Pricing models

July 24, 2021
 by Paul McGowan

As of late, there’s been some discussion on the forums about the model we use for product pricing.

From what I can ascertain, the general view seems to be companies have a complex pricing model based on a combination of what they believe the market will bear and what it takes to cover all their R and D and tooling costs. At some level, this pricing model surely exists, else how do we wind up with half-million-dollar speakers or $50K cables?

When it comes to the mainstream companies I think the truth is somewhat simpler.

My guess is we’re all pretty much the same: a simple multiple of what each product costs to manufacture. The multiples vary depending on the expected number of units to be sold and what the sales volume of the company is.

At the end of the proverbial day, companies have to charge enough to cover expenses.

For most companies like PS Audio, pricing is based entirely on what it costs us to build your products.

Simple works best.

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89 comments on “Pricing models”

      1. FR, You better sit down and buckle up before you read any further. What all of this improved feet for speakers is about is something called constrain layer damping ( CLD ) which means you put some exotic elastomer between metal layers to dissipate vibrations. There is a pretty good explanation on the Magico site: https://store.magicoaudio.com/pod . If you go to the link you will see that Magico offers a range of these feet based on the weight of the speaker. My S7’s at 300 lbs each have to use the M Pods not the less expensive S Pods. Those prices you see are what it cost per speaker and in the case of the M Pods that starting price is for 3 pods which is what the M series speakers use. My S7’s have 4 feet per speaker. So to replace my old run-of-the-mill spikes it cost me $8K! The cute think about the M Pods is as you can see in the picture of them they come with a release pin. You install them with the pin in place and play some music. Then you pull the pins and replay the music and you get a hear how much they improve the sound ( if you like you can re-install the pins and repeat the procedure with other music. I was convinced they were worth the money on the first time.

        1. Consistent with the godfather of mechanical grounding philosophy (michel reverchon goldmund) wouldn’t the elastomer between metal layers absorb as compared to dissipate?

          Come to think of it Goldmund cones do have some form of an elastic material inside the cone. Goldmund turntables made the Linn LP-12 sound like a pillow in the lower octaves by comparison.

          Wasn’t it Steve McCormick’s Tip Toes machined aluminum cones that inspired this thread?

  1. Paul,
    I remember one of your presentations last year wherein you explained that you figure out the
    bare-bones cost, to build, a component & then you simply multiply it by a factor of five to be
    able to pay all the other business expenses & to be able to stay in business for the long-haul…makes sense to me.
    With all the computing power that we have at our fingertips these days I’m sure that your
    ‘times five factor’ retail pricing ‘logic’ can easily be monitored, & adjusted, by a handy
    algorithm that will let you know if it should adjust up or down to say, ‘times 4.7’ or
    ‘times 5.4’ should raw materials or increased sales or any variable business factors
    change the ‘profit constant’.

    ALSO-
    **Previous Paul’s Post – ‘Audio Philosophy’ (July12th)**
    Hans Beekhuyzen – ‘The Audiophile’s Philosophy’
    For those who have not watched this very recent presentation by HB, I recommend it.

    https://www.youtube.com/watch?v=a836JFAcqm8

    1. There are too many variables in audio manufacturing today as to have a simple times 5 formula across the board for any product line, from entry to top level models. Standard dealer margins are 30% on video, 40% on electronics, 50% on speakers, etc. while distributor margins average @ 40%.

      Ever since the great recession, audio prices have risen astronomically. Just look at Vandersteen Audio entry level speaker model pricing for example which doubled in five short years. Of course, Richard required extra margin to afford the design, research, machining and tooling of his top-level speakers which are exceptional in terms of music performance.

      Further, the market for high performance floor standing speakers is more competitive today as modern interior designers drive the Cedia market away from in-room speaker enclosures in regards to the integration of invisible audio/video solutions.

      Next, due to the gigantic increase in digital audio applications, analog cable companies who experienced explosive growth throughout the 80s, 90s, and 2000s are now having to expand into other categories to maintain sales levels while experiencing massive cost increases on their vendors raw materials such as copper, adjusting pricing accordingly to reflect these market factors.

      Then, when you look at a company like Spectral Audio, all standard formulas are off the table. Rick Fryer openly admits to the fact his company is extremely well financed due to smart financial investing and prices his products rather fairly when compared to other high end electronic manufacturers.

      The bottom line, all business need profit margin to sustain the cost of doing business. Some just do it better than others and some in vastly higher quantities. Value is relative to the individual consumer and their application.

      Nobody needs stuff. A wise person once said, all you need is food, water, shelter and love!

      1. It should also be noted for the record that Apple’s recent quarter gross margin was 42% (diving as low as 19% during the early summer months of the pandemic) since a great majority of consumer electronic dollars that used to be spent on hi-fi and video now go to the great Starship in Cupertino.

        Gross margin is the percentage of revenue left after accounting for the cost of goods sold. Apple margin increase was driven by their services division which includes the AppStore, Apple Music, Apple TV+, iCloud, Third-party Subscriptions, Licensing, Apple Care and Apple Pay.

  2. This doesn’t explain why prices to sell direct to customer are same as those in the dealers who have their own margin to add. I’m based in UK and prices in £GBP generally match the $USD price despite £GBP typically 1.35 stronger. Despite all that any product is worth what anyone wants to pay for it. I’m very happy with my Directstream DAC and still chose it over similar UK brands like NAIM or Linn, which perhaps represent better technological value on exchange rates etc. but not on personal value to me.

    1. Part of that has to do with shipping the item to you, return shipping and restocking the unit if you change your mind. Got to also have some extra room for coupon code offers.

  3. Interesting topic. The phrase ”what the market will bear” means different thing to different people and it has to do with capacity to be able to afford whatever goods. Which is why I generally don’t like very rich people because they never bargain. I don’t want to generalise, but too many of them just pay and never question the price too much, which can drive the prices up since the seller will say ” well I just sold one yesterday for a gazillion dollars”, thus justifying the exorbitant prices. Of course sometimes it can be difficult for one to appreciate the complexity and cost of components to build certain items. Not an easy job to calculate some of these items. That’s why there are quite a few ”financially challenged audiophiles” out there.

    1. Interesting perspective, Pete. In my experience, the more money someone has the less they are willing to pay for something. It’s rare amongst everyday audiophiles to ask for a discount and inevitable for someone of means. I have always found it funny that those with the most money drive the hardest pricing bargains. One might say “well, that’s how they keep what they’ve earned” while others would suggest it’s simply become a game.

      1. Usually people with the most money will buy a new product without waiting for that price drop thats coming down the road thus those with the most money are paying for the R & D which allows the price drop once the company recaptures it’s costs to develop a new product. This is why its important for a company to protect its proprietary information and get a patent before China steals the design through reverse engineering which they are notorious for doing including our military secrets. Their aircraft carriers and figther jets closely resemble our carriers and Stealth fighters. My company tries to protect it’s product’s against piracy for a minimum of 7 years allowing R & D recovery and a profit return for share holders. It has to be very horrifying for a company to develop a new product only to have its design stolen and sold for less because the pirate had no R & D cost.

          1. No FR, that’s why as a company you need to capture as much money early and as fast as possible. Patents help but not in China where they don’t follow international laws. Personally I think we need to isolate China from the rest of the world. We can make our product’s here in the good old USA and in other countries who respect the product right’s of other companies and don’t use Capitalism in their country for slave labor that helps make a Communist dictatorship into a global power. Part of the problem is Wall Street doesn’t care where the profits are coming from even if it’s a national security threat. Sounds like treason is happening right before our very eyes and love him or hate him that’s what MAGA was all about.

            1. Joe,
              China (the CCP) wont behave until the
              rest of the world stops buying from them.
              I have refused to buy anything from that
              country since March last year, but the rest
              of the world, I fear, is too apathetic to bite
              the bullet.
              I am but one man against millions.

              1. Everyone is so worried about Russia while China has their tentacles in every part of our country and spreading viruses that’s damaging our economy. China is this countries biggest foreign threat.

                1. I don’t know your particular circumstance, the probable answer of how he got your email is “social engineering”. The majority of domestic and international companies “sell you” meaning YOU are the product being bought and sold. Have a social media account, ever unsubscribed from an email or filled out a form with your email address without reading the EULA or privacy statement first? Long story short, most folks who are paranoid about their respective security give it away every day.
                  I’m not saying this is your example, you might want to take an introductory class in “ethical hacking” it sounds like an oxymoron but it’s not. You would be horrified to find out how easy it is to collect personal information on someone. The corporations that do this are experts at it and have billions of dollars at stake. There are plenty of start ups as well.

                  1. Good morning Lancruiser!
                    If you want to know the truth, Google is our worst au fender when it comes to this kind of a thing.
                    I know this because, this didn’t start happening to me, until I downloaded and installed Google Crome on my computer.
                    When I discovered that they were spying on me, I quickly uninstalled it, and scrubbed my computer clean of it.
                    I won’t use their search engine either because of that.
                    They collect information on you, and sails it to the highest bidder.

                2. I get those same emails John. Some are pretty Asian women trying to scam people out of their money. But there are also many scammers here in the USA. Another thing companies have to guard against are those ransomware attacks coming from foreign countries like Russia. Many times companies are being forced to pay out millions due to ransomware attacks.

            2. Treason is what happened on 1/6, committed by all the MAGA lovers who tried to overturn an election. Also, a pricing model that overcharges their customers just in case someone tries to steal their products/ideas is one reason why companies fail.

          2. Our company is on high alert for Chinese espionage. There are some Chinese interns going to our schools who are headed back to China when they are done with their education with as much information as they can gather. Heck Eric Swalwell a Congressman from California was sleeping with a young Chinese spy who bolted back to China for crying out loud. They are everywhere even buying off our politicians and infiltrating our government and social media websites. They already said they want to pass the USA as the number one power and Wall Street and some traitorous politician’s are allowing them to. I’m weary that Covid escaped that laboratory by accident. Chinese G6eneral’s are on record saying they can defeat the USA with biological weapons. They could have warned the world early on but them and the WHO organization allowed it to spread. We now know that Doctor Fauci was part of the funding of that Wuhan laboratory.

            1. I would like to add that there are many patriotic American freedom loving Chinese in our country. I’m soley speaking about the Communist dictators and their spies and politicians who allow them too much leniency that’s damaging our country.

            2. My goodness, such anger. Like it or not, the reality is we are a global economy, we always have been. Isolation rarely works out well for those involved, a better solution would be negotiation. Most insecure people need a boogeyman to blame their problems or shortcomings on, unfortunately history is replete with such examples. It’s probably unlikely you or your company has anything of value that anyone would want. Would you feel better if an american company stole your “secrets”? Unfortunately, there is too much prior art concerning sheets and dunce caps.

              1. Hi Lancruiser, If a patent is violated in the USA or with other western countries who are our allies there are courts and diplomats to turn to. There’s nothing you can do against countries like China who violate copyright laws and patents except to sanction and isolate THEM from the free world not us. China is not the rest of the world. Put tariffs on them too. There’s a difference between free trade and fair trade. We were in some bad trade agreements like NAFTA that even President Clinton said he made a mistake signing that Bill. Also I’m not mad…lol. Just have an opinion.

                1. We cannot depend on foreign oil when we don’t have to. Biden Ok’s the Russian pipeline to Germany but halts ours out of Canada killing
                  US and Canadian jobs. Build back better in Russia I suppose. Pipelines are the safest way transport oil. And Trumps tariffs were working. We obviously cannot cut off communist China cold turkey but over time we can switch to other countries whose goals are not to become the new world communist power.

                2. Hello Joe,
                  You obviously were absent the day history was taught wherever you went to school. You might be surprised but I share ethnicity with you. I remember being in the EU before Covid, I was asked “what makes america exceptional”? I really had to think about that and replied “Our refusal to objectively acknowledge our collective history” which means we are doomed to repeat it over and over again. The maga supporters would have us believe that america is great again when it always was great, a shining light for those oppressed in other countries, now the current maga paradigm is to turn our collective backs. I’m feel sorry you feel like a martyr when I am just explaining history, I’m not blaming you personally.

                  1. Joe & Lancruiser,
                    Interesting to & fro between you two guys, however we, & your children (I chose very early on in my life not to have any) don’t live in the past, we live with the future in mind & if we as ‘the west’ continue to pour our money into China…well…it doesn’t take a brain surgeon to figure out what the future is going to look like for all of us, because China is very obviously not going to become the democracy that we were told it would if we extended the hand of friendship to her.

                    Keep your eyes on Taiwan & the South China Sea over the next
                    five years.

        1. Crikey! My response is so far down now people likely won’t recall what I’m agreeing with, if they even care 🙂
          So, just to clarify, I’m agreeing with Paul McGowan’s comment at 6.11am.

      2. You are also right Paul. Like I mentioned we cannot generalize and I have known rich people to be penny pinchers who drive a hard bargain. It’s more likely the ”nouveau riche” who will throw money without thinking.

  4. Seems to me (in its most basic sense) a business is dependent on profit margin and overall profit. What portion of that profit is returned to R&D, new endeavors, owner(s) profit, employees, & etc is up to the owner / management.

    In the end, regardless of many X’s mark-up there is, it’s up to the consumer to decide what they are willing to pay. If not enough sales to support a given product or organization then we all know what can (will) happen.

    Most Everyone expects / wants a bargain. The problem can be the perception of direct sales. Setting prices for one geographical location to maintain full retail values margins for distributors and retailers. And then in another using the ‘trade in program’…. If MSRP is dropped in one part of the world everyone wants that price.

    As the latest PS Audio ad says. “What is family for?” Factor in all the perks…

  5. The interesting thing with this pricing model is, that you probably have to reduce component cost to stay competitive (means certain parts not costing much but having high sound impact may have to be dropped) and that you have to finance development effort by the margin (meaning your factor on parts is probably chosen high enough to ensure a certain development effort you want, meaning, the factor not only ensures the survival of the company). Otherwise you wouldn’t be able to put so much effort in developing a server SW that doesn’t finance itself probably. In case you strongly cross-subsidizate, I’d wonder how the big margin products can be so competitive. In case you decided to save some costs on other sides (service, quality control etc.) this would not pay back on the long run.

    So assuming you have a nice balance of everything, you probably just take some risk out of the companies earnings, invest back as much as possible and choose the areas you think are most important for the future. No wonder that’s streaming and completing the product spectrum instead of more sophisticated other products. Anyway, as your possibly biggest current investment (people for Octave SW) only runs on your products and therefore won’t flood the market otherwise, It’s still an interesting business decision for me. But on the other hand, as you simultaneously invest in rather charity projects 😉 like Octave Records, the business side of the company seems to be very healthy…or at least healthy enough 😉

    1. Well, it’s fascinating to watch how people speculate about what’s going on behind the scenes. Certainly we, and everyone else in this industry, make decisions based on parts costs. However, where we draw the line is in performance. If we can’t afford the parts required to make something sound the way we want we either design around the problem or scrap the project.

      Investing in Octave isn’t being done out of profits because for the last few years we’ve not made much. Octave’s being financed out of debt.

      1. Yes, fascinating is probably extremely benevolently expressed by you, I rather think it needs a lot of patience for such wild guesses lacking competence 😉

        My assumptions were finally just based on the perceived even stronger parts cost orientation of PSA than usual (by your various pronounced references). And if you say Octave SW is financed out of debt, it even more admirable you made this step, as I guess this debt has to be mainly compensated by other products. But this again is a wild guess…possibly the projection of future streamer/server sales is in a range, making this a completely economically logic decision in order to co-lead the segment and not just rely on 3rd party SW.

        At least with the proposed design of the small streamer (sound quality focus, I2S, inexpensive casework, no hard disk and other redundant features to match reduced NAS user demands) you hit the favored feature and non feature selection for me, in case I can live with the SW functionality. I’m looking forward to the upcoming news about it.

  6. Good audio gear lasts. If I divide my stuff by the number of years I have owned it, it’s a great and cheap investment to enjoy music.
    You have to decide not only affordability but how much you value something.
    As someone (I forget who) said: “there are some who know the cost of everything and the value of nothing.”

      1. Cheers FR. I recently said goodbye to a good pair of Brit speakers after many years of using them.
        The Rogers originally cost a lot but overall they were great to listen to and cost around fifty bucks a year. Nothing compared to the pleasure they gave.
        Take care in the lockdown mate.

        1. R_43,
          I had 2 pairs of Celestion – ‘Ditton 66’s (my old Brit
          loudspeakers) from 1981 until 2018 & I do miss them.
          Spare parts were becoming a problem, so they had
          to go while they could still command a decent return.
          Thanks for your concern; will do.

    1. Richard_43,

      It was Oscar Wilde who penned the quote as the definition of a cynic.

      More generally, I don’t know the price of everything but feel cynical at the cost of some equipment, as cynical as I think some manufacturers are. I’m not talking about PS Audio here but the manufacturers of mega bucks kit. We’ve been here before, it’s been explained before, but I still don’t get/believe it.

      Think of a piece of kit, say speakers. Think about the cost of the components, the cabinets, add in any amount for R&D and then manufacturing. No real distribution costs if you sell direct. That is then multiplied by many hundreds of percent which personally I don’t see as justifiable. Isn’t 100% clear profit enough? Obviously not if you can make more. As we’re talking mega bucks products here in the hundreds of thousand dollars range you only need to sell one and you’ve made a year’s salary or more.

      Of course it’s not just hi-fi, it’s in all areas of high end spending. You can’t really blame anyone, it’s just business. If someone’s willing to buy it, they’ll build it.

  7. I yoost to spend a lot of time, talking to high end stereo manufacturers over the phone about how they bring their products to the market.
    One of them, a Mr. Bob Carver, told me this.
    “It’s kind of like buying stocks.
    You wait for the prices of any particular stock to fall.
    And if the price falls low enough, then you buy it.
    But when the price of the stock goes up, then you sail it at the market value price.
    Your broker may take his or her cut off of it, but in the long run, you have made a good deal of money.
    In some cases, you’ve made either twice or three times the amount of money that you put in to the stock back.”
    But I look at the manufacturing side of things.
    But sense we’re talking about high end stereo equipment here, it’s the cost of the materials.
    And also, the cost of the labor that the company owners, have to pay their workers.
    And also, it’s all the research that has to go in to developing the products.
    then, the cost of the patents.
    All of that, has to be factored in to the price that you the consumer will pay for the products.
    Take the PS Audio Sprout for instance, you can get that from Paul, for about $700.
    But if that amp was to be sold at a retailer, you may end up paying twice or three times the amount that Paul charged you for it.
    Because, when you look at retail stores, you have over head sur and other charges plus taxes to be factored in to the retail price of the products.
    That’s the difference between wholesale and retail.

    1. Hi there JP,
      The PS Audio – ‘Sprout Mk2’ (the current model) is AU$1,295 here,
      which is equivalent to US$945 at current exchange rates.
      Whereas the equivalent from S.M.S.L., the ‘DA-9’ is AU$380 or US$277.
      Both are ‘D’ class, both are fully balanced, both are made in China &
      both are 50 watts rms per channel into 8 ohms…just sayin’.

      Here is a recent review:

      https://www.youtube.com/watch?v=qEASsQ06SCQ

      1. Good morning again FR!
        First, thank you for the update on the price of the Sprout!
        Because, to the best of my understanding, it was actually, $699.
        But with the Alack speakers, that added $300 to it.
        Giving you a price package of $999.
        But just one curious question for you.
        How much did you pay for that MF 200WPC integrated amp you have?
        I’m asking because, I think I found one similar to it, for about $2800.
        It’s specked out at 20W more per channel.
        I found it at Underwood Hifi.
        Check it out at:
        https://www.underwoodhifi.com
        And tell me what you think.

        1. JP,
          What you are looking at is the ‘M6si’ (the current model) which includes a phono stage. They retail for AU$5k here (just divide by 0.73 to get USD)
          Mine is second-hand & it is the ‘M6i’, no phono stage that I don’t need.
          It is nearly 10 years old & I swooped in & grabbed it for a mere AU$1,200.
          The seller wanted AU$1,800 but I haggled the crap out of him, 3 days before Sydney went into it’s 2nd CoViD-19 lockdown…timing is everything in life 🙂
          20 extra watts, on top of 200, is not going to make one iota of difference to me & it sounds great!

          So, what do I think?
          I think that it’s a brilliant little integrated amp;
          just ask ‘tonyplachy’ & read the review in
          ‘Stereophile’ magazine.

          1. High again FR!
            Thanks man!
            I appreciate that info!
            I’m in to making my own recordings.
            But the time has come, that I need to move away from my vintage Fisher receivers daring the hot summer months.
            Those receivers, make a little too much heat for me to handle.
            Granted that, I don’t need a full 440 watts total power, but it will do the job for me.
            But looking at the $2800 price tag, I don’t think that Walter will make me pay full price for it.
            He mite give me a 25% discount on it, if I decide to get it.

              1. Good morning FR!
                If I’m wrong, then please correct me.
                I assume you’re talking about the 1200AU you paid for your integrated amp.
                I tried to do that on the calculator that’s built in to my computer.
                I got 87.60.
                Is this correct?

                    1. Well, to be honest, it was more the timing than my ‘smartness’.
                      I was just lucky that the seller placed his advertisement for the ‘M6i’ when he did & that I happened to catch it in my ‘side mirror’ because I was ok with the Onkyo – ‘A9070’ for a while longer…sometimes you just have to jump ahead of schedule when the opportunity presents 🙂

  8. Probably shouldn’t add to the very interesting comments above…
    … but, as has been mentioned, Paul told us in one of his videos – PS Audio builds using the ‘best’ components, whatever they cost… each product is added up and then the cost to customers is multiplied by 5. There are exceptions, like the Sprout, where component costs were considered.

    I also seem to remember Paul saying they were proud to pay everyone above the ‘minimum wage’ or whatever the quote was. Obviously, he and a number of the ‘top end’ folk get rather more – or Paul’s annual iPhone update and Tesla are on ‘expenses’.

    As for the UK costs being 40% more for shipping, this should not be true if decent logistics is used – and the various import/export is done well. I’m told it can cost more to ship coast to coast up and down the USA than into the UK, we’re a small island.

    Unfortunately, as with Octave Records, while the cost of SACD plus international $15 shipping is good, the end payout is very high. This is because its not done correctly, so when it reaches the UK, as well as reasonably import taxes high extra charges (that almost double the whole order cost) are made as the courier and the UK impose very high handling fees… 🙁

  9. In the area of electronics for the airline and industrial manufacturing we used 38% over our cost. We were always open to special quantity pricing arrangements and or long term purchasing agreements. Service repairs were high, would cost you 38% of retail pricing.

  10. Hi everyone! I concur with hifipete! The prices of hi end audio have gone extremely crazy and now for a middle class audiophile to get a really good system, it will be by buying used equipment. I know that time have change, parts and materials cost, etc! But there still ways to bring down the manufacture cost, like chassis construction, by limiting the model numbers (Now we have model A to Z on which model Z is the best one and the first one developed. But not, let’s make 10 different ones for the poor audiophile and the rich one and other ways the companies know how to get peoples attention. Back in the days there was a lot of different accessories that will improve the sound of your budget system, those days are gone. But it seems that because some wealthy people buy this costly gear, the manufacturer keep building them! And also there is a lot of competition between some of them and even the manufacturers. There is misconception that if its cheap, it’s not good and that drive some companies into building gear that cost a mortgage, so they can stay alive in the Hi End Audio world. The way I see it, when I heard about a new piece of equipment, the first thing I do, I go and check the price and if it’s not on my budget I don’t bother myself on reading the announcement. There is always a way to build something available to everyone, without breaking the bank for consumers and manufacturers! But remember, money talk!

    1. Good morning lckyluciano!
      Some of those accessories that you spoke of, are still being both made and sold today.
      You just have to know where to look for them.
      For instance, a company that’s called, Black Ice Audio, makes a box that they call, a FXX-Sound Stage Expender/Bass Booster.
      Underwood Hifi, has it for $499USD.
      You can check it out at:
      https://www.underwoodhifi.com

  11. There are a lot of generalizations going on here and with respect to bargaining I do not think that it follows any specific pattern. I grew up in a lower class blue collar neighborhood. Some folks lived paycheck to paycheck. People always bargained simply to get their money to buy more. I realize that I am no longer that poor, but I still bargain to get more for my money. I would not have the stereo system I have if I had not bargained, trade-in, bought demo units, etc. to get more for my money.

    I have seen pricing from a different perspective than Paul has. All businesses can be put into one of two categories” Small and Medium ( S&M ) or Enterprise. Businesses like a deli or pizza shop that employee four or five people are small, businesses like VPI, PS Audio, Magico and Wilson Audio are somewhere between small and medium, and businesses like Sony, GM, Ford, Intel, IBM, Amazon, Apple, etc. are enterprises. I work for almost 30 years at a couple of enterprise businesses in R & D except for a three to four year period when I worked in the bushiness office for the area where I was doing R & D. I was an account manager ( meaning I was responsible for the P & L ) for an account that was expected to do about $250M in revenue each year. For any new product we made for that account ( we made lots of new products ) there was a team of 8 or 9 people who did a detailed cost analysis of the proposed new product. They would then give me that cost analysis with a recommended price range. In an enterprise business there are all kinds of regulations about fair competition, selling at a loss, what has to be included in a cost analysis, etc. If I wanted to go outside of the recommended price range I had to go see the big boys and unusually the lawyers ( believe it is no fun to have to see the lawyers ).

    Some of you think that audio gear manufactures like PS Audio go through all kinds of machinations to price their gear. Paul does not have 8 or 9 people to do a detailed cost analysis and an in house legal staff to see to it that you do not get a huge fine or have your ass thrown in jail if you price something too low. Give the poor man a break.

      1. I have no idea what business you are in, but there is no such thing as a captive market when it comes to semiconductors. It seemed like there were always price negotiations going on with the customer. If it was an established part number they would argue we should be having high yields and be able sell for less. If it was a simple tweak on an existing part number they would argue the same thing. If it was a new part number we would ask ourselves do we want to have more product like this, which would effect our pricing.

        When I had this job I actually new some guys at another one of our sites who got their butts fired over playing nasty games with DRAM prices.

        1. Hmm, semi-conductors I consider chips as a razor blade business, IE: ultra thin margins. Bet it was a constant challenge, and exciting to make things happen!
          The place I was working for offered value added specialty thermal barcode printers and airline ticketing equipment. They were heavy, fast units with twin-ax / coax network interfacing pcbs designed for use with mainframe computers. Customer base was American Airlines, Transworld Airlines, Walmart, Fedex, UPS, Sears, etc, etc.
          All that old iron so to speak is long gone, most all have moved on to those tiny plastic printers and no service contracts.
          I think audio manufactures could switch to a similar format that the airlines use, micro circuits placed inside a tiny metal box. Think the days of the eye candy effect are waning.

  12. I worked most of my life in a large architectural engineering firm. As an architect who managed billion dollar projects from proposal through completion, I had to be concerned about more than just delivering an exceptional quality project to the client. I had to think about profitability, liability, and contingencies. I had to know by experience and intuition what costs to expect–direct and indirect (including company overhead–which can run 150% to 350%–higher for those who have to do a lot of marketing), manhours by classification to perform the services, the most advantageous fee structure while still being competitive, what subconsultants would be required and at what cost, legal pitfalls to avoid (one big lawsuit can wreck the firm’s financials for years), sales opportunities for additional services and fees (which can be substantial). And once a project was under contract, I had to monitor it continuously to track project costs against the budget and schedule I set up in the beginning, manage my team to be sure they did not overspend effort and expenses, leaving enough to successfully complete the project without eating into profit. Such is the life of a managing architect. We all cannot be a Frank Llloyd Wright living most of our life in bankruptcy. The nitty-gritty of business is more than just winning awards and making customers happy. Making a good profit to fund R&D, cover contingencies and keep people employed, secure and well-compensated is part of the business plan.

    When people look at the price of a product or a professional service, most do not have a clue about all the costs of doing business that must be factored into that product or service. The direct cost of labor is only a fraction of the total cost of production. Legal, accounting, insurance, taxes, facility costs, employee benefits (retirement, holidays, sick leave, jury duty), research and development, even birthday parties during work hours–all have to be factored in. Just think: part of what we pay for a product is for lost time for birthday celebrations, trips to the coffee machine and potty breaks during the work day…LOL

    1. My last paragraph should have included one of the biggest business expenses of all: marketing. Reaching new clients and customers is vital, but it costs time and money. When you hire a plumber, expect to pay the one who advertises on television much more than the ones that don’t. Recently, the new water heater quote I got from “the smell good plumber” was twice that from a smaller, lessor known company. i don’t know about you, but I don’t get close enough to a plumber to worry about how he smells. My water heater is in the garage.

    2. Good afternoon JoesthLG!
      I don’t know if you saw my earlyer post, but here’s what I said.
      “I yoost to spend a lot of time, talking to high end stereo manufacturers over the phone about how they bring their products to the market.
      One of them, a Mr. Bob Carver, told me this.
      “It’s kind of like buying stocks.
      You wait for the prices of any particular stock to fall.
      And if the price falls low enough, then you buy it.
      But when the price of the stock goes up, then you sail it at the market value price.
      Your broker may take his or her cut off of it, but in the long run, you have made a good deal of money.
      In some cases, you’ve made either twice or three times the amount of money that you put in to the stock back.”
      But I look at the manufacturing side of things.
      But sense we’re talking about high end stereo equipment here, it’s the cost of the materials.
      And also, the cost of the labor that the company owners, have to pay their workers.
      And also, it’s all the research that has to go in to developing the products.
      then, the cost of the patents.
      All of that, has to be factored in to the price that you the consumer will pay for the products.
      Take the PS Audio Sprout for instance, you can get that from Paul, for about $700.
      But if that amp was to be sold at a retailer, you may end up paying twice or three times the amount that Paul charged you for it.
      Because, when you look at retail stores, you have over head sur and other charges plus taxes to be factored in to the retail price of the products.
      That’s the difference between wholesale and retail.”
      You covered some bases that I didn’t cover.
      But never then less, we both are in agreement about the same things here.
      A lot of people don’t think about stuff like this.

      1. Yep, and then there are the so-called “lost leaders,” where you practically give a product or service away in hopes that you can up-sell in the future. Or times may be slow and you may need to keep your staff busy in the slow period rather than lay them off and have the expense of rehiring when things pick up. For example, a tree removal company quoted me $24,000 to remove four 90-foot tall eucalyptus trees from my backyard. Another company with a crane and 10-man crew quoted $5,400 for the same job. Naturally, I grabbed the second deal. Several months later, that same “great deal” company quoted me $5,400 just to remove a 25-foot long hedge, three times what my gardener wanted for the same task. My gardener did a fine job.

          1. If you saw the size of those eucalyptus trees, you would understand why the quote was so high. The trees were humongous. My house and the neighbors’ house were under the tree canopies and electrical lines were running through one of them. I was expecting quotes of around $20k. Just to trim the trees would typically run $4K. It was an interesting day, watching heavy logs swing on ropes within a few feet of my windows before crashing on the ground. I think the tree climbers came from the Amazon rainforest.

        1. Good afternoon JosephLG!
          All excelent points man!
          That’s exactly what I was getting at.
          Sometimes, you have to shop around, in order to get the best deals.
          Not very many people know how to do that.
          This is especially true about most of the people in the younger generation.

  13. JosephLG, that has to be one of the most demanding positions a person could have, your mental dexterity must be over top great..
    Your marketing comment gave me a thought. There probably would be more people involved in buying high end audio gear if they new it was available. Here in the KCMO area I still stumble onto audiophile stores I never new existed, been here over 20yrs.
    These stores don’t advertise, only a few of them have a web presence. Think most people rely on the big box stores for there needs and we all know how limited they are… Not sure what the answer is.

    1. Thanks, David. I have thankfully retired from the rigors of my former profession, so my mental dexterity is probably in decline from underuse. Regarding audiophile progression, the internet and its forums, including sites like this one, are in my opinion the future of the audiophile craft. I haven’t been in an audiophile store for decades.

  14. This is a hugely complex subject.

    Obviously there is the extreme high end that is almost bespoke and may well be loss-leading for the manufacturer, but for a purpose. For example, Rega developed the Naiad turntable at vast expense and ultimately sold 500 of them for £30,000 (about $40,000) each, but it was primarily a research exercise into what was possible in design and, moreso, materials technology. The end result was the P8 and P10, which are possibly the most advanced and best value turntables on the planet and have been a massive success.

    So if you do a “cost-plus” approach, which many do, you need to get your costs right to get to a sensible price. That’s the basis of Quad’s success over decades. All companies who designed speakers and amps for the BBC were very cost conscious (the BBC is publicly funded) and had to build world class “monitor” quality cheaply. It’s a mentality that still has a big place in British audio. Harbeth is a good example.

    A problem with “cost-plus” is that when you get to a price and you make the unit for 5 years and the costs go up, your margins shrink, because price increases are difficult without a product upgrade.

    Another approach that I think is really sensible is, for example, the Dynaudio contour range, when the engineers were tasked with producing a range of 3 speakers of increasing size with as much value as possible (and reflecting the Contour heritage – I had a pair – they were great speakers) to be priced at €4,000, €6,000 and €8,000. Again, a huge success, a range based on market assessment.

    At the more budget end of the market, which has always been very price competitive, it seems you have to manufacture in Asia. Companies like Cambridge Audio have done that since the 1980s. John Weslake, one of their best engineers, spent several years in China developing world class production facilities and logistics. So my Cambridge Audio CXA81 cost one third the price of the Stellar Strata and is probably significantly better.

    Of course the Stellar Strata may sell based on brand value alone, and brand value is of course hugely important. In some industries, like cosmetics and fragrances, brand value is everything and production cost is usually around 5% or less of sale price. You are just paying for a brand name.

  15. I remember when car dealers used to have nearly all their available models fully equipped so the sticker price would be higher. Everything from power steering, power brakes, air conditioners to radios were extras. To get the base price meant waiting several days or weeks. When I bought my first car, a Mazda RX4 with the rotary engine for base sticker price $2,000, that is all I could afford. The dealer thought he could at least get an extra $200 out of me by saying he had no cars without a radio. It was late at night and I was about to walk out the door when he offered to pull the radio, to bring it to $2,000. When I picked the car up the next day the radio was gone. I am the only person I ever knew that did not have a radio in their car. How did I ever become an audiophile? LOL

    1. I once bought a new car without wheels.

      It was delivered and inside 12 hours it was sitting on bricks, even though it was meant to be fitted with locking nuts (optional in those days). Turned out the salesman was running a racket passing details of new sales (and locking nuts) to a criminal gang. His salesman days shortly ended.

      1. Steven, I think you and I just lost any shred of credibility we might have had. I bought a new car with no radio, and you bought a new car with no wheels. Let’s see if FR can beat that.

              1. Good morning FR!
                What you told me last night, makes perfick sense!
                A cupple of months ago, I stumbled across a pare of vintage Pioneer Titan IVPW30-C speakers.
                The guy that had them, wanted 1200USD for them.
                I talked him in to giving them to me, for 300USD lest then what he was asking for them.
                Do you think that this is a good deal I made?

  16. To my ears, the claim that PS Audio pricing is all about the cost of production does not play musically. It sounds dry, analytical and some might say digital. It’s never that simple.

    I’ve no doubt cost of production plays a role in pricing, but the fact that so many PS Audio products are similarly priced gives me pause, a great deal of pause.

    I would bet there is a heavy dose of what the market will bear in pricing considerations. I also would not be surprised to learn that a desire to fit into the “affordable high-end” category plays a part – not obscenely expensive but within the reach if we stretch enough.

    No doubt the multiplier includes administrative and other costs usually found under overhead. However, design costs have to play a part. How else would PS Audio recover the very lengthy development costs of a speaker line with a forever expanding launch date?

    1. Well, whether it plays well or not doesn’t much matter. It’s still the truth. Speakers and their development costs, for example, are just covered by ongoing operations and income like everything else we do. Sometimes we get lucky (or good) and produce a product on time and to schedule. That helps a lot. Other times not so much. So, it’s a mixed bag.

      You can usually predict how we’re going to do. If we’re redesigning or updating an existing product we can be pretty on schedule. Or, if we’re coming out with a new product based on technology our engineering team has previously done before (amps and preamps might be good examples) we can stay on schedule. If we’re doing something new like speakers or Octave streamers, you would be in the money betting against our proposed schedule.

      It’s really hard to accurately predict how long it will take engineers to design something they’ve not yet designed before – especially us and because of our stuff standards of what it has to sound like.

      1. Paul, you are an educator and a good one. Please help me understand.

        It’s easy to understand how designing something new or something that the staff is not highly experienced with takes longer and timelines can be iffy in those situations, as are costs.

        However, those are costs that must be paid for. Unless you have an angel investor, the only way to pay for those costs is through income from sales. That, logically, means that PS Audio gear prices have to somehow include those costs.

        I’ve never resented paying PS Audio prices because to thrive you have to expand and innovate and that costs money. Voicing something musically, which I value a great deal and PSA does so well, takes money.

        I think it’s fine to mark up products to cover all costs, not just production and what is typically covered by overhead, which is included in the multiplier. Research and Development has to somehow be included in the multiplier to pay the bills. Otherwise, how does a company with one source of income, namely product sales, do it?

        Of course, it’s not any customer’s business to ask questions relating to the finances of companies they buy from. I ask only because you’ve touched upon it in answer to questions at various times. I also do it because I, too, am an educator and like to understand.

        1. Thanks for the kind words, psalvet. I imagine every company has its way of working. For example, my good friend is the head of research at Northrup Gruman and they figure out how much every phase is going to cost them then markup the final product to reflect that along with profit.

          We are simple folks that don’t want to make things complicated. Plus, as a small company of 50 people we don’t have the layers of project managers and accounting nerds to figure such things out.

          So, our engineering department runs about a million and a half a year to fund. So, clearly we need to pay those bills or people go home and won’t work anymore. 🙂

          In its simplest form, imagine our company with an ongoing set of bills to pay each and every month. To pay those we must have (as you point out) income from sales (no, we have no angel investors or anyone with deep pockets). Over the years we have learned the amount of gross profit and sales levels we can expect each month. Our finance people (through the yearly budgeting process) have a good idea of what we can sell per month and what profit that will bring in. As long as we’re bringing in enough gross margin (profit after accounting for the cost to build the product but before expenses are removed), and we sell enough, we’re good.

          Example: let’s say widget A costs us $200 in parts and labor to put on the shelf. We sell it for $1,000. Our gross margin is $800. From that $800 we have to cover all our expenses like salaries, health care, rent, and so forth. If anything is left over, that’s called net profit.

          As a company, we’ve never made a lot of net profit and what net profit we do make we plow back into the company in order to fund its growth (which involves cash management which is a whole other can of worms).

          So, as a company our average sales are steady enough to mostly cover our expenses. Some mnoths we make net profit, other months are break even, some we lose. But overall, we squeak by as profitable.

          In consumer audio models of equipment have lifespans. We can sell the same model of product for between 3 to 5 years before we need to update it (people want the latest greatest and we saturate our market). As long as our engineering team is doing their job, then we get product refreshes somewhat on time and this in turn helps us maintain a steady rate of sales, month to month and from year to year.

          We find this method of averaging expenses comes out just fine in the wash. Mostly.

          1. Paul, I appreciate your taking the time to explain. I learned something today about small to mid-size business management.

            I also harked back to another learning from one of your videos. When giving a tour to the editor of Stereophile magazine, you said that lots of good reviews could break a company like PSA, by creating great short-term demand that challenged the capacity to supply.

            No business wants disappointed customers. It changed my perspective on the sudden onslaught of good press and was an eye opener. Thanks for sharing.

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