Full or Discount price - thoughts from a manufacturer

[Guitarsan]

Originally Posted by Howard Klepper

There are many ways for a market to fail to reach an efficient result, but buyers seeking lower prices from sellers is not one of them. On the contrary, that is necessary for the market to be efficient. What the OP is describing--consumers seek the lowest price from retailers, and retailers seek the lowest price from manufacturers, and manufacturers seek to reduce their costs--is just the way markets are supposed to work.

But even efficient markets do not maximize people's happiness. Competing is hard work, and takes time away from things like guitar playing.

And.... that's a wrap on this thread! Well said Howard.

[drtedtan]

Well stated, Howard.

To Amy, efficient markets don't guarantee sellers the right to a profit or even the right to continue their existence as sellers. If an item or service can be replaced with a better or less expensive option, it will be in an efficient market (think horse drawn carriages and buggy whips being replaced by cars, local manufacturing being outsourced to areas with lower costs of living (and, of course, the resulting lower wages), etc.).

[tadol]

The other part of this that doesn't seem to be getting mentioned is that wholesale is not a fixed price - many large retailers are able to get lower costs, discounts or rebates on advertising and promotions, and other retail services to help promote the product, brand, and the retailer. So while a small music store may get to buy 2 or 3 guitars at a price of 500, and are assured that the manufacturer is enforcing a MAP of $750 vs list of $1000 (so the small shop can appear competitive and make a small profit) the large shops and online dealers may purchase 20 or 30 units and get an additional 10-20% off the wholesale cost, advertising spiffs of hundreds of dollars more, T-shirts and other swag in volume, and even the ability to return unsold instruments (in any condition) for full credit.

So the value of MAP is to spin it that manufacturers want to help small retailers survive in an environment that is tilted wildly against them - even though most manufacturers are far too beholden to the massive online retailers to actually enforce any of it -

[devellis]

Originally Posted by tadol

The other part of this that doesn't seem to be getting mentioned is that wholesale is not a fixed price - many large retailers are able to get lower costs, discounts or rebates on advertising and promotions, and other retail services to help promote the product, brand, and the retailer.

In fact, none of the parameters are static. Costs, profit margins, customers' willingness to pay, etc. are all dynamic variables that are influenced by each other and by countless other factors. One can't simple say, "I will charge X dollars because that's what will be needed for me to make a reasonable profit," unless all of the other parameters are consistent with that pricing. And the whole idea of rational self-interest as the prime mover of economics has been pretty thoroughly debunked by the growing body of work in behavioral economics. Some builders will seek to make more or less profit for reasons other than money, like the sense of fulfillment building provides. Likewise, buyers will be driven by a whole host of factors both rational and irrational that will influence what they are willing to pay at a particular time. Targets (for sales, profits, costs, etc.) are fine but there needs to be some recognition that they are not fixed values over which any one party has complete control. A change in one target (e.g., price) may warrant changes in other targets (e.g., sales volume) and the relationships may not be linear or fully predictable.

[Wozer]

very complex subject...

first let's ponder just what does profit mean...I'll make a comparison by trying to define 'runout'...in guitars it's twist in the tree that makes soundboards look like one side is lighter/darker than the other...to a carpenter like me it's grain variations that cause a router bit to cut cleanly on one section and rip out chunks of wood on another...point being different definitions to different people...

profit...in a pure economic sense profit = funds left over after EVERYTHING is accounted for...what is everything? well, everything...costs of manufacturing, materials, labor, owner of company getting properly compensated...savings for future machine repair/replacement/upgrades...research and development...well, EVERYTHING...with this definition of profit a company can operate on a 0% profit scenario as if all costs of running the business are taken care of then no profit is needed...

unfortunately, in my eyes as a person who has a 4 year degree from the University of California, Santa Cruz, profit also includes investors...you know those who do nothing real but expect a return on their investment (to be more explicit, the fake/obviously controlled stock market, bankers, etc.)...making money off of money...leeching...here's a historical fact: the stock market was intended to be a way for inventors/etc. to be able to sell part of their future expected profit so that they could make a product they envisioned...where are we now? sick, just plain sick...

that was a ramble, I admit...

now let's take this concept to a 'small time' luthier's viewpoint...they also have to pay costs, and their 'profit' is what they live off of...if they don't make enough this causes them to starve, lose their home, body fall to disrepair, etc...so eventually they give up...eh, just life I guess...

on the flip side, they make it...they become in demand like Ervin Somogyi (yeah, there are others also, and I mean no disrespect by not naming them)...that breed can charge what the market will bear...and just exactly is wrong with that? not many artists make it in their lifetime...e.g. many times it's not until they pass that their works become priceless...arguably one could say recognized artists are overpaid...yet obviously there are those that want their works...simple supply and demand with a dash of mystique...

what's my simple answer to what is 'too much profit'?...profit garnered by abusing the work force...so an 'elite' few can suck the life out of others...oh yeah, that's modern day society..

[dcmey]

If a retailer does sell below the MAP he could make up for loss of profit margin by gaining higher volume of sales. Most music retailers also have accessories like strings, books, amps, etc. to bring in additional money. Plus many offer services like lessons or luthier services.

[Howard Klepper]

Originally Posted by devellis

And the whole idea of rational self-interest as the prime mover of economics has been pretty thoroughly debunked by the growing body of work in behavioral economics.

A bit of an overstatement, Bob, especially since Amy started the discussion from an assumption about buyers seeking the lowest price and how that affects "manufacturers." Microeconomics in any case has not become a branch of psychology.

[djg]

Originally Posted by Howard Klepper

A bit of an overstatement, Bob, especially since Amy started the discussion from an assumption about buyers seeking the lowest price and how that affects "manufacturers." Microeconomics in any case has not become a branch of psychology.

I started to type some overlong thing that could neither help this thread nor say anything very helpful (or pertinent to this board) about the limits of applied behavioral economics. So, now that's gone, and never mind, but yeah, what Howard Klepper has said, very sensibly, albeit with perhaps a bit of an understatement.

[SongwriterFan]

Originally Posted by Howard Klepper

Microeconomics in any case has not become a branch of psychology.

In a sense, though, it IS.

Microeconomic theory is all about maximizing UTILITY. Which doesn't HAVE to be about dollars and cents.

Also, it's about the PERCEPTION/BELIEF of what will maximize one's utility (or profit, if one insists on making it about the dollars). But just because your economic modeling makes you BELIEVE that what you're doing will maximize your utility/profit doesn't make that the truth.

[crikey]

Originally Posted by amyFB

From another thread, I have quoted here the bit that inspired this new post:

I don't think discounting does much to support the long term prospects of the brand.

IMO - singling out as guilty the poor guy/gal looking for a discount is misguided. He/she is just moseying along looking for the best deal, according to economic rules already set up. If you are worried about the long term prospects of the brand (aka the manufacturer), look first to the manufacturer's marketing group - they set the processes, rules and limits for the dealer network, and the dealers market to consumers. There is generally pricing leeway built in as it's one of the methods of competitive marketing.

[Wozer]

Originally Posted by SongwriterFan

In a sense, though, it IS.

Microeconomic theory is all about maximizing UTILITY. Which doesn't HAVE to be about dollars and cents.

Also, it's about the PERCEPTION/BELIEF of what will maximize one's utility (or profit, if one insists on making it about the dollars). But just because your economic modeling makes you BELIEVE that what you're doing will maximize your utility/profit doesn't make that the truth.

I have to agree with this whole heartedly

here's the rub...economics is an attempt to mathematically model society...

skipping a bunch of rhetoric and the rather lame nature of some of the math economists use, society=psychology

as pertaining to the title of this thread it's all about perception of what the end price is...and in the end said price is determined by the consumer...and it should be the goal to make him/her feel as if they got a good/fair deal relative to what they just purchased...

going a boring step further it comes down to the model the manufacturer operates under...are they trying to control an inflated price of their product in an attempt to get the public to perceive them as in demand high priced pieces of work? are they playing the opposite field and trying to make the consumers think they are getting bargains?

in the end your typical customer is looking for a deal, and that 'deal' price is structured into the whole marketing strategy...

as has already been stated in this thread it's rather simple: the manufacturer sells their product to the end merchant who then sells to the consumer...the manufacturer has already gotten their penny...it's up to the dealer to earn theirs...

myself? I'd rather buy from a local store with a GREAT service department and pay a few bucks more than go the opposite route and fight for every penny...and in the ultimate situation of finding a guitar in stock that was "The One" I'd pay what was needed assuming I had the funds to achieve that...

[SMan]

Consumers rarely seek out higher prices.

[devellis]

Not true. That's what people believe but it's not what the data show. Under certain circumstances, consumers will predictably seek higher prices.

Classical economics is based largely on a set of "self-evident truths" that turn out to be far more complicated than most people realize. Under certain circumstances that occur fairly commonly in the course of microeconomic transactions, people behave at odds with their rational self-interest. Daniel Kahneman (a psychologist by training and Professor Emiritus at Princeton) won the Nobel Prize for his work in this area and his decades of empirical evidence in support of his ideas. His popular book, Thinking Fast and Slow is an excellent account of the ways in which our impressions can lead us to make poor decisions that we believe are in our best interest financially but, in fact, are not. Dan Ariely, a professor at MIT and Duke, is another academic who has worked extensively on these topics. His popular book, Predictably Irrational: The Hidden Forces That Shape Our Decisions is another accessible overview to behavioral economics (with particular emphasis on factors affecting our perceptions of risk). Part of the reason why these ideas are so difficult to accept without looking at the actual studies is that when we make these cognitive errors that work against us, we typically think that we're choosing the more beneficial option. But unless we actually stop and do a more formal analysis, our gut impressions (which are often wrong) will win the day. These books are chock full of vivid examples and the well-controlled experiments that support Khaneman's and Ariely's ideas.

I think Howard is right that I did overstate things in my earlier post but the extent to which the assumption of rational self-interest has been undermined as a foundational assumption in economics is actually quite substantial and behavioral economics is a well established subdiscipline with strong underpinnings in social psychology, cognitive psychology, and neuroscience. It's not so much that the players in various transactions have decided to ignore their rational self-interest, it's just that they very often misjudge what is objectively in their best interest. Microeconomics is about behavior, cognition, and emotion, just like other human behavior and social interaction. It's not surprising that the same principles that govern behavior in other situations apply in economic decision-making.

This newer work doesn't completely negate classical economics by any means. But it adds nuance that explains a good chunk of the residual variance in some micro-economic models that don't predict behavior all that well. And it's especially useful in understanding the specific economic choices of individual consumers (which mostly interests many of our discussions here). Classical economics is more about behavior in the aggregate but behavioral economics provides novel and demonstrably useful insights into the decisions individuals make when deciding whether to make a purchase. How large an impact it eventually has remains to be seen, of course, but it's been "the next big thing" for more than a decade now and doesn't show any reliable signs of weakening in influence that I'm aware of.

[werkout52]

Originally Posted by Wozer

I'd rather buy from a local store with a GREAT service department and pay a few bucks more than go the opposite route and fight for every penny...and in the ultimate situation of finding a guitar in stock that was "The One" I'd pay what was needed assuming I had the funds to achieve that...

Totally agree. I recently bought my Martin from a local shop and paid more, but considering the price I would have been uncomfortable buying from an online merchant. Service is always a consideration too. I have only bought one guitar online, and it wasn't expensive to begin with.