An Aside About Pricing

I’m not sure who to blame here or who started the whole campaign against MSRP, but I put Amazon somewhere near the top of the heap. Used to be that the price was the price, and if you didn’t like it, you could lump it. Or, wait for the inevitable holiday sale. But now, every day is a holiday on Amazon. The MSRP is right there in black and white, and right next to it in big bold red letters is the discount you’re going to get if you order from them, right then and there. And when those discounts are 33% or 40% or even more, it’s hard to consider your traditional brick and mortar stores as being even remotely viable as sources for product.

Today, I think consumers pretty much expect a discount of some kind. At least something. Because “no one pays retail anymore”, right?

Well, maybe — but this does have some implications for us audiophiles. Especially now with the firmly entrenched popularity AudiogoN, where many new and used products are routinely sold (or re-sold) at very significant discounts off of MSRP.

Given some of these, in many cases unreasonable, expectations on the part of us buyers, I thought I’d take a few lines and unravel some of the “mystery” around MSRP and why we should care.

The price we pay at the counter is a complicated little beast. Ultimately, the price is set by the guy behind the register of course, but before that checkout occurs, a lot of folks have their fingers all over that price tag. The first of those is the manufacturer. Of course.

The price that a manufacturer puts on their product is a bit fluid, but based on a rather interesting construction called MSRP.

Most manufacturer’s, at least those that use resellers, mark up the pricing of the unit significantly to set their Suggested Retail Pricing (that’s the SRP in MSRP). This is so that dealers can actually make some money selling that vendor’s products, which dealers tend to find helpful.

Manufacturers sell product to a reseller, aka a dealer, at a discount from MSRP, usually somewhere between 40-60% off, but this depends on the product and/or the industry. Anyway, whatever this discounted rate actually ends up being, it is called the wholesale price. It’s then up to the dealer to sell the product for whatever they can get for it, and the difference between the final sale price and wholesale (aka, their price), is their margin (less shipping, tax, marketing, overhead, &c). High margins are good, because the dealer can then discount the product as necessary to drive interest or to close deals and still make some money on the deal. I should note here that the dealer may or may not be able to actually advertise their discounting — many manufacturers write into their dealer agreements restrictions on pricing, allowable deviations from that pricing, as well as further restrictions on the advertising of that pricing (whatever it may be) which may prevent dealers from actually telling anyone that they’re willing or able to offer any sort of discount at all. Confusing, no? I know some manufacturers, Berkeley Audio Design for one, actually prohibits any dealer discounting at all. Others could care less, dumping product on their dealer networks with little oversight or concern. It’s a bit of a mixed bag, I suppose.

Getting back to the wholesale price, not every vendor is generous to their dealers — some vendors set wholesale at 60% of MSRP or even higher. I suppose their reasoning is that they’re either trying to better compete or perhaps they’re just mean. Anyway, the higher the wholesale price is, the less margin the average dealer is able to count on making, and therefore the less likely that the dealer is to discount or even carry the product. Makes sense — the dealer needs to make money on a transaction or else why should they bother?

For what it’s worth, my understanding is that the average wholesale price for speakers is 50% of MSRP, though this can go much lower in the custom-install part of the audio biz. For electronics, the wholesale price is usually a bit higher, so say about 60%. The wholesale price for wire is something like 5% (just kidding — but you do have to wonder where all that cost is going). Going a bit afield, I know that the average wholesale price of the typical book is 50%. That is, Amazon or Borders or Barnes & Noble all buy their McGraw-Hill books at 50% off of the cover price.

So, a manufacturer making some audio product can expect to pull in ~50% of MSRP, right? Well, no.

There’s the distributor, too. This person’s (or persons’) job is to sign up dealers & promote product. Many of them do all the importing or exporting to the various global markets for several vendors. Musical Surroundings and Sumiko are large-scale distributors and responsible for a large portfolio of brands. Like everyone else in the chain, their goal is to maintain a healthy margin for their efforts, too — and yes, like everyone else, they’d be happy to get 20%, which can come from the manufacturer’s “cut”, or be split between the manufacturer and the dealer, which may be why the wholesale price could be on the higher end, like 60-70%.

Ok, so with wholesale at some percentage of MSRP, the manufacturer still has priced in their own margin. The typical manufacturer likes to be at about a 20%+ (usually net, instead of gross) margin, with more being good and less being suboptimal (though pretty common and seems dependent on business model and/or competition). In computers, HP, for example, lives at about 15%. Dell at 4%. Cisco, by contrast, sits at about 22%. This number tells you quite a bit about the company’s business models and what they need to do to make money, no?

The actual cost of the unit (to the manufacturer) is generally less than 30% of the MSRP, and if you’re talking parts-costs, then that number is far lower. But the cost-to-the-vendor is never just parts costs, now is it? No, lots of other stuff must be calculated into that 30%, including: marketing & showcase events, rent, operations costs (including heating/cooling and power), salaries of supporting staff, shipping, design & development time and effort, testing gear, and actual unit construction. And this is all in addition to the costs of the raw components themselves — which, in the case of audio, is things like wiring, damping, drivers, and cabinets. In the case of books, McGraw-Hill, out of their 50%, they still need to pay the author some pittance, which usually amounts to about 10% (or possibly up to double that, maybe, if the author is a rock star). So, for every $30 hardcover you see on Amazon, the actual author would typically earn about $1.50. My understanding is that this is even rougher on music artists.

So here’s our audio pricing dollar break down:

1. Vendor: 30-40%
2. Distributor: 20-30%
3. Dealer: 30-50%

So, let’s talk about a particular speaker: the Pulsars from Joseph Audio. There’s a lot of speculation on the Internets that the price of these little gems is in no way tied to the actual parts cost. This is unfortunate, and given the discussion above, simply untrue. So, lets take a moment to think this through. Drivers on these monitors are about $500 per cabinet. The cabinet & finishing is probably about half that, maybe more. The crossover and development (and marketing, shipping, &c) are worth whatever they’re worth, but let’s start with the cabinet & drivers. At $750 in raw parts (retail, I’m sure it’s less when they buy in bulk) per cabinet, the MSRP of the finished product should be north of $2500 per cabinet. Or $5000 per pair. Is it all that unreasonable to think that into each cabinet that there’s an additional $275 worth of “other stuff”, which could take the per cabinet price to $1050, or $2100 for a pair? If so, that’d push the MSRP of the Pulsars to $7000 — remember, dealer cost is 30% of MSRP, which is what the actual MSRP is.

Yes, sure, any vendor ought to be buying parts in bulk to drive costs down. It’s reasonable to think that Joseph Audio’s cost on components are going to be lower than what mine would be should I choose to DIY my own pair. But if you were to ask me “are the Pulsar’s overpriced?”, I’d have to say, “no, not so much” — and certainly not for what you’re getting for that money. Could the price be lower? Sure. But if we want to have all involved continuing being able to provide all this nifty gear for our listening pleasure, we’re going to have to allow them to make a living. That’s just how it is. Don’t like it? Well, AudiogoN is your friend.

The exception to all this is, of course, The Ultra High End. You thought $7k speakers were high end? Nah, not so much. Things can get a bit crazy as we climb the ladder. Consider Vandersteen’s new Model 7 at $45,000. Or Nola’s Baby Grand Reference at $55,000. Or Wilson’s Maxx 3 at $68,000. All three are, to all reports, amazing loud speakers. But. The pricing on these speakers is entirely a function of the perceived tolerance of their target consumer, not actual cost. These prices are total fiction. Admittedly, the MSRP is certainly not what consumers will actually pay for them — the margins on speakers like this are huge, so a buyer can and should expect a rather deep price cut without even having to ask for it. But still! Even at 30% off, there’s nothing in a Maxx 3 that justifies a price tag on par with a loaded 5 Series BMW. It’s just a box with wires and drivers for crying out loud.

Anyway, that’s a rough sketch of how and why pricing in audio is what it is. Sort of. I haven’t really talked about vendor-direct pricing, because it’s a bit of a novelty and terrifically hard to do well. But here’s the skinny: by forgoing a dealer network, a vendor won’t have to give anyone else a cut of the potential profits — which means that the cost to the consumer can be lower. And in many cases, much lower. Which is all good, right?

Maybe? But the manufacturer will also lose all of those (paid) tongues wagging new customers in their direction. There will be no distributor out there flogging the dealers to position that product, or encourage them to showcase products in ways that produce sales. Or fund marketing efforts. Or staff shows. All of that falls back on the vendor. Which is expensive. And if you’re not terribly good at it, well ….

Let’s take a look at the flip side. Yes, you as a customer will be paying your dealer a cut every time you purchase from them. That cut might have been saved had you been able to buy direct, yes. The dealers are very well aware of that. And no, they’re not just hoping you fail to notice their relationship to and dependence on the final price. They, as a general rule, will do one of two things, facing this reality.

“Low touch”. They will quote you some discounted price right off the top. If they’re getting product at 40 points off, they might give you 30 of them as a flat, standard discount. 30% off! Woo hoo! But these dealers can only survive on volume — the more they do, the better. So here is the flip side — the only way this works for them is if they do even less for you. Customer service? Yeah. Not so much. You want to hear the gear? Or try it out with a variety of complementary components? Take it home to “try before you buy”? Sorry. No dice. There’s simply no margin left over from the individual transactions to actually cover those costs, so every time it happens, the company would take a loss. Let’s just say that the volume-dealer that indulges in these niceties is one that will quickly find themselves in another line of business. BTW, this would be your typical “internet vendor”.

The other dealers survive by adding value. These are the folks that will let you come hang out, fiddle and play, test and ask all your annoying questions. They’re the ones that will show you what works well with what and help you find a way to get to your aspirational destination in the baby steps that your budget requires. They’ll set up your turntable, dial in your speakers, wire your home theater, build, install and configure your computer audio server. If you find a dealer like this, you’re going to need to expect that the discounts will be a bit thinner — their margin is eaten up by the time they have to spend catering to slobs like us. These value-added dealers live and die by service, so if you want or need that, this is where you go. Sadly, these are also the folks that we consumers regularly tend to abuse. Have you ever done the following: you visit your local dealer to listen to the latest and greatest from some vendor and the dealer invests time and effort in supporting your research, which helps you to decide to buy, but then you take your business to a volume-dealer for the extra 5% off that they’re offering. I’ve done it. I know you have too. It’s a rather shitty thing to do and every dealer I know can fill a phone book with examples of how they’ve been burned by this. Makes the whole “grumpy dealer” thing a bit easier to understand, even if it is still annoying and inexcusable — but now you know why that dealer you just met is rolling his eyes at you when you walk up and brazenly ask for 20% off as it it’s your due and then say, “let me think about it”.

Look, I — like everyone else — want to pay less for my audio addiction. And yes, there are lots of deep discounts out there for the taking. But I wanted to lay it out there why things cost what they do. Who gets paid, when and why. So now we can all stop whining about how everything is so expensive and how “They” must be out to “Get Us”. The “They” in this case is “us” — we did this to ourselves.

Being paranoid doesn’t mean they aren’t out to get you. But in the Mom & Pop Shop world of audiophile manufacturing, everyone is just trying to get paid enough so they can give up their day jobs. You don’t like it? Well, did I mention AudiogoN?