To kick off the new year, I thought we’d have a look at one of the most common questions people have about the pen business: why are some FPs so cheap and others so expensive? It’s too big of a question to address in a single post, so today we’ll just look at one part of it: substitutability, and how competition forces prices down. If you haven’t previously seen it, you might like to check out an early post of mine, The Purchase Decision, as background reading.
There are some standard explanations for the high cost of some pens: materials, workmanship, and scale. If you build a pen with expensive materials — whether they are rare celluloids, abalone shells, sterling silver, diamonds, whatever — it’s rather obviously going to make a pen more expensive. The same goes for anything that requires detailed, expert workmanship, like hand-painting layers of urushi lacquer or hand-tuning a nib. Not only is this kind of work expensive, but finding expert practitioners can be difficult, and unlike some other parts of the FP world, those costs really only rise with time.
Production scale also matters. I’ve spoken about this before, but coming up with a new pen requires designers, engineers, and marketers. It all costs money, and is an investment that needs to be recouped. Those costs are divided amongst all of the pens sold, and if a pen is sold in small quantities those costs aren’t spread out terribly much, and the price has to be higher. On the other hand, a pen sold in large quantities can spread out those costs very thinly — so even a pen with quite expensive development can be sold at a price not much higher than the production cost.
Those explanations focus on cost factors, but that isn’t all there is to the pricing decision. If really only provides us with a price floor: the minimum price that a brand would be willing to accept if they brought the pen to market. Ideally, they would very much appreciate it if price was considerably higher than that minimum. In technical terms, we’d call this the lower bound on price.
Contrary to what some people assume, there’s also an upper bound on price: a ceiling or maximum price that a brand would choose. That ceiling is determined by how much value buyers will get from the product. In general, we can say people are willing to pay up to that figure to own the pen: so if a Twsbi 580 is worth $150 to me, I’d be willing to pay up to $150 to own it. That’s the most I would pay, and so that’s Twsbi’s price ceiling.
Of course, if I value the pen at $150 but can pay a lower price — say $65 — that’s when I’m getting a good deal. The difference between the two figures is what we call surplus (you can read the background on that here). The further that price falls below my value, the more surplus I’m accruing, and the better deal I’m getting. Alternatively, if price stays the same but my value increases — maybe because I find the perfect colour or nib size, or the brand adds a new feature — my surplus is also increasing. Whether it’s a better value product or a lower price, I’m getting a better deal.
The upper and lower bounds provide a range into which price must fall: any higher and it’ll be a bad deal for consumers — price will be higher than the value they get — so they won’t buy. If price goes below the lower bound, the brand will be losing money. The brand has to choose a price which fits into that range, but there’s a final constraint they need to face: competing products.
The presence of other brands and products means that consumers aren’t just thinking about the absolute price and value, but the relative price and value. Buyers aren’t thinking about minimum price or maximum value, they’re thinking about surplus: which product is offering the most bang for my buck?
Faced with this further constraint, brands have to figure out how they can offer buyers more surplus than their competitors. At the design/production level, they can tweak the product to be more appealing or more function: they could change the design to be more comfortable, better quality, or more colours, etc. This would improve the pen’s value and increase buyer surplus. But once a pen is released, brands mostly only have one lever they can pull to influence surplus: changing price.
Reducing price isn’t always desirable: you might sell more product, but each unit is bringing in less money. Plus, it might induce your competitors to reduce their prices as well, just to deny you any advantage. But often it’s the only thing a business can do to compete in the short term.
So if you release a product that’s brand new to some part of the market, you might have the luxury of pricing without any substitutes — without any competition. You might well opt for a price close to the upper bound and would have quite a profitable business. But that profit would induce other firms to join the market, firms who would introduce substitutes products and creating competition. Those firms would compete in how much surplus they offer to buyers: some would redesign their products, offering more features at the same price (such as the Pilot Metropolitan’s new, retro pop colours); others would reduce product price; and, on rare occasions, a brand like Twsbi would emerge and do both. Over time, prices would fall away from the upper bound and keeping falling until they settled at the lower bound: the lowest price that firms could offer while still breaking even.
The next phase of competition is where the most efficient firms push prices even lower. If they can make better products for the same price as their competitors, or they can make the same products at lower prices, they have a real edge. They can push price down, beyond the point where their competitors can break even, and force them to leave the market. Generally, the firms forced to leave are the ones who don’t have effective marketing or design teams (and therefore can’t create products that offer a lot of value to buyers) or who don’t have effective management (and therefore lack cost discipline). While it’s always sad to see businesses quit a market, it’s generally those who aren’t really offering buyers a good deal anyway. In the FP world, we’re more likely to see Parker or Sheaffer call it quits than Twsbi, Faber-Castell, or Edison.
While this sounds harsh, a highly competitive market is great for consumers. Products get better and better while prices get lower and lower. Firms invest in innovation to create products that are valuable to consumers, and in production innovation to reduce their costs. The 1950s are a great example of a highly competitive pen market, where competition led to some monumental advances in pen technology and design. And the 1970s-80s show us a time of decreasing competition: firms closing down or withdrawing from the pen market meant fewer substitutes, and prices shifted back up towards the upper bound. It’s not surprising that firms then weren’t too interested in innovation.
Today, the lower end of the market (sub-$200) is probably the most competitive it has been in half a century — particularly in the sub-$100 category, where more than a dozen brands are producing competing products. The old stalwarts like Cross, Parker, Sheaffer, and Waterman — brands which have coasted off their reputation for decades, without any real investment in innovation or providing real value to buyers — have been almost completely pushed out of the sub-$50 market and will find it increasingly difficult to stay in the business at all.
Competition in the $100-200 market is less vibrant, and is dominated by the Lamy 2000 and Pilot Vanishing Point. While there are a lot of other models available in this price range, most are basic steel-nib, cartridge/converter pens which don’t offer buyers anything special. My big hope for 2016 is to see someone come up with a genuinely innovative product to compete in this space: not just another c/c pen with a different paint job, but something new and interesting that will actually shake things up. (That said, I’m not holding my breath).
At the other end of the market ($400+), there are a lot of brands and products but I wouldn’t call it particularly competitive. Competition isn’t just having lots of other products available, it’s about having effective substitutes: multiple brands offering products for the same group of buyers. And without effective substitutes, there’s no pressure on brands to get prices down.
My read is that most premium brands have each found niches of buyers that they serve, with little overlap between from one brand’s niche to another. Even similar products aren’t necessarily catering to the same group of buyers. To an outsider, a Montblanc Meisterstuck and Pelikan Souveran seem like they’re a pretty similar product: both are gold-nibbed, piston-filling fountain pens of similar sizes. To some in the community, these two products are effective substitutes: they could go either way, depending on which offers better value. But I think those buyers are the exception rather than the rule.
My view is that these two appeal to quite different type of buyers, both in design and writing style. The Souverans have more colour and liveliness to their design, while the Montblancs are more subtle or more plain, depending on your point of view. That difference speaks to the different buyers. The stereotypical Montblanc owner is a top executive, diplomat, judge, or politician; my personal experience with such people is that they tend to prefer subtle design — something which doesn’t stand out. Name a single successful politician with a bold taste in fashion, or a diplomat who wants a meeting derailed by a discussion about his or her showy pen? The subtle design of the Montblanc is an advantage to those buyers, people who might find the Souveran design a little too eye-catching or distracting.
Those who prefer the Souveran often describe the Meisterstuck design as boring, or wish the pens were available in other colours. Those buyers want reliability and quality, but they also want something a little more colourful and lively, and so the Souveran is a much more appealing option for them. It seems reasonable to conclude that the brands are catering to quite different groups of buyers, that they’ve built their businesses around serving the different needs of their particular niche, and that the groups of buyers generally don't necessarily see the two as effective substitutes for one another.
The same goes for other premium brands: they are all specialising in different niches. If you’re someone interested in writing with a hand-crafted masterpiece, there’s not much in the way of effective substitution for a Nakaya. If you want something with a nib that is simply sublime, I’m not sure there are many good alternatives to Omas. And if you want something that’s more of a technical spectacle, I’m not sure you can go anywhere but Conid. Even with the showy Italian brands — Aurora, Delta, Montegrappa, Visconti — each has a very different design aesthetic which is likely to appeal to quite different buyers. That lack of substitutability means that brands aren’t facing the same degree of competition. They don’t have to give up as much surplus as the brands in the lower end of the market, and prices tend towards the upper bound.
Of course, the internet — in all its undoubted wisdom — has its own view of higher prices, and has decided that such prices are possible only because of the brand name: that some people are seduced by effective marketing into believing one product is vastly superior because it carries a particular brand name or logo, and will pay a much higher price for it. I have problems with this account for both philosophical and practical reasons. Philosophically, I dislike any explanation of human behaviour which assumes away agency or rationality: if your explanation can be summed up as ‘other people are stupid’, then it’s not terribly compelling. Particularly when you’re trying to make the case about people like CEOs or judges, who we might reasonably assume to be quite rational decision-makers. I’d much rather see an argument which assumes other people are just as intelligent and rational as you are.
The brand name argument also fails on practical grounds. If a premium brand like Montblanc were successfully selling inferior, overpriced products, why wouldn’t Pelikan simply copy that strategy? They have the pedigree and financial resources to build up their marketing capability and position themselves as an historic, premium, luxury brand. If this strategy is so blindingly effective, why haven’t they done so? In my opinion, it’s because the brand name isn’t the key to Montblanc’s success, but because they have found a profitable niche and served it effectively. (And I’m yet to see any evidence that Pelikan is actually less successful than Montblanc, despite their brand name having less cachet.) For me, the brand name argument fails on those grounds.
If we accept the two premises — first, that prices are influenced by competition, and second, that the premium market lacks effective competition — we must come to the conclusion that prices in the premium market are higher than they could be. We can also conclude that the solution is for more brands to enter with effective substitutes, forcing incumbents to offer more surplus to buyers in the form of lower prices or better products.
Now that’s a pretty tall order, especially in some of the smaller niches. But I’d say that growth in the popularity of pens, and better economic education of the community, is likely to lead to more and better-discerning consumers. As long as that continues, I think we’re likely to see brands becoming more competitive and better deals for buyers.
Personally, I would love to see more competition in the FP market. Not just because I want to see some of the deadwood removed (though I do) or because I want to see lower prices (though I want that too) but because I believe competition will lead to more investments in innovation, and that will lead to new and interesting products for us to enjoy. Here’s hoping that 2016 takes us a step further in that direction.