Posted by Rick Denney on May 04, 2001 at 12:36:14:
In Reply to: What constitutes the price of a tuba? posted by Karl Parks on May 04, 2001 at 11:09:06:
I can't answer many of your questions, but I believe you have left a number of variables that affect cost off your list. And you didn't mention any variables that affect price but not cost. I would like to bring them up, because they likely have a bigger impact than the items you mentioned.
1. Price and cost are two different things. Price is based on the market, and cost is based on the materials. You are hoping to explain differences in price based on factors that affect only cost. Cost is only one of many factors that determine price. More on this as we go.
2. One price factor is the business model. For example, the 4/4 BBb tubas that you mentioned are likely as well made as some of the far more expensive CC counterparts (at least in terms of physical quality--playing quality is subject to further debate that I won't get into). But they are targeted to the school market, where the volume is much higher and the margin can be much lower. More on this later, too.
3. Development is a part of the cost. The standards and therefore the development costs are much higher for high-end horns than for mid-priced horns. Simultaneously, those development costs are fixed and spread over many fewer horns, so the contribution to paying off those costs from each horn must be much greater. For example, if I spend $50,000 developing a pro horn and $30,000 developing a school horn, and I sell 100 of the pro horns and 2000 school horns, then each pro horn must include $500 to recoup develoment costs, and each student horn must include only $15.
4. Labor costs vary considerably. Labor costs in the parts of Germany once in the East are lower than in the former western parts. Hence, the VMI and B&S tubas reflect lower labor costs than Meinl-Weston tubas, even though they are both part of the same company. The differences in eastern and western Germany are narrowing, and were much greater before unification. The Czech Republic (Cerveny) has much lower labor costs, and Taiwan (Jupiter) likewise. I'm sure that Werils are as cheap as they are partly because of the lower labor rates in Brazil. Japan has high labor rates, but overcome those with more efficient production techniques, and the same is probably also true for most American instruments that are made with tools and techniques refined over decades (hence the limitations to use mostly existing King parts on the new Conn 52J). For something with as much handwork as a tuba, the variations in labor rates have a huge impact.
5. Advertising costs vary. Pro horns must be advertised differently than school horns, and some companies spend more on advertising than others.
6. Distributors' margins affect price. Instruments with competitive distributorships (e.g. Miraphone) usually sell for a lower price than instruments (e.g. Hirsbrunner) that are exclusively distributed.
7. Currency values affect price considerably. Aside from the obvious comparison of Currency X against the dollar, a company might artificially keep their price high when their currency is weak to avoid having to raise their prices substantially when their currency strengthens. I think this is a large factor in Yamaha's current pricing policies, because eventually the Yen will strengthen.
8. Prices are affected by the production capacity and demand for a product. Hirsbrunner can only make a given number of tubas while maintaining their quality model, and if more people than that want them, then they will price them so that the richest of those who want them are the ones who get them. It's as simple as that. If I have a pro tuba for sale that gets great reviews, then I can predict my market based on the prices buyers in the market are willing to pay. Just to pull some examples out of the air: RickBAT might be the bext big thing, and if I sold it for $1000, 5000 tuba players might buy it. If I sold it for $5000, 500 players might buy it. If I sold it for $10,000, 50 players might but it, and if I sold it for $15,000, 20 players might buy it. Maybe only five would buy it at $20,000. If my production capacity is 50, then I'd be a fool to sell it for less than $10,000, right? And this consideration has nothing to do with cost. If I sold it for less, my investors would fire me, because my first obligation as a businessman is to increase their wealth. Otherwise, they put their money elsewhere, and nobody gets a RickBAT.
Once I've determined I won't sell it for less than $10,000, then I have to analyze what pricing scheme makes me the most money. If my total costs (include ALL cost factors) are $8000 for each tuba, then I'll make $100,000 if I sell 50 RickBATs for ten grand each. If I sold 20 of them for $15,000, I'd make $140,000. If I sold five of them at $20K each, I'd make $60,000. Clearly, the $15,000 price point maximizes my profit, and does the most to increase the wealth of my investors.
9. Pricing strategies are considered across broad product lines. Often, a maker that sells in quantity to schools but also offers pro horns will sell the pro horns at a lower margin because of the endorsement value. For example, if I can sell 100 expensive Meinl-Weston 21xx's to pros, then those pros will recommend those horns (even if just by example) to their students, who might therefore buy a BBb Model 25 which is considerably less expensive. Because putting those pro horns in the hands of those teachers will make sales of the student horns, they can afford to reduce the margin on the pro horns a bit, knowing they'll make it up in volume on student horns.
10. My simplistic model above will be varied by a host of factors, ranging from the time value of money to the cost of maintaining an inventory (versus products designed for quick sale) to the tax structure of the company where they are made and where they are sold. Rest assured that Gronitz or Nirschl gets less money for a big tuba partly because they only build them after they are paid for.
Some will complain that the approach above is greedy, because it is designed to maximize profits. I don't agree. If we don't maximize profits using such strategies, then nobody will get the product. Anybody wonder why York, despite being regarded as one of the great tuba makers of all time, is no longer in business?
Not everyone in the business has to follow these models. If I'm Gerhard Meinl, and I control TA-Musik, which, in turn, controls Meinl-Weston, VMI, B&S, Courtois, and all their derivatives, then I guarantee you that I spend my days defining and refining these business models. If I succeed it is because my model was better and I applied it more effectively. He didn't buy those other companies out with HIS money, and the only way he could persuade investors to help him do it is by maximizing their wealth.
But if I'm Joe Sellmansberger or Matt Walters, I might create a tuba that is unique and wonderful, and sell it for a reasonable profit above my costs in producing it, if that is higher than what the market will bear. That is a choice that they can choose to make, and when they do, their customers benefit and should be grateful. That is also why they are so highly regarded in this forum (not, as another poster suggested, just because they are prolific).
Rick "a businessman in addition to being an engineer" Denney