action auto ever made. I think the quality of the hand-ground Terzuola is on a par with many of the knives being made by Brian Tighe. Then Microtech devolved to the CMTX5, a knife so inferior to the Lightfood DA and Terzuola DZ you'de think a different company made it.

 

[cdk8]

I have a cheap OTF - $39 - and it's no more worthless than a $25 folder. It cuts down boxes, or opens them, cleans fingernails, and does most of the other stuff an inexpensive knife does. I've had Branded knives that were problematic out of the box and a huge disappointment - like the Buck Strider Tarani in 420 and FRN. Bad lock, soft steel, overdone features, riveted construction, abrasive checkering that damaged jeans within a few days. In comparison the OTF is looking ok. Not the quality of a BM Rift or Strider SnG, no. Worthless? That's overreacting.

The out of the box knives you are referencing are not very good by any standard. Benchmade and Strider make reasonably well made production knives, but most of their products are far from anything special.

Form factor on blade steels, shape and grind do make a difference but a lot of it is also user skill. Changing up from the OTF to a BM CQC7 chisel grind tanto reminds me of how it steers to one side cutting and has no belly at all. The OTF I chose is a simple single edge blade grind with swedge with is about average on the market, and handles about average for the knives I own. So far it hasn't needed sharpening but I'm just using it EDC to see what will result.

With the exception of Chuck Norris, skill can NOT offset physics!!! Blade design is EVERYTHING, as is the quality of the heat treatment. If this was not a major difference, we'd all be using Frost Cutlery 39-cent folders.

Your customers are going to want to know these things prior to buying...
-Why are you grinding a swedge into a utility blade, given it unnecessarily removes metal from the blade, usually for the purpose of cosmetic purposes?
-Is this blade going to be a drop point? Clip point? Spear point? Hybrid?
-Are you using a hollow, flat, sabre, chisel, or convex grind?
-What angle are you grinding the blade at?
-How are you heat treating your AUS8?
-What materials are you using for your internals?
-How well does your disconnect work so that, if the knife opens in your pocket, it doesn't punch a massive hole on your leg?
-Is your test blade using a single or secondary microbevel?

If you are going to design a knife, and you want knife people to buy it, going to painstaking lengths to achieve the best blade design possible should be one of the earliest points of design. Most knives from Benchmade and Strider are not known for spectacular blade grinds, but there are many companies offering knives with outstanding geometric design that are very affordable.

Do you think your OTF will have remotely comparable blade performance versus the SuperBlue or ZDP-189 Spyderco Delica with a full flat grind, or a CPM-S30V Ritter Griptilian with a high flat grind? Your knife is going to be competing with these, and people spending $80+ on a knife are going to demand quality.

Perhaps the best way to illustrate just how dramatic blade performance differences can be is to purchase a Benchmade Griptilian in S30V steel and purchase a Benchmade Ritter Griptilian (in the same S30V steel), use each for several identical tests, keep track of which blade dulls faster, try to sharpen each, and examine the results in regards to what that means to the end user. While reviews of knives priced $20-50 tend to focus less on details, when you get close to that hundred dollar threshold, many individual users and reviewers alike are going to base a large portion of how they rate an EDC knife on the blade's design...not the novelty of the opening mechanism.

A nice AUS8A single edge 3.5" long with G10 handles for $80would be a good working knife. Nobody makes it in the current climate but when they do things are going to rapidly change.

A knife at that price is going to be competing with other folders using blade steels dramatically superior to AUS8. While you may feel some of the listed features are not important to you personally, your prospective customers will.

Also, it seems unlikely that G10 has enough structural rigidity to be used to make a good OTF without stainless or titanium liners, and the addition of liners can rapidly drive up the cost of a knife (for example, the Spyderco Delica 3 vs. the Spyderco Delica 4, or the Spyderco Civilian without liners vs the newer Civilian with dual liners, or Emerson moving to dual titanium liners to save weight over steel.

Finally, if your goal is to make a knife that can handle a ton of cardboard, AUS8 is not desirable at all. Since cardboard rapidly dulls blades, the steels suited best to prolonged cardboard use are steels with very high wear resistance. Examples of this are Bohler M390 MicroClean, or Crucible CPM-S90V. M390 is very likable because, while it has extremely high wear resistance and holds its edge much longer than most other knife steels, most users find it to be relatively easy to sharpen versus something like S90V. Additionally, S90V and M390 are capable of holding paper thin edges for prolonged periods and resist rolling far better than say your standard 154, VG-10, ATS-34, D2, 440C, etc.