What it really costs

Frame and Wheel reads in The Economist Magazine that Life Should be Cheap. This article an elaboration on the principle of frugal innovation, which Frame and Wheel has shamelessly adopted as its guiding management theory. This article touches on the vast disparity between health costs in the West relative to Asia, and describes how manufacturers in Asia can produce medical devices that perform the exact same functions as those in the West, but cost one tenth the price. It is pretty sobering stuff and worth a read. 

The point that resonates with Frame and Wheel is the idea that when it comes to health care, consumers want the very best, and thus they do not care what it costs (the fact that insurance companies are typically paying rather than the consumer doesn't encourage shopping around). This explains why medical device manufacturers in the West can get away with selling devices for hundreds of thousands of dollars, even though the same machine can be obtained from an Asian manufacturer for a tenth of the price. 

Frame and Wheel is not convinced that the consumer fully appreciates that his $2,000 frame costs the bicycle brand $500 or less. Perhaps they are, but then black arts of marketing and branding take over, and the consumer convinces himself to pay a $1,500 premium for a carbon fiber frame that will be obsolete in three years and fully depreciated soon after that. Frame and Wheel reads in the The History of the Bicycle that as far back as the turn of the 19th century, cyclists were paying this premium purely for reasons of perception. The only difference is that now we have eBay, the great arbiter of value, and a ruthless one at that. EBay is a mechanism that through the auction process helps indicate what the salvage value of an item is. Typically, salvage value is not too far off from original cost. 

For example, Frame and Wheel recently auctioned a 2004 Trek 5900 Superlight for $530, a bicycle that retailed for $4,800 in 2004. The auction had 1,500 views, 108 watchers, 27 bids and 16 bidders. It was a healthy auction. The strongest draw for the bike Frame and Wheel believes was its brand as well its relatively light weight; otherwise its components were dated (nine speed) but good quality and the frame had cracks, chips and flaking.  Assume that half of the value is the components and wheels ($265) and the other half is the frame ($265).  For a high volume manufacturer like Trek, $265 per frame does not sound too far off the mark. 

Persistent discounting at retail and the continued popularity of EBay and other online channels suggest to Frame and Wheel that the consumer will soon be (if he is not already) fully educated about the real cost of their frames, wheels, components and other accessories. Epiphanies like this spawn new business models that result in industry upheaval, red ink, corporate whining, lawsuits and so forth. Ultimately though these turning points benefit the consumer. The music, book and car industry have had their moments. Frame and Wheel cannot help but thinking that this moment is not too far away for the bicycle industry.