Pricing niche products: Why sell a mechanical keyboard kit for $1,668?

← Back to Kevin's homepagePublished: 2019 August 22

I recently visited a friend who runs Keycult, a business that designs and sells $500 keyboard kits.

Not keyboards — keyboard kits — the buyer must provide their own switches and keycaps, as well as solder everything together themselves.

My friend's beautiful hands, assembling a high-end custom keyboard

(More photos of my friend’s beautiful hands assembling a keyboard.)

I knew nerds built their own mechanical keyboards, but I hadn’t realized just how deep this obsessive-collector subculture went.

During my visit, my friend listed their kits for sale and sold out their entire inventory of 60 kits literally within minutes.

So I did what any good friend would do: Point out that $500 is obviously below the market-clearing price and they should charge more next time.

But exactly how much more?

A primer on the custom keyboard market

One can buy fully-assembled mechanical keyboards at retail; the largest sub-market is “gaming”, where keyboards run $50–200 and look exactly like what you’d expect (black with Mountain Dew-colored LED back-lighting).

However, my friend serves a very different niche, which I’ll call the “enthusiast market”. This market consists of folks who hang out in online forums like r/MechanicalKeyboards, Deskthority, and GeekHack, where they swap keyboard photos, trade rare boards and keycap sets, and record videos about (I’m not joking here) how to install space bars backwards and lubricate switches to improve key-feel.

The process for buying custom keyboards on these communities roughly goes like this:

1. A creator posts 3D renders of a new keyboard design.

2. They hype up a “group buy” to collect enough money for a production run with a Chinese contract manufacturer (the keyboards are typically CNC-machined aluminum with custom circuit boards, so unit costs work out much better when ordering 20+ parts).

3. If enough folks pre-order, the group buy goes forward.

4. Stuff then goes terribly wrong (the organizer runs off with the cash, the organizer wasn’t a scammer but PayPal understandably freezes their account anyway after 100 strangers suddenly wire over $500 each, the PCBs don’t work, the aluminum anodization turns out poorly, etc., etc.).

5. After 6+ months and much gnashing of teeth on the forums, a keyboard kit shows up in the mail (maybe).

(That my friend has a reliable track record for delivering keyboards on time in part explains their brand’s popularity.)

Setting a price

Back to my friend’s pricing dilemma — how should they choose a price?

One approach could be to estimate various factors:

- design and manufacturing costs

- risk premium (given that my friend is financing the production and selling at retail, rather than just collecting pre-order money)

- aesthetic / brand premium (I’m told Keycult keyboards are super dope — personally I can confirm that they’re pretty heavy)

and then combine them into a single price.

However, I’m not a fan of this inside-out approach, for several reasons:

- factors like “brand premium” are inherently subjective — the temptation to compare to others limits potential upside and differentiation

- picking a (new, higher) price may have reputational downsides (because of course your customers spend all day in mechanical keyboard chat rooms and may gripe about you “selling out the community”)

- you will second guess yourself regardless of the outcome; either you sell out again (goto 0) or you sell too few and then must live with the shame of having $20k worth of unsold keyboard in your garage

The most compelling argument against simply picking a price, though, is that it limits how much you can learn about your market.

If you run a sale at $X, the most you can learn is that Y people were willing to buy there. Actually, not even that: If your entire inventory sells out, you learn only that at least that many people were willing to buy — you don’t learn how many would’ve bought your kit, had it been in stock.

Vickrey auction as price discovery mechanism

So, rather than speculate on a price, I convinced my friend to run a Vickrey auction to let their market determine the price. The auction worked as follows:

- On their next sale, my friend held out 10 kits to sell via auction

- Bidders had 24 hours to submit a sealed bid (“sealed” meaning bidders can’t see each other’s bids)

- The highest 10 bidders won, and they all paid the same price — the 11th highest bid

(See Keycult’s announcement for more details.)

Much has been written about the Vickrey auction from a game theoretic perspective — namely that it incentivizes bidders to ignore other bidders and simply state their own true value — but the auction has other benefits for an ongoing luxury keyboard brand:

- The price is set by “the community”, which deflects whining from toxic nerds.

- All buyers will likely all pay less than they were willing to pay, which makes ‘em feel like they got a good deal.

- The auction yields a full demand curve, including the maximum price each customer is willing to pay and their freaking email address!

On their next sale, my friend reserved 10 keyboards to sell via an auction. This auction worked out…well:

Vickrey auction results graph

The 10 kits sold for 3x list price, with the top bidder willing to pay 5x list.

Long story short, my friend is now:

- taking custom commissions (if someone wants to pay you $2,500+, find a way to let them!)

- visiting their factory in Big Rock Candy Mountain to organize a much larger production run (if a lot of people want to pay you $500+, let them too!)

Why isn’t this more common?

I can’t overstate the benefits of knowing the demand curve.

In my friend’s case, the auction let them sell far above their initial price and revealed that the market was deep enough to justify a larger production run.

In the context of an ongoing concern with multiple production runs, having email addresses associated with price-levels allows for very effective targeted email marketing: “Hey, we just did a larger run with lower unit-costs, so now we can afford to sell you a board for $X — you still in?”

Given these benefits, why aren’t such auctions more common in artisan manufacturing niches?

(I’m seriously interested, so if you have ideas please email me!)

Explanations I don’t find compelling, buyer-side:

- Trust: A pre-order (whether organized on Reddit or Kickstarter) already requires trusting that the seller will actually deliver the product; this level of trust ought to subsume the level needed to run a Vickrey auction honestly/correctly.

- Buyer confusion: Did I mention that these people spend all day in keyboard chat rooms and regularly wait 6+ months for purchases to arrive? It’s not exactly a casual crowd. (My friend reported that, after announcing the auction, several chat room regulars excitedly re-lived their undergraduate economics heyday by extolling the game-theoretic virtues of the Vickrey mechanism.)

- Buyer preference: Perhaps buyers simply prefer having upfront price levels? It’s familiar, and also allows them to both comparison shop and pre-allocate an overall “hip desk setup” budget.

Perhaps these factors will keep auctions out of the mainstream consumer consciousness, but the empirical success of the Keycult auction shows that enthusiast buyers are open to participating in non-traditional market mechanisms.

Explanations I don’t find compelling, seller-side:

- Implementation complexity: There’s negligible additional complexity to running a sealed-bid auction compared to a fixed-price pre-order or a Shopify/Etsy retail backend. (My friend linked to a Google form, sorted the resulting bid spreadsheet, and sent Shopify invoices to the winning bidders.)

- Bundling considerations: One hipster desk accessory company I spoke with (not keyboards) bases their pricing strategy on differential product margins: Their primary product has low margins (but attracts customers) and they profit when customers purchase high-margin “add-ons”. While it’s not obvious how auctions could fit into such a strategy, bundling limitations cannot explain the behavior of niche keyboard sellers who have only a single product.

Potentially compelling explanations:

- Early days: Niche online communities organizing manufacturing runs of anything at all is a recent thing, enabled by the accessibility of:

- online forums (Reddit, 14 years old)

- Chinese contract manufacturers (Alibaba, 20 years old)

- e-commerce platforms (Shopify, 20 years old)

The market is simply too young, and cultural norms just haven’t grown beyond either “I’m hooking up my friend at cost” or “I’m raising capital to sell 50,000 units at retail”.

- Inefficiency-as-virtue: Folks designing/collecting keyboards are true enthusiasts, and it’s really a status game with satisfaction derived from exclusivity. I.e., designers are proud their work sold out and collectors are validated for having spent so much time in the chat rooms by getting to the purchase link first.

- FOMO (fear of missing out) premium: By committing to a fixed price and quantity upfront, a group buy cultivates a sense of urgency which results in higher prices than would otherwise be achieved in a “more efficient” market mechanism.

However, none of these explanations feel like a slam dunk: The first two sound like “people are dumb amateurs who don’t like money”, whereas the third presupposes that Reddit keyboard designers have all attained galaxy-brain levels of economic reasoning.

Again, if you have an explanation that I missed, please email me!

People are worried about custom keyboard market liquidity.

Okay, maybe not a lot of people worry about the liquidity of niche products on Reddit. But I do think improving those markets would, on the margin, increase the amount of interesting, small-run art / products in the world. This could occur via at least two mechanisms.

Consider a product designer who runs a Vickrey auction instead of a fixed-price, fixed-quantity pre-order.

Mechanism 1: Sustainability The designer can use the demand curve to choose the size of their production run — maximizing either their profit (as a business) or their status (as an enthusiast, maximizing distribution of their work and spreading the “keeb lifestyle”). Either way, the more effectively they meet their goals, the more likely they’ll be inclined to produce work again.

Mechanism 2: Super-niche discovery Unlike a fixed-price pre-order, auctions will discover the super fans who’ll pay $2,684 for a keyboard kit. These price levels may easily determine the viability of a niche or polarizing product (e.g., successfully selling at $2,000 to 10 people versus a failing a $200 pre-order with 70 backers).

Given the trends that’ve enabled niche manufacturing in the first place:

- direct producer-consumer relationships online via email newsletters, forums, social media, etc.

- decreased production costs and turnaround time (whether via contract manufacturers or in-house, e.g., CNC capabilities)

It seems feasible that creators could run regular pre-order auctions to quantitatively gauge the viability of new design ideas.

Personally, I’d love for the preorder status quo to shift from “would you buy this?” to the more nuanced “how much would you pay for this?”

As my friend discovered, the answer to the latter may be a pleasant surprise =)

Further reading

- Tyler Cowen’s Conversation with Hal Varian: Cowen literally asks Google’s chief economist: “Why doesn’t the world use more second-price auctions?”

- Vickrey Auctions in Practice: Nice history of Vickrey auctions, from stamp collecting to EBay

- Why Are Vickrey Auctions Rare?: Good breakdown of reasons why auctions aren’t more common

- Lovely but lonely Vickrey auction: Mathy overview of some failure modes related to bundling

- How do you know when the price is right?: Nothing about auctions, but nice overview of how to think about pricing

- Prices for many goods do not move the way economists think they should: On the stickiness of consumer price levels and the tendency to cut production costs or packaging sizes before altering prices

Misc. thoughts

- My gut feeling is that, in general, purchasing power correlates inversely with time spent commenting on Reddit, so creators should spend more time developing other marketing channels. But if auctions allow creators to capture “super-fan” dollars, should they be spending even more time engaging Reddit and community chat rooms?

- In pursuing super-fans, at what point does a creator transition from “small niche market manufacturer” to — in the limit of a single super-fan — “commissioned artist”?

- The keyboard group buy FOMO reminds me of another market with hyped upcoming releases, limited availability, and obsessive collectors: Sneakerheads. However in that case, sneaker manufacturers profit (I assume) not from the limited-run sneakers directly, but from the “halo effect” that boosts sales of their mainstream product lines. As far as I can tell, no keyboard creators are pursuing this strategy — all the online stores I’ve seen tend to have a lot of (sold out) kits at the same price level.

Thanks

- Sebastian Bensusan for keeping me from unintentionally using Hayekian pricing jargon

- Spencer Wright for encouraging me to write this article and suggestions to better explain the Vickrey auction mechanism

- Tyler Cowen for suggesting the explanation of consumer preference for discrete pricing

- Zach Allaun for willingness to experiment with Keycult and letting me share the story