New product priced far too low to gain credibility?

A insight into how many makers define the retail price of a product might be of interest. Generally, the manufacturing cost per item (sometimes with the R&D cost amortized, or not as the case maybe) is multiplied by say 10, 15 or 21 - or any other number that springs to mind, albeit with one eye open to see where competitor products are sitting in the price band. Thus an audiophile product that retails for say £900 ex VAT might have a base manufacturing cost perhaps as little as £45.

On the face of it, without knowing the facts, you might feel this is greedy. But do stop to consider that within that multiplier is the need for retained profit at the maker, transport to the UK, transport to the retailer, the dealer’s margin, marketing, promotion and so on.

Anyway, I have come across a supplier (not one I currently use) who is thinking of a radical approach in that their multiplier may be as low as x (7). They argue, with some justification I think, that they will sell far more of this product if it has an RRP of (maker’s true cost) x (7) rather than maker’s true cost) x (21).

As a retailer, my own margin as indeed the maker’s would be drastically reduced. But both they and I are confident that we can sell four times as many @ x (7) than @ x (21). It’s an interesting opportunity and being a commercial gambler by inclination, I may well agree to this. But therein lies a dilemma.

This product (confidential currently) would in the x (21) situation probably sell for say £3,000 inc VAT and at x (7) around £1,000 inc VAT. In a nutshell, would anyone believe that at such a low (comparatively speaking) cost, the £1,000 unit had credibility? I wonder just how robust the 'snob' value of silly pricing still remains a buying motivator. I do believe that Richer Sounds with the Cambridge brand have pioneered this approach in the hi-fi arena, but I have yet to see it in the high-end arena.

Regards

HP

It may simply be reality taking a bite. We supply one off manufactured products to customer specs, and I would happily settle for manufacturing cost x 7, rather than the more normal x 1.5 - 2.3

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Originally Posted by Colin

It may simply be reality taking a bite. We supply one off manufactured products to customer specs, and I would happily settle for manufacturing cost x 7, rather than the more normal x 1.5 - 2.3

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Yes, I can easily imagine you would. I hope your buyers appreciate your effort. I'm assuming here that you sell direct. Is that correct?

Yes, into engineering companies for use on their workshops.

All this company needs to do is be transparent about their pricing structure and perceived VFM will take over from pure snob value. In these troubled times this strategy is more likely to work than during times of greater prosperity.

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Originally Posted by Steve Toy

In these troubled times this strategy is more likely to work than during times of greater prosperity.

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Both logical and rational. And yet ......... I'm not so sure. Buying decisions are not always rational nor logical and I believe that the 'snob' factor is alive and thriving in many environments. It may be in decline, but not terminally so.

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Originally Posted by Howard Popeck (Stereonow)

Both logical and rational. And yet ......... I'm not so sure. Buying decisions are not always rational nor logical and I believe that the 'snob' factor is alive and thriving in many environments. It may be in decline, but not terminally so.

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I suspect the snob factor is significant. One of the greatest costs is often the distributor margin, quite often this is around 40% for items such as cartridges. Of course distributors have costs to recover out of this.

Howard,
in your opinion would you say/guess that the majority of hifi 'snobs' could be classed as recession proof ?
I don't think we've seen anywhere near the worst of the current financial situation and i'd be inclined to think that any company who has the balls and transparency to reduce their prices must stand a better chance of meeting more custom.
new punters will get a bite of the apple, brand loyalists might remain and the snobs can go and spend their money elsewhere.
i have no idea how lively the high end market is - could you please give me some idea. i always imagine it's footballers who send their P.A to go get them a nice stereo :)

ps
your posts are always a good, thought provoking read

I can think of a few very "midfi" (based on price) product lines that perform head to head with the high end, and they are universal dismissed on the rare occasion that they are noticed at all by the high-end community. I think your friends may, indeed sell a lot more product, but not to the high-end audiophile community. Do let us know who these audio philanthropists are as soon as you're able, though. I'm always on the hunt for the kit that hits way above its weight.

Tim

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Originally Posted by muffinman

Howard,
in your opinion would you say/guess that the majority of hifi 'snobs' could be classed as recession proof ?

ps
your posts are always a good, thought provoking read

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Strangely, since the early days of Subjective Audio in 1976 I have not seen any credible correlation between the 'snobs' and the recession proof. I can cite many examples of the reverse, some of which are very sad. Thank you for the PS. i aim to please.