In order to cover the cost of overhead and also realize a profit, most average-sized dealers need to make a gross margin of between 25% and 30%. This calculation assumes turnover within around 60 days. If the dealer thinks he can’t make a sale within that time frame he may need to realize a greater gross margin, or choose to invest his money in other brands. If turnover needs to be proven to the dealer, it may make sense to sell a first guitar on consignment, then negotiate a future wholesale arrangement.

Mark Campellone from Greenville Rhode Island replies:

Because independent builders produce instruments in far smaller numbers than large-scale manufacturers, a standard discount rate of 40% to 60% isn’t practical. Builders like myself usually discount at a rate about half that of the manufacturer’s standard. Of course, most dealers are more inclined to invest in a builder who already has an established reputation. For those who are not yet well established, offering instruments to dealers on consignment, at least initially, can be a good option.

John Greven from Portland Oregon replies:

Traditionally dealers paid the makers of guitars half of the retail price plus shipping costs. This was true for Martin, Gibson, and others from their earliest days of production. Martin never did any “incentive discounting” to their dealers and, to my knowledge, still does not. Gibson had a “floor plan” sales scheme for decades whereby dealers had to take a minimum number of instruments in order to qualify as a dealer and get the specific models they really wanted to sell in their market. This system assured that Gibson could move targeted numbers of all of their various models and keep production steady. Gibson did, however, discount an addition 5%–10% if overall sales were slow or they had excess inventory of a particular model, but for the most part it was the usual 50% discount to dealers.

Then came handmade guitars gradually infiltrating what had been a locked-down, manufacturer-only market. Individual makers had to set their prices with very different issues involved. They did not have the advantage of large scale production in reducing material and time costs, but they also did not have the high overhead. From the 1960s through the mid-1980s, most individual builders (and there were only a handful of us then) sold direct to the consumer with no discounting. Others, me included, sold both direct and through a small network of exclusive dealers. The standard dealer discount for us was 40%. This is now certainly not uniformly true. I know a number of makers doing only 15%–20% if the market will bear it.

Today, with the plethora of large and small guitar dealers around the globe, discounting is all over the map; from none at all for the top makers on down to the 40%–50% builders. It is a combination of what the market will bear and what the builder needs to have to make a living and continue in business.

I still have a small number of dealers around the world and domestically, and I still offer them a decent discount. The bulk of my production is divided about evenly between wholesale and retail and I like it that way. I always have plenty of work and a steady, dependable income stream, even in “hard times” when the market goes soft. The only way I was able to survive the steep recession and near market collapse of 1982-3 was through sales of my guitars in Japan. Even though I made less money overall, I was able to stay in business and continue to work. A number of hand builders at that time went back to their day jobs to survive.

While the dealer seems to make more money than the maker at the 40% discount, bear in mind that the dealer is taking care of your marketing and sales and all of the potential hassles that can follow a sale. As a maker, you do not have to deal with any of those aspects directly, and you can better manage your cash flow.

For established makers with a good reputation and long track record, direct sales are the way to go. For new makers trying to find a niche, dealers make better sense until your market is better established. The goal is to build what you love and sell what you build. If dealers can make the difference between success and failure for your business, they’ve earned their markup.

Over the decades, I have enjoyed working both with my dealers and individual customers. They are like family now. Some of my dealers go all the way back to 1975. The combination of dealer/individual sales has allowed me to make and sell over 2000 of my guitars over a forty-three year period. I could not have accomplished this without them. They have provided me with a continuing education and kept me in touch with the subtle changes in the market on a global basis. It is a good, working system for me and (the good news is) the costs are all deductible! ◆