The Goldilocks Effect

thegummy

Just watching an old episode of QI and they're talking about a business tactic called the Goldilocks Effect.

It's where a company will release products at three different price points - one very expensive, one very cheap and obviously much worse but then also one that's in between the two price points but seems basically as good as the expensive one so people feel they're getting such good value for money.

I wonder if this is used in the guitar business. I'd believe it, it would explain the huge popularity and reputation of the higher end Mexican Fenders for example.

They also mentioned another tactic, which IMO is almost definitely used in the guitar world in a big way, which is called Prestige Pricing.

That's where businesses will have products at a very high price point despite not being any better than lower priced offerings purely because the market for it exists as some people will want to buy the more expensive product believing that it must be better. Also that if they didn't offer the expensive product, another company would and those people would buy that instead.

I'd find it very easy to believe that both these tactics are used in the guitar world. I definitely feel that it's been on my mind that, for example, an American Strat "must" be better than a Mexican due to the price point despite not being able to identify a huge difference that I could report.

What I'm really not sure about is at what price point the point of diminishing returns kicks in. I'd guess about a grand or just under but there may well be some who would say it's half that, some would even say Squiers can be pretty much as good as anything and, of course, many of the people who buy very expensive guitars would likely believe there are significant improvements going up in to the 2 or 3 grand range.

merciful-evans

Have a wisdom point. I couldnt agree more.

I have a couple of higher end UK and USA guitars, but nothing feels better to me than finding a cheap one that punches above its weight.

Maynehead

Goldilocks or not it’s nothing sinister. It’s common sense to offer products at different price points to maximise your customer base.

It’s only a problem if it turns out that the more expensive product is actually the same or worse than a cheaper offering by the same company. Fortunately in my experience this is not a very common occurrence in the guitar world.

Yes, the value for money curve flattens out as you get above a grand but it never really goes downwards.

p90fool

There is also the need to offer products in certain price ranges just to stop punters going elsewhere.

Most of us think that six grand for a brand new electric guitar is just silly, but there are people out there who WANT to spend that much "because I'm worth it" and if a maker doesn't offer one those people will go elsewhere. 

thegummy

Maynehead said:

Goldilocks or not it’s nothing sinister. It’s common sense to offer products at different price points to maximise your customer base.

It’s only a problem if it turns out that the more expensive product is actually the same or worse than a cheaper offering by the same company. Fortunately in my experience this is not a very common occupancy in the guitar world.

Yes, the value for money curve flattens out as you get above a grand but it never really goes downwards.

The effect specifically refers to the most expensive of the three being that price in order to make the middle priced one look like more of a bargain than it would without the higher priced one to compare it to. So if it was just 3 separate price points with significant differences between the middle and the higher, I don't think it would count as an example of the Goldilocks effect.

When you say it's not common I'm surprised - would you say that the American Fenders were significantly better than the higher end Mexican Fenders? (Not arguing against you if you are saying that, it's pretty much just our opinions anyway).

P.S. Whether these specific tactics are used or not, I wouldn't personally have any reason to think that guitar companies were more honest or less prone to marketing tactics than any other kind of hugely successful business.

Maynehead

thegummy said:

When you say it's not common I'm surprised - would you say that the American Fenders were significantly better than the higher end Mexican Fenders?

Yes, just the extra fret alone is worth it!

Joking aside, I’ve never played an American Strat (or a Mexican one at that), but I can say from plenty of first hand experience that a Japanese ESP is better than a Korean LTD, by a significant enough margin to reasonably justify the price difference, after taking into account the rule of diminishing returns.

I guess the same would apply to Gibson/Epiphone and many others.

digitalscream

thegummy said:

What I'm really not sure about is at what price point the point of diminishing returns kicks in. I'd guess about a grand or just under but there may well be some who would say it's half that, some would even say Squiers can be pretty much as good as anything and, of course, many of the people who buy very expensive guitars would likely believe there are significant improvements going up in to the 2 or 3 grand range.

I'd say it's different for each manufacturer. For example, with the Ibanez RGD range, the £900-£1k guitars aren't significantly better as instruments than the £500-600 guitars, but they have fancier woods and finishes, and their £2k+ guitars definitely aren't a massive step up from there (because the cheaper ones genuinely are great guitars).

For Gibson, however, pretty much everything below a grand is a turd compared to the £1500-£2k range, yet the £3k+ instruments aren't such a massive improvement over those that people will be spending a month or two's wages on them in droves.

p90fool

digitalscream said:

For Gibson, however, pretty much everything below a grand is a turd compared to the £1500-£2k range, yet the £3k+ instruments aren't such a massive improvement over those that people will be spending a month or two's wages on them in droves.

This is true, partly because making a Les Paul for example is genuinely more expensive than making a Telecaster. Well maybe not a turd, but with obvious cost-related compromises. 

thegummy

Maynehead said:

thegummy said:

When you say it's not common I'm surprised - would you say that the American Fenders were significantly better than the higher end Mexican Fenders?

Yes, just the extra fret alone is worth it!

Joking aside, I’ve never played an American Strat (or a Mexican one at that), but I can say from plenty of first hand experience that a Japanese ESP is better than a Korean LTD, by a significant enough margin to reasonably justify the price difference, after taking into account the rule of diminishing returns.

I guess the same would apply to Gibson/Epiphone and many others.

As much as you're joking about the extra fret, there does seem to be some times where Fender only offer certain features on their American guitars.

There might be a feature that might not add much expense itself but if it's only available on an American model then the buyer has to pay extra for the American labour costs etc. to get it.

For me the reason I ultimately bought an American Strat is because the only Mexican one I liked the colour of only came with a 7.25" fretboard which I didn't want so I had to go American to get a colour I liked.

thegummy

p90fool said:

digitalscream said:

For Gibson, however, pretty much everything below a grand is a turd compared to the £1500-£2k range, yet the £3k+ instruments aren't such a massive improvement over those that people will be spending a month or two's wages on them in droves.

This is true, partly because making a Les Paul for example is genuinely more expensive than making a Telecaster. Well maybe not a turd, but with obvious cost-related compromises. 

With my LP which was just under a grand, it's clear to see where the costs have been saved - no flamed maple cap or glossy finish and no binding. I liked being able to decide if those things were worth paying extra for.

With some brands there can be 2 guitars that vary massively in price but it can be hard to tell what is actually different about it. That seems likely to lend itself to the "the more expensive one must be better" mentality.

Maynehead

Most of the time the “difference” is the cost of labour. Whether or not you think higher paid workers make better guitars, they have to pass that cost onto the price.

If there was a guitar company making similar specced guitars from the same factory but priced significantly apart, then I’d think something dodgy might be going on.

Oh and I was only half joking about the extra fret... I cannot play a guitar without at least 22 frets, so that rules out most of the Mexican offerings for me straight away.

Nikc

Writing only from personal experience my MIM Tele is as good as any other i've played and my PRS SE is better than any of the full fat american ones I've played - but it is a Santana model which I love

Blaendulais

Custom shop vs regular is similar to the Porsche scenario where a 911 turbo costs maybe 5k more to make than a Boxster but they charge a 'prestige price' of 60k more. 

You can't even get the Turbo reliced ffs.

thegummy

Maynehead said:

Most of the time the “difference” is the cost of labour. Whether or not you think higher paid workers make better guitars, they have to pass that cost onto the price.

If there was a guitar company making similar specced guitars from the same factory but priced significantly apart, then I’d think something dodgy might be going on.

Oh and I was only half joking about the extra fret... I cannot play a guitar without at least 22 frets, so that rules out most of the Mexican offerings for me straight away.

One could theorise that if two workers were in the same country, or countries with comparable economies, then the higher paid one might make better guitars but the difference in labour costs is because of the economies of Mexico and SE Asia wouldn't have that same effect IMO.

I think it only takes looking at Korean guitars and American guitars to see that the work quality isn't better by the workers getting more pay (not saying it's worse either). 

Also, remember that Fender are still making a choice on the price points of the guitars - there's no reason they have to make some in America. Which raises an interesting question - if they did decide to make their entire range in Mexico, for example, would the model that's currently called American Professional still be more expensive than the Classic Players and other models at the higher end of the current Mexico production?

thegummy

Blaendulais said:

Custom shop vs regular is similar to the Porsche scenario where a 911 turbo costs maybe 5k more to make than a Boxster but they charge a 'prestige price' of 60k more. 

You can't even get the Turbo reliced ffs.

I don't know anything about expensive cars but I trust what you say is true and it definitely sounds like a good example of prestige pricing.

I think Custom Shop guitars - where it's still just off the shelf but branded as Custom Shop, rather than actually being custom specced by the buyer - must surely be an example of prestige pricing. I've never actually played a CS so could be completely wrong but it's hard to imagine how much a Strat, for example, could be improved to justify the price of Custom Shop models.

Fishboy7

p90fool said:

digitalscream said:

For Gibson, however, pretty much everything below a grand is a turd compared to the £1500-£2k range, yet the £3k+ instruments aren't such a massive improvement over those that people will be spending a month or two's wages on them in droves.

This is true, partly because making a Les Paul for example is genuinely more expensive than making a Telecaster. Well maybe not a turd, but with obvious cost-related compromises. 

Precisely why I could never get behind a (non vintage) £5k telecaster. 

Whitecat

These tactics are just some of many the big boys use to shift product. 

Another one worth mentioning/reading about is “line filling.” If you ever wonder why there is such a bewildering choice, this is one of the main reasons. 

http://www.businessdictionary.com/definition/line-filling.html

midlifecrisis

i think people get confused in that the cost of a product has very little to do with what it costs to manufacture.Marketing has to do with selling a product for as much as you can get.

p90fool

Fishboy7 said:

p90fool said:

digitalscream said:

For Gibson, however, pretty much everything below a grand is a turd compared to the £1500-£2k range, yet the £3k+ instruments aren't such a massive improvement over those that people will be spending a month or two's wages on them in droves.

This is true, partly because making a Les Paul for example is genuinely more expensive than making a Telecaster. Well maybe not a turd, but with obvious cost-related compromises. 

Precisely why I could never get behind a (non vintage) £5k telecaster. 

Me neither, but given the number of punters who have decided they deserve a five grand guitar then Fender would be crazy not to offer one, or they'll lose a sale to someone else. 

The hardest part of making a five grand Telecaster is having to dream up some mojo-laden backstory for the ad copy to justify the extra £4,500. 

Three-ColourSunburst

midlifecrisis said:

... the cost of a product has very little to do with what it costs to manufacture.Marketing has to do with selling a product for as much as you can get.

Spot on, the perceived value of many goods is largely created by clever marketing rather than having anything to do with manufacturing costs. Examples in the guitar world range from the perceived added value of 'mojo' or 'hide glue' to that which comes from having the 'right' brand name on the head stock.

'Veblen' pricing takes things to the next step, with people perceiving something to be of high value simply because the manufacturer has put an inflated price on it. 'Luxury' goods such as Swiss watches are the masters of Veblen pricing, with companies such as Rolex turning out around a million watches a year on their automated production lines at a typical unit cost of perhaps a hundred Swiss francs apiece, with the marketing machine then persuading people that they are worth thousands.

Another disconnect between manufacturing cost and the selling price is selling on features or the advantages of a given product. A good example here is washing machines, with a basic model from a given manufacturer typically having the same build quality and almost the same manufacturing cost as a feature-laden top of the range model that sells for twice the price.

As the old marketing saying goes 'Sell the sizzle, not the sausage'.  

Three-ColourSunburst

Fishboy7 said:

 I could never get behind a (non vintage) £5k telecaster. 

Many would argue that the whole vintage market is just another marketing scam, with perceived values being inflated by a whole load of essentially irrational perceptions that have very little to do with the intrinsic qualities of the instruments on offer. And that is without even considering the level of fakery and misrepresentation that is associated with vintage instruments.