Over at the Pelikan’s Perch, Dr Danley had an interesting post recently, where he points out that Pelikan prices are unexpectedly falling in the US. You’ve probably seen the post, along with some of the discussion it’s prompted, but I’d recommend having a read if you haven’t already. And if you’re not already subscribed to his blog, you should rectify that while you’re there! Then come back here, as his post has got me thinking.

Explanations

Whenever this kind of price change occurs, it’s always interesting to read through the discussions and how people try to explain it. I’ve noticed three common explanations for Pelikan’s shift: the previous price was a mistake, which has now been rectified; because the US distributor (Chartpak) was losing too many sales to European vendors; and that Chartpak are simply doing the ‘right thing’ and giving consumers a break. I want to evaluate each of these.

The first explanation doesn’t really pass muster with me. Companies certainly do make mistakes and it’s entirely reasonable to call them out when that happens. But I think you’ve got to have more support for the claim than just a price change. Pilot recently dropped the price of their Iroshizuku inks but it’s not like the old price was a mistake – they dropped price after changing production methods reduced their costs. But if you didn’t know that, the idea of Pilot rectifying a mistake might seem credible.

My preference is always to start my analysis with the assumption that people have all the relevant information and that they make rational, sensible decisions. If a decision doesn’t make sense, this assumption forces me to think hard about what the decision-maker knows but I don’t. That assumption helps me to see things I otherwise miss and it prevents me from passing off easy answers as thought they’re true. After all, easy answers are usually wrong answers.

The second explanation – lost sales to Europe – is more compelling but not entirely convincing. There’s plenty of anecdotal evidence (including comments on Joshua’s post) that US buyers have realised they can get great bargains from the European retailers. The problem with this explanation is that it’s not new: US buyers have been at it for years. And I’m sure Chartpak have known about it for years. Presumably, they just accept it as a cost of doing business – if you want to have high prices, you have to accept that some buyers will go elsewhere. It’s a worthwhile trade-off, so long as the extra revenue from higher prices outweighs the lost revenue from imports.

Given that this has been going on for years, it’s not clear why it would prompt Chartpak to take action now. If there had been a large, recent increase in sales leaking abroad, that might have pushed them into action. But I haven’t heard anything to suggest Pelikan sales are rapidly falling in the US or rapidly increasing in Europe. So, while this explanation is plausible, there’s some things which don’t add up.

The third explanation is an interesting one. I saw the same claim made when Pilot cut the price of Iroshizuku, that they were ‘doing the right thing by consumers’ or ‘giving something back to the community’. I have a natural skepticism for these claims as they just don’t fit with my experience of how businesses. After all, businesses aren’t charities. It’s a bit like saying a football team lost a game because they wanted to do the right thing by the other team – it’s possible, but that’s not really how things work.

In Pilot’s case, I understand they replaced hand-blown glass bottles with machine-produced ones, which significantly reduced production costs. As with any business which has cut costs, they had a choice: they could keep prices the same and bank the higher profits, or they could cut prices. The choice they make isn’t going to be decided by kindness; it’s going to be decided by what’s better for the business. Pilot obviously chose to cut prices and I’m pretty sure they didn’t do it because they thought the old price was immoral.

They would have done it because a lower price makes the ink more affordable. In some cases, that’s going to mean buyers opt for a bottle of Iroshizuku rather than a bottle of Graf von Faber Castell, Montblanc, or Sailor. In other cases, it means buyers will pick up two bottles of Iroshizuku rather than one. Either way, Pilot are going to sell more ink. And they would have cut prices knowing that their profits will increase more that way.

I’m sure the same is true of Pelikan. They wouldn’t have cut their prices because they wanted to ‘do right’ by US consumers or because they felt guilty about charging premium prices. I doubt they found God and He expressed a view that the special edition M805 was 20% too expensive. No, they would have run the numbers and determined that reducing prices would result in greater sales, which would generate more profit for them.

My Explanation

Personally, my theory is that there’s a combination of factors. First, I think that the volume of Pelikan sales has increased over the last couple of years. The release schedule is busier now than it was once, particularly with all of the limited and special editions that Pelikan have been releasing. For a distributor, volume matters a great deal because it allows them to enjoy greater economies of scale. The more they sell, the lower the markup they need to charge.

I also think that exchange rates play a key role in this. Five years ago, the exchange rate of dollars to Euros wasn’t so great: you’d need $1.35 to buy €1. Two years ago, it was down to $1.10 per €1 and this year it’s averaged around $1.15. When the dollar appreciates, it becomes cheaper to buy products from abroad. The 15% appreciation in the dollar is like Chartpak getting a 15% discount on their Pelikan purchases. Just like Pilot with the Iroshizukus, Chartpak have had a reduction in their costs and are passing this along to the consumer. Not out of the goodness of their hearts, but because it makes good business sense.

The third factor is sales leaking offshore. As I said in the previous section, I don’t think that there’s been a sudden increase in this but it does seem like more US buyers have gradually become aware of the European option and are taking advantage of it. Three years ago, this might’ve been a tiny fraction of Chartpak’s sales. Maybe it was just the Pelikan buyers who are super price-sensitive. But over time, word seems to have spread, especially with the closure of local B&M stores. So European sales to US buyers may be increasing, a little each year, and it’s having a more noticeable impact on Chartpak’s business.

Together, I think these things have put Chartpak in a position where they’ve decided to change strategy. Any distribution or retail business has a strategic choice: they can opt for high margins on a few sales (like with Rolls Royce) or they can have a lower margin on many more sales (like with Amazon). That choice depends on lots of factors, but the most important one is your customers. Specifically, whether your customers are price sensitive. If they care a lot about price, a low-price strategy is usually the winner. If they don’t care about price, go for a high-price strategy.

My read is that Pelikan buyers in the US are becoming more price sensitive. Partly because of the European option, partly because there’s simply a lot more options for pen lovers lately. But mostly because there’s a lot of new Pelikan enthusiasts who have a very good understanding of the market, and are happy to buy offshore if the deal is right. (It’s interesting that a couple of US buyers commented on Joshua’s post, saying they would continue to buy from their European retailer even if US prices were the same.)

So the first two factors mean that Chartpak’s costs have been reduced. In times gone by, they might have been happy to keep prices high and bank the extra profits. But the third factor, the changing behaviour of their customer base, seems to have changed the calculus. Now makes sense for Chartpak to cut prices and pursue higher profits through higher volumes.

Convergence

Readers might remember that I put forward the ‘convergence hypothesis’ some time ago. Essentially, I think time is running out for regional distribution strategies. Having different distributors in different regions, each with their own product mix and pricing strategies, works when buyers can’t easily access different regions or take advantage of lower prices outside their home region. But once buyers can make their purchases from any retailer in the world, regional strategies are unsustainable.

Instead of working together, distributors become competitors with each other. The distributors with high prices will find their customers defecting to distributors with lower prices, undermining their business strategy. Ultimately, manufacturers will have to make changes to appease distributors or they’ll have to adopt a global distribution strategy. That’s where the same product mix and prices are available everywhere. My claim is that this is where the pen market will end up.

It’s interesting to consider whether that’s playing out here. Certainly, it seems like prices between Europe and North America are converging and that is partly due to consumer behaviour. But it also seems due to factors like increased volume and changing exchange rates, which doesn’t really fit my narrative. If Pelikan decreased the number of new product releases, Chartpak’s volume might be reduced to the point where they are forced to increase retail prices once again. This isn’t really supportive of my hypothesis and overall, the evidence is pretty mixed. I still have faith that the industry will undergo convergence but it’s proving to be more gradual than I’d anticipated.

Conclusion

There’s a lot of blogs in my RSS feed and most get a quick skim before I move on. Joshua’s blog is one of the few which I’ll leave for a few days, until I can give each post the time and attention it deserves. His post about Pelikan pricing certainly got me thinking – about the industry, about economics, and about my own hypotheses – which is something I appreciate about him and his work. Hopefully this is the same effect that my blog has on readers, as it’s what I aspire towards.

If you have any thoughts or insights about what’s happening with Pelikan and Chartpak, or just some feedback for me, be sure to leave a comment or contact me directly.