[cyberferret]

Agreed that I left out an important segment, but I guess I was focused on the business case for the two extremes. The low end entry level stuff probably makes money for Fender due to the sheer turnover. The high end makes them money due to the larger profit margins.

As for the mid range, or 'working musicians guitars', it wouldn't surprise me if these were 'break even' or loss leaders for them. Most working musicians I know have a mid range workhorse guitar they use on bar gigs and open mics, but they also usually tend to have a high end guitar or two that they use for wedding gigs or purely for recording/private playing.

[jdietrich]

I can't provide sources (for obvious reasons), but I can tell you that there's a power-law relationship between retail price and gross margin. The cheapest starter guitars are very close to breakeven because of absolutely vicious price competition. Mid-range instruments are less profitable than they used to be, but they're still the bread and butter of the industry. The "custom shop" level of instruments are outrageously profitable, but they're also rather difficult to sell. Buyers for $5,000 guitars are few in number and exceedingly picky.

Prestige brands like Gibson, Fender and PRS rely to a significant extent on the "rich dentist" market of collectors, but most other brands don't sell significant quantities of super-premium guitars. Top-shelf guitars are often halo products, used to elevate the prestige of more affordable mid-range guitars. Having a "custom shop" in America or Japan is often treated as a marketing expense rather than a profit center.