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Today’s Luxury Watch Market Needs Fairly Priced Precious Metal Watches

Today's Luxury Watch Market Needs Fairly Priced Precious Metal Watches Featured Articles

When Grand Seiko introduced its Elegance Collection, aBlogtoWatch’s David Bredan described the pricing structure as “insane.” $7,400 gets you the SBGK005 in a stainless steel case, but the yellow gold SBGK006 will cost you $19,000, while the rose gold costs a mind-numbing $29,000. It’s hard to disagree with David’s assessment, and Ariel Adams and others on the team have railed against exactly this problem. Sure, gold costs more. An ounce of gold is trading for $1,300 and rose gold will cost slightly more, so there’s going to be a premium over the negligible cost of stainless steel. But there’s nowhere near $22k in gold in a watch case, so what exactly is driving the pricing structure of precious metal watches? Is it tooling? Rarity? Exclusivity? Veblen effect? A combination of all these factors? Or perhaps the price is simply what the market will bear — enough people are willing to pay these “insane” premiums, so that’s where the watches are priced. It’s an easy fallback answer and a common sentiment amongst watch enthusiasts, but I wanted to delve a bit deeper and see if I could find a more nuanced explanation. To do so, I spoke to representatives at several large retailers as well as StockX (a “stock market” for things, including watches) and also did a bit of number crunching myself. Lest I bury the lede, my take is that the luxury watch market is doing itself a disservice through illogical (and often astronomical) markups on precious metal watches.

Today's Luxury Watch Market Needs Fairly Priced Precious Metal Watches Featured Articles

Let’s start by looking at the numbers and see what they reveal about markups on precious metal watches. My background is in science, so I figured the first step should be to dig into the math and throw a bit of science at the problem. To do so, I scoured pricing catalogs to find 30 steel watches from 11 different brands, along with their gold equivalents. (There are 31 points because I included both the rose gold and yellow gold Seikos from the Elegance collection.) Note that there was no overall difference in price or markup between yellow gold and rose gold watches in our sample, so the Seiko is a bit of an anomaly. The steel versions of watches I included ranged from $2,200 to $11,800; I purposefully excluded brands like Patek Phillipe and Audemars Piaget, as a vast majority of their catalogs consist of precious metal watches, and pricing of high-end watches tends to be a whole different ballgame. I only selected watches on straps because bracelet manufacturing and extra material costs are added complications that could bias the data; note also that, primarily for this reason, Rolex watches were excluded. And, of course, Rolex is always the odd exception — the brand for which the normal rules never seem to apply.

Today's Luxury Watch Market Needs Fairly Priced Precious Metal Watches Featured Articles

Alright, so now we have some data! The next step is to start asking questions to see what we can learn about the pricing of gold watches. For the sake of the majority of our audience, I’ve left out the nitty-gritty statistics, but if you’re a stats nerd, feel free to ask questions in the comments.

Are markups dependent upon the price of the steel version?

Nope. There is no relationship between the retail price of a steel watch and the amount the gold version is marked up. In other words, if you know the price of a steel watch, it’s nearly impossible to say how much of a premium you should expect to pay for its gold equivalent. The plot below shows what we science types affectionately refer to as a shotgun blast — no pattern whatsoever. Yup, the pricing of gold watches seems to be lacking in the logic department.

Today's Luxury Watch Market Needs Fairly Priced Precious Metal Watches Featured Articles

Now, let’s look at the price of a gold watch in relation to the premium you’re paying for the gold version. Here we see that the price of the gold watch depends almost entirely upon how much it’s been marked up. In other words, you’re paying whatever markup is set by the brand, not the intrinsic value of the watch plus a consistent markup across brands. Let’s look at that brand-to-brand variation a bit deeper.

 

Today's Luxury Watch Market Needs Fairly Priced Precious Metal Watches Featured Articles

 

Are pricing markups consistent across brands?

Nope. In the sample of watches I analyzed, markups range from $4,900 to $26,135 and span a moderate 161% increase to a whopping 515% increase in price for a gold version. That’s a lot of variation in premiums. This becomes apparent when we compare the price of a steel watch to the price of its gold counterpart. Here, I’m showing a scatterplot where each point represents a steel watch (price on the x-axis) and its gold equivalent (price on the y-axis). There is a weak positive relationship between the price of the steel and gold watches, but a lot of variation. The gray line is the regression line, which represents the predicted gold price, given the price of the steel version. Deviations from this line are represented by the lollipops — larger, redder lollipops represent greater deviations; those above the line are marked up higher than predicted, those below are marked up lower than predicted. What I get out of it is that watch brands aren’t looking at each other — for that matter, they’re not even looking at other models in their own lineups — when pricing their gold watches. It’s a mad, mad gold-pricing world out there.

Today's Luxury Watch Market Needs Fairly Priced Precious Metal Watches Featured Articles  

What does all this number-crunching really tell us? Mostly, it probably just confirms many people’s suspicions that pricing is all over the map and there’s no clear rhyme or reason to it. At the very least, the pricing structure for gold watches does not seem contingent simply upon material costs, but upon other factors. To figure out what those factors are, I spoke with representatives from several retailers (Govberg Watches, Stephen Silver Fine Jewelry, and Grenon’s of Newport) to see if they could offer insight that the numbers simply can’t provide.

What is ultimately accounting for the premiums?

Frankly, I was surprised by how candid the retailers were when it came to explaining the premiums. All agreed that you’re not paying for intrinsic value (i.e., the value of the gold itself). As Ray Grenon from Grenon’s of Newport said, “Pricing never has to do with the market price [of gold].” And, unless you’re talking about making brand new bracelets, tooling costs are minimal.

Today's Luxury Watch Market Needs Fairly Priced Precious Metal Watches Featured Articles

Really, it all comes down to paying for exclusivity. As George Mayer from Govberg told me, “You’re paying for exclusivity, status; you have something others don’t have.” Each retailer echoed this sentiment in one way or another. Whether we’re talking about purchasing gold because of the “perception of value,” as Jared Silver from Stephen Silver Fine Jewelry pointed out, or the “look-at-me effect,” it’s still ultimately about exclusivity.

Today's Luxury Watch Market Needs Fairly Priced Precious Metal Watches Featured Articles

And that’s fair enough. Jared also made a parallel to the car industry: Sure, you can buy the base model, but many opt for the premium model. Even though the upgrades may only cost the car manufacturer several hundred dollars, consumers are willing to pay the extra $10k or more for the sake of buying the premium version. To be fair, there are some functional attributes car buyers gain by upgrading from the base model (heated seats, moon roof, etc.). In the case of watches, not so much. Generally, the only change is the case material, not the movement, finishing, dial, hands, or anything else.

We never said watch collecting was a logical hobby.

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  • Joe

    Firstly, nice article and great research 🙂

    I wonder whether perhaps “watch enthusiasts” vs “wealthy individuals wanting an exclusive watch” have interests that are somewhat mutually exclusive?

    For instance as a watch enthusiast, I care about overall design, the evident quality of a movement, initial value, resale value (in case
    I get bored and want to flip), overall fitness for purpose (which may include use of the right materials for case and bracelet) and perhaps history/heritage.

    As someone wanting an exclusive watch, I may care about some of the things above if I happen to be an enthusiast at all, but mostly it’s about cachet – having something that the next person won’t have or can’t afford to buy. For this 1% perhaps this non-linear cost discrepancy isn’t an important factor and maybe as the saying goes “If you have to ask how much, you’re not our target customer.”?

    Even though Rolex may be the odd-ball, you can see them playing this game in subtler ways too.
    Models like the Submariner having white gold index surrounds and a platinum PVD bezel.
    All of these attributes are added in an attempt to “raise the game” above the average manufacturer and in doing so result in a price that isn’t justifiable from a practical standpoint.
    Blancpain and JLC use solid gold rotors (amongst other things) and I’m sure many other manufacturers do something similar.

    Ultimately maybe my post ends with “this is like the pot calling the kettle black”.
    My point being that I think we have a tendency to justify what we can afford – but argue against products that we cannot.

    For the majority of the population out there, a steel Rolex is an unjustifiable cost considering that phones (and even a $10 Casio) can provide us with the time.

    Question: So why is it wrong for the ultra wealthy to want to retain their exclusivity, even though to the rest of us it feels unfair?

    • Matt Reudink

      Great points and I think that’s one of the challenges in generalizing consumers. I mean, there are plenty of wealthy individuals who are also watch enthusiasts, so ultimately the question may be “who is buying the most watches,” which will clearly be driving brand decision-making. But, in regards to your question–I don’t think there’s anything inherently wrong with the ultra wealthy wanting exclusivity. But if gold is being priced away from the “merely” wealthy to only the ultra-wealthy, but the cost of producing a gold watch isn’t close to being in line with the retail price, then there’s a problem (opportunity) that could be remedied (exploited) by some well-placed brands.

  • Joe

    the pricing structure of precious metal watches is insane

    This is exactly what wealthy individuals (and brands) want.
    It may not work for “us” but it’s the perfect situation for them.

    • Independent_George

      Funny, I was at WatchTime LA yesterday, at the GS booth, looking at a gold Credor and a time-only Platinum GS Spring Drive. I asked why the platinum GS was more than twice the price of the Credor since Platinum is currently trading less than gold. Engineering and watchmaking differences aside (which was explained), I asked why the 30K difference? He said “Because it works for our high-end clients.”

      • Joe

        Imagine if Rolex steel sports models were suddenly reduced to half their current price.
        Veblen product aside I think it would cause turmoil for the whole industry. People would no longer trust the luxury watch market.

        I have no idea what would really happen, but perhaps the industry would lose credibility if they suddenly slashed all precious metal watch prices.

      • So be fair, platinum cases are usually “950” (95% pure precious metal) while gold cases are typically 18K (75% pure gold). So an extra 20% increase makes sense when gold and platinum are equally priced. Anything more is just another gouge (as in your example) ’cause platinum currently having more prestige than gold.

    • Matt Reudink

      True enough, but I think the interesting take-away is that when the pricing gets too out-of-whack, there’s an opportunity for brands to make a correction. In other words, if the “them” group keeps getting smaller because of the pricing structure, there may be opportunities for other brands to cater to “us”. That was my take anyway.

  • JamesWWIII

    To be fair in using the luxury car analogy, often times moving up from the base to premium model often gives you a more powerful engine on top of the improvement in various bells and whistles.

    • Matt Reudink

      good point!

  • Marius

    Bearing in mind Richard Mille is charging $175k for some plastic looking BS, a gold Grand Seiko looks like a bargain!

  • Joe

    Sure but I also think a lot of “wealth” is accumulated in dubious ways, from drug kingpins laundering money to bankers doing deals based on inside information, turning a bling eye to laundering, etc.
    Definitely let’s not let the guilt police obtain too much power 😀

    • ray h.

      Love the Freudian slip of bling for blind ( I assume ). (:

      • Joe

        I wouldn’t have noticed 🙂

  • Matt

    Thanks! Glad you enjoyed it. Interesting point about Longines–which models?

    Regarding the stats: steel price vs. gold price: r2 = 0.27, steel price vs. premium: r2 = 0.03, gold price vs. premium: 0.87. Pretty telling, right! This was a simple linear regression, but if I use an LMM with brand as a random effect, it improves the model fit. But, for getting the point across, I think the r2s are pretty telling.

  • ray h.

    Damn, that was well said even if it’s proved wrong somehow it sure sounds right ! I always say if it was most other objects for sale they would be one tenth the price . i.e if a watch should sell for $500 in my mind with a good profit to the seller but in realty they ask $5000 and will settle for $3500-$4000 when you buy it. That just my hunch. Maybe I don’t take in to account how few they really sell of any one model but the piano thing really puts that idea to rest I think. So are there are no non super rich watch co. owners ? Maybe we are all in the wrong business ?

  • ray h.

    The true rich love to hear your laments . If you like it buy it. If you can’t afford it well … that is a shame.
    (I can’t afford them ether)
    If you and I could afford Richard MIlle then the true rich would only buy them to give to the help.

  • Sturzenegger

    Dear Mr Reudink,

    If possible, I would be pleased to receive the data regarding these interesting Charts (base on RRP incl taxes, US market ?). Could you send it to [email protected] ?
    Respectively your,
    Patrice

  • Bert Kanne

    Precious metal “luxury” watches almost by definition are not marketed with value or fair pricing in mind. This applies to all luxury products. Microbrands fill the void quite nicely.

  • Larry Holmack

    And folks wonder why the “Homage” & Replica ( illegal I might add ) markets thrive? A gold tone PVD “homage” to a Sub…with an NH 35 automatic movement can be purchased every day, online for under a $100 USD. Want an SW 200 instead…under $200 USD. Some people don’t care about the perceived quality…or lack there of…they just want the look. If it dies on them…they just get another one…or…in many cases…they have purchased multiple inexpensive watches that they like ..and have different color varieties of the same watch. I happen to know plenty of guys and gals that prefer having a wider variety of watches than just one really expensive watch with a name brand on it. Like me…I’d rather have 8 or so watches of various styles and sizes than just one…but that’s me.

  • merida condo

    Here’s another way to look at the “precious metal premium: A watch repair center weighed out all of the gold parts of a Rolex Day Date 1528. They came up with a weight of about 2.4 troy ounces of pure (24kt) gold in the case, crown, bezel, caseback and bracelet. At todays gold value thats around $3100. http://www.horologist.com/rolexmetals.htm

    As Rolex does not offer the Day Date model in steel, take a new GMT Master II and say it’s twice the weight of the older Day Date. Thats $6200 worth of pure gold. A new all stainless GMT lists for $10,000 US while a new white gold GMT lists for $39,750 US. Seems like a big premium…….. but manufacturers (successful ones) rarely, if ever, just tack on enough to cover additional material costs.

    The cost of the premium materials is added into the total cost of goods (labor, materials, overhead, etc) and multiplied by a factor the manufacturer has determined it needs to earn a profit (no matter whether steel or gold). So if a stainless GMT costs Rolex $2500 to produce and winds up retailing for $10,000, then a gold GMT would cost about $8700 to produce and retail for about $34,800 with the same markups along the way. My numbers are all guesses, but seem close enough to reasonably explain the prices.

    For a traditional dress watch, with a thin gold case and leather strap, the difference in material costs should not be so great as for an all metal Rolex sport model.

  • Rob Crenshaw

    Pianos take up a lot of space and are not in high demand. Pricing is based on supply and demand, not on intrinsic value of materials or workmanship. A Van Gogh has a few dollars of paint and canvas.

  • Thanks for the comprehensive post Matt. What I found interesting was that there is no consistency in the gouging. A simple example of why gold watches “should” be like this:
    50 grams – case weight in 316L stainless steel
    120 grams – case weight in pure gold (ss = 8 g/cc, gold = 19.32 g/cc)
    90 grams – case weight in 18K gold (75% pure gold)
    $3700 gold cost for the case.
    $7400 with manufacturer markup (2x)
    $11,100 with retail markup (3x total) and this could easily be $14,800 with a “keystone” (2x) mark-up over the manufacturer’s pricing.

    So when both the brand and the retailer mark-up the gold, the consumer pays a lot more than the “intrinsic value” (melt value) of the gold. Thanks the nature of the beast for a 2 tier distribution model. How can my friends at Alexander Shorokoff mark-up so little you ask – they often sell direct (though not always – they are available at Grennons) and mostly because Alexander is a fair minded individual.

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