The Economics of Limited Editions (Part 1)

It seems like limited edition offerings are popping up more and more these days, in both pens (at every price point) and inks. Lately, there has also been some discussion online about whether limited edition products are worth the premium prices that they seem to command. So I thought it would be interesting to explore the economics of limited edition products: this week, we’ll look at the demand side of the market and, next week, we’ll look at supply. 

There were two recent discussions which really got me thinking about this topic. The first was an episode of the Pen Addict podcast, where the guys discussed the launch of the Star Wars edition of the Cross Townsend, limited to 1,977 units for each of three models, and priced at a whopping US$575, 2-3x the cost of the normal Townsend FP. The guys (understandably) thought this price was completely absurd and could not understand why Cross would choose such an extreme price. 

The other influence was an excellent post from the Gentleman Stationer last week called The Perception of Scarcity. The Gentleman (Joe) argued that limited edition inks — like the Montblanc inks that are temporarily released alongside their limited edition pens — really aren’t as limited as they used to be and, in his view, are no longer deserving of the premium price tag that they typically bear. I like Joe’s blog a lot and this is a good post, so I’d encourage you to read it.

While I like all of these guys, I have to disagree with them on this. Cross have marked up the Star Wars Townsends by an extreme amount but I don’t agree that it’s obviously a mistake, or even necessarily irrational. And I also have to disagree with Joe that scarcity matters for these inks. Today I’ll explain why, and next week we’ll look at things from the perspective of the brands. 

Before we get started, let’s define our key terms. I’m not claiming these definitions are absolutely correct, but it’ll help things if we’re all on the same page. So, as far as I’m concerned, a limited edition (LE) product is one where a predetermined number of units will be produced — like the 1,977 Star Wars pens. For LEs, each product might be numbered, it might not, but once 1,977 are produced then that’s it. A special edition (SE) is one which will only be produced for a predetermined period, maybe 12 months, but an unlimited number could be made in that time. So the annual Lamy Safari or Pelikan M205 (or their associated inks) are special editions. And so are the Montblanc inks that are available for a few months before disappearing, even though they’re labelled as LEs. Generally speaking, an LE product is scarcer than an SE (probably a lot scarcer) and therefore command greater prices. Finally, we have regular production items. These won’t be produced forever, but they aren’t limited in any predetermined way. They also tend to be the cheapest of the three. 

Now let’s go back to my model of the purchase decision (you can skip this paragraph if you’re already familiar with it). I think that buyers weigh up two independent factors in making a purchase: the price that they pay and the pleasure or satisfaction they get out of the purchase (what I call the value). When the value exceeds the price, the product is worth buying. And what’s left over is called surplus: maybe you value a Vanishing Point at $200, the price is $140, so the surplus is $60 and it’s worth buying. As long as surplus is positive, you’re getting more from the transaction than you’re putting in. But if surplus is negative — if the price is greater than the satisfaction you’ll get from the product — you won’t be purchasing, because you’re giving up more than what you are getting out of it. 

This calculation changes when we’re considering an SE product — but not by a whole lot. Most SEs are variations on existing products. Maybe they are available in an unusual colour, as a demonstrator, or have some other differentiating feature, but it’s still quite similar to a pen which is already available. A good example of this might be the new VP in Twilight: the point of difference is the unique (and quite appealing) colour, but otherwise it’s not going to be that different from any other VP on the market. 

That similarity means we’re going to compare both products when considering a purchase, and weigh up which is better value for us. The Twilight is more expensive than a regular VP, around $200 instead of $140. Your value is also going to change, depending on how much that unique colour appeals to you. If you like it a lot, your value might increase from $200 (for a regular VP) to $300, meaning the Twilight offers you a surplus of $100 ($300 value minus the $200 price). If you compare that to the $60 surplus of the regular VP, the Twilight is offering a better deal and that’s the one you’ll end up buying. 

Alternatively, if you only like the Twilight a little more, your value might only increase to $220. At the higher price, your surplus is just $20 — well below the regular VP. That’s a situation where you might say you prefer the look of the Twilight but it’s just not worthwhile, and you’d buy the regular edition. 

Differentiation can increase the pleasure or satisfaction that we get out of a product, which increases the value — or what we’re willing to pay — and that, in turn, means brands can charge a higher price for SE products. But they’re constrained in their ability to do this by the regular edition products they offer. If they price an SE too high, buyers won’t see any reason to get it instead of a regular edition. 

This is why we don’t see prices increased that much for SEs. At the lower end of the price spectrum, Lamy Safaris and Pelikan M205s have annual SEs that are priced the same as normal Safaris or M205s; at the other end, Montblanc’s 90th anniversary pens were almost the same price as the regular editions too. The biggest markups I could find were for the Pilot VPs (around 40%) and Pelikan M805s (up to 25%). 

It’s the same story with inks: annual SE inks from Lamy and Pelikan are priced the same as their regular inks, as are the 80mL Montblanc SEs. Their 30mL inks (the ones that match their SE pens) are the only SE inks I’ve found that have a price increase (around 250% on a per-mL basis, though they stick close to the same price as the 80mL bottles).

The one factor I haven’t mentioned yet — the one that is central to Joe’s argument — is scarcity. And that’s because I don’t believe scarcity really matters all that much for SE products. Maybe it influences a few buyers — people who like to own something that others envy or is seen as ‘rare’ — but I don’t think this is a big part of the SE market. The production run is theoretically unlimited but, realistically, means that everyone who wants to buy the product will be able to do so. The only real effect this has, in my opinion, is on scheduling: you may reorganise your pen buying around the fact that a particular purchase has to occur within a certain period. 

So my response to Joe is that we shouldn’t be too worried about scarcity for SE products. It doesn’t have any real effect on price and certainly shouldn’t influence your decisions about whether to buy or not. In the past, I’ve avoided SE inks — I didn’t want to fall in love with a colour, only to run out of it. But these thoughts have fallen by the wayside. There are so many ink producers nowadays, and so many different colours available, that it’s hard to believe a popular colour would be permanently consigned to history. 

On the other hand, LEs are a totally different kettle of fish. People seem to group SEs and LEs together, but I think this is a mistake. SEs have a lot more in common with regular production items, whereas LEs are highly differentiated, genuinely scarce, and command premium prices. We’ll go through each of these in turn.

When a brand produces an SE, differentiation often doesn’t extend much further than a new coat of paint. Sure, the colour makes a huge difference to some buyers, but the pen overall isn’t really that different — that’s why we often compare the value proposition to the regular item. It’s a totally different story with LEs, where the design and materials can change completely.

Pelikan have some interesting examples example of this. You’ll already be familiar with their regular editions, and you may know the SEs: there’s an M800 with an orange barrel instead of black, and two M805 demonstrator options. Different but, honestly, not that different. Certainly nothing like their LE M1000s: a range of breathtaking maki-e creations, limited to hundreds of units, and priced in the thousands of dollars. 

It’s a similar story for Montblanc, Omas, Visconti, etc: every brand with LEs aims to produce small batches of pens that are totally different from their other offerings and the offerings of other brands. The goal is to produce something which is effectively unique, so that when you start thinking about whether to buy the product, you’re not able to make an easy comparison between two pens. And if you can’t make an easy comparison, you’re not thinking about which product offers you greater surplus — which one offers you a better deal — but only about whether value exceeds price.

For a brand, that’s an ideal place to be. They’re no longer competing with other brands — and that competition is what keeps prices down. As long as they can offer you something you want (and, let’s face it, pen companies are pretty good at that), they can push their prices up and it will still make sense for you to buy. If you value something at $1000, it makes sense to buy whether the price is $200, $500, or $950 — you’re still benefitting overall. But, from the firm’s point of view, there’s no reason why they should sell a pen for $500 if you’re willing to pay $950. When competition diminishes, there’s nothing to keep prices down. 

This is pretty much what happens with the Pelikan maki-e auctions, which are held every few years. Everyone who wishes to buy one of the pens is able to submit a bid, and the highest bidder wins. Auction theory tells us that bidders in this situation will put in a bid that’s pretty close to the full value they expect to get out of a product: if the value of a pen is $1000 and you only get one chance to bid, you’ll probably choose a number very close to $1000. Pelikan therefore get to put up their price as much as possible. It’s not a great deal for the buyer, but remember they are still benefitting: they are getting a pen they want, at a price they are happy to pay. 

The auction approach works well when you have a unique product but it doesn’t work so well when your production run is higher. That’s when you need a marketing team that really understand the market and how much they value the product. Ideally, you would want to identify all the interested buyers and rank them in order of how much they value the product. 

With this information, you can determine which price will maximise revenue. If you had 100 units, setting price equal to the 100th-largest valuation would ensure all units sold and you brought in as much money as possible. This is assuming you want to sell all of the units — but, sometimes, that’s not optimal. If the top 80 valuations are markedly higher (at least 25%) than the lowest 20, it might be better for a brand to price high. They don’t sell out of the product but those higher prices mean they make more money.

This works in theory but reality is much messier. Brands sometimes overestimate demand and price too high, meaning they sell fewer items than they expected and brought in less revenue than they could have. Sometimes they underestimate demand, things sell out quickly, and they also miss out on revenue. There’s a mixture of art and science involved with choosing the right price, and a good marketing team needs good intuition to complement the data. 

So to bring the discussion back to the Star Wars pens, those pens are hugely expensive. But people will have chosen that price for a reason. I would say there’s a small group of people who place a very large value on such products — and Cross are catering to that market, not the broad community of FP users or Star Wars fans. They might only expect to sell a small number of each: selling 600 of each of the three models would bring in more than $1m in gross revenue, maybe half of which would make it back to Cross HQ. Assuming they make the pens for less than they sell the regular Townsends, and taking off a fee for the Star Wars branding — you might be talking about a $250,000 profit for a pen that ‘only’ sold a third of its production run. Not a bad result for such an incredibly niche market!

Next week, we’ll continue looking at the LE market but shift our focus to the supply side.