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The price of a guitar

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Mr. Ovation
Posted 2015-04-19 4:48 PM (#509016)
Subject: The price of a guitar


Joined:
December 2001
Posts: 7032

Location: The Great Pacific Northwest
I've seen references in other threads about "how could they sell a guitar so cheap" and I wanted to toss in some insight for those that don't understand the difference between retail and wholesale as it applies in those cases.

This is not an economics lesson, but something to think about regarding how can a store sell a $1500 guitar for $600 and make any money. Simply put, because they sold a whole bunch of other things that made LOTS of money but those things aren't as sexy as a guitar to bring in customers, so you sell a really sexy guitar for less than you paid for it, and all you have to do is sell one other rarely sold, high markup item, and you've broken even and everything else is gravy.

This is much easier to do if you are a big box store but smaller numbers are easy on the brain. Imagine you own a store and you have three $10 items and two of them cost you only $2 each to buy, and they're consumable items that people buy every day and the other item costs you $8 and people generally buy one of them but at $10 you really have to sell it.

So you plan to get 5 each of the consumables and one of the other items. Your cost = $30 and your potential profit $82.00

To get people to come in, you price the low margin item at $5.00, a $3 LOSS for you. You also place your next order of high margin items, so you can get a $25 cent discount on them and price the ones you have at .25 over what they normally sell for so you are making an additional .50 cents on each. The low margin items sells immediately because it's half price, and you can replace it with another at that same and price it again at half price, but let's check on things before you order more..... Oh yeah, and the people that came in were so excited to see that other item at 1/2 price, they didn't even notice paying a few pennies more for their consumable item.

The high margin items garnered $85 due to your discount on the backend and bumping the price just a little, and your "under cut" low margin sexy item cost you $3.00.... but brought in a huge amount of customers and buzz to sell other items and you end up at the same profit of $82. Yeah, you devalued the sexy item, but there ya go.

That'a a pretty basic example using small numbers, and same priced items. Spread that across a whole store, in any industry really, and it works.

My point of this is that the "Manufacturer" (think Kaman or Fender) didn't sell that low-margin item at 1/2 price. They got FULL price for it. The store sold it for 1/2 price, and they too made a profit off of it because it generated customers and other sales.

In a real world example, it's VERY common to be able to buy a Motorcycle for less than the Dealer paid for it. Why, because if it's a highend bike like a BMW, Victory, Harley, Indian etc.. you'll likely get a new exhaust, upgrade the air box, and a few other items and the margin on those items is so high, it's to the dealers advantage to move the bike UNDER their cost cause if they don't move the bike, they aren't going to move the accessories for the bike either. Everybody wins.. Customer is happy as they got a bike AND all the accessories for what just the bike would normally cost, the dealer sold stuff at a good profit, the manufacturer moved another unit.














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arumako
Posted 2015-04-19 8:55 PM (#509019 - in reply to #509016)
Subject: Re: The price of a guitar



Joined:
October 2012
Posts: 846

Location: Yokohama, Japan
Thanks for providing details of the trade Mr. Ovation. So, although Ovation sold their guitars and were profitable, the discounts offered at the retail level may have forced the perceived value of the USA made Ovations way down? If that happens, it is nearly impossible to bring the prices back up unless there are significant improvements to the products themselves or there are some serious supply/demand issues (although I don't think that happens in the retail guitar industry that often). In the industries I've been involved in, usually there are agreements between the manufacturers, distributors and retailers to ensure there is a "price flooring" so the perceived value of the product doesn't degenerate in the market place. It sort of protects the brand value just in case the retailers get too ambitious with their discount policies. Price floorings are hard to enforce, but when done properly they work pretty well. I wonder if that is an uncommon practice in the guitar industry? Of course, if you maintain a price flooring; and customers don't buy your product anymore, that's a whole different issue isn't it?

I guess living in Japan, the perceived value of an USA O is much higher than in the States... Things are way more sophisticated than the Mom and Pop Guitar Store of yesteryear. I have no idea how DW's mfg., distributing and retail pricing structures are, but they seem to know how to handle high-end products like Ovation. It'll be interesting to see what kind of marketing savvy they use to get Ovations reputation back to where it should be.

Edited by arumako 2015-04-19 8:58 PM
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Mr. Ovation
Posted 2015-04-19 11:22 PM (#509020 - in reply to #509019)
Subject: Re: The price of a guitar


Joined:
December 2001
Posts: 7032

Location: The Great Pacific Northwest
arumako - 2015-04-19 6:55 PM
the discounts offered at the retail level may have forced the perceived value of the USA made Ovations way down? ........... In the industries I've been involved in, usually there are agreements between the manufacturers, distributors and retailers to ensure there is a "price flooring" so the perceived value of the product doesn't degenerate in the market place.......... Price floorings are hard to enforce


Yep, Yep and Bingo. Actual dealers may chime in, but to my knowledge there were pretty strict rules, but as you noted... if they aren't enforced... what's the point. GC was a huge offender to many manufacturers. They moved the most product by far.

I guess if you have what is recognized and perceived as a high end product that's in demand, the retailer has no reason to "bait" people into their store with that product.
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