Origin Story
Early pandemic, I built a keyboard without any intention of selling it. But, after posting the build log to reddit, a few people said they’d be in on a group buy.
Interesting. Unfortunately, I had no idea:
- how to price it,
- what it would cost,
- how many people would want it, and
- if those inbound requests were serious or just anonymous commenters being supportive.
Bulk-manufacturing keyboards in the hopes people would buy them from me at a price I think they’re worth is risky… and if no one ultimately wanted or needed it, why bother?
Rather than be too clever about it, I thought to let potential buyers answer these questions for me—aided by technology, not anecdotes. Experience has taught me that soft commitments (i.e. “Sure, I’d hypothetically buy your product at some yet-to-be-determined price.") in surveys are poor predictors of actual purchasing decisions. Instead, I thought, let’s make this exercise a little less hypothetical and a little more entirely real.
So I built this thing and called it The Group Buy Experiment. (TGBE, for short.)
Making the Commitment
The closest analog to TGBE is a Vickrey Auction, but with two key differences. On TGBE:
- there are no pre-fixed number of units offered for sale, and
- there is no guarantee the product will be made.
If there are not enough people who want my product for a price I can afford to make it, it probably shouldn’t be made. Conversely, if a lot of people want it, but not at the price typical of a short-run keyboard, it probably should be made… but I would never know to do it!
I think this is true for many a keyboard designer (if not independent makers generally), many of whom underestimate the demand for their creations. Or, they don’t want to (or cannot) outlay thousands of dollars in the hopes of making a profit. (I’ve since learned many people in this “hobby” aren’t full-time keyboard designers nor manufacturers, although this market is maturing.)
There’s also a risk as, especially with keyboards, there’s little intellectual property protection. If a small-batch product turns out to be super-popular within a community, it’s fairly common for larger companies to clone it and, using their existing supply chain and buying power, undercut the independent/small-batch maker on their own product.
Keeping it Fair
Vickrey Auctions are almost fair in that all the winners pay the same price; but, the winners are often those who are highly-motivated, or simply have more disposable income or cash-on-hand. For my keyboard, I want to offer a price for my product that I could afford to sell it to anyone who wants one, no matter how many (or how few) want it.
There are buyers of all stripes and buying power interested in group buys, and to the extent possible, I want to level the playing field for all. To help with this, I want to separate the commitment from the buyer.
On TBGE, the seller does not know which buyer committed what.
If sellers know who is committing what, it adds a level of gamification and performative dance to what should be a fair and straightforward application of economics in practice. (Vickrey auctions, for example, can be gamed with shill bids, driving up price.)
Note: This means, of course, that I can’t run my own group buy with violating the anonymity principle; however, if/when I do sell my own products on TBGE, I will disclose them as such. I will either hire someone to run the group buy and select the price for me, or I will select a price between reach and revenue rather than exclusivity/absolute profit and share this (and the data) publicly.
It’s all about Choice
Once all the commitments have come in, sellers (called “Runners” on TBGE), will have to choose on what they’d like the final Group Buy Price to be.
A few highly-priced commitments (and a smattering of unrealistically low commitments) may encourage the runner to do a very short run. On the other hand, a boat-load of market-priced commitments may encourage the runner to place a massive order and make the product available to the maximum number of people possible. In fact, the math shows that most products are more profitable as the unit cost goes down thanks to the wonders of modern industrial manufacturing (even at the small-batch).
Either way, the choice is theirs: Runners they can control the supply of their product based on a true sampling of market demand.
Now how about about Buyers' choice.
Buyers with high commitments increase the chances that the group by will be successful simply by making it financially doable to the runner. (The per-unit costs is typically much higher on small-batch runs than in larger runs.) Similarly, buyers with lower commitments can help drive down price by helping the runner sell additional units which encourages the runner to lower the price for everyone without the running having to sacrifice profitability. But, if they are too low, the maker won’t be able to afford making the product as a more affordable price, incentivizing the buyer to commit to a price they’re are comfortable paying… and only if they truly want one.
Of course, buyers can also commit a token amount and buy the free option to purchase once a Group Buy price has been chosen. But, even those buyers might be better suited committing to an honest price as it helps the maker understand the long-tail of the market… making it both cheaper for them and all the other buyers.
All-in-all, the more commitments that come in, the more incentive the maker has to deliver a product for a fair price.
I hope Keynes would be proud.