Case Study #10: C.F. Martin & Co. – Strumming to an Evolved Business Tune

Economic recessions spare very few industry categories, but as I hear great music at Grant or Millennium Park, I wonder how musicians are weathering the storm. We pay for the music we love, and the musicians we love have to pay for things they need. But, when we pull back on discretionary purchases (even for the things we love), our musicians have to pull back on things they need too.

C.F. Martin & Co., one of the world’s oldest guitar makers, is known for making expensive guitars. The more popular Martins sell for $2,000 to $3,000, and a limited edition guitar made of Brazilian rosewood sells for $100,000 (Aeppel, Timothy. “Guitar maker Revives No-Frills Act from ‘30s” Wall Street Journal 6 July 2009). Recently, the company launched the solid-wood 1 Series model that sells for less than $1,000. Martin reports it sold its first year output of 8,000 guitars after its launch in April. An incremental few million dollars within a few months is good for a company that generated $93 million in 2008.

Companies like Martin that make premium products in their industry categories face a business dilemma, especially in tough economic times: How can they make money without diluting their brand equity?

The target market demand for $2,000 to $100,000 guitars will not grow for the rest of the year. In fact, it may dwindle as evidenced by the high inventory glut of high-priced Martin guitars. But, C.F. Martin sells 8,000 1 Series guitars within three months – At this moment, there is little (if any) inventory of the 1 Series guitars.
There are a few reasons for this business feat:

1. Brand strength: Luxury brands survive and grow by the loyalty of their most profitable customers. As consumer confidence wanes in an economic recession, these customers pull back in spending, but remain loyal to the luxury brands by purchasing lower-ticket items rather than higher-ticket items. Brand dilution for these companies occurs when prices are reduced on their higher-ticket items to generate immediate revenue. Martin has very strong roots in the music community – Rather than cut the retail price on the glut of high-priced, yet flagship guitar inventory and damage its reputation, it invests in another model in the short-term to recognize significant financial achievements in the long-term.

2. Price elasticity of demand: Strategic pricing is a combination of what the market will bear and what the company wants to monetize. While the cost of designing a simpler guitar without inlays is cheaper, it is not necessarily in the company’s interest to proportionately reduce the retail price. Their “less than $1,000” tag is appealing to price-sensitive target customers without tainting their positive associations with the brand, but is indicative that Martin is holding to its margin goals.

3. Manufacturing process advantage: Martin products are primarily handcrafted. Each guitar travels through a series of 60 workstations, with more than 300 distinct production steps (Aeppel). This may be perceived as inefficient. But, when a de-contented product is being introduced to attract target customers and offset losses from its more expensive counterparts, Martin does not incur much (if any cost) of re-tooling its manufacturing process to accommodate the 1 Series model products.

Even if you are not an aspiring, yet price-sensitive musician, but someone who is serious about learning how to play a guitar for fun, get a Martin 1 Series model. Your air guitar, while the least expensive of any guitar in the market, may not be best way to practice your strumming skills.