Why are things always more expensive here than overseas? Are we being ripped off?

We are frequently asked the question - why are things so expensive in South Africa? If something is $440 in the US (The US launch price for the GTX480), surely it should be about R3300 in South Africa, not somewhere between R5263 and R7146? (Looking at the price range of our current GTX 480 cards, and the exchange rate of R7.54 to the dollar)

Are we being ripped off? Is the South African public being taken for a ride? Are the importers and the retailers taking huge profits, driving around in gold plated sports cars?

Firstly, let me start by saying that it’s supply and demand. As long as people are willing to pay a price, the importers and retailers will sell at that price. It’s simple business practice. This said, the picture is not as black and white as the above statement.

Lets take a look at the recently launched GTX 480. Why are some cards going for R7000+? Based on our experience both importing products, and reselling products bought from our network of suppliers, I think we can begin to answer this question.

• Firstly, the launch price is not always the price the cards are going for on the street, even in the US. For example, although the Asus GTX 480 has a list price of $440, the lowest retail price I could find in the US is $509.99 at NewEgg. Infact, the cheapest GTX480 of any brand is $499. When a card is as popular as these new cards, supply cannot always meet demand and the prices rise. Add to this the fact that the price is much closer to retail price than people imagine - from what I’ve been told, and from quotes I’ve received, an SA supplier is likely to be paying about $490 for a well known brand such as Asus (Remember - NewEgg individually sells more cards than the whole of the South African market combined!)
• Secondly, cards such as this need to be air-freighted into the country - because of the pace of technology, and the relatively small volumes done, initial shipments (and on high end cards, usually every shipment) is done via air freight - from our experience, this adds about $10 to each card. 
• Returns & RMA’s - in the US, the manufacturers have a local presence, and so they cover warranties. Warranty costs are worked into the price of the card that is charged to the supplier if the manufacturer has a local presence - if they do not have a local presence, then the supplier has to handle warranty costs themselves. In this case, the supplier sends cards back to the manufacturer, paying for shipping both ways, and covering the loss in value of the card during this process. Conservatively, I would calculate warranty costs (including the cost of having a technician to test cards, etc etc) at about 5%. In any event, the cost of carrying warranties for the SA market has to be covered, and this cost per unit is higher than in the US because of the lower number of cards brought in compared with the US market - often the difference is larger than $25 on a $500 card. 
• Insurance - generally suppliers end up paying 1% to 2% for insurance on the shipment - this is an extra cost beyond the cost of shipping.
• Finally, the mid market exchange rate that is generally listed is not what people pay when making international payments - it’s usually between 10c and 20c above that rate, and many suppliers also buy forward to fix the exchange rate. So lets work on a rate of 7.54 + .15 to the dollar, which equals R7.69 to the dollar. 

So now we have can calculate a landed price:
$500 (cost of card) + $10 (2% insurance) + $10 (shipping) + $25 (RMA Costs) = $545 x 7.69 = R4191.05.

Already our cost is higher than US retail! How can this be? This is primarily due to the smaller volume of cards imported - fewer cards mean a higher price per card, higher shipping costs, and higher RMA costs. Plus, air freight in general from the far east to SA is more expensive than the far east to the USA, even for the same quantity.

But R4191.05 is not that bad - sure, it’s more expensive, but it’s not nearly the retail price. What else needs to be added?

• Supplier margin - most suppliers work on a roughly 10% margin - out of this they need to cover all their costs, plus make a profit.
• Retailer margin - for an online shop, generally around 10%
• And now the big one - VAT. Yes, the government makes more money out of your graphics card than anyone else in the chain!

Adding 10% for the supplier, 10% for an online shop, and 14% for the government and you end up at a price of R5781 inc vat - which is in the price range we currently sell for. Some of our cards are cheaper, cards which we do big volumes of (Zotac and Inno3d, for example) where we can secure lower pricing. Other cards, Asus and Gigabyte, are more expensive - they both have good reputations in South Africa, and the local importers are taking advantage of this fact. Furthermore, sometimes a sub-distributor will purchase the majority (if not all) of the stock of a popular, high end limited card - they then obviously need to add their margin (another 8 to 10%) and have carte-blanche to price what the market will bear.

So, are we being ripped off? Sometimes, sure yes! Most often though, we’re not being ripped off - SA pricing is a result of the market conditions present in SA, which are very different to the US market.

My advice to consumers? As a rule of thumb you should be able to get a product for around ten to twelve times the US dollar price - in that price range you are getting a fair price, or even a good deal. So a GTX 480 for around R5300 is a good deal, but one at R7100 odd is definitely not!

Comments

[Tank]

thanks for explaining it. still doesn't make sense though.

[OsMoFF]

Thanks for the insightful information. I understand the argument with my basic knowledge of Economics. Always wanted to know how the prices are calculated for the Tech we buy here in SA.

I have a Inno3D GTX 260 and it feels like i bought the inferior brand...Oh well, only way the company will grow is if consumers buy their goods.

[Shipping Agent Clerk]

Well explained, with few omissions.

My experience in importing in general, not exclusively to computers.
1. The exchange rate for SA Rand is volatile, so importers often calculate on 8, just to be on the safe side.
2. Shipping cost is higher than $10 as claimed in the article. It is often up to 8% of the value, plus insurance, plus local logistic, plus custom duties, plus agent fees to deal with inefficient custom offices (that is how we agents make money). The shipping cost in total can reach 10%.
3. Computer parts are duty free, but there are still some small admin fees to pay. So, yes, you feel the pinch when the importing quantity is small. Surely importers will add this into their selling price.
4. The margins made by distributors, sub distributors and retailers are higher than other countries. Trust me, retail margins can be as high as 30% depending on the types of products. I don't really blame them because they have to pay higher company tax, higher transport, security and insurance costs because of high crime rate. Often retailers even have to pay a percentage of their turn over to shopping centers on top of their rentals. So these all add onto their costs.

Finally, my opinion: shop around, and don't go for the cheapest.
Simply look at the products and you see the difference. Anyone can see the difference between TATA and BMW.

When I shop for computers, I never go cheap like Zotac and Inno3D. ASUS is my first choice and Gigabyte is also not bad. Yes, I do pay more, but simply look at the products, you will enjoy it much more.

[Paul Johnston]

Thanks for the comments.

@OsMoff
Don't worry, Inno3d is a great brand - I wouldn't hesitate to put one in my own machine

@Shipping Agent Clerk
Thanks for the information :) Obviously our figures are rough figures from our experience, and from what our suppliers and others in the industry have told us. From a few follow up conversations I've had it looks like our shipping cost was low - that was based on our own experience, but we where shipping from Europe as opposed to the Far East.

In terms of markups - some distributors do make higher margins, but I think they are not as high as people imagine - especially when we are purchasing in bulk. And yes, retail pricing is obviously a lot higher than online pricing!

RE the brand issue - I'd definitely agree with you on a product such as a motherboard - in that case, the manufacturer plays a major role in the quality. However, for Graphics Cards that follow the reference design, our experience has been that just about any brand is the same - we mainly look at price, local support, and how long the warranty is. For an Asus GTX480 or an Inno3d GTX480 (assuming they are both stock, reference cards, which in this case they are) the design is identical and done by nVidia, and there are even cases where they are produced in the same factory - there are large 3rd party OEMs that do manufacturing for multiple brands depending on demand.

Of course, when it comes to non-standard cards the manufacturers can make a difference, the same as with a motherboard.

[Consumer]

It's called "value based pricing" - ie charging people what they're willing to pay, regardless of wholesale cost. I perceive it to be even worse in the photography industry. Seen as a hobby for the wealthy, even the biggest retailers charge exorbitant prices for "last year's" camera models which are in actual fact now "new second hand". The only aspect ever so slightly keeping them in check, is local online retailers who seem to be growing at an impressive rate. Even so, aforementioned do not come close to international online sellers (quite a few of them ship to us directly as well). A 15x Fuji EXR 550 can be bought for about R2000 retail abroad, and the local official importer/retailer (they're actually one & the same company) thinks you should pay R3699! Yeah, right - I don't earn my living that easy to be willing to be ripped off by an 85% local retail surcharge!

My advice is to do as I do: Find a repackaging/shipping agent in the USA. There are a number of them around if you search. They provide you a USA-local delivery address. Most online sellers in the USA deliver free to USA-addresses. This company repackages/consolidates everything you order into a single parcel, and ships it via a reliable courier at a very reasonable cost. You will be so amazed how much you can save, you will be tempted to start up a business! Before buying anything overseas though, make sure that the product is covered by an international warranty! I don't even buy local officially imported products if they're not covered by international warranties, as I believe it says something about how much pride a manufacturer takes in their product quality!

[Paul Johnston (Artagra)]

Thanks for your post, Consumer. I don't have a lot of experience in the camera world, but I do know that for most PC components, international warranties are not applicable to South Africans who grey import products, but are rather intended for customers who are travelling with their equipment. I don't fully agree with this distinction, and manufacturers will sometimes make exceptions to this. I personally would not suggest importing IT products yourself, unless you are working on the assumption that you may need to cover warranty costs for returning products to the US on your own. Now, with camera equipment the difference in price may be large enough to justify this cost, but for computer components that is generally not the case.

Another difference between the computer and camera worlds is that the camera manufacturers generally have their own presence in South Africa, either a subsidiary or a strong importer who functions, for all intents and purposes, as "Canon South Africa". On the PC side, their is only one component manufacturer who does this (Asus), and they specifically do not cover international warranties for consumers who grey import.

[Paul Johnston (Artagra)]

Oh, otherwise RE the whole "value based pricing" - it definitely happens, also in the computer retail market. By purchasing from a wide variety of suppliers, we can generally offer a product that's well priced in any segment. If a customer is looking at a product but they feel it's too expensive, please call us - generally we can offer a better priced alternative from another brand :)