Martin Guitars & The Price We Pay (Part 1)

Most of this article is from a paper I wrote for a pricing theory class I took while pursuing my MBA. I learned many interesting things in that class including several theories on how to figure out what to charge for a product or service. The least recommended choice we explored was "Cost Plus". In Cost plus pricing you simply take the cost of your product and add whatever margin you want to make. It sounds simple and fair but there are some fairly fundamental problems with this approach. For instance, what if there aren't enough people who are willing to pay that much for your product or service? Or, less troubling if you aren't interested in maximizing your returns; what if there are a lot of people who would pay more, perhaps substantially more? When you're in business, particularly when you have employees; you can't afford to leave money on the table. I'm not saying that there aren't ethical standards that should be adhered to, but an abhorrence to charge what people not under duress are willing to pay is not a recommended characteristic for anyone who wants to build or maintain a business.

Of course not every customer has the same ideal price. This is why most companies provide differentiated products at many different price points. Consider your favorite car maker. Odds are that they don't give their customers just one model and options package, right? I guarantee you that all those choices they are providing are designed primarily to do one thing, maximize the amount of money that people will spend. Lets take a look at how the Martin guitar company approaches this .

Company History

Martin has been making guitars in the US since 1834. Currently the company is led by Chris Martin, the sixth generation of the family to do so. Martin has an MBA from Boston University and provided much of the leadership during the companies late 80’s resurgence. Martin is the Rolls Royce of American style acoustic guitars. As such they are a premium brand and price accordingly. They have a rabid base of fans, many of whom have bought and owned multiple Martins at the same time. Martin has a highly segmented approach to pricing that allows them to sell to a wide variety of customers. The value Martin creates is one of quality, prestige and identification with great artists such as Eric Clapton, Joan Baez, Stephan Stills, Joni Mitchell, Willie Nelson and Roy Rogers.

Analysis Scope

Martin has a complex and highly segmented pricing structure. Their product line, which was at one time very simple now encompasses dozens of entry level, standard and limited edition offerings. They regularly bring new items to market, especially limited editions. I have chosen to focus my primary analysis on their line of Dreadnaught or “D” sized guitars. The Dreadnaught was invented by Martin in 1918 at the behest of the now long defunct Ditson music company. D sized Martins have been the most popular non classical acoustic guitar model in the US and much of the world since the mid 1930’s. This success and longevity has led to many imitators. While it was not always the case, good quality product in this and many other sizes is now available from Asian countries at very low prices. Most of Martin’s guitars are still made at their factory in Nazareth Pennsylvania, where Martin has been making guitars since the mid 19th century. A complete discussion of how they have managed to continue to make so much of their product in the US is outside the scope of this article but suffice it to say that pricing does figure into the answer.

In addition to limiting myself to D sized guitars I have also chosen to only look at instruments that are made primarily of wood, including laminates on the low end. I have also eliminated a few very high priced limited edition guitars. On the low end Martin has a couple of additional models that feature backs and sides made of composites. On the upper end they have very fancy guitars with MSRP’s of $50-$100k. Martin will also custom make almost anything you want so long as it conforms to one of their standard sizes. This allows them near infinite price customization opportunities.

Dreadnaught Guitars (Pricing)

Figure 1, Martin D sized guitar prices

Figure 1 shows the MSRP, MAP (Manufacturers Advertised Price) and “Low” retail prices for D size 6 string Martin guitars matching the criteria I listed above. The text at the bottom is the size and “style” of the guitar. A higher number generally denotes a fancier and thus more expensive guitar. The text above that shows the type of wood used for the backs and sides of these guitars. Wood type is another differentiator. Rosewood has traditionally been viewed as a premium wood in comparison to Mahogany, the other common wood used in guitar construction. There are other subtleties here but I don’t want to bore you. The MAP price is the lowest price that dealers are allowed to advertise a particular guitar at. They can and often do sell the guitars for less. This is where the “Low Retail” price comes in. Most dealers will sell any guitar in Martins line for 40% off the MSRP if asked. This fact is widely known and exploited by their most loyal customers.

The companies lowest priced product is the DM which retails for just under $1000 MAP. Low Retail on the DM is just over $700. The combination of MSRP/MAP & “Low Retail” price enables Martin to influence customized pricing at the dealer level. I've heard that Martin does not offer volume discounts to their dealers so everyone pays the same price whether they are Guitar Center or a small independent. Martin does however have sales quotas and other requirements of their dealers such as the purchase of less popular models that can make it difficult for smaller businesses to stay associated with the company. Some merchants will discount a bit more but only accept cash for such transactions. Actual dealer wholesale price is rumored to be about 50% of MSRP.

The primary differentiators between the least expensive and most expensive guitars in the above list are materials and ornamentation. There are some arguably esoteric structural differences which also figure into the equation for more sophisticated buyers. While the wide range of prices might normally lead to substitution of less expensive instruments for those higher in Martins line; the differences in materials, construction and ornamentation strongly differentiate the various models. In my experience people buy the most expensive guitar they can afford as it is either a once in a lifetime splurge or they are affluent enough that buying down in the line isn’t an attractive or necessary alternative.

I'll focus more on the customer in my next entry.