Revisiting the Leica M9 vs the Leica M 262 at overgaard.dk

[Bill Livingston]

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Leica is known to work on a per-project basis and is a compartmentalized company. Furthermore  production runs are small, the S was expected to sell 1000 units per year on introduction, the R was dropped because R&D would drive the price per unit too high to be competitive.

I don't think business models of large firms can be applied to a firm that is to all intents and purposes, little more than a cottage industry.

 Hi Jaap,

 

I think it is clear from your post that we have a very different understanding of 'R&D' costs.

 

Without wanting to sound patronising, R&D costs are purely 'research and development' costs. That includes the engineers salaries and all the time they spend on developing new products are included in those base salaries... no-one pays an engineer to sit at his desk doing nothing. Other costs that can be included in 'R&D' are components and models that are built for testing and experimenting with layout, ergonomics etc, and this may include 3D renders all the way through to models, whether hand crafted or machine produced through 3D engineering, although these costs should be attributed to the pre-production, modelshop or production departments themselves. These, and many other elements go together to derive a 'cost of development' for a product or group of products... these are not R&D costs.

 

Where you say that the R was dropped because 'R&D would drive the price per unit too high' isn't actually, technically correct. R&D would recommend, or develop a specific part, or want to use a particular material or component in the final product and the sales/marketing team would reject it because it would make to BOM cost too high. If you have too many parts/materials where the overall BOM (bill of materials) is higher than your target BOM to meet your target price for retail, you either have to increase the proposed retail price upwards, say no and force R&D to come up with a better, more affordable solution, or if not possible, accept a lower quality component in order to meet the market price.

 

I spent a long time arguing on both sides of this particular divide when I was at Linn. Our Engineers always wanted to use the best possible material or solution because that was what drove them... but Sales and Marketing KNEW that if a product retailed at a price that would reflect those costs, then the product wouldn't sell enough to present a product and we would ALL lose our jobs!

 

Some basic numbers in a specialist manufacturing industry... and at the size of Leica. Most companies in any specialised consumer industry, in this sector of the market, work to an approximate 5 x BOM = Retail  

 

That means something that sells for £5000 in the UK (incl Vat at 20%) would need to have a BOM (bill of materials cost) of £1000 and sell to the retailer (at 40%) for £2500 ex VAT.

 

So, for a basic sale at a retailer to an end user customer would mean that the cost of materials and production to build that product needs to be £1000. The company then sells it for £2500 to his retailer and makes £1500 'profit' for that sale. If the manufacturer gets a net margin of around 10% (and trust me, 10% net is very good!), then the manufacturer earns around £150 per camera profit. (The rest goes on the overheads of the business. ALL salaries, all new investment in machine and tooling costs, staff, all heating and lighting, everything...). 

 

Not much is it?  £1350 to pay all the overheads from the sale of the camera and then £150 profit. So where do you make the savings ex factory...?

 

ANY discount on the ex-factory price comes out of the profit assuming all the costs remain the same... So you reduce costs or increase turnover - or reduce the retailer margin.

 

The fact is, retailers may not get anywhere near 40% from Leica... it may be that they expect their retailers to work on much lower margins... maybe 20%, so Leica does have some flexibility in terms of pricing, but then that impacts on the quality of retail side, both owned or independent, of the business chain, their staff, their shops, their investment in inventory... or even just being able to afford the basic models available to show to customers...

 

So everyone moans at retailers for making a lot of money. Trust me, they don't. They have to pay all their business overheads and make a living on what are often really very tight margins... and are completely dependent on their suppliers for products consumers want to buy and their ability to attract those customers and close the sale... and then we have customers coming in, looking at every model in the range, expecting quality advice and support, all of which costs money and eats into their overhead... and then ask for a discount...!

 

It's an insult to the quality manufacturers and an insult to the quality retailers, too. But we do it...

 

(Well, I don't, I know what its like on both sides of the industry...). 

 

And this is a reason why we have such a poor record of quality businesses growing and sustaining themselves over the long term... Every penny of discount you get, it comes from the profit of the sale... and invariably from the retailers profit, not the manufacturers.

 

It is this that gives some flexibility in pricing... so Leica could afford to reduce the costs (assuming they have a low margin to their retailers) and still retain some profitability.

 

Much more that any amortised R&D costs...!

[jaapv]

As much as they could - but it was indeed a bit obvious to remove the frame selector lever and not much else  Still, they pulled it off, -undoubtedly helped by the CCD-CMOS controversy- no harm done

[jim0266]

See the 32 minute mark of this video by  Thorsten Overgaard with Stefan Daniel. Daniel explains how Leica was able to lower the price on the M-E.

[Bill Livingston]

See the 32 minute mark of this video by  Thorsten Overgaard with Stefan Daniel. Daniel explains how Leica was able to lower the price on the M-E.

 

Thank you... Couldn't be clearer. Stefan Daniel talks about having recovered production costs, such as tools etc in order to be able to reduce the price of the ME. Tooling costs are often the most significant cost in any specialist technical quality product. The actual final cost of production per unit is a function of sales and the overall cost of manufacture. 

 

Thanks for posting.

[pgk]

The fact is, retailers may not get anywhere near 40% from Leica... it may be that they expect their retailers to work on much lower margins... maybe 20%, so Leica does have some flexibility in terms of pricing, but then that impacts on the quality of retail side, both owned or independent, of the business chain, their staff, their shops, their investment in inventory... or even just being able to afford the basic models available to show to customers...

35 years ago when I was a student and worked at R G Lewis we sold Pentax ME Supers at £129.95. If we didn't sell accessories with the camera (erc, filter, hood, etc.) then we apparently just broke even.

 

I imagine that today most photo dealers would be delighted with 40%, very happy with 20% and satisfied if there was nobody selling on the web at lower prices than many of them can purchase at trade. There are actually very few dealers left and one of the reasons that Leica runs its own shops is more than likely to be that this way they can make a better and more viable percentage themselves.

 

I have to be honest and say that I am amazed that a small company like Leica can even attempt to compete against fierce and much larger opposition, let alone produce the extraordinarily good products that they do - even at the prices which many apparently find high - for most purchasers cameras are a luxury product. For some of us they are tools but still cost the same...... .

 

FWIW as part of what I do I sell some specialist photo equipment (nothing whatsoever to do with RF cameras). The margins are insufficient to ever make me particularly rich and certainly not the higher end of the margins suggested (I wish ). Its a tough world in specialist retail, and trying to get a 'deal' and narrow margins is a short term strategy.

[Peter Branch]

Never thought I would see a thread on this forum largely devoted to "Cost Allocation Conventions" in manufacturing companies.

 

There are, of course, many books devoted to the subject of "Cost Accounting", some from professional standard setting bodies.

 

Before I retired from Kodak this was an endless source of debate and argument particularly as each geographic operation had its own, long established, conventions. 

 

I'm more than ever convinced, despite having an accounting qualification, that Cost Accounting is as much an art, if not a sort of religion, as a science. 

 

I have absolutely no idea what cost allocation rules are used by Leica.

 

Many years ago I was told by a senior Leica manager in the UK that the price charged for camera bodies was always "constrained" by the price of "similar" professional camera bodies sold by Canon and Nikon. 

 

Apparently the camera body market was somewhat price sensitive, however it was stated that the same did not apply to lenses where Leica could command a significant price premium.

[Bill Livingston]

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Just to be clear, I work in the audio distribution world now, running my own company. These are gross margins, but typical of the industry worldwide. 

 

Actual net net margins with a high cost of sale erode these to almost nothing. Accessories (and redundant insurance or warranty extensions) are a way of making up lost margin. Your £129 for a Pentax ME was because you as a retailer had to compete with other, much larger retailers with higher buying power. The suggested retail price for an ME or MX was £229 and then £199 if you remember. Your margin was slashed to compete. At the proper retail price you had a 40 point margin, at £129 you had around 15... so you would lose money unless you sold accessories... Remember Jessops or any of the other larger UK sellers would buy much higher quantities and probably make twice your margin at the same selling price.

 

A lot of retailers today are happy to break even. However, as a gross margin anything less than I suggested for retail would be unsustainable. Retailers accepting less gross margin will inevitably go out of business. It's just not possible to compete with huge sellers who buy at much higher levels. That allows them to buy products at lower prices (increasing their margins) and allows them to undercut their competition and STILL earn more doing it.

 

The fact is, retailers, particularly small retailers, do not earn enough overall to sustain their businesses to the levels and location that their customers expect. Even the Leica stores will have difficulty, they STILL have all the overheads to meet, by definition have to be in the 'right' areas, meaning rental and rates costs will be high (and staff salary) and they will still be measured as a 'cost centre'... so although they can afford to run at a loss, it isn't sustainable in the long run.

 

And we still ask for discounts from the independents...!

 

On the other hand, if you want everything sold direct, on the web, through huge resellers and all advice to be online in forums and all chances of actually getting your hands on a product to be reduced to shows and exhibitions, then we should keep going as we are.

[pgk]

The fact is, retailers, particularly small retailers, do not earn enough overall to sustain their businesses to the levels and location that their customers expect. Even the Leica stores will have difficulty, they STILL have all the overheads to meet, by definition have to be in the 'right' areas, meaning rental and rates costs will be high (and staff salary) and they will still be measured as a 'cost centre'... so although they can afford to run at a loss, it isn't sustainable in the long run.

 

And we still ask for discounts from the independents...!

But prices are still complained about here. As I said, margins in the photo retail industry have been low for a long time. And we have far, far fewer retailers than we did. But long term sustainability is not something given a great deal of consideration by consumers.

[Bill Livingston]

But prices are still complained about here. As I said, margins in the photo retail industry have been low for a long time. And we have far, far fewer retailers than we did. But long term sustainability is not something given a great deal of consideration by consumers.

 

 

Good post... And I know...

 

Margins are constrained in order to be competitive and in the long term it actually hurts the consumer in the medium to long term as it hurts both the manufacturer and the retailer in the short term.

 

Large retailers and manufacturers can deal with it by dealing in huge quantities and buying power, larger companies can reduce costs by reducing overheads, hence China having been a manufacturing powerhouse for the past two or three decades. But wages in China are going up, Chinese consumers are beginning to be able to actually buy the goods they at one point made for the rest of the world and because salaries are increasing, manufacturing moves to the next lowest production cost... such as India or Indonesia, maybe South America later.

 

That's  why China is no longer in double digit growth.

 

Its consumerism unchecked. With people perfectly reasonably expecting their life to improve as their level of growth increases. 

 

Bottom line is if you want Leica to continue producing great products and you want to buy them from stable, well financed retailers that can offer the level of service you expect. Buy the best you can afford and don't ask for discounts...

 

Anything less is selfish... Because someone has to pay for it, sometime, and in the end, we all will...

 

And yes, people will continue to complain about prices because that's what people are like. They want the best for the least cost to themselves. Worse, it's a badge of honour often to buy at a lower price than anyone else... but these people are cheating themselves as much as the rest of us in the long term... and yet they will be the first to complain when the products are not as good as they should be or the retailers are fewer or less able...

 

Stupid really, but that consumers for you...

[tsleica]

Bill Livingston has an unusually perceptive understanding of the manufacturing markets..profit and loss that is..

But in retail..its the same as always...buy low..sell high..thats how retailers stay in business..and I know as I have

owned my own retail shop for 22 years now..

But that said..customers are a fickle lot..and will leave you in a heartbeat..for another retailer with a .1% discount..thats just the way it is..tough these days to stay alive in retail..

But if you want to stay in business..you have to be inventive and adaptable..esp these days..

Like it or not..all the retail camera mom & pop stores..around here...are all but gone.. gone.. gone..

One would think..you could..sell weed in the back for profit at 10x's.....and do 20% profit on Leica sales in front..and your bank acct grows..like that's gonna happen...hahaha!

[mca]

I completely agree with Bill Livingston regarding the poor naming of Leica M cameras after the M9.... total confusion! Someone should be in charge of this and things should always make sense and be simple for consumers to understand a product line up and a product evolution. 

 

But then most companies fail to do this.... Apple is a good example of failing on this too, sadly. 

[Overgaard]

 

 

But then most companies fail to do this.... Apple is a good example of failing on this too, sadly. 

 

 

Apple was their ideal when they invented this. So that explains why. 

 

Some retailers have "fun" making specials on MacBook computers as many consumers have no idea that it's the previous model. Some times the Mhz specifications are better on old ones than new ones because its a different processor. Confusing, yes.

 

Someone should create and sell M10 and M10-P stickers for the Leica M 240 

 

[pop]

 

Someone should create and sell M10 and M10-P stickers for the Leica M 240 

 

Even better: someone should make a programmable display - say in e-Ink - which lets you show increasing model numbers, year after year, on the same body.

[Bill Livingston]

Even better: someone should make a programmable display - say in e-Ink - which lets you show increasing model numbers, year after year, on the same body.

 

 

Its Sunday, Pop, I get more confused on Sundays than any other day of the week... I have no idea what you mean

 

As far as model designations is concerned, all this 'type xxx' is just irritating to me. I can see the logic in it internally, because from a manufacturers point of view it is the ideal way... have a series and then have 'type' designations to identify clearly which specific model.

 

For owners and potential owners, it is not at all helpful. Strictly speaking, the 240, 246, 262, are ALL simply called Leica M... and they are clearly different cameras.

 

The 240 should have been Leica M10

The 246 should have been Leica M10M

The 262 should have been Leica M10E

The 240 M-P should have been Leica M10P

 

The problem I think was going into two digits... and with digital cameras naturally having shorter sales lives, they felt they needed a change. There are far better ways though. Assuming a three to four year cycle, we would have been between three and four hundred years away from needing to move to three digit M camera designation...!

 

They could of course have simply gone back to renumbering from the start and call them M1, M2, etc. But that would have confusing... but calling them Digital M's may have been an option...

 

Then the 240 would have been Leica DM1

The 246 would have been Leica DM1M

The 262 would have been Leica DM1E

The 240 M-P would have been Leica DM1P

 

So, all in all, very messy... I don't like the look of that either.  Thankfully, that never happened!

 

I think M10 and so on would have been the way forward. Once you got used to two numerical digits, and we all would, the following new camera designations would have been fine... 

 

It's not as if it makes the cameras look messy. The reality is, only the first iteration of the new model would have M10, M11, M12 written on it... the others simply have the model designation on the accessory shoe, so the cameras would have a very clear and clean look and it would have been consistent with the past... The lack of consistency started with the digital cameras, from the M8 onwards. 

 

M8.2... WTF? That could have been called M8-P

 

The M9 series seemed to sort of get back on track. I think M9-P is clear... MM isn't, it should have been M9-M (Surely they realised there was going to be another monochrome M series camera sometime in the future...)

 

And what if there is a new film camera sometime in the future? What would that be called...? 

 

Like I said before, whoever came up with the current designation method should have been shot...!

[hepcat]

 

They could have simply gone back to renumbering from the start and call them M1, M2, etc. But that would have confusing... but calling them Digital M's may have been an option...

 

Then the 240 would have been Leica M1D

The 246 would have been Leica M1DM

The 262 would have been Leica M1DE

The 240 M-P would have been Leica M1DP

 

So, all in all, very messy... I can see why that never happened!

 

 

However the M9 series seemed to sort of get back on track. I think M9-P is clear... MM isn't, it should have been M9-M - surely they realised there was going to be another monochrome M series camera sometime in the future... even if it was a decade away!

 

Like I said before, whoever came up with the current designation method should have been shot...!

 

The M8 should have been the M2d.  The M9 should have been the M4d and M4d-P...  The M240, the M6d and so on...  that'd at least have some correlation to the earlier lineage of film cameras and left the M8/9/10 monikers open for future development.  

[jaapv]

I cannot see what is so difficult. Camera type - i.e M,  Monochrom, SL, Q, etc. (not MM, that is an unofficial Internet abbreviation) and a series number to indicate the umm... series.

 

Quite easy and obvious, I would say.

 

The M+number system worked fine when Leica had only an M and an R, but nowadays the model palette is too manifold.

[hepcat]

I cannot see what is so difficult. Camera type - i.e M,  Monochrom, SL, Q, etc. (not MM, that is an unofficial Internet abbreviation) and a series number to indicate the umm... series.

 

Quite easy and obvious, I would say.

 

The M+number system worked fine when Leica had only an M and an R, but nowadays the model palette is too manifold.

 

jaapv... you should know better.   This is a Leica group.  It was change.     Change is always greeted poorly by this demographic. WTH were you thinking?  Get with it, Man!   Geez...  

[Bill Livingston]

 

The M+number system worked fine when Leica had only an M and an R, but nowadays the model palette is too manifold.

 

 

I understand you first point... although I don't agree.

 

Certainly don't agree with the point I highlighted above though... M is a range in itself, as is T or S... or Q. No reason at all not to have a simple number increase on a new model iteration on all of these series... It would take care of model numbers for between twenty and thirty years at current model replacement rate before you got to double digits on all but the M (R no longer being around..).

 

People write out the whole name/number anyway... Look on eBay or the classifieds here... or any price list... so why not simplify it... It's longer and more confusing. Precisely the opposite of what you want in model numbers/designations...

[Bill Livingston]

jaapv... you should know better.   This is a Leica group.  It was change.     Change is always greeted poorly by this demographic. WTH were you thinking?  Get with it, Man!   Geez...  

 

I like change... I hate stupid, clumsy, short sighted change though... and this, to me, is stupid, clumsy and shortsighted...

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Hallo,

Look here: Leica M

[jdlaing]

Nah. The numbering system is fine now. There is not a Leica user nor a prospective one that after a few minutes doesn't know exactly what they are.