Cell phone wholesalers operate in a competitive industry in which small differences in operating costs translate into large differences in profit margins. To survive and thrive in a low-margin business, it’s critical to understand your cost structure and its implications.
Fixed Costs vs. Variable Costs
In business, there are fixed expenses and variable expenses.
- Fixed costs are the unvarying price of doing business—no matter how many devices you sell in a given month, fixed costs stay the same. Examples of fixed costs are salaries, utilities, and office rent.
- Variable expenses change based on how much business you do. Cell phone wholesalers typically have a large amount of variable costs, such as the cost of stocking inventory, paying freight for delivery of phones, testing and grading phones, packaging costs, shipping costs, sales commissions, and marketplace fees.
Finding Your Best Business Model
Wholesale cell phone business owners should build a financial model of their business that measures fixed and variable costs relative to their revenue. It’s important to understand how much of the money you earn is sunk into paying off fixed costs, how much of your expenses depend on your sales volume, and how much is left for profit.
Crunch the Numbers
It’s helpful to walk through fixed and variable costs as a percentage of a single sale. Let’s say you buy a phone for $100 and sell it for $110. That looks like a clean $10 of profit—but we haven’t accounted for variable expenses yet. You might have spent $0.50 on transaction fees, $2 on processing, and $1 to market it. That leaves $6.50 as genuine profit on $110 in revenue.
Another useful perspective is to consider what volume of sales you need to make to pay your fixed costs. Let’s say you have $5,000 in fixed monthly expenses, and make $6.50 in profit on every phone you sell. Divide 5,000 by 6.5 to arrive at the number of units you must sell for your profit to equal your fixed costs. In this case, you need to move 770 units per month to cover fixed costs. That means that every unit sold above 770 contributes $6.50 directly to your bottom line.
Fine-Tune Your Profit Margin
Understanding your fixed and variable costs as a percentage of your revenue may reveal changes you can make in your business.
You may see that office expenses are eating up too much of your revenue, and find a cheaper space (significantly reducing your fixed costs). Or you may notice that you’re spending too much money processing each phone, and choose to work with a more reliable wholesale cell phone distributor that grades phones more accurately. Well-graded phones sell more quickly (because they are exactly as described), and faster sales increase your inventory turns. And the more your inventory turns, the greater profit you earn.
Accurately graded phones have the additional benefit of reducing returns and customer complaints, which reduces your time lost on fixing bad situations. A high-quality supplier stands behind their product and will take action to remedy any mistakes, like shipping a bad batch of devices. This level of support will reduce your level of inventory risk.
Contact us today to see how excellent grading can make a difference in your business.