Small Market Pricing

One of the common questions asked by pen enthusiasts in countries like Australia and the UK is why the price of pens and inks are so high at local retailers, particularly when they can be imported directly much cheaper than the retail price. This post is going to explore some of the reasons why this is, and what the consequences can be. 

In case you aren't aware, there are huge price differences around the world that cannot be explained by exchange rates. My favourite example, the Lamy 2000, is around US$160 from Anderson Pens in the US, which is a pretty typical price. That compares pretty favourably with £149 (US$230) from Cult Pens in the UK, or A$249 (US$210) from LarryPOST in Australia (which is currently on sale - the regular price is US$240). For FP enthusiasts in smaller markets, this hobby can be considerably more expensive than for enthusiasts in the US. 

There are two main factors driving this: import costs and distribution costs. Each will be explored in the post before we look at the effect of higher costs, and how it can create a cycle that leads to yet higher prices. For clarity, we're going to use 'price' to refer to what customers are paying and 'cost' to refer to business inputs. 

The first factor is import costs, which are faced both by distributors and by enthusiasts who choose to import directly from overseas. The costs vary depending on who is importing the product and the country to which it is imported: distributors tend to order in bulk and enjoy much lower shipping costs per item than consumers. On the other hand, consumers can avoid some of the tax implications that hit distributors in countries like Australia (where imports worth less than A$1000 avoid sales tax). Taxation can also affect both types of importer in equally painful ways: the UK tax office (HMRC) imposes enormous costs on pen enthusiasts in the UK.

These effects are relatively well known in the pen community, but foreign exchange (FX) is rarely (if ever) mentioned. The risks of a sudden change in the exchange rate can be a windfall for a distributor or a death knell; consumers can easily manage their FX risk by deferring purchases if the rate makes the buy undesirable. Distributors lack this freedom, and require protection - protection which costs money, and becomes more expensive when rates change frequently or substantially. The cost of that protection, along with the costs of transport and tax, all get passed on to consumers in the form of higher prices. 

If these were the only costs driving up prices, we might expect to see retail prices slightly higher than in the US - probably not much more than the cost of a consumer directly importing the product for themselves (and likely not worth the time or effort). And yet, costs are nowhere near comparable. So while import costs are part of our explanation, what is more important to small markets are the distribution costs.

Distribution costs over the efforts of wholesalers to have retailers stock their products; to hold stock and transport it to stores; to promote products to consumers; to handle nib exchanges, returns, and defective units; maintaining relationships with retailers, manufacturers, logistics companies, and other stakeholders; and the costs of managing all of this activity. These costs are not incurred when a consumer imports a pen directly and add substantially to the wholesale cost of pens. 

How much they add to the retail price depends dramatically on the volume of product being handled. A small operation might involve three staff with running costs of $250,000 a year; spread over 5,000 units it is an additional cost of $50 per pen. I would be surprised if all of the FP retailers in Australia sold this many units a year, let alone a single distributor. Compare this to a distributor with the same costs but handling 20,000 units a year: the distribution costs would be $12.50/pen. Clearly, there is a real advantage to retailers and consumers in a large market. 

Both of these factors work to force retail prices higher and those higher prices have one certain effect: fewer pens will be sold. Fewer sales means the distribution costs can't be spread out as much, driving wholesale costs even higher. At 5,000 pens, the cost was $50 each. But if volume falls to 4,000 pens, the wholesale cost will rise to $62.50. This is going to push more consumers away - as they decide to buy online or abandon the purchase altogether - and force the distribution costs up yet again. It is easy to see how a sudden, large increase in any of these costs could trigger a drop in sales and a death spiral for a distributor or a particular brand in a small market. 

So we can see what while import costs play a part, the biggest drivers of higher costs in a small market are those of the distributors and it's possible in the future that more and more sales will be concentrated in a few, high-volume markets where prices are lower than countries like the UK or Australia. A future post is going to take the next step and look at retailers in small markets and some of the challenges they are facing.