How are Hig-End Speakers Priced?

I recently (early Feb 2012) purchased a pair of Model 61 Human Speakers, intending to build a small office system with them. I've been listening to them through my main system for a few days now, while breaking them in. These were purchased directly from the builder/designer; my cost was only $675, delivered to my door.

I am so very impressed with the build quality of these small speakers and the quality of the music emanating from them (even though they are not yet fully broken in). I'm honestly surprised they are as inexpensive as they are, and have begun wondering how high-end speakers are priced.

The speakers are manufactured in the Northeast US, and (so far as I know) the builder/designer doesn't advertise and doesn't attend trade shows. The speakers are built with only one pair of binding terminals, two hand-built drivers, and a very simple 1st-order crossover using a design I believe is refined from an 1970's-era design. I'm not sure how much the designer is actively pursuing R&D currently.

I'm wondering if there is a formula that speaker manufacturers generally use when designing/pricing their products. For example, does a manufacturer target a price point, and then decide to follow an "industry-standard" formula like (say) 15% for R&D, 15% for materials, 15% for manufacturing/assembly, 15% for marketing, 15% for distribution, 15% for manufacturer's profit, and balance for seller's profit? Certainly, eliminating (or reducing) one or more of the above categories could yield a speaker that is much less expensive than the price point it was designed for.

Any thoughts?
I'd say the standard model is more like 20% R&D, 20%manufacturing/distribution costs, 20% marketing and 40% dealer costs. Except cables, they have their own special set of rules. ;)

Generally spending less on marketing or dealers will give you more bang for the buck sonically. The problem with that is re-sale. Since no one has heard of your special XYZ speakers, resale value plummets immensely.
"I'm wondering if there is a formula that speaker manufacturers generally use when designing/pricing their products."

You mean like - -whatever the market will bear, like every other industry.
Jmcgrogan2, I'm one of those people who, with most things, characteristically buys once and keeps "forever"—at least, this has been the case with me with respect to audio ever since my first several years in this hobby in college—so resale value means relatively little to me. However, I do appreciate your point. The fact is, when I did my initial Google search in April 2007 and stumbled upon Human Speakers, there really wasn't much I could locate on the www about the company. And today, there is still very little there. By the way, after several e-mail exchanges with the designer/builder/owner back then, I was intending to make a purchase, but then life for me suddenly got extremely complicated!

Tpreaves, my percentages were completely made up to help illustrate what I was asking. I was hoping to learn some *real* percentages (if they actually exist) from knowledgeable A'goners, so I might impute the *real* value of my speakers.
Any speaker manufacturer's business model will fail if the manufacturing cost, parts, labor and packing, is over 10% of their retail selling price. As for the R&D, that could be zero to 15%, as most brands spread that cost over three to five years. In some cases it is zero in that they are doing knock offs of existing speakers, including those of other manufacturers. My numbers come from the financial statements of some manufacturers that were looking for financing.
5 times the cost is what I was told also. I am building a preamp for commercail sale and after I added it all up, it would be priced at over $10K by this standard. Parts add up quickly.
For a pair of $25,000 avalons, this is my estimate:

Components (electronics and cabinets)(at manufacturers cost): 10%
Labor: 10%
R&D: 10%
Marketing & overhead: 10%
Dealer margin" 40%
EBITDA margin: 20%

Very depressing: $2,500 worth of components gets you a $25,000 avalon speaker (of course, I would not dream of buying this speaker new at MSRP, but that is a different issue).

Now my Salk center channel is build to the same standards (if not better), and use the same quality components.

Because of lower overhead, factory direct sales, and probably lower margin, I estimate this $3000 speaker has about $1000 worth of components in it. A much more interesting value proposition!
Speakers are priced by what the market will bear. A look at the recent pricing history of the Gallo 3.x will illustrate that (no shot at Gallo intended, it's just one good example of a popular speaker model that saw pretty steep prices increases commensurate with increased demand - rather than with increased cost of parts).

My understanding is that the rule of thumb re: "price vs cost" was that retail should be at least 400% of parts. That is, if the market won't support that level of mark-up, the belief in the business is that the speaker is likely to be a commercial failure.

It appears as if most of us feel the same, we are simply stating it in different ways. My comment that the cost was 20% (1/5th) the price seems to line up with Thorman and Bigkidz saying 5 times the cost and Marty's 400% of the parts. Many different ways of saying the same thing. Yet far from the 45% that the OP thought (15% each for parts, manufacturing, distribution). I say main stream product is 20% for parts/maufacturing/distribution, except for cables, where the cost may be MUCH lower than 20%.

The key is to know yourself Rx7audio. As I previously stated, you definitely get more bang for the buck buying from a small company that cuts out retail, marketing and other fees, as long as you know that you will keep the equipment forever. Then re-sale value is meaningless. For someone like me, who likes to sample many different flavors, re-sale value is very important, so I tend to avoid small boutique manufacturers. Know yourself....enjoy your speakers Rx7audio. ;)
I'm guessing there are too many different situations to make definitive across the board pricing scales. A small manufacturer that eschews advertising, shows, and distribution (Human Speakers?) might have a very different formula than a larger manufacturer that uses all of the above, but garners huge volume discounts from suppliers and can afford smaller margins in return, due to sheer sales volume (Vandersteen?).
This all depends on what type of business model the manufacturer is going for. Is it factory direct high or low volume then price reflects this, is it going through international distribution and retail outlets then its priced for that. Also you will pay more for name brand then one not so well known this too is factored into price. So the most marked up are top of the line name brand internationally distributed loudspeakers sold in retail setting these have the most mark up.
I know of a speaker manufacturer who's speaker was priced at $15,000. At the time the speaker was expensive, but the speakers were labor intensive with all drivers broken in prior to matching and the cabinets were custom manufactured on site then fully tested. During a show someone walked into the room and said "That's a $20,000 speaker if I ever heard one." The price instantly went up to $20,000. Several years later the same speaker doubled in price.
I didn't realize they made Genesis speakers. I bought a pair of Genesis 110 loudspeakers brand new back in 1981 and kept them for about 15 years and loved them. They were my very first speakers. This isn't the same Genesis a lot of you are probably thinking of. These were part of the New England design of speakers. They're responsible for my lack of good hearing all these years later.
Yes, I know how the price them! On top of mount chargawayatomucha in peru they all gather for what is known as the MOMP (meeting of marketing and pricing). Here they drink copious amounts of single malt scotch and boutique bourbon. Then then going around in a circle, they mention a new model, then they chant 43,000 and if no one laughs they chant 54,000, and then this goes on till someone breaks out in laughter. Then they all mount their asses(i mean burros) and travel down the mount to where working people live. If this ever moves over to other appliances just think they'll move the handle on a refrigerator call it the refrigagreater IIIb special edition and charge 123,000.00.
the reputable speaker manufacurers price their speakers off parts cost plus marketing,distribution, research + profit. Its a hard go in the hiend industry these days. Companies without substance tend to fail eventually.
Thanks, all. It's been very enlightening to read your perspectives. Some of you have provided great insight—and hilarious entertainment! Thanks again.


Here is my example to my preamp. To develop my preamp it cost me over 5,000 in various parts just to try them out to see how the preamp would sound. Along the way there were so many changes based upon parts availability and how they worked together. I had read up on resistors, capacitors, wire, etc., to use that so many others found to be better than the other ones someone else liked. I had to hear most of them myself to come up with what worked for me. Then there was the chassis. So far that will be the biggest expense in the entire design even with custom wound transformers made to my specifications. So for example, if the preamp comes in at actual parts costs around $2500 how much of a market up should I charge. That does not take into consideration cost of parts to get me there, over a year or two of time to develop the component, chassis designs, etc. Plus the cost to use a copper chassis which I wanted to use would add another $500 minimum to the cost of the chassis. Try and find companies to make a chassis or cabinet for you and then you can see what it takes to manufacturer a product. I have not even mentioned website, custom shipping box, marketing expenses, etc. It all adds up very quickly. Until you try to manufacturer a product yourself, you cannot really know the total expense.

Happy Listening.
I don't know how hi fi companies work, but in the world of high volume manufacturing, the direct labor (the people who build the product) is about 2-3% of the cost. Parts are about 60-70% of the cost. Overhead, including salaries are about 15-20% and the remaining is EBITDA. When EBITDA runs 15% or more, investors are happy and the company can reinvest to develop new products. When it is below 5%, the future is bleak. Don't forget that warranty costs and scrap eat into EBITDA too. The earnings also cover all of the investment costs like a building, manufacturing tooling, and taxes. In a low volume specialty business, I could see labor being up to 20% of the cost. In the end the biggest margin is the middle man- ie. the dealer. Brokers make money anytime a deal is made. I don't believe markets can handle 40% margins on big ticket items in today's climate, in general, but I could be wrong. Even a box of cereal has a fairly thin margin these days. I notice cell phone companies do fairly well...
I agree with Tonywinsc - I'd be amazed if the average speaker was sold at 4-5 times cost. I also want to really believe I did not pay such a mark-up for my equipment! Too depressing otherwise.
The problem is you are looking at just component costs. from the point of view of the manufacturer overhead, labor, dealer margin, R&D are all cost. The fact of the matter is, I don't think any of these speaker manufacturers are operating on absurd margins.

Check Apple's income statement - how much do you think it cost to build an iPhone? The only difference is, the iPhone does not have that - I could just buy the components and build this myself feel to it.
I don't think 4-5 times the manufacturing cost is unrealistic, I think it's a pretty standard number. Sure, some items like cables, bottled water or sneakers return 20 times the manufacturing costs, but they are in the minority...I hope. Keep in mind that we are talking about the big name mainstream manufactuers here, not manufacturers who can sell direct to the customer, which pretty much knocks 40% off the cost right up front.

Remember, there is a lot of money being spent on trade shows and free samples to help market products. I know a turntable manufacturer who has dozens of very expensive cartridges given to him as gifts. He also has given out gifts, I'm talking in the $10K+ per unit range. That's serious marketing!! So I still say that 60% of the cost goes to the manufacturer and is equally split between R&D, Manufacturing (including parts) and Marketing (including advertising). 40% is dealer mark up.

On another note, I also know more than a couple manufacturers who have come out with more expensive products because their dealers have told them that the market demands it. Just look around at all of the manufacturers whose top of the line product today is double the price or more than their top of the line product 5 years ago. There is a LOT of people with a LOT of money out there....I wish I was one. ;)
I wish not. If I were I could do many stupid things, one of them spending half a million dollars on stereo.
I had the manufacturer of my US speakers over to visit a year ago, to try and develop some interest here in the UK, at a show. He gave the example of an $80000 speaker, he thought would have a material content below $20000, similar to the range mentioned above. Most of the rest of the cost is marketing, dealer and distributor cost. The answer, is to go for a small direct sale manufacturer like him. I won't give his name, the conversation was in confidence.

Interestingly, I could get no interest in the speaker, partly because the dealers felt it was too cheap. Their margin would make it too expensive over the direct sale cost, even though the manufacturer would only have sold through the dealer in the Uk.
A grandson runs an import business... sales by internet. He had some small speakers priced at about $40. Few sales.

He reintroduced the same speakers priced at $200. Sold many.

Go figure.
A grandson runs an import business... sales by internet. He had some small speakers priced at about $40. Few sales.

He reintroduced the same speakers priced at $200. Sold many.

Go figure.

I've heard similar stories before, sometimes even from a manufacturer. Hey, it's hard to knock them. They are simply along for the ride, the market drives them. A LOT of people just want to spend a LOT of money. This isn't quarantined to the audio industry either. You can find this in many luxury entertainment markets.
Eldartford, makes you wonder how many high end manufacturers are using the same tacktics?
The editorial in this months HiFi+, discusses the new paradigm of what is expensive, in our hobby. A few years ago, $100,000 for a piece of kit, was a stupid waste of money, now it seems the norm. Who are these people, who can drop $500000 on a pair of speakers? The answer is, not us.
Another conversation with an idustry insider, about a US speaker company who decided to make a out, top of the line speaker, which came to about $1,500000. They were'nt expecting to sell a single pair, it was more as a marketing move. They took them to a Shanghai show. Some guy listened for an hour and paid for 2 pairs, by cheque.
Do you think if a manufacturer does not have a dealer withing 100 miles of you that they should sell to you direct at wholesale - no real reason they should take a dealer's cut on top of what they ordinairly make - right? I do understand paying a dealer for the service and ffacilities they provide, but if I'm not be services by a dealer, I would not pay the manufacturer for a service not rendered.
02-28-12: Branislav
Eldartford, makes you wonder how many high end manufacturers are using the same tactics?
Branislav, EVERONE of them does without exception!! don't think too hard about this as it'll make your head spin & might even get you riled up.....
Pubul57, I understand your perspective, but the dealers would be outraged if the potential for undercut to them, came from the manufacturer themselves. The manufacturer would now on some level be acting as dealer, something that would add to their costs and perhaps it's something they're less well suited to do. After all, if there were issues, you would now take them to the manufacturer. It would be a difficult to be both a manufacturer and direct discount seller, and at the same time maintain an MSRP dealer network. I think on some level it might be incompatible. Furthermore, what would prevent someone from purchasing discounted merchandise from the manufacturer and then reselling at a cost less than dealers offer, in a manner that might compromise the manufacturer's marketing and customer care strategy. Never mind, opening the potential for counterfeit products, for which the duped consumer might expect the original manufacture to be responsible for. Grey market?
Would 200 miles be sufficient protection? At some point the dealer simply can't service the customer. I believe in protection the dealership witin reason based on territory - but in this day and age some product are found in 3 dealers and 500+ miles away. It is a complex issue, and one I don't think the manfufacturers have solved - the dealer networks simply don't serve much of the country anymore, and you do want to protect those that make the financial investment in carrying the product - don't know what the answer is, but the current model is quite right.
I think that's why we're starting to see catalogue merchants like Crutchfield starting to carry high end lines.
I didn't know this thread was still alive. (I'm not receiving e-mail notices.)

Here is a bit of my perspective: I returned home from work rather late last evening, a bit worn out by some projects I've been struggling with. I turned on my DMA-90 to let it warm up while I watched the late-night news. (I had left my Icon and DMC-12 on from my listening session the previous night.) A short while later I was thoroughly enjoying cuts from Yellowjackets' "Live Wires", Joshua Redman's "Wish", Lyle Lovett's "Joshua Judges Ruth", Rickie Lee Jones' "Pirates", Duke Ellington & John Coltrane, and John Coltrane & Johnny Hartman. I had the volume set at twelve o'clock! The music was beautiful.

I had thought I would need to spend three-to-five thousand dollars on a pair of stand-mount speakers to have something commensurate with my main system. (And the ATC's I spent some time with a few months ago certainly satisfied, even though they thirsted for a bit more power than my DMA-90 could muster.) However, I am so pleasantly surprised to be enjoying my music through these relatively inexpensive Human Speakers as much as I am. The music is detailed and fast and involving and, um, musical—whether at lowish SPL's or highish!

Now, I don't have "golden ears", and my listening room—my family room—isn't treated with audiophile sound panels, etc., and I haven't invested in special power cords, etc. But I do attend a fair bit of live music performances, and I can absolutely appreciate the quality of music emanating from these small, inexpensive speakers. The live cuts on the above CD's sound very good, indeed.

I can't help but believe that if the designer/builder of these speakers was more "conventional" with respect to marketing, etc., these small speakers would sell for a good deal more than they do. Oh, God! I really hope he doesn't read this!

Pubul57 That's a very interesting point you raise. How far is to far to expect to be able to buy from a dealer. This is much more of a problem in the US, with the size of the country. Here in the UK, 500 miles takes you from one end of the country to another. I also believe, that is why shows like Denver are so much more important to you than us. It really is impossible to audition a range of options, unless you go to a show.

What I do know, is direct selling by manufacturers, drives dealers crazy. Particularly when they dem the speaker and the client goes and buys cheaper from the manufacturer. Most dealers would drop a line of products under these circumstances. I think you have to ask a dealer, how far he considers, his patch covers
RMAF is the only time I see equipment I or a friend don't own:( In my 30s I visited dealers in NYC/NJ/CT many times and it was the way I bought equipment - last 15 years? Everything through Audiogon, or direct from manufacturer with "anchor" pricing to feel like you got a good deal.

Not sure how well 2-channel dealers are doing, HT seems to be where it is at in terms of retail survival.

A few regional shows for the hi-end is probably the best we can hope for to "audition" and expose ourselves to new equipment - or buy/sell/buy/sell... on Audiogon.