It's pretty normal for a company to mark up accessories far higher than their core product. Look at an Apple iPhone silicon case at $50. What's that cost them, $3? The core product has competition with other brands. But if you want the "official accessory" for that product you love, there's only one place you can buy it.
Margins for items are a case by case. Video games for example - consoles are sold at smaller margins or even a loss. They make the money back through subscriptions and accessories like controllers.
The AD's are a big contributor to the high prices. Take a $10,000 Rolex for example. Rolex sells that watch to the AD for $6000. The AD gets a 40% discount, so Rolex is working with $6000 of revenue on those watches. This is pretty standard for all AD relationships. If the brands reduce the number of AD's (or eliminate them) they can sell direct and increase their margins, which would hopefully yield fewer price increases in the future. Another contributor is consumer demand. Until demand drops, prices will remain high
Since in work in the watch industry for over 30 years-though never for Rolex-I can imagine that their prices are calculated at a markup of x10. Compared to other brands, Rolex invests very little in R&D simply because they don't need to. Their designs are classic and time-tested, requiring minimal innovation. We also have to consider the substantial cash reserves they hold. So, when you compare them to other brands, especially those producing steel watches, a x10 markup is very likely. The combination of low R&D costs and significant cash flow makes it feasible for Rolex to operate with such high profit margins.
As a journalist, your attention to the problem at hand and the many different ways you approach it is utterly fantastic. People get lost and confused in videos like this because the point can be a moving target but your awareness of the topic makes for such a compelling and informative video. Thanks for doing great, and different, work than most other content creators in the space.
The Blancpain fifty fathoms case: They must know that say a 40 mm would be desirable and sell well, and the people in charge are not dumb. So why don't they do it? I've always guessed that it is because they are a Swatch brand. Competition with Omega might not be wanted.
As always, a terrific video full of enlightening perspectives. Thank you. You used the term "Veblen good" which is not in the common lexicon, even for a seasoned marketing executive like myself. The transcript even got the word "Veblen" wrong. I knew what it was, but I'm guessing a lot of others might not which is why I put the correct word/spelling in this comment. Keep doing these. Start a Patreon and I'll join.
I appreciate the spelling but I would've appreciated the definition more: "A Veblen good is a type of luxury good, named after American economist Thorstein Veblen, for which the demand increases as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve."
@@LucaTheStar Well, I figured if it was important enough to know what it meant, a Google search was not an unnecessary burden - provided you knew the spelling of the search term - you're more likely to remember it if you have to dig a bit. But yes, that is the definition - taught in most marketing 101 classes in college.
I’m a Chartered Accountant. Whilst deriving pricing from costing is interesting to me and I think a good thought experiment, ultimately luxury goods are value item rather than a cost item. This is where value represents brand, lifestyle, aspiration etc. It’s obviously subjective.
People who complain about profit have likely never owned a business…….speaking as a veterinarian and hearing impaired only in it “for the money”…. As I save for my first true luxury watch however, I do wish Omega would skimp a bit on that great big box….
"Whatever the market will bear" refers to the highest price consumers are willing to pay for a product or service, regardless of its production cost or intrinsic value. The phrase highlights how prices in a free market are determined by supply and demand, with sellers aiming to charge as much as the market allows without losing customers. It originated in the 19th century during the rise of capitalism and industrialization, reflecting the idea that market forces, rather than just production costs, drive pricing decisions.
The "rise of capitalism" lmao, as if it's some thing someone invented. 😂 It's a spontaneous system based on the interplay of free and rational agents in the free and open market, in a world with scarce but desirable resources. It's the most effective way to operate. Any kind of intervention decreases net efficiency, and net benefit. Fcking economic illiterates.
Pre quartz, the purpose of owning a watch that cost a few quid, was that it actually kept time. Back then cheap watches were crap and a good Rolex for time keeping was money well spent. Nowadays even cheap watches keep accurate time. Owning an expensive watch is a 'luxury' to be enjoyed, if you like exquisitely made mechanical devices.
One of the other things i learned recently is that Rolex, Richemont and other luxury brands are shouldering the costs of training a new crop of much needed watchmakers, at least here in the US. A dying breed if ever there was one but vital for the continuation of our enjoyment of these anachronistic time pieces.
what pains me is that seiko, bulova, tissot, citizen and orient sell products for less in USA(a developed country) and more in India(a poor country). Guess we have to choose our hobbies basis the country we are born!
That's because of tariffs and trade agreements! For instance, flights from Europe to the US are a third more expensive than if one travels from the US to Europe!
You missed whole sale price vs retail. Omega sells their watches to AD’s at 35per to 45per retail. An AD told me this. He was allowed to buy one watch per year from his boutique at cost price. So, 10x for Omega is probably more accurate.
This point was touched on briefly(?) but I think is really the main/key point (though I don’t know the percentages). If there is a local distributor between the brand and the AD (as with some brands) there will be additional costs/margins there also - this is just how retail works unfortunately 💰💰💰
The price is one thing. But the hoops some of those brands want you to jump through just to be able to give them money is insane. To buy an AP you pretty much need to go through a multiple interview process.
That’s because of supply and demand. They create the scarcity and exclusivity on purpose because in reality brands like Patek and AP aren’t selling just a watch. They’re selling prestige and status. Many people want their products largely in part because they’re rare, expensive and hard to get. Yeah I get that it’s pretty gross but these brands know what they’re doing. And COVID with the demand in luxury watches exploding just threw more gasoline on the fire.
Gotta also pass on the praise here, your videos are always insightful, well thought out, with a delivery that makes it easy to understand. Even if you may not be 100% accurate, the logic is always there. Fast becoming my favourite watch RU-vid channel.
I wear camping/outdoor clothes most of the time. Last year walked into a boutique in a mall in Dubai wearing my Garmin. Got basically ignored. Few weeks later walked into the same boutique wearing the same old, outdoors clothes.......and a rather rare Breitling on my wrist. They were all over it as they had seen pictures, but never a real one, wow didnt they try to sell me a new watch!!!I bought it because i wanted one. It sits at home and I wear my casio or garmin instead. Your comment makes me think, Where am I in life?
Any product in the "luxury" class is going to have a higher cost multiplier, and profits will be higher. Luxury goods by definition are not made to appeal to the masses, and want to be exclusive. They are Veblen Goods. If you think a brand or model is too expensive, then don't buy it, buy a competitor's watch. One caveat though is that the higher the price, the fewer customers can afford it, and people find other brands. There are discussions amongst collectors if Rolex at retail is reaching the upper boundary of what collectors are willing to pay or not. Collectors will vote with their wallets...
People who complain about profit have likely never owned a business…….speaking as a veterinarian and hearing I’m only in it “for the money”…. As I save for my first true luxury watch however, I do wish Omega would skimp a bit on that great big box….
I had typed out that exact first phrase. I agree completely. You won't be disappointed by Omega, I just picked up a titanium world timer and I was very pleasantly surprised, above and beyond what I was expecting, and I was expecting a lot.
@@TheSlowoldman I’m waiting on the new white speedy pro to be available in Canada and hoping I can wear that 42mm…. Otherwise it’s an aqua terra 38mm in black or Atlantic blue.
100% ... It's utterly bewildering to me that many people fail to understand that cost of materials + profit ≠ price. There's R&D, labour, taxes (and duties), capitol costs, marketing, packaging, ...
You don't buy a rolex because it is affordable you buy it because it is absurdly expensive. Luxury brands invest a lot of money to make their products expensive. These investments (to make their products more expensive) range from maintaining factories and workshops with the capacity to manufacture 100 times more watches per year than they produce, to paying tens of millions to sponsor an America's Cup boat. If you think that these investments do not make their watches better, well yes, you may be right, but it does make their watches *exclusive*, which is , by far, their most desired characteristic.
Thanks so much, Mike! A master class in economics and marketing. Please don’t take this the wrong way, but you are brilliant and I continue to appreciate your content!
In 1999 I was starting to look for my first luxury watch. It took over a year to find my very first luxury diver…the Omega 300M with the Chronograph dial and blue wave pattern. I wore that watch for 23 years. Then resized it and now it’s my wife’s daily wear (her choice). I don’t sell watches. I gift them occasionally. But way back in ‘99 we decided what number was acceptable. And every 5 years or so, we sit and discuss the new cost we’d deem okay for a watch. A watch is worth what you FEEL it’s worth to you. A Rolex for me, isn’t “special enough” to justify their cost. I love the look. They are beautiful. But in my heart and mind, just not worth the work I need to put out to earn enough to buy it. Over these 20+ years of collecting, I find myself more at home or comfortable with high end Seiko over Omega or Rolex. When you travel the world a lot, you find you can’t wear true high end watches in most places. Too dangerous and almost guaranteed someone will take it. Just “KNOW THYSELF” and own what you love. I’ll always own an Omega. But I’m more at home with Seiko…
100% agree with all of your analysis. As always your analysis is straight-talking, self-aware and so simple to follow. Back in 2015 I was seriously considering getting a JLC Reverso Duo one day, now I just can't afford one. If the product had meaningfully changed I would understand but it's the same watch it was back then.
Thought-provoking (and excellent) commentary as always. PS. I think you might be quoting Fax Cone of FCB fame when he said “50% of advertising is wasted. Trouble is we don’t know which 50%…”. That was according to David Ogilvy who created Ogilvy & Mather: titans both of Madison Avenue’s legendary luminaries of advertising…
wondering if Hamilton introducing a cheaper quartz field watch is a form of "backtracking" from their recent price increases? very grateful mike for all the effort you put in. thank you.
These companies have too much overhead and spend too much on advertising and sponsoring races. They manipulate to that 15% to 20% because that range is considered nominal. Great video! And I love your channel. You have an opinion and share it. Not everybody on YT does!
Cost to consumer is between x7 / x12 the overall manufacturing cost depending on the brand. ‘Brand position’ is another consideration. 35-40% sale cost is for the AD and 20% of the total is VAT. Good video though, I enjoy your content.
Great video. Personally I believe that the profit is higher to some degree. I can just talk about the omega seamaster 300M for example. At a local AD I got ~10% discount just by asking nicely. I am not a regular customer there. I do not believe this discount would be possible with the margin numbers you stated. Of course this is also just an assumption. Thanks for the amazing content!
Yes, you are correct. His numbers are BS. I work in large company and I see how my employer is doing magic with numbers, nobody outside of company has no clue about real profit.
The conversation that was long overdue. I think you are close in your assessment. I think the big solid gold Rolex are close to the 20X. The material just don’t get close to the retail dealer price. Well done.
If Swatch spend 23% on materials there total cost of manufacturing is clearly more than 25%. Add in labor and direct overhead and it would be closer to 40 or 50%.
Very interesting perspective. When you look at some brands like Tudor that have made improvements in some* of their movements but most of the cases have stayed the same (bulky slab sided). Folks rarely complain about Tudor prices. However, Omega have upgraded all their movements, case and almost all their bracelets yet many say the prices are too high. A Starbucks sub cost the same as a jubile Pepsi gmt yet a speedy cost less than both...... And people still complain. Shrugs.
Great explanation! I don't mind those companies making a profit. What's a pity for me is them failing to serve a big community of watch enthusiasts by making time pieces more expensive just to invoke a sense of exclusivity. This is alienating a lot of people, and in the end, only brands that are already established as exclusive (rolex, patek ext.) will profit. After all, why would you buy an omega over a rolex if they cost the same or slightly less. Choosing to push for price related exclusivity over serving horology enthusiasm can't be a rewarding decision in the long-term. The trend of selling les watches for higher prices could lead to the market exponentially shrinking. We will see how it plays out I guess.
Your analysis is, as always, excellent. Just to understand better how prices function ADs fees are around 40% or more of the watch sales price. With those fees ADs need to pay their own costs, and in some cases contribute to the marketing efforts of the watch brand. Of course it varies from brand to brand.
I overthought buying my first mechanical for years and debated what entry point made the most sense. If you look at the history of watches it became apparent high quality tool watches cost roughly with inflation about 800-2000 in today moneys I personally think the ETA/Sellita are the best priced watches in the industry. Cw, farer, formex and yema are some that catch my eye always the quality for value is extremely apparent especially with CW and formex.
Wonderful video! Business 101 and some folks need to hear and comprehend this. The businesses need to understand too, as you say, it's always the product. Luxury goods are just that, luxury. As a company you need to make sure your product emphasizes that, better through quality, but also through marketing. Though may people dislike them I don't believe there is a company out there that does this better than Rolex. With regard to marketing, and Rolex, it will be very interesting next year to see if Rolex's choice to leave Formula 1 will have a detrimental effect on sales. It will also be interesting to see which brand steps into the void and if they will receive a bump from doing so.
I think they definitely are currently. There's been a lot more value for money in the lower end watches. With new innovation, style, designs, ect.. The "luxury" brands aren't really changing anything and giving you more value proposition. If anything they've INCREASED their prices substantially with nothing to back it up. Meanwhile you've never been able to get better quality in a $100-$500 watch than now
This is an excellent video. when people talk about prices the brand that comes to mine is Rolex, this is were you have seen huge price rises. You have to look at how much of the cost is going to The AD - with Rolex it is at least 35%. They are the watch brand who are making the most money .
Absolutely no doubt there is overcharging and brand equity that adds cost to items. That being said bigger brands likely pay higher fees in labor, taxes and other operational expenses compared to Chinese factories that pay workers significantly less and if they aren’t complying with certain labor laws and regulations, it is still cheaper than paying those expenses in Japan or Switzerland.
Nice analysis. Bravo. (nice to have a watch geek with the acumen to simplify the business side of the industry for the wider audience). I'm sure it can help people help explain their hobby spending to their partners...
Seiko makes everything in house. And their costs are minimal when compared to Swiss brands. There’s no excuse for asking $5,000 for a piece that costs 25% of that to make. At some point, the price includes the Swiss tax and brand name. Seiko defeated the Swiss already. You pay for the “privilege of having a Swiss watch.”
As always, I liked and comment! Great analysis! As for JLC (and btw did I spot a Reverso on your wrist?), I love my Polaris and thought about getting my burgundy Reverso at retail, too. But it just didn't make sense. I love the watch and bought it grey, unworn for 8k(!) instead of 11,4k. And I thought, if who loves the brand, their boutique in Munich and every detail of the watch (and being in the position to go ahead and by it at retail) doesn't do it, who does?
The price is formed on the market. "Number of sold products x price = maximum" is the sweet spot you search with your pricing. The production costs together with other costs (mostly marketing & sales and R & D) just tell you when you make a profit. During the last years many costumers would pay higher prices so prices have risen but this is changing now. The next years prices will fall (or not follow inflation) and companies which can not make a decent profit with lower prices will get in big trouble. In comparison to their next competitor Omega I think Rolex is obviously over priced, even more than every other swiss luxury brand (except high end), but it worked for them on the market. I think this will change because when people are more price sensitive they more often and intensely compare the products. This is a problem for the whole luxury industry, especially for fashion brands, when more people realize they are just paying more for paying more (status without background).
Hi, interesting video! I could be wrong, though isn't the 20% profit margin after deduction of tax? i.e if VAT is also 20%, meaning that the actual bottomline price for which a watch should be sold and still make a profit must be >60% of MSRP. So 6k omega should be sold for higher than 3.6k to still make a profit, if it's correct what I am writing 😀.
The analysis is flawed, you’re looking at published profit numbers across the entire company. Swatch Group’s profit margin may be 12% across the entire company, but the margin on an Omega Speedmaster is much higher than lower end models in the Swatch Group like Tissot, Certina, or Mido, and they have a lot of dogs across their lower lines that don’t sell and drag down the corporate profit margins. Omega’s profit on a Speedmaster, if it was broken down separate from the Swatch Group, would be 5x or more of the total costs including materials, labor, R&D, distribution, marketing, etc.
A Dior bag costs $50 to make but sold for $2800. You have to be very simple minded to think luxury brands are taking only 20% profit margin. You’re really naive and gullible. 20% isn’t worth their time, trouble. Luxury products by design are significantly overpriced so that not everyone can afford them and make buyers think they have something of high quality and exclusive. It’s a mind game and it looks like you got played. Join the rest of the mugs.
that's the margin based on price to the dealer, you gotta add in the dealer margin as well. dealer margins are as much as if not more than the manufacturer
Are they over priced? That is always a loaded question. Depends on the brand and the reputation. People purchase brand because they connect with their philosophy or status. That is true regardless if we want to admit it. No one should care about someone's else profit rather if you want to add to their profits. Remember to cry once and buy once.
Something that you said confused me: you mentioned that companies should be allowed to make a profit because they need to be able to innovate (let me know if I misinterpreted). Are the profit numbers you mentioned for the companies before R&D expenses? It seems to me that if you are adding R&D into your margins and they’re still hitting 20% profit numbers, I am confused by your argument. I suppose that it gives more options to increase R&D budgets but if companies are publicly held, a return expectation also must be considered…
Mike, phenomenal video and analysis. Enjoyed every second of it. Please please please keep up the good work, I look forward to your analysis of brands and businesses every week. Regarding your last point that product is King, it made me think of Longines over the last 2-3 years, and Tudor over the last 4-5 years as two contrasting companies to JLC. They seem to be coming out with hit after hit. I remember you saying that Longines are in a bit of a weird space pricing-wise, but I think they are focusing on the right thing with the Zulu time, the hydroconquest GMT, the Majetek. Their product line-up over the last couple of years appears revitalised. Tudor has had a very similar story, arguably a few years ahead of Longines and doing a better job of slowly crawling the prices up with each new hit. What do you think?
One of the factors that help Longines aside from them improving their product year over year is availability. You can walk into Macy's and buy a Longines. This same factor is what substantially helps Cartier as well. You don't have to search high and low to find a boutique. Availability and heavy marketing are the name of the game. Also brands like Omega need to restrict smaller boutiques that don't sell higher luxury brands from carrying their product. They don't deliver the luxury experience that it takes to convey to the customers that Omega is on a higher tier and worth the higher price.
It there cannot be a consensus that the prices of Swiss watches are elevated to ridiculous levels, especially when other companies are providing quality pieces for much less, not to mention the loss of Swiss market to Chinese pieces and the Apple Watch, there is honestly no point having this conversation.
I work for a non profit organisation, therefore making very little money. So you can probably conclude where I stand on ideology. In my perspective, off course a profit on what you sell is a realistic must- yet when it goes on route to the piggly capitalism of making extra profits on the backs of the employees and/or the costumers, that is the line for me. Yes, yes, I know you’ll think I’m naive and unrealistic, but I practically live according to my ideology, so I don’t care… I enjoy a 30-40 dollar watch the same as a 3000-4000 watch, and nobody else gives a damn on what is on our wrists🤷🏼♂️.
My brother and I had this very argument earlier this week. He reckons we've all been duped by marketing hype and overinflated prices. Hope you doing well man!
Your analogy of watch companies loosing Money if they lower prices does not take basic economic factors into account. If omega cuts their price in half they would likely sell 400% more watches. I’m not suggesting they should but seiko is a good example of a profitable company that sells very good watches for much less than the Swiss companies. It is in reality the high prices that drives the demand. People want what they can’t afford.
Hi there. One point might be missing. What about the situation 10 years ago? For instance have profits increased faster than prices? I have the feeling that 10 years ago (even when considering inflation), prices were more "reasonible". What do you think? For me the excuse of using the money to invest for better bracelets does not stand for a second! Bracelets and clasps a often much better (with modern features) with non mainstream swiss brands! The only exception might be IWC Mark XX's steel bracelet... top of the art!
Can someone help me understand... Why isn't marketing "paid for" by creating an increase in sales volume rather than an increase in price? If executing a successful marketing effort results in an increase in price, doesn't that seem to imply that the point of the marketing was just to convince people to pay more?
People choose to pay for LUXURY' They are not forced to buy these items. That is why the items are classed as a LUXURY. So of course even though the items are designed and built to a much higher level than day to day product, the prices charged are disproportionate to the increase in quality. The companies providing these items know this and they also know that there are people who earn disproportionately to the normal man in the street. A match made in heaven. if you then look at the function, the actual basic function that watches provide then LUXURY is just not needed. A time piece is for displaying time and nothing else, no reason to be jewellery, no need to be a piece of art. no need to be an investment piece. So to answer your question. YES because there id no need for luxury only a desire.
this question is being answered in real time. people 's. perceptions and their dollars are going to answer this question over time. and then the market will adjust one way or the other.
As for marketing...going for the same style of marketing over and over again gets very old at some point. reading another "You never actually own a Patek. Phillipe. You merely look after it for the next generation." makes me roll my eyes at best. Especially in combination with that cheesy father and son picture.
Profit should correlate to risk - for example pharma companies require billions in R&D with no guarantee a product makes it to market - that risk should drive a disproportionate profit.
Re your point at <a href="#" class="seekto" data-time="800">13:20</a> -- the way I think about it is: the way you dress is a story you are telling other people about who you are, but your watch is a story you are telling yourself about who you are.
my general rule is whenever i see a watch video discussing "overpriced" i immediately tag as "not interested". Watches are more or less "man jewelry" and there is no true value price. The entire price of the watch is how much marketing can convince a man that it is "worth" it. The cost of the watch is totally irrelevant and only brought into the discussion to justify why they are buying man jewelry
For the price of some of these watches you can buy a car that took billions to develop, has dozens, if not hundreds of suppliers, consists of many thousands of individually produced parts that all take specialized high-tech machinery to produce, has software and microchips and complex engines made of high-performance materials and if all is added together it takes thousands of manhours to assemble that car. Then you have luxury watches that can cost as much as a luxury car and contain barely evolved versions of technology that already existed 100 years ago. Yeah, watches are sure as hell overpriced. Ridiculously so. That's why they're luxury products.
Having a good product is one thing, selling it is another. Good products don’t just sell themselves. Marketing can’t be underestimated. Rolex is a great example. When it comes to watches and other luxury goods it’s also very subjective. Unlike video cards, which you mentioned in one pf the videos. We buy what we like. There are many objectively good watches for a reasonable price, but they just sit in jewelers’ windows.
