The Economics of the Ultra High End

[Lee]

There was an article in HiFi News on CES in the current issue. Paul Miller remarked that he had never seen so many $100K+ amplifiers. This week I was talking to a friend who is an importer of some very expensive gear. So here is what I learned is driving the proliferation of these ultra-expensive components:

1. An approximately 5 to 1 ratio of MSRP to factory cost for many high end items. The large ratio is to provide enough manufacturer profit, distributor/importer profit, and dealer profit. On really exotic and more limited items with a less established dealer network, a distributor may sell direct to consumer.

2. So what does this mean? On a $150,000 item, the distributor may clear as much as $50-60K depending on how carefully they watch overhead and whether they do direct to consumer transactions. Clearly this means much fewer sales are needed to make a nice income. Plus, with fewer customers less infrastructure is needed. One can be a distributor out of one's home. Customer service needs are more easily met with fewer customers.

3. There are more millionaires in the U.S. over time, some of which are audio fans that can spend more disposable income.

I think these three things explain why the ultra-luxury end of the audio market has grown so rapidly and why some of us with more modest means are startled by some of the component prices we see.

The silver lining is that some of this technology trickles down in creating higher performance gear at moderate prices. It also helps create more choice by improving the business potential of a new company. If we were just dependent on the entry level market then I believe companies would be more subject to effects of the recession and other parts of the economic cycle.

 

[amirm]

The list is more or less correct. I would modify #3 though. I can't tell you how many single engineers I had in my group who had a tiny apartment, cheap little car, would eat cheap meals in the cafeteria, but would save their money and buy $20,000 amplifiers. This is no different than the renters I would see in the apartment complex near Microsoft who would drive $80,000 Porsches. Yes, these are "luxury" items but we all splurge and buy luxury items regardless of our total net worth.

BTW, the margin situation applies to many industries. When we built pro video equipment, our margin was 68%! Add to that channel margins and you see that our cost was a fraction of the purchase price. That enabled us to build custom VLSI (ICs) even though for us, selling 100 of something over its entire lifetime was a success!

 

[Mike Lavigne]

my opinion is that sales of 'ultra-expensive' gear is not really growing in the USA. sure, there have been more really expensive pieces recently come to the marketplace. but my guess is that the Asain market and maybe even the Middle East market is driving that much more than this market. those markets have smaller living spaces and fine audio is more previlant and the bling-bling of $100k amps for 2-channel listening is getting more traction. no doubt that is where the money is going....always follow the money.

i'm somewhat connected to many higher end audiophiles here, and i see very little movement to really expensive gear. besides; i'm not convinced that 'uber' costly stuff is worth it, regardless of Mr. Valin's perspectives.

 

[Lee]

The list is more or less correct. I would modify #3 though. I can't tell you how many single engineers I had in my group who had a tiny apartment, cheap little car, would eat cheap meals in the cafeteria, but would save their money and buy $20,000 amplifiers. This is no different than the renters I would see in the apartment complex near Microsoft who would drive $80,000 Porsches. Yes, these are "luxury" items but we all splurge and buy luxury items regardless of our total net worth.

BTW, the margin situation applies to many industries. When we built pro video equipment, our margin was 68%! Add to that channel margins and you see that our cost was a fraction of the purchase price. That enabled us to build custom VLSI (ICs) even though for us, selling 100 of something over its entire lifetime was a success!

This is quite true Amir. I know of several people who have scrimped and saved to buy something exotic. I took a summer off from Wall Street in the early 90s to work in audio at the Sound by Singer store in NYC where I designed the sales commission spreadsheet. The audio margins were usually 40%, 50% on cable and 20% on TVs.

 

[Lee]

my opinion is that sales of 'ultra-expensive' gear is not really growing in the USA. sure, there have been more really expensive pieces recently come to the marketplace. but my guess is that the Asain market and maybe even the Middle East market is driving that much more than this market. those markets have smaller living spaces and fine audio is more previlant and the bling-bling of $100k amps for 2-channel listening is getting more traction. no doubt that is where the money is going....always follow the money.

i'm somewhat connected to many higher end audiophiles here, and i see very little movement to really expensive gear. besides; i'm not convinced that 'uber' costly stuff is worth it, regardless of Mr. Valin's perspectives.

Mike, my importer friend does a lot of business in Russia, Germany and Asia-Pacific, primarily China and Japan. As for movement to high end gear, I think it would be more evident to you if you went to the Rocky Mountain Audio Fest where high end systems have multiplied in recent years.

 

[Mike Lavigne]

Mike, my importer friend does a lot of business in Russia, Germany and Asia-Pacific, primarily China and Japan. As for movement to high end gear, I think it would be more evident to you if you went to the Rocky Mountain Audio Fest where high end systems have multiplied in recent years.

Lee,

i've been to all of the RMAF shows, and agree that very expensive stuff gets shown there. i'm skeptical that there are significant increases in purchases of very expensive pieces of gear in this country.

i do know that there are plenty of Asian audiophiles who travel to RMAF to see gear there.

i have friends who sell gear all over the world. they tell me the most expensive stuff goes to Asia.

follow the money.

 

[FrantzM]

Hi

There has been a rise in the consumption of luxury goods this past decade. It could be due to the increase in the number of millionaires in the US or the world but I believe this is due to the housing bubble ... Suddenly anyone with a house was in possession of a good worth several time their yearly income and with the craziness that ensued, they could derive income from it (remember these refinacing loans that would drop $200,000 on any human able to hold a pen ?) So people began acquiring more ...stuff ... and they were willing to acquire expensive ... stuffs ... Audiophiles always wanted to acquire expensive ...stuffs... anyway. Manufacturers obliged .. Audiophiles anyway have the tendency to rationalize any price however outlandish it might be vide the $650K TT thread . Manufacturers which up to now saw themselves as enthusiasts just trying to make a living now could hit the jackpot and they did in many instances.
In different activities , yousee now more people buying things they can not truly afford … from the millions dollars houses to Louis Vuitton bags that it seems any 20 years old want to have or the $500 Manolo Blatnik sandal or …

Now I see our crazy pricing as part of this tendency. The only problem is that a Louis Vuitton bag is worn and people notice it .. Our high end system lays in the underbelly of our houses … Our number is declining while the number of Manolo Blatnik, Prada, Rolex wearers seems not … The High End Audio industry may have to adopt a different strategy ..

 

[DaveyF]

Lee,

i've been to all of the RMAF shows, and agree that very expensive stuff gets shown there. i'm skeptical that there are significant increases in purchases of very expensive pieces of gear in this country.

i do know that there are plenty of Asian audiophiles who travel to RMAF to see gear there.

i have friends who sell gear all over the world. they tell me the most expensive stuff goes to Asia.

follow the money.

Have to agree with Mike. Years ago, i had a conversation with Jeff Rowland whereby even at that time, he told me his #1 market was Asia.
Another factor is the various exchange rates around the world. In some countries, the exchange rate to the USD is very favorable.

 

[Lee]

Lee,

i've been to all of the RMAF shows, and agree that very expensive stuff gets shown there. i'm skeptical that there are significant increases in purchases of very expensive pieces of gear in this country.

i do know that there are plenty of Asian audiophiles who travel to RMAF to see gear there.

i have friends who sell gear all over the world. they tell me the most expensive stuff goes to Asia.

follow the money.

Mike, I agree with you that the overseas markets are where the action is and I said that above. Where we differ is the growth of very high end gear. That niche within a niche has definitely grown based on what I have heard and observed. My friends at Nordost talk about unit growth in Odin and I know the North American importer of Continuum tables and they have sold north of a dozen! That's a lot into a market that was largely non-existent before excepting a handful of Goldmund/Rockport owners.

Also, if you talk to the importers in the LA area then you find the market for $100K+ speakers has really developed whether you ask Magico, Marten Design, or Wilson.

 

[JackD201]

These 6 figure items are usually made to order. I know of no manufacturer that won't advise you of some lead time. I believe what they do is help sell the more "affordable" offerings by just being there.

My observation is that 6 figure buyers often stay putt when they get there. This makes them one time clients for the most part who may or may not avail of upgrades but usually do. This is a peculiarity of the segment. It is so far removed from the rest of the market that there is hardly a market for second handers. It might be because even second hand prices are too high for most candidates and those that can afford it can afford brand new at street price.

 

[Lee]

These 6 figure items are usually made to order. I know of no manufacturer that won't advise you of some lead time. I believe what they do is help sell the more "affordable" offerings by just being there.

My observation is that 6 figure buyers often stay putt when they get there. This makes them one time clients for the most part who may or may not avail of upgrades but usually do. This is a peculiarity of the segment. It is so far removed from the rest of the market that there is hardly a market for second handers. It might be because even second hand prices are too high for most candidates and those that can afford it can afford brand new at street price.

This may be true. If I spend $100K on a turntable I stop but the question may involve one of customer lifetime value, something I do in my day job. How many $20K table sales and upgrades does it take to equate to one $100K sale? I suspect many retailers may want to get the big sale.

Maybe where Mike and I differ is more around timeframe. Are there more $100K table or speaker sales during a recession? Probably not in the U.S. but maybe so in APAC, Germany and Russia. I was thinking about what has happened over 5 years time where there has been the emergence of ultra high end. Maybe Mike was thinking about sales over the past two years.

 

[JackD201]

Very good point Lee. I think every retailer wants that one big sale or for that matter that one big client whether he upgrades or not. One will also find that retailers also tend to service these customers extensively even without repeat purchases. There's a symbiotic relationship here anchored more on learning than money. Jonathan and Mike's relationship is a good example as is mine and Jim's, who by the way seems impossible to get out of lurker mode. These "super systems" get to be used as labs or test beds by the retailers to some extent and in return the owners get continued service and free consultation if needed. Of course, friendships develop here and that plays a big part as trust is a major factor, think AMP and his dealer.

Although I am a dealer myself, I am also a "ultra high end" client as far as analog sources go and I have the same relationship with my suppliers. The relationships are so good, it has actually stopped me from pursuing distributorship of products in this segment. I don't think I can better their service in this area. When we're talking about 5 figure cartridges there's a lot of care and skill required to install, calibrate and service these fragile beasts. A lot of risks too. Like you said about lifetime value, I believe most ultra high end buyers have to have the word "Keepers" in mind when the check books come out these items are often the ways off the merry-go-round. Whether getting off leads to burn out or to a state of satisfaction is a different story. I've seen many examples of both.

 

[Lee]

I agree 110% Jack. We had a great dealer in Atlanta that would visit repeatedly simply because it was fun to talk audio and I valued the personal friendship as much as the business relationship.

One of the things I really like about this hobby is that it is a small and fairly close-knit community. My travels to Rocky Mountain and other shows has introduced me to a lot of good people. The passion and friendliness of many in the business is what keeps me energized about the hobby, both from the music and the audio side. Many people have helped me with quality advice over the years.

 

[Nyal Mellor]

I do not know if this is true but I was told by someone that often the actual price for these super expensive components is often 50% of list and is so that the salesmen can go 'look I can give you this 80k speaker for 50k, what a deal you are getting!'

Maybe someone who works in the uber high end can correct me if I am wrong

 

[mep]

I do not know if this is true but I was told by someone that often the actual price for these super expensive components is often 50% of list and is so that the salesmen can go 'look I can give you this 80k speaker for 50k, what a deal you are getting!'

Maybe someone who works in the uber high end can correct me if I am wrong

You are right about the 50% mark-up and wrong about the part where the salesman sells you an $80K speaker for $50K. That ain't going to happen unless the dealer is going out of business.

I just sent a letter to the Editor at Stereophile over the review Michael Fremer just did on an Axia phono cartridge that sells for $1950. Michael said the cartridge has "a lack of deep bass" and it would be good to mate it with a stand-mount two-way speaker with a bass bump to compensate for the lack of deep bass. That pissed me off. First of all, 2 wrongs don't make a right. Second of all, a cartridge that sells for almost $2K damn sure better cover the bottom octave or otherwise it's defective.

I'm not buying any nonsense that you have to spend at least $5K in order to get good bass from a cartridge. If that was true, I would just throw all my LPs in a pile and burn them. When you live in the land of accommodation prices and probably some free expensive cartridges, it's easy to lose touch with reality.

 

[caesar]

I agree 110% Jack. We had a great dealer in Atlanta that would visit repeatedly simply because it was fun to talk audio and I valued the personal friendship as much as the business relationship.

One of the things I really like about this hobby is that it is a small and fairly close-knit community. My travels to Rocky Mountain and other shows has introduced me to a lot of good people. The passion and friendliness of many in the business is what keeps me energized about the hobby, both from the music and the audio side. Many people have helped me with quality advice over the years.

I undestand the value of personal relationships, but the "obsessed audiophile" has to be careful to trust his own ears. When one buys a luxury product, the service and purchase experience are second to none. It is very different buying jewelry at Macy's than at a respected jeweler and it's very different buying a Chevy than a BMW. In short, the buyer is treated as a member of the royal family, as the salesperson is well aware that people buy from those whom they like.

But what if the dealer doesn't carry both Rockport and Magico, and you happen to buy one, but then discover you really like the other?

 

[mep]

But what if the dealer doesn't carry both Rockport and Magico, and you happen to buy one, but then discover you really like the other?

Uh, I believe you are screwed. You will take a bath on the speakers you just bought in order to take another bath on the ones you decided you really wanted.

 

[JackD201]

I do not know if this is true but I was told by someone that often the actual price for these super expensive components is often 50% of list and is so that the salesmen can go 'look I can give you this 80k speaker for 50k, what a deal you are getting!'

Maybe someone who works in the uber high end can correct me if I am wrong

That discount sounds pretty extreme but let me put it this way, people that can afford to buy super expensive stuff don't get rich by paying list. Retailers that want to keep their doors open stay open because they know how to be flexible.

So this is the beauty of the Brick and Mortar system. You can negotiate. My best 2 pieces of advice are for the buyer to first show serious intent and second show that despite this he is prepared to walk away. It is absolutely no different from any other negotiation.

In a good relationship a balance is struck where the buyer get's a god deal (better than anywhere else) and the distributor is allowed by the buyer to make enough money to make the activity worth his time, effort and cost of money. Over here, where salaries are nowhere in comparison to the western world, buyers of the expensive are usually business owners not salaried people. As such, the buyers know from their business experience what it is like to be low balled or squeezed so this behavior is generally avoided. In the eyes of the seller, low balling is a sign of low interest but more importantly a lack of appreciation for the item's value. This indicates that the buyer may be more in it for the thrill of the deal more than getting what really suits his tastes. This is a recipe for an unsatisfied customer no matter what discount you give. Be prepared to hear complaints on the sonics spewed publicly and expect your product to be dumped when he next attractive deal comes along. I just avoid these types of buyers by holding firmly onto my pricing. If the buyer is particularly troublesome, I charge list. If he is obnoxious, I refuse his business outright.

 

[garylkoh]

That's a great point, Jack. Most of my best customers are business owners. They know that they have to pay enough to keep my dealers and me in business so that they have long-term service. It is a relationship, and I know of no relationship where "I win, you lose" is sustainable. Even a parasite knows enough not to kill its host!!

The customer who appreciates the product and appreciates the service provided by the dealer gets the best service. If all he wants is a big discount, I will point him to another brand.

Edit: It is saddest when buyers are more interested in the discount than the price. A $100k product that I can buy at $40k discount is not a better deal than a $50k product that I cannot get a discount for. Oscar Wilde said that a cynic is a man who knows the price of everything and the value of nothing.

 

[JackD201]

@Mark

If a $50 cartridge does not produce the bottom octave it is defective.

@Caesar

People that do not trust their own ears shouldn't be swimming in these waters lest they drown (discover they like the other one) or be eaten alive by sharks (get sweet talked into buying a less than perfect fit).