Why Are Patek Philippe Watches So Expensive?

Why Are Patek Philippe Watches So Expensive?

Explaining why any luxury watch is super expensive can sometimes sound like a very woolly justification for what many outside the industry to be little more than daylight robbery. Yes, certain brands do impose a “luxury” tax on their products, which can sometimes seem to the uninitiated and experienced alike to push the boundaries of commercial acceptability. However, the truth of the matter is that there are many good and genuine reasons behind every pricing decision made by top-tier brands.

Before we dive into the airy concept of “luxury tax,” let’s take a look at the practical reason why luxury watches cost a lot of money.

Retailer margin

Let’s start at the very top. The single highest expense incurred by a watch manufacturer is the margin offered to its retailer network. Historically, a brand’s retailers were its most important contact point for customers. “Brick and mortar retailers”, that is, those with a physical presence, always acted as the brands’ ambassadors, as their greatest champions. They were able to explain the specifications and stories behind the watches they stocked. Customers were able to try on the watches there and make a decision in a relaxed environment. For many years (until relatively recently), it was an almost essential part of the “luxury pathway.”

Although margins differ from brand to brand and retailer-to-retailer (depending on prestige, experience, incentives, and so on), a rough median is around 40% of the retailer price. This may seem like an awful lot of “air” in the price you end up paying for a watch, which clearly costs significantly less than its retail price to make. However, there are several expenses incurred by the retailer during the process of selling you a watch.

The obvious expenses are the cost of the building and the staff within it. Other expenses, which often fail to be considered, are very basic things. There are things like utility bills, store decoration, and visual marketing materials. Then there are the little details like the tea, coffee, Coke, or champagne you are offered when you enter the store. And don't forget about all the travel, like going to trade fairs to meet with brands, or the shipping, the cost of processing returns, stationary, and so on.

The internet has changed things. Some retailers now exist exclusively online and thus are generally offered lower margins than their brick and mortar counterparts. Not all brands believe in the online-only business model since it seriously alters the luxury experience of buying a luxury watch. It simply “commodifies” their products, which brands labored against being seen as “products” for decades.

Watches are conduits of experience. They tell stories. We are only compelled to break down their costs and find it shocking how much the retail is in comparison to a unit’s literal production cost because these things are seriously expensive and require much more thought and personal justification to buy. The truth is, however, that almost everything you buy has a huge mark-up on it. Mass-produced commodities are worth buying despite the profit margin because you literally cannot produce them for the same cost yourself. More artisanal products, like luxury watches, are worth paying for because most people don’t possess the artisanal skill to make a watch themselves.

Making the watch itself

Yes, that’s right: humans spend their lives crafting your luxury timepiece. Those particular humans have likely spent years of their lives being trained. While being trained, they might have been funded by brands that need to recoup those apprenticeship costs somewhere and bank a little extra money to plan for the future. And not just their future, but the future of the industry itself.

There are a mind-boggling number of stages in the watch creation process, with a staggering number of specialist trades along the way. Thinkers, designers, engineering experts, trained watch-makers, artists, artisans, polishing and packaging professionals… The list goes on, and that doesn’t even encompass the record-keeping that is expected of luxury watch brands.

The Paperwork

As we have established, watches do not appear out of thin air, priced at the exact raw cost of the materials used to make them. Additionally, the watches need to be checked, recorded, and distributed once finished. Furthermore, there is an extensive process for watches that return to the manufacture for service. For starters, they have to be logged in the system, assessed for necessary work, assigned to a watchmaker, passed through quality control and returned to the logistics department. All of these steps must take place before the watch can be shipped back to its owner.

While after-sales costs can often seem exorbitant, these processes are lengthy, complex, and require extensive training. None of this is easy or simple. Even once the processes have been completed for a new or serviced watch, those watches’ details still must be banked and stored by the brand for future reference.

The raw materials themselves

We could have started here, because what is a watch without materials? It is nothing. It is just an idea. And although brands will pay millions for good ideas, their customers generally prefer a physical product in return for their hard-earned cash.

The physical elements that make up a watch are often expensive in their own right. Certain things like gold, platinum, and other precious metals, along with run-of-the-mill luxury fare such as diamonds or Mother of Pearl, are clearly going to push up the price. Especially given the explosion of gold's current value, taking it way past the value of raw platinum per ounce. But even humbler materials like 316L stainless steel, 904L stainless steel, and Titanium can cost a pretty penny if responsibly sourced and properly machined.

The Brands Coffers

And yes, the brand likes to make money, but once you’ve deducted all of the above, you can see that the piece of the pie left over for the brand’s piggy bank isn’t quite as gigantic as it might have seemed at first glance. And that’s all before considering the most important cost of all from the brand’s perspective…

Branding

That’s right: without a brand, a luxury watch is just an obsolete timekeeping instrument. Luxury watches cannot compete in terms of accuracy, reliability, or affordability with our smartphones, so why wear one at all? The name on the dial, which can stand for craftsmanship, trustworthiness, and innovation (to name but a few positive qualities of brands), is incredibly important!

Having an effective brand costs a lot of money. Positioning that brand can cost even more. We take for granted the endless Patek Philippe posters adorning airport walls the world over. Each one needs to be conceived, photographed, printed, distributed, and erected before it meets your eyes for the first time. The big brands like Rolex and Patek Philippe spend the equivalent of smaller brands’ annual turnover on aggressive marketing campaigns alone. The success of this is undeniable. In fact, this cash-heavy approach (which is only an option for the privileged few) is so effective that waiting times for preferential pieces are often unconscionable.

Angry would-be purchasers might feel tempted to point the finger at the brands for what is often peddled as “manufactured scarcity.” AKA that brands want their products to be unavailable to create a feverish hype around them. Thus the resale price is driven up, and it increases the perception of desirability and exclusivity in the minds of everyone who cannot become a customer of theirs even if they wanted to. There is at least some truth to it.

Take Rolex, for example: the brand’s professional models are all sold out. They have been sold out for years. Realistic waiting lists mean hanging around for 12, 18, 24 months, or longer is a serious possibility. Some retailers act as brand gatekeepers. They might literally refuse to sell watches to certain people if they don’t fit the ideal customer profile, or if they haven’t spent tens of thousands of dollars on watch models they don’t actually want.

And yet, no brand can simply “increase production.” Building new factories, training new staff to the level of excellence required (or poaching them from competitors) is very easy to say but much harder to do. However, the majority certainly could do more to meet the specific demands of the market, but they don’t because at least a little bit of buzz is important.

This borderline insane situation is something you find with Patek Philippe, also. In fact, Patek Philippe made the horrifying announcement earlier this year that it would be phasing out its current Nautilus model once the current run of green-dialed beauties had served its purpose.

That’s right, we’re talking about the ca. $30,000 stainless steel sports watch that now sells for around a quarter of a million dollars on the secondary market. If it weren’t for the immense investment of brands like Patek Philippe and Rolex in communicating their specialness to their audiences, figures like that would elicit nothing but laughter rather than muted contemplation of whether or not it’s “worth it” given that prices only seem to go in one direction. And that, really, is one of the finest justifications for the “luxury tax” applied by certain brands.

Luxury Tax

Okay, this isn’t an “official” term, but it is widely used in general industry parlance. Many people will know what you mean if you think the luxury tax added to Patek Philippe watches makes for an excellent after-dinner discussion and you feel like bringing it up.

We’ve been through some of the more obvious reasons why luxury watches, particularly those made and marketed by brands such as Patek Philippe, cost so much. But this rather spurious notion feeds into the previous portion of the cost, and that’s the brand’s coffers.

Generally speaking, “luxury tax” is a nominal extra amount added to the retail price after all actual expenses are taken into account. This depends heavily on the brand’s position in the market and the price bracket tussles in which it is engaged.

The use or neglect of this strategy can define a brand’s trajectory. It clearly communicates to its audience how it sees itself, what kind of customers it wants to have, and what you have to do to become one.

Some brands, (more and more of the startups we’re seeing these days), want to “disrupt” the industry by cutting out both the physical retail network. Many see this as nothing more than a drain on their potential profits, but this is a huge load to ask the customer to bear, and by eliminating the “evil” luxury tax, they accuse most established luxury labels of adding to their products.

As mentioned before, this does a couple of things that are very damaging for the future of watchmaking. Firstly, by eliminating the retailer network, you remove an established communication infrastructure. eCommerce can substitute for in many ways, but it can never adequately replace it. By eliminating the luxury trying and buying experience, the justification for any kind of luxury tax seems weak. However, conversely, although it makes products more “accessible” it makes the “products” not “luxury items”. This business model preaches its radicalness as something we should celebrate because it's pointing towards the total commodification of high-end wristwatches.

Luxury tax annoys people that are priced out of the watch they want because the brand thinks highly of itself. However, it attracts the kind of customers the brands that do this want. As the literal “quality” of the watches in question increases, so too does the potential to add luxury tax exponentially. In fact, rather than it being an option, it almost becomes a necessity.

Case in point: nobody looking to buy a fully-iced-out timepiece, dripping with diamonds is looking for a bargain. Rather, that kind of customer wants the item too expensive. They want it to be exclusive. They want it to be hard to get. Why? Because luxury items are rare and desirable and will almost certainly hold their value and increase because of the unusual position they occupy in the market.

A strong heritage is the string to Patek Philippe’s bow

Now, the above pricing theory can be applied to many a modern Haute Horlogerie brand such as Jacob & Co., or MB&F, for example, but there is one added wrinkle that makes the application of the same strategy when it comes to Patek Philippe watches slightly more palatable for the masses — heritage.

Patek Philippe is the real deal. As one of the largest and oldest continuously operating watch companies under private ownership, the company passes the sniff test however you wash it. You can’t buy history, and you can’t imitate innovation. And you certainly can’t fake the effortless class that Patek Philippe has refined over the years.

Young watch brands stand around wondering how they can become the next Patek Philippe or Rolex. The truth is, they almost certainly can’t. Watchmaking is an old industry, and its mature roots run deep. Any new brand will always be younger than the behemoths of the game. And those lucky few that were around to write the rulebook won’t be ousted easily.

Therefore, if you want to get one on your wrist, you better get saving. It seems unlikely that you would regret it, though...