Pricing premium kits and gold nibs

[RussFairfield]

I am interested in how you would respond to the following question.

I got into a discussion with a collector, who is also a friend, at a pen show last fall. The topic was the relative value of the kit pens and how everyone was pricing them.

Here was his problem. We start with $30 kit, and then make a pen that looks just like the one in the catalog because it was turned bushing-to-bushing (B2B) with the only deviation being maybe a small swell in the diameter between the bushings, and a fancier wood or plastic than in the picture. It takes us 40-minutes, 1-hour max., to make the pen. Then we price it at $100 and believe we will have made a reasonable profit. If he offered to pay $75 in cash for it, we would take it because we still thought we were coming out OK. He has no problem with pricing because it is fair.

However, when we make the same pen from a premium kit that costs $130, Some vendors offer a "Limited Edition" kit. Others of us just add a gold nib to a standard kit with a premium plating. The cost to us is similar.

It still takes the same amount of time, and our costs for wood and incidentals is the same. The only difference is that the kit cost us an additional $100 for the fancier platings and a gold nib. However, when the same person is selling this premium pen, they are pricing it at something over $400.

His question was, why is the premium pen priced in excess of $300 over that of the standard kit pen, when our costs were only the additional $100 for the premium pen kit . What was he getting for the additional $300 other than a gold nib that he could buy for $75?

He observed that he had asked this question of 6 or 7 kit pen sellers at several shows, and none were able to give a satisfactory answer. His conclusion was that we were trying to take advantage of him in a high-priced venue, and he wasn't buying into our game.

He also observed that none of them were selling very many pens.

I am curious what others who make bushing-to-bushing kit pens would say to his question.

 

[jjenk02]

What about artistic value??

 

[thewishman]

Excellent question. I'm not in that range yet, but will be interested in the responses.

Chris

 

[PenWorks]

I would throw it right back to him.....
You have no problem paying 400-900 for a manufanctured pen from XYZ famous pen company.
I think my pen is a value compared to theirs []
The most expensive pen I sold at the Barrett-Jackson auction was a Caran d'ache pen for $2,500
It was blue resin under a gold vermiel overlay. If you look at total material cost, maybe 200.00
So where is the reasoning?

 

[airrat]

I was bored off my butt in economics. My teacher there had the monotone voice and just droned on and on. I still got a B in it but I don't know how. So that being said...if my math is wrong please correct me.

Your cost of goods was $30, the markup was 150% = retail sales price $75, Gross profit being 45.
(30 x 1.5) + 30 = $75
Now if we use the same formula for the $130 kit.

Cost of goods 130, the markup of 150% = retail sales price $325, Gross profit being $195
(130 x 1.5) + 130 = $325
The only difference was the cost of goods going up $100.

He feels that just because a penturners COGS goes up, their sale price should only go up that much. Does that happen with all retail? With his formula the markup would be approx 73%.

Not sure if that was an answer for your original question.

 

[webmonk]

Good point with the percentages (my answer bumps into that principle.)

I'd also offer up the risk factor. It's one thing if you get an paid-up-front order for a higher cost item because you know the money will be there. However, if you risk the extra capital on higher end stuff to keep in stock, the return must be higher. Not just as a reward for the pens you sold, but also to help offset the ones you didn't.

 

[Randy_]

Russ: I have been wrestling with that question , myself, for a long time and must admit that I agree with your client. I've discussed this idera with a number of folks and no one has ever offered a fully satisfactory explanation for the "multiplier" principle. I'm not saying that it is not correct, just that I don't understand it and have never seen a reasonable explanation of why it should be valid. And apparently there a lot of people who use it; but really don't understand it either.

I think it isn't too hard to accept that the pricing structure established by a business or quasi business oriented pencrafter might be significantly different from one required by a hobby turner who is only interested in breaking even on his tools, time and materials. It also makes sense to me that a one person business operated out of a basement or garage could reasonably have a different pricing structure from that of a full-time, multi-person person business operating out of a dedicated manufacturing/retail facility. Perhaps the "multiplier" idea might be valid for one of the above mentioned "business" models, but they ore so different in there financial structure, it is hard to accept that a simple 3x formula would be applicable to all situations.

Guess I am off to the the library, Tuesday, to see if I can find a book on economics or business practices that will enlighten me. [?][?]

 

[LEAP]

My Grandfather was a dour old yankee farmer who had one philosophy on selling something:
charge what you think is fair if its too high nobody will buy it.

I think that pretty much sums it up.

 

[mrcook4570]

If a fixed dollar markup were a viable option, then that $130 kit pen should sell for $150 - $160, based on a slimline's markup. Also, Ferrari and Lamborghini would need to drop a zero (or two) from their price to be at the same markup level as a Ford Focus.

I strongly agree with webmonk. There is much greater risk involved in offereing higher end products, so the markup must be greater.

Here is an example. The $130 spent on one limited edition kit can buy 65 slimlines (based on $2 each). Using an average price of $25 per finished slimline, the total sale would be 65 x $25 = $1625. The selling price of the limited edition pen must be marked up at a higher percentage to compensate for the risk involved in tying up the capital.

That said, three years ago, I would have agreed with your friend. Since I have been in business for myself, I have realized that philosophy completely impractical and could quickly lead to the failure of a business.

 

[leehljp]

I agree with Webmonk and Stan. The higher end products involve more risk / investment. If you are taking flat dollar profit as your reasoning instead of the percentage of investment, a couple of bad/slow sales and you will go broke. I watched my dad in business on one venture, and his idea was quick turnover with a flat rate of profit across a wide range of service material. It didn't take but a couple of slow months and a couple of bad returns to put him in the hole quick!

A wealth pen turner can weather the storms, but making enough to live comfortably (a relative term) as a hobby or second job, the flat rate profit equivient of a $30.00 kit when applied to a $150.00 kit (kit plus, sandpaper, wood/plastic, finish material and tool wear) can go south quick.

I am not even to a $75.00 pen, but I can see the investment risks and have seen it in other fields.

 

[Rifleman1776]

You have to decide if you are just selling pens or something that approaches, or can be defined as, art. Five dollars worth of paint on a ten dollar canvas can end up being 'worth' $2.00 or $20,000. If you just want to sell pens, buy them at Wal-Mart, unwrap and stand on a street corner selling for a little more than you paid. The market will set your price. e.g. the market will determine 'value'.
In my town, a Jr. Gent won't bring $10.00. At the art gallery in a distant city, they bring $160.00 to $240.00. The multiplier is only a starting point. Learn your market and ask what you believe the item is worth. Keep in mind, you are satisfying a want, not a need. What is a piece of jewelry really 'worth'? Nada. But to satisfy a want it must be expensive or it will not sell.

 

[airrat]

I was tired when doing those formulas. I did forget to mention the "risk" factor of the higher cost kit. The holding time it will take to sell a higher end kit.

Hank I was just showing the difference in profit with those markups. My point was a business is not going to pay more money for an item and receive 1/2 the profit off it.

Lets look at it differently too, that model just showed the cost of the material, nothing else. How much is the labor worth? What do you feel your time is worth? How do you pay yourself from the pen? What cost are associated with the sale of the pen?

Steve Roberts could answer this part better then me since I have not done any shows and will miss cost involved. But in the sale of pens in that show they have to figure in cost of the show before looking at his profit. I am sure he prices his pens differently then others just for that reason.

Anthony can answer the cost of his store. Does he figure that into the sale price of the pen?

The hobbyist doing them out of their garage/basement, has a risk factor involved, but does not have the associated cost the above do. The answer to this question is not text book.

 

[Gary Max]

My thought----the Slimline pens I sell run from $20.00 to $100.00---they all cost about the same to make---give or take a few dollars. Priceing difference-----what ever the maket will bear. If I sold them all for the same price---my sales would drop and so would my profit.
Right now I am wanting to take the next step and move up to Gents and Statesmans-----they would be my highest price pens. But to carry a inventory of them will cost several coins which I do not have. But before show season gets going strong I will be calling CSUSA and placeing a order.
I am wanting to sell my first ---Over $250.00 pen this year

 

[Tuba707]

1st off, we are probably making a making a much lower profit percentage than the pen manufacturers who mass produce and sell for much higher prices than even a nice Emperor with a 14K nib would cost. As a vendor, you have the right to charge whatever you want. If you are making quality pens, you have probably spend countless hours reading, researching, and trying new techniques. Years of getting your skills up.

If the market supports the prices, then go for the prices. You also wouldn't want to sell some of those pens because it would undervalue them. In other words, if I were a serious pen collector with money to spend, I wouldn't buy an emp.with a gold nib for $150, because that would say to me - its only worth that much - I'll just pay $350 for a Mont Blanc that doesn't look as nice, but it's obviously superior (because of percieved value.) Otherwise, the eBay kids with $75-100 emperors would put us out of business.

How about consumables (sandpaper, bits, blades) and equipment cost (bandsaw, lathe, miter saw, etc.) and shipping and cost of shows and time and more time? And its not like a retail business - we buy a kit and then sell the kit - its much more.

So maybe some of the prices are "too high" according to the markup percentage that your friend expects. But he is welcome to buy whereever he likes or get a lathe himself and make his own pens. And everyone else is welcome to charge whatever they like. Like the guy (I forget which site it is) that sold a copper baron for $300!!! Talk about markup percentage! Cost - about $10 - but, he sold it, and thats impressive.

Just a few of my humble opinions =)

 

[Fritz]

Being new to pen turning and this forum, my first reaction after seeing pen prices on some members web sites, is that they were quite low. I plan on selling my pens wholesale to fine gift stores and art galleries. If a B2B jr Gent is going to retail for $50, I would have to whole sale at $25. Not a lot profit there. I plan on using inlay for my pens to make them different and sell for more money.

We have to factor in the labor and skill it takes to make a good looking pen, even a B2B with no inlay . Also, the pens we make are one of a kind, something small gift stores like because it sets them apart from other stores.

Let's not sell ourselves short. When pricing pens, think of what they would sell at wholesale (50% of the retail price) and adjust accordingly. Don't be afraid get what you're worth!

John

 

[Dario]

I too use a factor and I am with Tom and Stan.

I tend to be more meticulous when turning high end pen kits too, both with my fit and finish. I also use my best blanks with it.

For me atleast, the difference doesn't stop at the kit alone.

 

[DCBluesman]

I beleive that some of these calculations are begging the facts that Russ presents. Let's lay this out logically.

First, you have already decided to invest in two Emporer kits (just as an example), one of them the regular edition at $50 and the other one a limited edition at $150. Next, let's simplify things and say that you have only a three-step process: turn barrels, assemble pen, sell pen. Let's assume a $40 shop rate. ($80,000 a year if one person can be kept busy making barrels). Let's further assume that each step is it's own business and, therefore, entitled to a return or profit. Let's watch the money fly!

Process #1: Here we purchase a beautiful, stabilized and blue-eyed blank of curly maple at $5. Since we are just making barrels, we get $.50 worth of tubes for the blank to be mounted on. If we assume that shop costs (electricity, depreciation of tools, glues, finishes, blown blanks, etc.) can reasonably be applied at $10 per pen and if we further assume that it takes 1 hour to make a set of barrels, start to finish, our Process 1 costs come out to $ $45.50. Since Process 2 (Assembly) will buy all we make, our risk is very low. As business the Process 1 business owner, I want 10% pure gross profit, or $5.06. That makes the sales price to Process 2 company $50.56.

Process #2: My cost of barrels is $50.56. I can put this barrel on either a standard edition kit that costs $50 or a limited edition edition kit which costs $150. In either case, the "artistic value", which is primarily an area of appearance, is the same. My cost of assembly is $5 labor no matter which kit I use. So Process 2 Company can make either of two pens whose costs follow. Standard Edition: $50.56 for barrels, $50 for the kit, $5 for assembly for a total cost of $105.56. Since Process 3 Company will buy all we make, I too want a 10% pure gross profit, $11.73. That makes the sales price to Process 3 Company $117.29. If Process 2 Company makes the LE version, the barrels still cost $50.56, the labor is still $5 but the increase in kit cost raises my total cost to $205.56. I still want my 10% return, so my sales price to Process 3 Company increases to $228.40.

Process 3: I buy 1 SE for $117.29 and 1 LE for 228.40. I have to pay my salesman and he gets 50%. That means my SE costs me $163.67 and my LE costs me $342.60. Because I may not sell my pens as fast as I buy them, I want a better return, taking into account the cost of tying up my capital, 20%. That means I should price my SE pen at $204.59 and my LE at $428.25.

Now mathematically that makes sense, but look at it from the customer's perspective. What is the value to the customer of the rotary engraved number on the finial of the Emporer. Since it doesn't even say 73 of 500, but just a long number, it's not worth anything to me and I'm a collector. How about the gold nib? Well, gold replacement from the finest companies run about $75-85, so that's my perceived value. Also, those of us who stock gold nibs typically charge $65-$95 for them. That INCLUDES our cost, cost to carry, risk, and profit.

In summary, a customer has a choice over an amazing pen for $204.59 or an equally amazing pen with a gold nib for $428.50. Of course, he could buy my amazing pen for $204.59 and a gold nib for $95, keeping his cost at just under $300. Why would he choose to give me, the seller, an additional $128? Because of the rotary engraving on the finial? Really? Where do you live? I've got some pens for sale!

 

[Paul in OKC]

You guys are really making me think I don't charge enough for my vises,based on these formulas for pens[:0] []

 

[Gary Max]

Paul that is Lou making the big bucks---I am still selling $20.00 pens-----LOL[]

 

[Paul in OKC]

Ok, how's this. If you are making and selling pens for $150 or more, the vise is $150, for those of us still selling $20-$25 pens it will stay the same (for now).[]

 

[ed4copies]

I think Lou is making the case for why he WISHES he was making the big bucks.

As long as he is still talking to us, his "free time" isn't THAT valuable!!!

 

[ed4copies]

'Corse we all know Russ IS making the big bucks, so maybe Lou is getting PAID by Russ to CONSULT !!!!

 

[DCBluesman]

Originally posted by Paul in OKC
<br />Ok, how's this. If you are making and selling pens for $150 or more, the vise is $150, for those of us still selling $20-$25 pens it will stay the same (for now).[]

Hmmm... thank heaven I bought mine back before the word got out. MY PHD Sidevise cost ~~~~ back in 2004!

As for the big bucks, I think I'm making that poor assembly guy's wages.

 

[Rmartin]

The answer to your customer's question is difficult because a pen seller is also the pen maker. As pen makers, we are the manufacturer, wholesaler, and retailer all rolled into one. A manufacturer will add on adverage 20 pecent to the cost of production when selling in volume to a wholeseller. The wholeseller will then add on adverage 30 percent when selling to a retailer. Standard retail mark-up is 2.2; called a keystone. Retailers expect to sell so many items at full value and the rest will be sold at sale price. They also factor in loss through theft, damage and other factors.

As others have pointed out, the risk factor through out the process is increased for someone who takes on the job of manufacturer, wholeseller, and retailer.

But, in the end, the number one reason for the price of any item for sale is what the buyer is willing to pay. That's the way the free market works. Period.

 

[TellicoTurning]

My son always contends that value is a perceived figure... if your customer perceives the value of your pen at a certain level that is it's value... I'm sure other factors fall into the mix, the venue of the sale, the type of customers you have passing through, etc... in my area, we have a lot of customers that pass through my booth that are honest hard working people, but their spendable cash is limited... at the same time, I have another group of people who have or are in a situation where their spendable cash is less limited and more likely to pay the prices for the higher end pens... depending on their perceived value of what I offer. I'm not sure there is an answer to Russ's question, other than the value is what the buyer perceives it to be.. the old adage, the price is what the market will bear.

Lou, I like your analogy though... definitely something to think about.

 

[Sawdustman]

I've always found this an interesting topic. I have turned fulltime since late 1995 starting with slim pens. My current business software (MYOB) tracks all my parts and I use a rough "profit margin" to price my items. Of course I have to adjust for what the market will bear. So, a european pen that I sell for 37.95. My software says my margin is around 89%. Now lets take an Emperor that I sell for $225. My Margin is only 85%. The software only takes into consideration the parts, box and blank if it is a custom blank. If it is a plain wood pen which I buy as rough cut 4/4 stock then I have to figure that cost in later (about 0.50 per pen).
Now some of you will say that 80+% is a pretty good margin. I say I am almost making a profit. I do the indoor show circuit, have a 10 X 15 booth, pay around 1200 - 1500 dollars for the booth space per weekend, have lodging expense etc. And then there is the cost of carrying inventory. And I do carry a large inventory. I routinely have 8 to $10K tied up just in parts. And yes, some of the pens I get more for "because I can". When explaining why something is more expensive than another one I am unafraid to use perceived value as part of the justification. So far it works for me.
Art

 

[Ozzy]

Unless you are using a computer controlled duplicator, each pen that you turn is (or at least should be) one of a kind which adds to the value of the pen. I eyeball all of my pens, a fact that I point that out to all of my customers, and that seems to be a big selling point for me.
The bottom line is your pens are only worth what the customers are willing to pay.