Friday, July 15, 2016

It Does Not Take Much To Compete On Design: Dr Dre Beats

Here an expert disassembled a pair of Dr. Dre Beats headphones to figure out how they are made and what they cost.    Two non-surprises:

1. The $199 retail headphones cost about $17 to make.

2.  The core offer, better sound, comes from off-the-shelf headphone speakers.

Read the article, several more interesting points, such as the psychology of weight in design.  When he says "COGS" that means cost of goods sold.  He is an engineer, so an error on his part is understandable. I understand COGS to be synonymous with landed cost, that is all costs in to arrive at your warehouse ready to ship to customers.  I think he means 'first cost" when he says COGS.

At any rate, my riff is if they cost $17, and land at $20, and wholesale for $50 - $100, and retail for $200, again, that is competing on design.  But here is the thing, Dr Dre has dozens of designs, all at different price points.  Assuming the same guts, each item needs its own marketing campaign.  Selling a low cost one through Walmart ($109.00) can cost more to promote than the $400 "studio set."  But far fewer $400 studio sets are sold, meaning a big portion of the mark-up goes to marketing.

Whatever the markup from cost to wholesale, each item has costs associated unique to the market of that version.  Whole lotta managing going on too. If anything, these margins strike me a tight.

There will be plenty of people who will try to copy Dr. Dre's success.  It's simple: he has added extra weight to fool people into thinking the quality is superior.  Dr. Dre's success is valid, but not reliable.  Even though everyone can know how he did it, no one else can repeat it.  Such is competing on design.

Feel free to forward this by email to three of your friends.


Nathan said...

I would add Dr. Dre is using his name in the marketing and that is valuable and risky to him. If the product turned out to be defective, it might cost him his reputation. That endorsement needs to factored into the cost.

Also, I believe that the equalizer in the headphones is set to settings Dr. Dre likes. Dr. Dre knows how to sell music, knows how to make it sounds good to his audience. A pair of the same headphone equipment with different settings in the internal equalizer might not sound as good to listeners of rap and pop music.

You can see that users complain Dre boost his beats headphones EQ to sound "crazy" big. Maybe not good for classical music but perfect for teenagers listening to gangster rap who want to really boost the bass and look good.

Anonymous said...

When copying doesn't work:

German company Rocket Internet Struggles to Prove Its Profits Can Take Off

German tech company has created 100 startups, many of which remain unprofitable