Death of a Sales Model, my latest article on The High Fidelity Report

[mep]

Lee-So you are only advocating this process for cheap audio products?

 

[ddk]

David, you are totally misunderstanding what I am saying. No place in the article did we say mfr.s had to go the direct model. We are only asking that firms like Geek and Schiit who are doing it (and have decided to do it by their own free will) are doing a service to the industry. In other words today's Schiit Lyr buyer is tomorrow's Stax/Aurelic/etc. buyer.

Also, we never said the traditional model is "already dead"; we are saying that it is dying at least in terms of customer base.

Lee, I thought that we clarified this point in one of the above exchanges and we continued the discussion with high end in mind. You're also making statements about high end audio industry and its state of affairs yet you're saying that we're misunderstanding your article, what are we missing. The title makes a very bold statement, his it a question now? Did Gary and others also misunderstand what you're alluding to? Just look at how much time he spent replying to your article. The model you're describing is based on social media hype and the naiveté of masses. Its not industry specific and will never be a substitute for professional businesses. Its a sham! You're Selling a non-existent product at an imaginary price to sheep and calling them investors, are you kidding? This isn't a new phenomenon, its been going on for years in different formats all around the world. I want to see what happens when enough sheep get sheared and government steps in with regulations. Actually rather not, we already have too much government!

You don't have any proof of a shrinking customer base, we've been and still going through a horrible economic downturn worldwide and its hurting everyone. You're also ignoring the emerging markets in Asia, there's great expansion there but not everyone's competent to take advantage of it. Many will lose out while others will prosper, nature of the free market and nothing new. Not everyone can or should succeed! While the US high end shows might be dwindling some of the European ones like Munich and Milan are expanding. Its tough times and more competition but there's not evidence that high end is dying.

david

 

[Lee]

Lee-So you are only advocating this process for cheap audio products?

For entry level products most likely up to $1,000 if I had to guess.

 

[ddk]

Here is some key language from the article.

And yes the dealer doesn’t fare that well in this situation. This is frankly a modern end run around the dealer. The dealer loses a $10.00 sale for the $4.00 that goes directly to LH. However, we need to put this into perspective. I don’t think the dealer will ever die. It’s one thing to buy a DAC from LH Labs for a few hundred dollars, but a $20,000 Da Vinci DAC is another story. If the Geek Pulse is shipped and it doesn’t work, LH will fix or replace it within warranty because their reputation is at stake. And it won’t cost much for shipping or repairs. There are many more complications that arise when buying expensive and highly specialized items. I’m not sure I would buy a Porsche sight unseen or un-driven. When it comes to higher end products, we simply need more assurance. We need that test drive when so much money is at stake. We need that audition in the chair at the local dealer. We need immediate and comforting attention – and service – from the dealer if that expensive DAC goes on the fritz. When the stakes are very high, we need the confidence of having a local dealer on our side.

For entry level products most likely up to $1,000 if I had to guess.

Your entire hypothesis seems to be based on LH and what they might or might not do in the future. Where are you getting your data from to say that there's a price barrier. If a sales model is right and work, it should work for the $20k DAC as well as a $1k model. I'm sorry Lee the only fact I see here is your excitement of Crowd Financing and interest in getting a LH product on the cheap.

david

 

[Lee]

Lee, I thought that we clarified this point in one of the above exchanges and we continued the discussion with high end in mind. You're also making statements about high end audio industry and its state of affairs yet you're saying that we're misunderstanding your article, what are we missing. The title makes a very bold statement, his it a question now? Did Gary and others also misunderstand what you're alluding to? Just look at how much time he spent replying to your article. The model you're describing is based on social media hype and the naiveté of masses. Its not industry specific and will never be a substitute for professional businesses. Its a sham! You're Selling a non-existent product at an imaginary price to sheep and calling them investors, are you kidding? This isn't a new phenomenon, its been going on for years in different formats all around the world. I want to see what happens when enough sheep get sheared and government steps in with regulations. Actually rather not, we already have too much government!

You don't have any proof of a shrinking customer base, we've been and still going through a horrible economic downturn worldwide and its hurting everyone. You're also ignoring the emerging markets in Asia, there's great expansion there but not everyone's competent to take advantage of it. Many will lose out while others will prosper, nature of the free market and nothing new. Not everyone can or should succeed! While the US high end shows might be dwindling some of the European ones like Munich and Milan are expanding. Its tough times and more competition but there's not evidence that high end is dying.

david

:sigh:

David, that's a very unfair characterization of our analysis. We used real world data from several high end audio companies. The numbers are real as practiced.

It's also not correct to say the new crowd funding models are a "sham". Geek has already delivered a great sounding Geek Out. So good products are already in the hands of investors.

http://www.head-fi.org/t/677263/light-harmonic-geek

 

[garylkoh]

Gary, no need for personal attacks as we are being civil here and yes I was a McKinsey consultant. Let's clear up a few things:

No personal attack. I am saying that as a former McKinsey consultant you should know better than to deliver an incomplete report.

1. "Sunlight is the best disinfectant." It's my job as an audio writer to provide insights into the industry. My goal here is to talk to the advantages of the new business model of direct to consumer by way of breaking down what happened with the Geek campaign. If you feel I have shared too much data on high end audio pricing and cost then that is a shame because we are trying to help the industry. The Customer is not stupid though. They know that better prices are had when two middlemen are cut out.

The two middlemen provide the market access, and represent the customers' ability to access the product. When you cut the middlemen out, then there is no more opportunity for the customer to touch and hear the product. You claim to provide insights into the industry, but the insight needs to be fair and balanced.

I know that there is a new business model and there are products that would work with such a new business model..... but again, the article doesn't make it clear enough and hence confuses and mislead.

2. All the expenses you included above went into our calculations. I am not writing a McKinsey Quarterly article here (although I've done that as well) as my audience is that of audiophiles and music lovers. We simplified the chart to wrap a readable narrative around it. We obtained all of these expenses for our value chain research. From that we created some typical numbers found in the high end business. We did the same with direct to consumer sources. In our $1.00 cost of goods, these expenses are included minus warranty and marketing which we decided to break out separately. We were conservative along the way. We stand by our analyses, indeed we have proposed on WBF here to use if you like more conservative numbers like Vess suggested. The resulting huge differential is still supportive of our theme.

In every business I've looked at, the accounting is separated out into direct costs and overheads. Direct cost relate to the actual volume of business being done represent the cost of goods (or cost of sales). Overheads are usually fixed like rent.

How do you assign rent directly to product costs if volume manufactured and sold can vary month by month? Research and development?

3. We are not saying that distributors or dealers do not add value (they do!) or even have an easy time (often they are challenged!). We are saying that I don't need two middlemen to buy a $300 DAC...or even a $1,000 DAC.

4. You are not giving any benefit from the extra volume (economies of scale anyone?) when the industry gets more customers because they can buy in at a lower price. Joe College can now buy a nice sounding DAC for $300 at Geek instead of $600 at the local dealer. Isn't this a good thing for Genesis? Not every Joe College will buy good or better speakers but some will get hooked on the high end sound an wind up at a dealer that sells Genesis.

Not if every dealer in the country closes down before Joe College graduates.

Where do you draw the line? I don't see direct sales companies like Amazon taking less margin than a retail store. You move the costs around - you don't eliminate stores.

 

[Lee]

Your entire hypothesis seems to be based on LH and what they might or might not do in the future. Where are you getting your data from to say that there's a price barrier. If a sales model is right and work, it should work for the $20k DAC as well as a $1k model. I'm sorry Lee the only fact I see here is your excitement of Crowd Financing and interest in getting a LH product on the cheap.

david

You need to read the article more closely. There is a big difference between a direct to consumer DAC for $1,000 and a $1,000 DAC from the dealer.

P.S. It's not just LH/Geek, it's a wide variety of companies including Schiit, emotiva, iFi, etc.

 

[Lee]

No personal attack. I am saying that as a former McKinsey consultant you should know better than to deliver an incomplete report.



The two middlemen provide the market access, and represent the customers' ability to access the product. When you cut the middlemen out, then there is no more opportunity for the customer to touch and hear the product. You claim to provide insights into the industry, but the insight needs to be fair and balanced.

I know that there is a new business model and there are products that would work with such a new business model..... but again, the article doesn't make it clear enough and hence confuses and mislead.




In every business I've looked at, the accounting is separated out into direct costs and overheads. Direct cost relate to the actual volume of business being done represent the cost of goods (or cost of sales). Overheads are usually fixed like rent.

How do you assign rent directly to product costs if volume manufactured and sold can vary month by month? Research and development?




Not if every dealer in the country closes down before Joe College graduates.

Where do you draw the line? I don't see direct sales companies like Amazon taking less margin than a retail store. You move the costs around - you don't eliminate stores.

Gary,

"I am saying that as a former McKinsey consultant you should know better than to deliver an incomplete report."

1. Again, this is not for publication in a marketing research journal. We simplified the chart for a readable narrative. It's unfair to call that "an incomplete report".

"I know that there is a new business model and there are products that would work with such a new business model..... but again, the article doesn't make it clear enough and hence confuses and mislead."

2. Read the underlined quote above I posted from. It clearly spells out where we think the new models work.

"How do you assign rent directly to product costs if volume manufactured and sold can vary month by month? Research and development?"

3. In a value chain analysis, it is customary to aggregate fixed and variable costs for presentation which is what we have done here. McKinsey consultants often simplify detailed analysis to get to a "so what?" takeaway or recommendation for senior executives with limited time.

"Not if every dealer in the country closes down before Joe College graduates."

4. My feeling is that dealers losing a few sales to cheap DACs and such are not going to cause dealers to lose any real money. In fact, the money (all my dealer friends tell me) is made the in the multi-kilobuck components.

There are two paths here in my humble opinion. A. Continue the status quo and see the customer base dwindle. B. Accept the new world of Customers armed with more options and data and use it to the industry's advantage.

 

[Peter Breuninger]

I applaud Gary's post. I see this article as a publicity stunt for getting eyes "on" it.

I do have uneasy feelings regarding preselling a prototype product in a fast moving market segment. That segment being the CE personal listening industry. This has nothing to do with the highend audio industry. Death of a sales model? More publicity stunt. I refuse to even go there and address this statement.

I also believe as many posters here believe that this is a prepaid direct sale model disguised as a new paradigm. This is the part that bothers me. The false panacea of a new business model.

There is no advantage to the consumer for this model, only disadvantages...

1) no real discount... the price has already been set.
2) technology obsolescence is built into a nine month+ lag from pre design to marketing (funding) and then delivery.

The only advantage "I" see, is to a company that lacks a line of credit for proper funding of final R&D, beta testing, and actual production.

I believe the term "investor" is also incorrectly used in these models because no equity ownership exists. I am surprised the SEC is allowing this.

All that said, I congratulate LH for using any and every means possible to advance their product development and business success.

 

[Lee]

Peter,

Technically this is a new business model. There are books written on crowd funding as a new business model.

6-9 month lags are probably faster than most product development cycles so I think there is in fact a good chance this accelerates the speed to market. Many high end firms have a 1-2 year development cycle. It also takes the burden off staff in smaller size companies. For instance, Larry Ho at LH has been working on the product design while the actual funding is going on.

The first funding was to pay for tooling of the case of Geek Out which Geek admitted upfront. If I ran a company why wouldn't I want to have that funded by customers instead of an expensive bank line? This just seems like smart business operation to me.

I used investor in quotes as I agree with your distinction, which incidentally I made above as well.

"Death of a Sales Model" was indeed a provocative title from one of our editors. Standard practice for the audio business. It seems to have worked.

 

[carolkoh]

"Death of a Sales Model" was indeed a provocative title from one of our editors. Standard practice for the audio business. It seems to have worked.

Standard protocol for most media outlets these days, blogs and mainstream outlets alike. Great troll, Lee. Well done! It really worked. Provocative, over simplified and hits all the readers buttons. I did it all the time when I was more active writing in the gamer mags. It got the eyeballs and the forum posts went through the roof. I just did not expect it in an audio blog.

 

[garylkoh]

"How do you assign rent directly to product costs if volume manufactured and sold can vary month by month? Research and development?"

3. In a value chain analysis, it is customary to aggregate fixed and variable costs for presentation which is what we have done here. McKinsey consultants often simplify detailed analysis to get to a "so what?" takeaway or recommendation for senior executives with limited time.

So....... as a McKinsey consultant you'd tell a senior executive thinking of going into high-end audio manufacturing that there is a 50% nett profit margin to be made

 

[ddk]

You need to read the article more closely. There is a big difference between a direct to consumer DAC for $1,000 and a $1,000 DAC from the dealer.

P.S. It's not just LH/Geek, it's a wide variety of companies including Schiit, emotiva, iFi, etc.

I read it, I simply disagree on a number of points, starting with your price limits for factory direct. I'll use your own example of Porsche cars. I promise you that they'll sell out a years production in an hour if they came out with a scheme selling a $100,000 future model for half price. There's a lot more to it than just cheap prices.

I'd like to bring your attention to this short article from BBB,

Crowdfunding Sites Grapple with Fraud

As I said before wait till the government steps in and makes it too expensive to do, we'll see which model will die.

david

 

[Peter Breuninger]

Peter,

If I ran a company why wouldn't I want to have that funded by customers instead of an expensive bank line? This just seems like smart business operation to me.

I am only responding to this because of the term "expensive bank line", please clarify why a company would choose paying a website 9% vs. a bank line of credit of prime plus 1 (4.2%). Ummm, heck, if I was a McKinsey trained consultant (which you had to drop) how could I advise paying over 2x for money.

 

[ddk]

Peter,

Technically this is a new business model. There are books written on crowd funding as a new business model.

There's absolutely nothing new here only a small twist, its been done over and over and over again. The only difference is in the past it was done through direct mail, then it went to direct telemarketing now its in social media and some smart individuals have learnt that there's money to be made setting up websites selling these schemes. I really have nothing against this model and I applaud those who benefit from it, I just don't like it presented as the latest and greatest, that an outright lie.

david

 

[microstrip]

Microstrip, why do feel an article designed to get the industry to accept new ways of acquiring new customers will damage the industry?

Lee,

The article picked examples from the high-end audio to explain the sales chain and presents a way of marketing that as you say in a late discrete paragraph can not be applied to the high-end. IMHO, the article fails to show a clear distinction between audio, hifi and high-end. I have got the feeling that LH Geek is driven by very clever marketing, not by consumers ... I may be wrong, but also I got the feeling that all their marketing is not at all audiophile friendly.

IMHO the abusive use of audiophile jargon and the confusion created by LH, having a double face in this business, also upset people from the high-end. There is a permanent suggestion in their marketing about "audiophile" leaks in their products and it seems they want to go on in this direction.

And sorry I can not take seriously an affirmation such "As I tell my friends, in digital audio, timing is everything!" - unless you tell me you used it strictly as an economist, not as an audiophile. BTW, the sensationalist style, tittles and subtitles did not help.

Just my opinion as a reader.

 

[Elberoth]

Lee - that is an interesting report. Unfortunately, the numbers are totally off, which makes it kind of useless. I would expect more accuracy at collecting data from an ex-McKinsey guy.

 

[Lee]

Lee - that is an interesting report. Unfortunately, the numbers are totally off, which makes it kind of useless. I would expect more accuracy at collecting data from an ex-McKinsey guy.

The numbers are only based on observed real world data.

 

[Lee]

So....... as a McKinsey consultant you'd tell a senior executive thinking of going into high-end audio manufacturing that there is a 50% nett profit margin to be made

Not every component has a 50% net profit margin of course but our data that supported this on high end components. We used this for our composite view.

Let's assume we had a slim profit margin. We could change the net profit margin to 10% (or $.30 unitized in our example) and the total cost of manufacturing would be $2.70. The total cost would then be the same $3.00 and would not change our analysis either under our research or Vess' $9.00 to the Customer.

So the result would be 2.25X for the traditional approach.

As Hillary would say, "what difference does it make?" The direct to consumer approach is still more than half. That certainly supports all our major themes in the article.

Gary, in your case if you are barely at break even as a manufacturer then as a consultant I have to ask why do you still make speakers? Would there not be a better way to deploy your time and capital?

 

[Lee]

Lee,

The article picked examples from the high-end audio to explain the sales chain and presents a way of marketing that as you say in a late discrete paragraph can not be applied to the high-end. IMHO, the article fails to show a clear distinction between audio, hifi and high-end. I have got the feeling that LH Geek is driven by very clever marketing, not by consumers ... I may be wrong, but also I got the feeling that all their marketing is not at all audiophile friendly.

IMHO the abusive use of audiophile jargon and the confusion created by LH, having a double face in this business, also upset people from the high-end. There is a permanent suggestion in their marketing about "audiophile" leaks in their products and it seems they want to go on in this direction.

And sorry I can not take seriously an affirmation such "As I tell my friends, in digital audio, timing is everything!" - unless you tell me you used it strictly as an economist, not as an audiophile. BTW, the sensationalist style, tittles and subtitles did not help.

Just my opinion as a reader.

Look at the underlined quote above, we made it very clear that our suggestion is not to move Magico speakers to direct to consumer but to spell out the value of making it less expensive for younger people to enjoy music. Having a high quality, inexpensive DAC helps immensely as most have a computer.

The reason we have a paragraph at the end is that the structure of the article is to present the Dealer is King model, then the Customer is King model, then how they can work together to the improvement of the overall business.

More music enjoyment today among young people = more audiophiles in the future.

More audiophiles in future = more dealership customers = more buyers of Genesis or Magico speakers and other high quality gear.

I don't understand your comment about "abusive use of audiophile jargon". I don't see where we have done that. Can you point to specific examples?