In last week’s post, we had a look at limited edition (LE) pens from the buyer’s perspective and saw how product differentiation and scarcity influence the market price. Today, we look at the seller’s perspective and see why a brand might choose to produce a limited or special edition.
The first thing we need to think about is product development. Ideally, a product will begin with a brand’s marketing team identifying an opportunity in the market: a group of potential pen buyers who are looking for something specific, but aren’t being satisfied by anything that’s currently available. The marketers will learn about those buyers and their preferences, and the designers will come up with a product that should hopefully satisfy them, as well as the production process for how it will be produced. (In reality, I suspect that sometimes — or perhaps most of the time — the product comes first, as a designer comes up with something cool or innovative, and then the marketing team look to see who might buy it.) Once this is done, prototypes will be produced, tested, and refined and, once a model gets the green light for production, marketers will get to work choosing a name and price, estimating demand, and designing promotional strategies. For our purposes, the most important aspect of this is estimating demand.
This process is expensive, especially once you factor in the cost of designs and prototypes that don’t make it to market. I’ve heard that Montblanc design three prototypes for each of their LE pens, but obviously only one can be released. Each successful product needs to recoup its own development cost, but also the development costs of products which didn’t make it to market. Put together, these form an investment by the brand — and an investment that needs to be recouped.
The question of whether a product is made continuously or whether it becomes an SE/LE is essentially a question of how that investment is recouped, and the answer depends on the expected level of demand. A product with broad, long-term appeal — something like a Lamy 2000 or Pilot Vanishing Point, workhorse pens that will sell consistently year after year — is likely to be released as a regular production item, with the investment gradually recouped over several years. If we imagine such a product costing $200,000 to develop, and selling 1000 units each year, the brand might need to charge a markup of $40 per pen. That’s a markup in addition to the cost of production, promotion, and distribution. That $40 markup would allow the brand to break even on the development cost — the investment — after five years.
That doesn’t mean they will stop selling the pen at that point, simply that the development investment will have been repaid. After that, the brand will have a few options. They could reinvest, reduce the product price, or keep the markup in place and make further profits off their initial investment. The first option is probably the healthiest: it shows that they believe refining and improving the product could lead to increased sales in the future, and are willing to invest to make that happen. Even with products that have sold consistently for decades — think about your Montblanc Meisterstuck and Pelikan Souverans — there is a continual process of reinvestment and improvements, and they can be delivered without having to raise price to cover those costs.
The second option, reducing the price, is also healthy. Sometimes there isn’t much that a brand can do to refine a product, but they can increase sales by dropping price and making it more appealing in the marketplace. The Lamy 2000 is a good example of this: if you worked for Lamy, is there much you could realistically suggest to improve the product? Probably nothing that would have a bigger effect on the sales numbers than dropping price by $10-20. Dropping price keeps the product competitive, makes customers better off, and makes the brand better off too. It’s a sign of healthy competition in the marketplace, and that the brand has faith in the market’s future.
The third option is, in my opinion, the worst. Profit-taking shows the company doesn’t have much faith in future sales (or in its design/marketing team) and would rather profit off past investments than make new investments for the future. This is what we see with companies like Parker, Sheaffer, and Waterman (and Cross, until recently): they are happy to coast off their reputations and investments made decades ago. This is a short-term strategy, because the products become less and less competitive and those investments pay smaller and smaller dividends. Reputation suffers, and sometimes it can set off a death spiral. It’s not a strategy you would choose if you really believed the market would continue to be profitable.
But all of that is for your regular, production items. Things get a little more complicated when the product’s demand is not expected to be consistent orlong-lasting. The pink Pelikan M600 is a good example of this: it’s a product that will be really popular with some buyers, but is unlikely to have the same long-term appeal of a standard M600. If it was released as a production item, sales might be strong in the first year or two, but they’d quickly peter out. Our investment in development therefore can’t be spread out across sales made for years and years.
Instead, it makes sense to release the pen as an SE: limit production to a single year so that all of the sales and promotional work can be concentrated into one particular period. But that means the brand’s investment can only be recouped from the sales in that period; maybe instead of selling 1000 pens a year, an SE means we’ll sell 2000 in the first year — but zero after that. Our hypothetical $200,000 investment can’t be spread across as many units, so the markup needs to increase from $40/unit to $100. That necessarily flows through to the price the brand is willing to charge consumers.
There’s a tension here which can lead to some products becoming uneconomic. If R&D costs push by the price by too much, nobody will want to buy the pen. This might be because the costs are too great or because there aren’t enough sales to spread those costs over. Either way, and as we saw in Part 1, buyers will compare the value of a pink M600 to a regular M600 (or some other product) and opt for the product that yields the greatest surplus. That surplus really depends on the quality of the design and how much extra value (or satisfaction) buyers feel they are receiving. This means the marketers and the design team really need to be on their game, understanding exactly what buyers want, and giving it to them. In the case of the M600, it’s obvious that Pelikan feel this pen has some of that extra appeal: obvious because there’s a decent jump in prices from a regular M600 (list $525, street $420) to the pink SE (list $625, street $500).
In the last post, I went into some detail about how some SE pens are sold without any markup over their regular production equivalents, such as the Montblanc 90th anniversary pens. You might be wondering how the development cost can be recouped if prices are the same.
The answer is that there’s an offsetting factor, one which I believe is really important: excess capacity. If a brand has dedicated production facilities — a factory filled with equipment and machinery — there’s a pretty good chance it’s not being used to full capacity. In other words, the facility isn’t being run 24/7. But the cost of that infrastructure is probably already being met by the regular production items being made in the facility. (If not, the brand or the factory has some problems on their hands.) This means that those costs don’t need to be included when calculating the full cost of an SE — effectively, the SE can be quite cheap to manufacture.If those cost reductions are large enough, they can completely offset the development cost, and that enables a brand to offer an SE product at the same price as a regular edition.
So that’s SEs and we finally get to LEs. This is where a marketing team might conclude that a product — particularly a highly differentiated one — has fairly limited demand. But those buyers might be intensely interested in the product and willing to pay a significant premium to own it. For a brand, the best strategy here is to issue the product as an LE; but limiting the production run means spreading development costs over far fewer units, fewer even than the SEs we saw earlier. A 500 unit run means the $200,000 investment equals $400 per unit. A 200 unit run equals $1000 per unit. Some of the ultra-premium Montblancs might be limited to a run of just three units, where a $200,000 development cost would equal more than $60,000 (part of why those ultra-LEs have such astronomical prices).
But, as we saw in the last post, the price of a LE — unlike production pens and SEs — is not principally determined by how much it costs the brand to develop, produce, distribute, and retail. Instead, it’s determined by how much a small group of buyers are willing to pay. Provided these buyers are willing to pay a high enough price (and those maki-e Pelikans suggest some do), development costs can be large and spread extremely thin, and still be fully recouped.
Of course, this is a pretty risky thing for a brand to get into. The rewards of a successful venture are enormous but, if the pen doesn’t sell, it could mean an enormous loss. It’s not something that any brand should consider unless they have an extremely adept marketing team who have identified a group of interested buyers and know exactly what that group wants (and how much they’re willing to pay).
Some brands try to minimise their risk by reducing development costs. While cost discipline is a healthy principle, cutting corners — not investing in market research, prototypes, internal reviews, etc — can easily become a false economy. Products can be released that have no natural market or with flaws that were invisible to the designers but patently obvious to buyers. For a relatively meagre saving, a much larger investment might fail completely. It takes a skilled manager to tell the difference between cost discipline and cutting corners.
When it comes to LEs, there’s one thing that often seems to be missed in discussions: they are only really intended to appeal to a small group of buyers. I often see commenters scoffing at an LE and claiming that a price is absurd, a claim that carries an implicit assumption that the product (and its price) should have broad appeal. That’s not the case at all, and to criticise a brand for overpricing an LE is often an admission that the commenter doesn’t really understand what the brand is doing with that product. If you think a pen is gaudy, ugly, or overpriced, I don’t think it’s fair to jump to the assumption that the brand is incompetent or stupid: it’s probably far more likely that they’ve made something which isn’t aimed at you. It might not always be the case — sometimes a brand really is incompetent — but it’s a good policy to start out by giving others the benefit of the doubt.
Ultimately, when it comes to SE and LE pens, it reinforces my view that most premium pens are all about niche aesthetic appeal. The value comes primarily from the fact that they provide users with a huge amount of satisfaction, because it’s a pen design which really suits their tastes. And that means I certainly wouldn’t recommend buying one unless it has that particular appeal for you. But I hope nonetheless that this has helped you to understand the economics of why they are appealing and why they are offered.
PS. I had planned to discuss whether SEs and LEs make good investments but it seems we’ve run out of space, and I’ll have to save that post for another time.