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.

Loss Of Signal

The IPhone 4 launch has been a spectacular success for Apple in most ways. The primary exception being the well publicized antenna issues. Superficially it's surprising that the product made it out the door with a defect this significant. There has been speculation that Apples legendary secrecy may have played an important role in this.

 
The Case Against Secrecy


Gizmodo, a high tech web based magazine that has been in Apples time out corner for several years now for reporting on Steve Jobs health issues prior to public disclosure was the first to publish pictures and information on Apple's latest generation phone.  One of the pieces they published focused on how Apple went about disguising the prototype that Gizmodo ended up with.  That disguise, a plastic case that made the prototype resemble the previous generation 3GS model may have played a significant role in Apple missing the "grip of death" antenna issue that is currently getting them so much bad press.  Field testing is a standard part of product development for just this reason, but Apples's obsession with secrecy meant that they had to disguise the phone when they did send it out into the field with trusted individuals such as the software engineer who lost his prototype at a bar.  That disguise likely obscured the antenna issues since the case would have acted as an insulator.


Another less publicized/documented issue has been the tendency of the back and front glass to shatter when the phone is dropped. Again, the disguise used on the prototypes would have made it more difficult for Apple to discover this since it would have provided additional protection.


Design Versus Engineering


Of course Apple could have tested for both these issues without taking the phone out into public and if they weren't doing so before on their IPhone prototypes I'll bet they are now.  The point of consumer testing though is to discover things you haven't thought of before the product makes it to market.  It's really kind of surprising that Apple apparently did such a poor job here.


Apple is a company with an excellent reputation for design.  When Steve Jobs has been in charge how a product looks and feels is at least as important as how it operates. It would be very hard to claim that Apple hasn't prospered greatly using this approach.


Betting against Apple is always risky (The wide spread panning of the IPad prior to launch being the latest example) but it seems likely that Apple is going to take a hit over the IPhone 4. Several independent sources have reported test results that clearly show the problem.   Of course Apple is now saying that its a software glitch and I wouldn't discount that being part of the problem but it is hard to see how exposing the antenna's (one for WiFi, one for 3G, EDGE, etc) in a way that allows the user to "short" the two antennas simply by holding the phone normally in their left hand was anything other than a design decision but I'm not a hardware engineer.


I'd also be very surprised if the engineers had anything to do with putting in a glass back panel.  It was clearly done for looks and doesn't seem very practical.


What Does It Mean?


Apple is an amazingly resilient company; one way or another they'll weather this storm and a year from now the only reason anyone will remember is that we'll be comparing the IPhone 5 launch to what we just went through with the IPhone 4.


It's going to be interesting to see if Apple relaxes their secrecy a bit in the coming months.  There were two leaks of IPhone 4 prototypes well prior to the official announcement and clearly they didn't hurt sales.  Combine this with the loss of opportunity to truly test new products in "live" situations and it is at least worth considering.


At the end of the day the buck at Apple stops at Steve Jobs.   If he's considering loosening up a bit on the secrecy front he certainly hasn't given any indication.


Personally I'd want a case in any...  case.  I'm a bit of a klutz and even with the typical phone carrier discount a modern smart phone is not cheap.  The case mitigates both the antenna issue and the fragile glass.


Image: Salvatore Vuono / FreeDigitalPhotos.net

Sample Genius

Anyone who has read much about Sam Walton, the founder of Wal Mart will know that he loved merchandising.     What is merchandising though?  BusinessDictionary.Com has this to say in regards to Merchandising.

Activities aimed at quick retail sale of goods using bundling, display techniques, free samples, on-the-spot demonstration, pricing, shelf talkers, special offers, and other point-of-sale methods. According to American Marketing Association, merchandising encompasses "planning involved in marketing the right merchandise or service at the right place, at the right time, in the right quantities, and at the right price."

I summarize this in my mind as "enticing people to buy (lots of) your stuff".  There are of course many different ways to do this.  For instance, putting your product or service on sale, advertising and setting up a display if you are a retailer.  A variation of the display idea that I really like is the demo/sample tables that at places like Costco & Trader Joe's.

Costco

One of the less talked about motivations to buy a Costco membership is all the free samples you can partake of while shopping.  I really like the variety and the fact that they seem to do a good job of training the people behind the table.  Not only do they generally manage to offer up the samples without seeming pushy, they also know the products and are able to answer questions.  In some or perhaps all cases the people doing this job probably work for the company that makes the products being offered.

On several occasions my wife and I have purchased products after trying a sample.  The fruit bars at this display were winners for us and we brought a box home. Will this be a long term thing?  It wouldn't be the first time we've become repeat purchasers of a product we sampled at Costco.

Trader Joe's 

I'm a big fan of Trader Joe's. They have great prices and all sorts of really cool stuff that is either difficult or impossible to find anywhere else.  Our local store has a table at the back where they demo products. Recently they did something I hadn't seen before.  They demo'd a salad that used four different products that they had for sale.  The picture above shows the "recipe" and the items themselves were displayed as well. We tried the sample, liked it and ended up purchasing all of the items to make the salad for the Friday night potluck my wife and I attend regularly.  It turned out great and received several positive comments.  What more can you ask for?

Final Thoughts
Everybody likes free stuff.  Food and drink items are especially enticing as we get an opportunity to try before we buy and impulse purchases are a big part of the grocery shopping experience.  The concept of combining multiple products into a composite item struck me as very clever.  Rather than buying just one item we bought several.  As this was a salad there was a chance we'd get creative and substitute or purchase additional items. I suspect Sam Walton would have approved of this approach

Trader Joe's is famous for their store brands, so this is much easier for them to pull off than most retailers since they don't have to deal with potential fallout from external vendors over their choices or pairings.

The Good Manager

This is a topic I've given a lot of thought to.  What makes a good manager?  I have some very specific criteria for judging.  These criteria can basically be broken down into three categories; Vision, Leadership & Operations.  It is not uncommon to find people in positions of authority who are exceptional in one or two of these categories.  It is very rare to find a person who excels in all three.  Sadly it is very common to find people who show little ability in any of the three in positions of authority, particularly at the lower levels of a company.


Operations

To me, the most fundamental of the three is Operations.  Has an individual mastered the skills they need to manage the day to day activities of the portion of the company that they are responsible for?  On a superficial level these skills will vary widely depending on the industry and level of authority but the underlying aptitudes needed to have success in this area are pretty constant.  Do you have a good understanding of what your part of the company does?  Do you know how it fits in with the overall business of the company?  Do you understand the various processes that drive value creation within your area?  Are you good at anticipating potential problems and solving the crises of the day?  If the answer to all of these questions is yes, than you are probably operationally sound.

Leadership.

I break this down into two sub components.  Charisma & Procedural.

Do people naturally like you?  Are you able to walk into a room and instantly be the center of attention?  Does your winning smile let you get away with things that most people would get in trouble for?  If the answer to these questions is yes, congratulations, you have the charisma to be a good manager.  This is probably the most important factor in the success one will have.  A lot of people have gone a long ways based purely on their charm.  That being said, you are a lousy manager if this is all you have going for you and you will eventually do a lot of harm if you haven't already.

Procedural leadership is probably the most underrated and least visible attribute of a good manager, and below the upper levels it is by far the most important.   Do you keep in touch with the people who work for you on a regular basis?  Do you run interference for them when they run into trouble?  Do you discipline them appropriately when they need it and provide praise when they have performed above and beyond what is normal?  Do you mentor them?  When there is a conflict between two or more of the people who report to you do you sit down, listen to all sides and make a judgement in a timely manner?  When you do make that judgement do you make sure that the parties involved adhere to what you have decided?  Do you provide clear guidance and then get out of the way?  If you can answer some or all of these questions in the affirmative than you're probably a pretty good manager.  If this is your primary area of strength you are likely also very undervalued by your company.

Vision

Finally we come to Vision.  Vision is potentially useful at lower levels of companies but becomes increasingly vital as you move up the corporate ladder.  We live in a constantly changing world.  Technological advances and competition from other companies means that any  business that isn't thinking one or two steps ahead has a good chance of waking up one morning to the realization that they are in serious trouble.  Hollywood Video is gone and Blockbuster shows signs of being very close behind them.  Both companies made a lot of money at their peaks and have/had been around for less than thirty years.  There is an important lesson to be learned here.  Do you embrace change?  Are you constantly trying to figure out ways to make things better/faster/cheaper/more relevant?  If you are in an established company do many of your co workers dislike you and work actively to subvert everything that you attempt?  If the answer to some or all of these questions is yes than odds are you are strong in Vision.  As a general rule people hate change.  Change threatens the established order and most people feel more comfortable in an environment they are familiar with.  They will resist change as long as they can, even when it is clear that the environment around them is changing such that their current situation is increasingly unsustainable.

Final Thoughts

All to often people end up in management because they have the right degree from the right school, or because the only way to get an all star individual contributor proper monetary compensation is to make them a manager.  There are many other equally poor reasons for making somebody a manager.  Sometimes these choices even work out.  Frequently however such individuals have a negative impact on employee morale and productivity.

Based on my professional experience this is an area that most companies haven't given a lot of thought to.  Having a well defined and articulated set of expected competencies for management should be on the list of things to do for any business that wants to give itself the best possible chance of being around for the long run.

The image at the top of this post came from http://drivenleaders.com/tag/leader-vs-manager/.

Is IT a Cost Center?

First of all I'll issue a disclaimer.  I've worked the majority of my career in the IT field in many different capacities including management.  On the one hand this probably makes me a bit biased in answering this question.  On the other hand it also makes me very well informed.   If you're inclined to dismiss me because of my technical background then also keep in mind I am an MBA.  Now that I've ruined my credibility with the technical crowd as well I'll move on to answering the question posed in the title of this post.


I'm going to eliminate the suspense and answer right now.  No.  


OK, now that I have that out of the way I'm going to explain my reasoning.   Recently I've been on a certification binge.  In the past I wasn't a fan of certifications, primarily because most of my early encounters with certified individuals in various technologies were less than satisfying.  More often than not it turned out that while they were good at taking tests, they were lousy at actually doing productive work.  Since that time though most certifications have improved significantly in quality and the value is much more obvious to me.  For this reason I'm playing catchup, working my way through the lower level technical IT certifications so I can get to the more advanced ones.  To that end I've just started studying for ITIL foundations.  I'm currently reading "Foundations of IT Service Management based on ITIL V3" and came across a great quote.


"IT's role is no longer just supporting, but has become the baseline for the creation of business value."

"Creation of Business Value", sounds great doesn't it?  Substitute "Shareholder" for "Business" and we have the definition of the purpose of any business. 

IT is a cost center in the same way that Product development, Sales and Marketing are cost centers.  All are integral to the success of a business.  You clearly want to keep your costs under control but you don't want to make decisions about how much you spend on any of these functions based purely on lowering your costs.

Furthermore if you look at where much of economic growth has come in the last twenty years you'll find it is centered in the area of IT.  Google, Yahoo, Amazon, YouTube, Facebook, Twitter, etc.  Information Technology is the engine of commerce and business.  In developed nations the trend is towards almost everyone being on line all the time.  In emerging nations this is still somewhat true.  More importantly in the case of emerging nations is the opportunity that Information Technology is providing for these countries to take a different path to economic prosperity than the one that developed nations took.  Given the scarcity of resources and the environmental cost associated with the traditional path to economic development this is a very good thing.

Companies that view IT as a cost center are taking a very myopic approach.  Any budgeting decisions made in regards to a companies Information Technology component must take into account the real place IT has in todays world as an equal player with the other more traditional business components. Companies that do not take this approach risk cash flow hypoxia.

Traveling On The Cheap

I find I'm getting more frugal as I get older.  One of the great things about the Internet, at least from the consumers perspective is that it provides many opportunities to save money if you know where to look and can be a little flexible.

I'm on a short vacation right now.  I didn't do a lot of planning in advance and what little I did do has been mostly blown out of the water by changing circumstances.  Since I knew this could happen based on prior experience I didn't bother to book a hotel for tonight.  This is good, as my planned one night stay turned into two midway through today.  Since my only real requirement was to be somewhere in the Portland Oregon area I was able to go onto Travelocity.Com and get a room at a three star hotel for $55 a night.  I have a king sized bed, free breakfast, free Internet and am less than a hundred yards from a very good restaurant.   The standard Internet rate for this place is twice that.  Why was I able to get such a great price?   Because I was willing to commit to purchasing two nights before I knew where I'd be staying. Why would a business be willing to make this kind of deal?  Well, in large part it has to do with the kind of business a hotel is.

First of all hotels have very high fixed costs and relatively low variable costs.  Put another way, the costs for the company running a hotel are only slightly higher  if the hotel is full than they are if it is empty.  Additional guests are going to use more power & water but those costs are minimal when compared to staff and facility costs.  The second thing to keep in mind is that the value of a hotel room drops to zero at midnight.  If nobody has rented it the hotel will see zero revenue for that room on that day.

When you combine these two facts you get an intriguing possibility.  What if you were a hotel with a bunch of empty rooms?  If you could get even a buck or two for each of those rooms you would be ahead of the game revenue wise since your costs would hardly change at all with each additional occupant.  And if you have a restaurant or other for fee services/facilities you just might get some additional revenues that way as well.  The problem of course is that you don't want everyone waiting until the last minute to book at 50% or less of your normal rate.  Yes, your costs are fixed but you have your reputation to consider and your shareholders interests to protect; and thus it is a balancing act.

So, on the one hand you want to fill those empty rooms, even if it is at a rate significantly lower than you normally charge.  On the other you don't want to cheapen your brand and encourage people to game the system.  Travelocity isn't the first to offer a service that meets the needs of everyone in this scenario reasonably well.  At Travelocity it is called the "Top Secret Hotel (TM)".  Basically you tell them generally where you want to stay, how nice a hotel you want to stay at and they give you a list of choices.  These choices do not have names, just some very general details as to where they are and how nice an experience you are likely to expect.   You then pick your choice, pay your bill and Travelocity tells you where you are going to be staying.  This works for the hotel as they don't advertise that lower rate, you only get to see it after you have paid.  It works for the consumer because they get the lowest possible price.

Hotel's aren't the only travel related business to do this of course.  Most businesses in this sector have the same general dynamic.  Empty plane seats aren't bringing in any revenue either.  You can also find entire vacation packages at steep discounts if you're willing to be flexible.

Of course if you wait until the last minute and have very specific requirements you are going to pay a premium.  That's just the way these things work.  So it pays to either be early, or be flexible.

No Chair For You!

Recently my wife and I stopped off at one of the national chain bookstores while on our way back from running some errands in San Francisco. I'd brought my Netbook along and was going to do some web browsing since I didn't really need anything. The bookstore had a cafe but we'd just had lunch and I didn't want anything. I noticed signs by the cafe tables that said they were for customers of the cafe only and that there were chairs throughout the store. This seemed like a reasonable way of doing things so I set out to find some place to sit.

The bookstore had two floors and we'd come in on the second. I found several places on both floors where there was room for the comfortable chairs generally found in these kinds of places but there wasn't a single one anywhere in the store. I did locate a handful of hard wooden chairs though, all of which were occupied. I eventually ended up finding a place out of the way where I could sit on the floor and do my web browsing. On the plus side I was able to hook up to a free wireless access point from an adjacent business.

The store in question was in a nice mall, but was located close to some fairly run down neighborhoods. I'm going to go out on a limb and guess that the store manager(s) felt that they needed to discourage people from loitering to avoid potential problems. I'd only been in the store a couple of times before and hadn't been looking for a chair so I don't know how long this had been going on.

My observations are as follows...

1. At least fill the empty places that should have seating with merchandise so it is less obvious that you don't want people hanging around
2. If you aren't going to provide comfortable chairs and you don't have extra merchandise than at least provide enough uncomfortable chairs. The store wasn't even all that busy at the time
3. Being located near a business with free wireless Internet takes some of the pain out of sitting on a hard concrete floor with a very thin layer of carpeting laid on top