This is the final article following the chain of costs associated with how a piece of music gear gets to its retail price. We’ve previous explored MSRP vs MAP and the expenses associated with running a retail store and how those figure into pricing, so it’s time to dive into the final part of the pricing equation- the cost of designing and manufacturing a product.
For the purpose of illustration in this piece, let’s use a $200 MSRP boutique overdrive effect pedal made in the US by an actual company (not a guy in a garage) that is available at many major retailers. This simplifies the math because of the relatively low part count and labor as compared to, say, building drum kits or digital synthesizers.
Following the MSRP/MAP approach discussed in our article on retailer pricing and our case study pedal has an MSRP of $200 and MAP of $160, we can put a stake in the ground that the retailer paid the manufacturer about $100 for said pedal.
Many musician’s will (understandably) think the price of manufacturing is just the BOM (bill of materials) for the pedal and some nominal amount of labor. Like most things in life, the truth is much more complicated.
A piece of gear begins with an idea, and then R&D and engineering. Provided there wasn’t a marketing/executive dictate that “thou shalt design X style piece of gear,” designs will go through dozens of iterations once the foundation has been established, and engineers are likely juggling a half-dozen projects at a time. To be extremely conservative, let’s asapply 20 hours of focused research into the category and another 20 hours of experimentation to build the foundation for the effect (breadboarding, troubleshooting, etc). We aren’t counting the years of training that got an engineer to the point where they can tackle a project like this.
An entry-level engineer makes $60-80k per year, so we’ll use the middle of the road hourly wage ($34/hour before benefits, or $50/hour with benefits, insurance, and tax); we have $2k in a pedal assuming one focused week to go from idea to working prototype.
It’s now time to take that circuit out to testers/artists to get feedback. This will easily be 80 working hours (travel, correspondence, meetings, research). Now we have an additional $4k in user testing and feedback.
Assuming everything went well the first go-around, it’s now time to put together a BOM (bill of materials) and design a PCB. The BOM can be defined based on what works best or to meet a price point, but likely represents the smallest expense in a pedal.
As a standard overdrive variant in this example, the cost of parts, jacks, switches, and electronics can be relatively small; let’s say $25 assuming a price-break for volume ordering and pre-drilled, fully silk-screened enclosures.
One thing people point to when considering the price of parts for modern gear is the perceived cost savings in DSP (digital signal processor) hardware as opposed to now-expensive and part-intensive analog solutions. This is true from a pure cost-per-component standpoint, but doesn’t take into account the programming that goes into the chip (a consideration not needed for analog parts). The median starting salary for a DSP developer is $78k per year, so this work quickly get more expensive than using mojo-drenched analog parts.
PCB design and manufacturing can be done in-house, but typically gets outsourced to someone like Cusack Music’s fantastic Stompboxparts.com, where engineers design, test, and print through-hole or surface mount boards, can populate them, and even offer enclosures and varying levels of assembly, from completed products to unpopulated boards and empty enclosures.
Whether outsourced or handled in-house, there’s an associated $10 labor with every pedal produced in a standard production run.
So we’re at $35 in parts and labor for a simple circuit pedal, which leaves $65 in profit for the builder.
OK, now let’s get back to the real costs.
That $6k in (overly-simplified) work up front needs to be taken into account, so let’s spread that across an initial run of 1,000 units at $6 each.
Additionally, we can add another $10 per pedal in rent, utilities, shipping labor, etc.
Website and marketing will add an extra $5 to this first run as well, plus $10 for administration, bookkeeping, supplies, etc.
We’re now at $66 in cost in the pedal, so there’s $37 in profit, less 30% for business tax, and we’ve got about $26 profit per pedal.
All that math shows if this pedal sells 1,000 units in the first six months there is, in theory, $26k in profits to reinvest in the business, try new marketing, dedicate to longer R&D cycle products, and pay the owner (usually not the designer or builder at a certain point).
Parts and Labor- $35
After Cost of Manufacturer Operation Costs- $60
After Manufacturer Taxes- $74
Sold to Retailer- $100
After Retailer Operation Costs- $140
After Retailer Taxes- $144
To Customer @ MAP- $160
Final Sale Price + Taxes- $173
Parts and Labor- $35
Combined Manufacturer/Retailer Operations- $65
Combined Manufacturer/Retailer/Customer Taxes- $31
Combined Manufacturer/Retailer Profit- $42
Thanks for taking this journey. As I cannot state enough, there are more assumptions I’m not including that negatively impact all parties (start up costs, credit interest, sales and discounts, trade show and travel expenses, sales, warehouse, customer service, rework).
Whether you agree with the associated expenses or not, I hope you have a clearer picture of what goes into pricing. The music industry isn’t unique in this; it’s how things work in commerce in general. This information might be jarring if you’ve never been offered a peek behind the curtain of costs, but realize there is an entire infrastructure needed to support bringing you the gear you want.
Chris Loeffler is a multi-instrumentalist and the Content Strategist of Harmony Central. In addition to his ten years experience as an online guitar merchandiser, marketing strategist, and community director he has worked as an international exporter, website consultant and brand manager. When he’s not working he can be found playing music, geeking out on guitar pedals and amps, and brewing tasty beer.