Washburn International Pricing Issues

The case study discusses Washburn International, a prestigious guitar manufacturer, and its pricing issues. The company has four product lines: one-of-a-kind custom units, batch-custom units, mass-customized units, and mass-produced units. The challenge is to set prices that reflect the changing tastes of musicians while being competitive in the global market. Washburn has a prestige-niche strategy, which involves endorsements by famous musicians. The company's executive vice president, Joe Baksha, needs to determine the sales target and retail price for a new line of guitars.

Handout: MKT1040 Chapter 9 GRADED ACTIVITY #5
CASE STUDY Washburn International, Inc. – PRICING ISSUES
“The relationship between musicians and their
guitars is something really extraordinary—and is
a fairly strange one,” says Brady Breen in a
carefully understated tone of voice. Breen has the
experience to know. He’s production manager of
Washburn International (www.washburn.com),
one of the most prestigious guitar manufacturers
in the world. Washburn’s instruments range from
one-of-a-kind, custom-made acoustic and electric
guitars and basses to less expensive, mass-
produced ones.
THE COMPANY AND ITS HISTORY
The modern Washburn International started in
1977 when a small firm bought the century-old
Washburn brand name and a small inventory of
guitars, parts, and promotional supplies. At that
time annual revenues of the company were $300
000 for the sale of about 2500 guitars.
Washburn’s first catalogue, appearing in 1978,
told a frightening truth:
Our designs are translated by Japan’s most
experienced craftsmen, assuring the consistent
quality and craftmanship for which they are known.
At that time the North American guitar-making
craft was at an all-time low. Guitars made by
Japanese firms such as Ibane and Yamaha were in
use by an increasing number of professionals.
Times have changed for Washburn. Today the
company sells about 250 000 guitars a year.
Annual sales exceed $50 million. All this resulted
from Washburn’s aggressive marketing strategies
to develop product lines with different price
points targeted at musicians in distinctly
different market segments.
THE PRODUCTS AND MARKET SEGMENTS
Arguably the most trendsetting guitar developed
by the modern Washburn company appeared in
1980. This was the Festival Series of cutaway,
thin-bodied flattops, with built-in bridge pickups
and controls, which went on to become the
virtual standard for live performances. John
Lodge of the Moody Blues endorsed the 12-string
version—his gleaming white guitar appeared in
both concerts and ads for years. In the time since
the Festival Series appeared, countless rock and
country stars have used these instruments
including Bob Dylan, Dolly Parton, Greg Allman,
John Jorgenson, and George Harrison.
Until 1991 all Washburn guitars were
manufactured in Asia. That year Washburn
started building its high-end guitars in North
America. Today Washburn marketing executives
divide its product line into four levels. From high-
end to low-end, these are:
 One-of-a-kind, custom units.
 Batch-custom units.
 Mass-customized units.
 Mass-produced units.
The one-of-a-kind custom units are for the many
stars that use Washburn instruments. The mass-
produced units targeted at first-time buyers are
still manufactured in Asian factories.
PRICING ISSUES
Setting prices for its various lines presents a
continuing challenge for Washburn. Not only do
the prices have to reflect the changing tastes of its
various segments of musicians, but the prices
must also be competitive with the prices set for
guitars manufactured and marketed globally. In
fact, Washburn and other well-known guitar
manufacturers have a prestige-niche strategy. For
Washburn this involves endorsements by
internationally known musicians who play its
instruments and lend their names to lines of
Washburn signature guitars. This has the effect of
reducing the price elasticity or price sensitivity
for these guitars. Stars playing Washburn guitars
like Nuno Bettencourt, David Gilmour of Pink
Floyd, Joe Perry of Aerosmith, and Darryl Jones of
the Rolling Stones have their own lines of
signature guitars—the “batch-custom” units
mentioned earlier.
Joe Baksha, Washburn’s executive vice president,
is responsible for reviewing and approving prices
for the company’s lines of guitars. Setting a sales
target of 2000 units for a new line of guitars, he is
considering a suggested retail price of $329 per
unit for customers at one of the hundreds of retail
outlets carrying the Washburn line. For planning
purposes, Baksha estimates half of the final retail
price will be the price Washburn nets when it
sells its guitar to the wholesalers and dealers in
its channel of distribution.

Looking at Washburn’s financial data for its
present North American plant, Baksha estimates
that this line of guitars must bear these fixed
costs:
Rent and taxes = $12,000
Depreciation of equipment= $ 4,000
Management & quality control program= $20,000
In addition, he estimates the variable costs for
each unit to be:
Direct materials= $25/unit
Direct labour= 8 hours/unit @ $14/hour
Carefully kept production records at Washburn’s
North American plant make Baksha believe that
these are reasonable estimates. He explains,
“Before we begin a production run, we have a
good feel for what our costs will be. The North
American-built N-4, for example, simply costs
more than one of our foreign-produced Mercury
or Wing series electrics.”
Caught in the global competition for guitar sales,
Washburn searches for ways to reduce and
control costs. After much agonizing, the company
decided to move to Nashville, Tennessee. In this
home of country music, Washburn expects to
lower its manufacturing costs because there are
many skilled workers in the region, and its fixed
costs will be reduced by avoiding some of the
expenses of having a big-city location.
Specifically, Washburn projects that it will reduce
its rent and taxes expense by 40 percent and the
wage rate it pays by 15 percent in relocating from
its current plant to Nashville.
QUESTIONS

1. What factors are most likely to affect the demand for the lines of Washburn guitars (a) bought by a
first-time guitar buyer and (b) bought by a sophisticated musician who wants a signature model
signed by David Gilmour or Joe Perry?
2. For Washburn what are examples of (a) shifting the demand curve to the right to get a higher price
for a guitar line (movement of the demand curve) and (b) pricing decisions involving moving along a
demand curve?
3. In Washburn’s current plant what is the break-even point for the new line of guitars if the retail
price is (a) $329, (b) $359, and (c) $299? Also, (d) if Washburn achieves the sales target of 2000
units at the $329 retail price, what will its profit be?
4. Assume that Washburn moves its production to Nashville and that the costs are reduced as
projected in the case. Then, what will be the (a) new break-even point at a $329 retail price for this
line of guitars and (b) the new profit if it sells 2000 units?
5. If for competitive reasons Washburn eventually has to move all its production back to Asia, (a)
which specific costs might be lowered and (b) what additional costs might it expect to incur?