Are luxury watches all overpriced?

go to the comments of any watch YouTube channel and you'll see someone write something in the vein of they're overpriced it's a ripoff those conglomerates are just gouging us luxury watches cost a lot you pay $4,400 for a met Tuda Blackberry monogram you pay almost $10,000 for a Royal ex Submarina and a Royal Oak extra thin it costs like $336,000 cheap is not a word that applies at the other end of the scale you have Chinese replica brands that sell a watch for $500 which fan says is not as good as Rolex but so good

that the $9,500 price difference is completely unreasonable so question is are luxury watches actually overpriced that's what we're going to try and get to the bottom of let's dive in profit I'm not necessarily an ultra libertarian capitalist but I do believe that companies should be allowed to make a profit on what they produce generating some sort of dividend to the owners is reasonable enough also profit usually gets at least in part reinvested in product Innovations so it's very much necessary if you want new exciting products from that perspective Rolex AP long jees should be allowed

to make a profit but how big is that profit well for Rolex we've got no clue Rolex is super secretive about their business and we have no idea what they make but that's not the case with lvmh respont Swatch their books are largely open and we can see quite clearly what they make so in 2023 which was still overall a very good year lvmh had an operating margin of just under 20% SWAT group around 11 richmont about 20% quick note there are some differences in the way these companies calculate the numbers and how they include

other products like jewelry but directionally we're talking in this range of 10 to 20% so let's just shorthand the number to 20% one in $5 is profit that sounds like a lot but let's put that into context apple is 32% Microsoft is 38% Nova Nordisk now who are Nova Nordisk they're a pharmaceutical firm that you might not have heard of but you know their products OIC and wovi what's their percentage 39 double that of any watch firm now please don't make the comments into some ideological Battleground about capitalism and corporations so far I'm just putting

their profits into context to give some perspective you can still feel 18% profit is too much for a luxury good but there are far worse and far more profitable companies out there you've likely considered something else by now if their profit is at best 20% Then That Omega C Master 300M for $6,000 could sell for $4,800 they'd make no profit but they wouldn't be losing money I'm under No Illusion that any companies want to have a business model where they are truly nonprofit but also when people say it only costs $500 to make the reality

is that in total that's just not true selling an Omega C Master 300M for $1,000 is losing Omega money for $2,000 000 is losing Omega money for $3,000 is losing Omega money for $4,000 is losing Omega money what's going on well it's because of marketing and a couple of other things how much does it actually take to build a watch to get that Omega C master or speed master all the way to you it costs Omega 80% of the sale price the remaining 20% is the profit but the watch itself costs a lot less than

that the core cost of the watch is the materials and the parts that go into the watch plus the assembly hours that go into assembling it and testing it plus a share of the investment in buildings and machines and energy that go into making the watch that number is a whole lot lower than the 80% of the sell price but how much is it we've got a couple of reference points that aren't super solid but they're at least directionally interesting Christopher Ward states that they will never sell a watch for more than three times of

what it costs to make now in this video that statement is going to do a whole lot of heavy lifting so I'm trusting it a lot but basically a $1,000 C60 from Crystal Ward costs $333 to make 3x if you read through deoe reports and other industry expert reports a lot of them say about 25% of the sales price is down to the pure manufacturing cost of a watch SWAT group used 23% on buying materials last year so directionally 25% doesn't seem off for a $6,000 Omega putting it at a production price of about $1,500

so keep in mind Christopher Ward says they 3x the cost price into the sales price at 25% Omega would be 4 Xing the question most of you should be asking now is is it really $1,200 or thereabouts more expensive to build an aquatera or SE Master over a C60 Trident I mean they're both divers they're both 300 meters depth rating rated how does that track well I think it tracks okay because Omega developed their own movement and that movement is better than the celita movement inside the C60 the development costs that went into making that

metas movement add significant cost the dial on a CA Master is made with a special machine that machine can only do a couple of dials per hour on certain materials that adds cost the Precision Omega puts into the sharpness of the hands lead to higher error rates and slower production speeds that adds cost Omega might on some models throw a little bit of white gold or silver onto a dial that adds cost the intricacy of a curved lug SE master case likely makes for a slower Machining process compared to the more simple tridon C60 case

which overall adds cost because Omega has all their movements meta certified that means more time is spent on testing and verifying things it's adding cost the Omega box you get it in is also more expensive than the crystal reward box also adding cost and I'm not cynical at all I don't think for a moment that Omega are super inefficient and just bad at controlling costs I think all those individual things add up and most importantly it's intricacy that exponentially adds the cost anything that a machine needs to do that is complicated will lead to more

errors more waste and overall slower production driving the the overall cost polishing is going to be more expensive than satin or bead blasting because it takes longer and you more readily see the faults on a polished case but polishing is nothing compared to a case that has multiple finishings with bevels and shamas and the whole shebang every time a detail is added the cost goes up also when the detail is done by hand the price goes up exponentially a goil for handmade takes ages to make and locks down the watch maker on one watch for

a long period of time if it takes them a year to make a watch and the median salary and switzland is about $100,000 then just to recoup the cost of that one watch that watch has to cost more than $100,000 just to pay back that one watchmaker salary obviously the gble for sells for even more than $100,000 which of course leads us to the 3x statement again from Crystal Ward their CEO said at some point that some Brands 10x or 20x the cost of their watch and I think that's true probably at least I also

think the more expensive the watch the more they're multiplying so Christopher W is actively saying they are 3x in their watches I don't think it's directionally wrong to say Omega is probably 4 Xing it could be higher but I don't think they're 10 Xing I don't know but I think it's a fair and reasonable assumption now Rolex again nobody knows neither do I but comparing a Rolex to an Omega I do think Rolexes are put together better than an Omega but for a Bas steel model I'm thinking probably they're not just 4 Xing they might

be 5 Xing or 6 Xing on the steel models so that would put a Submarina costing somewhere between 1,800 and $2,500 to build maybe a little bit lower maybe a little bit higher probably not a little bit higher more likely lower you can feel free to think that I'm being overly conservative but we're just ballparking here and the point is I am after all assuming that Rolex is more than 3 Xing or more than 4 Xing compared to Christoper water Omega when it comes to the final retail price directionally at least I hope you agree

with that part what's also important to me is that I don't think you can build a Rolex for $300 those Chinese Brands cannot make a one to1 perfect watch at 20% of the cost the economics just don't line up even if you factor in lower production costs in China more importantly though why is Swatch group only making 11% well it comes down to two costs Omega has boutiques Omega has ads Omega has employees in all those boutiques and people they also have employed to sell to other ads that costs money and they have to recoup

that money if you are one of those people that is buying an Omega directly online from Omega just know that they are making more money on that watch on you than if you bought it at an 0 the second big cost is marketing now there's basically two kinds of marketing there's Performance Marketing and there's brand marketing Performance Marketing is something you see a lot on places like YouTube and Instagram it's where you get the link the affiliate link or you get the discount code Performance Marketing is great in a lot of ways because what they

do is they pay marz brownle and amount to talk about a ridge wallet and they can see exactly how many people went from mkbhd's website to ridge's website they can see exactly how many people bought a product and they can see how many people returned to buy more products it's clear it's measurable it's not particularly typical for luxury products it's something you see in subscription services and cheaper products but it's super super measurable now on the other side you've got brand marketing and brand marketing is anything but measurable and that's super important there's this old

saying in marketing which is 50% of all brand marketing works but nobody in the marketing department knows which 50% it is simply put how do you know for a fact that putting a rehad meal logo on the side of a Formula 1 car sells more re meal meals how do you know for a fact that the logo of Rolex at Wimbledon sells more Rolexes how do you know for a fact that tag haire sells more watches because Ryan goling War One the fact is you don't there's research that shows that people buy aspirational products because

Role Models use them but you cannot prove unequivocally that this specific ad will lead to the sales you ultimately want there's an inherent level of hunch to Brand marketing you throw money at something and you hope it works that leads to some level of waste and then when you're in a competitive space where a lot of companies are throwing money at the same things it gets expensive really really fast so are they overpriced let's run all those numbers again so you've got the Omega that cost $6,000 the cost to make it is maybe 4X so

$1,500 when all the bills are paid Omega maybe profited about $800 on the watch in between there's about3 $35,000 that go to the ad making a profit the marketing and the people in HR and finance and all the other people that also need to get paid so how do we get the price down Omega could go online only and lower the costs obviously them lowering the price is not happening but in theory they cut out the middleman they save a ton on boutiques and they pass that saving on to you but for me at least

it poses an interesting question does the boutique EXP experience have a value to me yes I like the fact that when buying a $6,000 product I can try it before I buy it I know you can buy a Tesla online and in Europe at least return it within the first 30 days and you can do that with your omega as well but I do think there is some level of positive value to actually being able to Window Shop to try out the watch and to talk to a sales rep and compare with other watches there

are another online brands that I will never buy because I've never seen them Hands-On and in photos they're just not compelling enough for me to even take the chance the ad service and the boutique service might not have a value to you but I suspect some people do see it as valuable but we could also drop all that pointless marketing but then again is it really pointless you don't want the cost of Daniel Craig wearing an Omega past onto you but if you didn't wear it would you care as much about the watch if you

didn't hear the story about the moonlanding would the moon watch still be as interesting and Rolex Rolex is a status symbol I don't agree with the belief that people only buy Rolex to show off but I do believe that people buy a Rolex because the status it implies communicate something to themselves I've Got My Yacht Master which you saw on my wrist in my Q&A video I love that watch I always felt it looked good but I also bought it to celebrate my first fully executive position in a large firm to me a Rolex was

the only right way to celebrate my own personal achievement is it shallow some are going to think so and I don't really care what those people think that's the power of that logo and that logo was created with marketing now to some the opposite is true the absence of marketing in that affordable Chinese watch is signaling what you wanted to signal but Zenith JRA Rolex they all signal something and that has a value to a lot of people and it's not inherently shallow we are complex aesthetic beings and objects take on emotional significance and branding

is a way to sh sh that significance in a way that will resonate for different types of people the value of a watch to many people is more than the sum of its physical components so before you start wishing for a world with no marketing just be careful what you wish for but Mike they making $800 on that Omega they should only make 100 okay but don't you want them to invest in developing a better bracelet don't you want them to develop a thinner metes movement so the Omega World timer gets down to Under 12

mm all those things cost money too and R&D costs design development that's the first thing that disappears when profits disappear profit is reinvestment no profit no reinvestment then it's just stale releases and a downhill spiral from here so Mike what you're saying is that the watches are reasonably priced you're okay with paying for ads and expensive marketing campaigns and you don't think they're profits are unreasonable based on what I've said so far that would be a logical conclusion but there's a plot twist I don't I believe that most brands not all but most above $4,000

are misinformed despite only making 13 or 20% profit and I also think they're killing their own products so I went down a rabbit hole of reading multiple years of annual reports for lvmh richmont and Swatch group and I learned a couple of things from year to year there can be wild fluctuations in Revenue it's up it's down it's super volatile at best most of them are flat in terms of overall growth and three their profits are kind of the same so depending on the company they are fairly consistently around these 15 to 20% it's a

little bit lower for Swatch Group which makes sense because they've got more low-end brands in their portfolio all of these brands or many of them at least have raised prices and they're not doing better overall some companies like Rolex I'm sure are but volumes overall are down and the profit levels are more or less the same sure 2022 and 2023 were Banger years but now they're down again it's that volatility I mentioned and this has been bouncing around in my head for a while because I'm really looking for a way to conclude that price increases

have been a mistake and I think I know why problem number one the idea that you raise prices to become more exclusive makes sense if you're the only one that does it problem is when everybody else does it you essentially just maintain status quo your brand went one step up the ladder but so did everybody else which means relatively speaking nothing changed problem number two you can't control whether your product is ablin good generally speaking if people don't see your product as ablin good now raising the price is not suddenly going to make people believe

it's avbl and good we're smart enough to know that the higher price hasn't made the product more special and then the big one problem number three the product didn't get better two examples chudah released the black Bay monochrome diver and it's now at the highest price point ever for black Bay 41 but I haven't seen any complaints about the pricing despite it going up why because they mixed in a new bracelet and a metas movement the price went up but you got more for your money and then there's jlc in the reverso what changed in

the reverso did you get a longer power Reserve no did you get better materials no nothing fundamentally different about the watch it's just more expensive Zenith a brand I like have consistently gotten more expensive but their watches still have subpar bracelets SEO wants you to pay3 or $4,000 for their premium models and they still consistently refuse to offer better accuracy guarantees so to recap same desirability of the product same position in the market with nothing improved in the product the absence of companies of course bar maybe Rolex and AP performing better than those 15 or

20% is pretty proed to me that the strategy broadly speaking isn't working but then the brands will say but Mike we can't do nothing the market is declining uliss nardan jir pero they've sent people home and are getting government support we have to premiumize they say otherwise we'll die but you haven't premiumize you've just raised prices you did nothing to make a better product jlc are a shining example of this I think they are looking at customers buying that duoface reverso Chrono for $27,000 and they see how everybody wants it and the conclusion is Raising

prices offer highend models like the Dual metas which I think makes sense but they invest in little to nothing in their entry models their price just goes up with no meaningful product Improvement Omega has had every single color of dial for an aquatera plus small second versions but you know what they haven't had until recently black dial aquatera doesn't even have to be crazy just a black dial Blan pan have maybe one truly compelling watch and until recently it was almost exclusively available at 45 mm watches that sit on the shelf and don't get sold

are not helping you as a business the point is everything comes back to the product do you have enough watches that people actually want if not it's not going to matter at all who wears your watch and how much you raise the price you are going to continue your inevitable decline so I don't think the industry as such is gouging you out of greed not in general en at least they're in a downward spiral and they've lost sight of what drives customers to buy it's product it's always product if you have good products you'll be

fine price the jlc reverso chronograph for $27,000 it's that popular but 11,000 for an entry reversal you're just losing customers mate make it better give us a reason to pay more for it other than we're jlc when you raise the price show us what we're getting extra show the True Value ad and develop products that people actually want with specs that are competitive it's not that hard it's my thinking at least like subscribe cheers