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The economics of small business: why does that part cost so much?

We occasionally get a complaint from a customer about the cost of some of our parts.  A great example is the hardware set for our single screw handle.

Pan/skillet 1-screw handle hardware set (all sizes)

We charge $2.99 for this part.  Compare this to a standard machine screw, nut, and washer of approximately the same size which you could buy from any hardware store for perhaps 25 cents, or, if you bought a bunch of them together, pennies.

To understand why we charge what we do for a part like this, consider the difference between the standard 8/32 machine screw, washer, and nut you might buy from a hardware store, and our screw, lock washer, and barrel nut.  What hardware you buy from a hardware store is made by the billions.  The principle of economies of scale say that the more of something you make, the cheaper you can make it.

We suffer from the opposite of economies of scale. We make and sell small quantities of something that is not standard and that has to be made specially for our application.  In this case, the barrel nut is not something you can just order; the screw is of a non-standard length.  For each order, we pay quite a lot for the manufacturer to set up and make a run of these parts for us.

If we were to sell tens of thousands of these parts, the set up cost would be spread among many many parts, and be a small part of the cost.  But selling only hundreds or low thousands of these, it comes to dominate the cost of making the part.

So the next time you come across a part you need for a very niche application, to fix a rare appliance, or an old something-or-other, think about how many of these the seller is likely selling and whether it is something you can buy off-the-shelf at any hardware store, and try to understand that the economics of small business sometimes require that we sell at a certain price, or not sell at all.

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