Martin Guitars & The Price We Pay (Part 2)

Smart companies understand their customer. Introducing new products is a very expensive and risky proposition. The more a company knows about it's customers the better the chances are of presenting those customers with something they want and are willing to pay an attractive price for. This is really an area where marketing departments earn their money and potentially annoy people. The likely hood of annoyance often has a lot to do with the product a company is selling. Tobacco companies have been reviled and heavily regulated due to their past efforts in this area for instance. Sometimes though people mistake advertising for marketing. Advertising is a tool of marketing but it isn't marketing any more than a hammer is a carpenter.

When marketing is done poorly though it can lead to all sorts of unpleasant outcomes. Microsoft's recent debacle with the kin cellphone is a pretty good example.

The Martin guitar company on the other hand seems to do a very good job of identifying and understanding their customer. Given the breadth of their product line it isn't surprising that there is some grumbling now and then but few seem willing to abandon ship all together, and by providing so many choice Martin has an option for almost any buyer.

Pricing & The Customer

To be clear, my analysis of Martin's customers is based primarily on observation and has no empirical basis. I'm sure Martin's marketing department has such information but I am not privy to it.

The customer varies somewhat depending on what part of the price spectrum we focus on. In general the target audience is primarily middle aged and older men who played guitars in their youth and were forced to put their passion on the back burner by the demands of career and family. They identify Martin guitars with many of their favorite singers, songwriters and guitar players and are aware of the legendary quality of Martin instruments. Women do buy Martin guitars as well but generally opt for smaller sizes such as 000’s rather than the D sized guitars discussed above.

While they have utility Martin guitars are clearly luxury goods. Even their lowest end instruments are priced at a significant premium over instruments of reasonable quality and arguably superior materials (solid wood rather than laminates) that are currently being made in various Asian countries and elsewhere in the developing world. As such price sensitivity tends to be low, but present.

The following table shows that Martin has maintained an amazingly consistent price point for their D-28 over the past 29 years. This indicates to me that at some point in the fairly distant past they developed a very clear understanding of the value of this product to their customers. Martin went through some very hard times in the 1980’s and still maintained that consistent MSRP. This is not a company that makes big changes one way or the other. They are in it for the long haul and manage their pricing accordingly.

D-28 MSRP, Real MSRP & Number Produced 1980-2009[i]

Year	MSRP	Inflation Factor	Real MSRP (2008 Dollars)	Produced
12/27/1980	$1,150	0.383	$3,003	2316
12/27/1981	$1,380	0.422	$3,270	1484
12/27/1982	$1,380	0.448	$3,080	851
12/27/1983	$1,380	0.463	$2,981	1250
12/26/1984	$1,430	0.483	$2,961	743
12/26/1985	$1,490	0.500	$2,980	916
12/26/1986	$1,490	0.509	$2,927	810
12/26/1987	$1,568	0.528	$2,970	825
12/25/1988	$1,648	0.549	$3,002	990
12/25/1989	$1,714	0.576	$2,976	952
12/25/1990	$1,790	0.607	$2,949	906
12/25/1991	$1,880	0.633	$2,970	1001
12/24/1992	$1,960	0.652	$3,006	1213
12/24/1993	$2,060	0.671	$3,070	1275
12/24/1994	$2,190	0.688	$3,183	1639
12/24/1995	$2,330	0.708	$3,291	1856
12/23/1996	$2,330	0.729	$3,196	1571
12/23/1997	$2,330	0.745	$3,128	1962
12/23/1998	$2,330	0.757	$3,078	1976
12/23/1999	$2,330	0.774	$3,010	2165
12/22/2000	$2,399	0.800	$2,999	1821
12/22/2001	$2,399	0.823	$2,915	2788
12/22/2002	$2,469	0.836	$2,953	3006
12/22/2003	$2,469	0.855	$2,888	2416
12/21/2004	$2,599	0.877	$2,964	2959
12/21/2005	$2,749	0.907	$3,031	3207
12/21/2006	$2,849	0.936	$3,044	N/A
12/21/2007	$2,849	0.963	$2,958	N/A
12/20/2008	$2,849	1.000	$2,849	N/A
6/20/2009	$2,999	0.99	$3,020	N/A

Besides income the biggest area of differentiation for Martin customers is in how conservative they are in regards to deviations from traditional building methods. Vintage guitars from Martins golden era (1932-1943) can go for hundreds of thousands of dollars. The closer Martin comes to reproducing those instruments the more the tradition minded customers are willing to pay. For instance the D-18 Authentic, modeled after the 1937 version of Martins flagship Mahogany guitar has an MSRP of $8,599 versus $2,599 for the modern version.[ii] Here is a link to a YouTube video of Chris Martin IV discussing the D-18 Authentic and the philosophy behind the pricing. The pricing is discussed around the 2:30 mark through the end.

http://www.youtube.com/watch?v=K7UtKDmtDu0&NR=1

Their highly segmented and differentiated approach and relative lack of elasticity in their customer price sensitivity allows Martin to charge a substantial premium over their competition. We’ll see support for this assertion in the next part of this article.


[i] Inflation Factors from http://oregonstate.edu/cla/polisci/faculty-research/sahr/sahr.htm
[ii] This and other Martin Pricing info come from http://www.martinguitar.com/catalog/PDF/MartinPriceList.pdf

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