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

[Lee]

It's not about the money. In most cases, it's about getting something (usually useful) that you didn't realise you wanted, that wasn't available anywhere before and may not be again.

Don, if I understand you correctly you are hitting on something we touch on briefly in the article which is this theme of "being part of something".

So let's say Joe is excited about his Geek Pulse because he is paying $300 instead of $600.

Joe is also possibly excited about "being an investor", helping design product features of the Pulse, voting on the Pulse case final design, being part of the Geek Forums, getting an early unit.

There is lots of attractiveness and "stickiness" to the kickstarter/indigogo crowd funding platforms.

P.S. Both platforms kick back your money if the financial goal is not reached so the financial risk is minimal.

 

[Lee]

And again, without dealers, going just off recommendations from reviews (a majority, also in Stereophile and TAS, are worthless I found out) or opinions of fellow audiophiles on internet fora, I would have made costly mistakes.

I agree to a point. Our comment was more around trusting knowledgeable friend's opinions more than a reviewer. It is our belief that reviewers are generally not trusted compared to peers. This is not to malign reviewers as we see this trend in many industries. In fact, Madison Avenue talks frequently and alarmingly about their declining influence. No one trusts corporate ads and branding which can be measured has declined significantly since the Mad Men days.

And the high end magazines do themselves no favors by largely running positive reviews. In fact one online publication never publishes a negative review. They just decline to run a bad review.

 

[Lee]

Also, keep in mind we are not saying the dealer is not needed. We love the dealer. We are just saying that the industry needs to embrace these newer customer-centric business models where on less expensive items the distributor and dealer are not needed.

 

[astrotoy]

Lee, thanks for your article. On another site I pointed out the distinction between crowd funding and a manufacturer direct sales model. They are not necessarily the same.

However, when all is said and done, I would not be recommending to my son or daughter that today they go and start a retail audio dealership, unless they have a lot of money they are willing to lose. To me it looks like a very tough business and seeing how many dealers who were prospering 25 years ago and who are not in business today, I think the statistics will bear that out. I'm not sure that a business that requires a large retail space (that is high rent) and keeping a reasonable inventory (which is constantly getting out dated by model changes) and should require intelligent and knowledgeable sales staff (not minimum wage Best Buy people) can stay in business competing with the internet (drop ship and no inventory and no retail space - much more limited staff per $ of sales).

When I started as an audiophile back in the '70's I regularly went to shops to see and hear what was new. They were the primary source of information on audiophilia. Today, most all those shops are closed and essentially no new ones have replaced them. They no longer have a monopoly on knowledge. You can and do ask advice from your buddies on the internet. Also, there is a thriving market in used equipment which thanks to typically good care taken by the owners can hardly be distinguished from new, except by model number.

There are other models, such as the one I patronize and give my business, the audio consultant. In some ways like a doctor who practices concierge medicine, it is not for everyone and is not a model that can easily be reproduced at scale.

 

[ddk]

Okay, interesting perspective so let's address these point by point...

First off, we used real numbers from participants in the industry. So the value chain analysis is on target. Since the article has run, the comments I am getting are that the numbers are accurate. But as we said in the article, this is a composite and pricing/cost data varies by brand and type of component.

Second, we made a big point in the article of carving out expensive components. As we say, we want to test drive that Porsche. But a $500 or even one day a $1,000 DAC? No dealer needed, no distributor needed.

Third, I agree with you that crowd funding needs to be proven by successful product delivery. Geek started shipping out the Geek Out last week. So they are on track.

Fourth, we know these guys. Geek is Light Harmonic which makes the $20-30K Da Vinci DACs, one of the best sounding DACs I have heard.

Fifth, it's not a little discount. It's buying it at WHOLESALE. It's a HUGE discount. The Pulse with my selected options will be well over $600, maybe even $800. I only have a little over $300 into it.

Why pay the dealer and distributor that difference if they are adding no value or no perceived value?

Sixth, we added in the extra expenses in the value chain analysis. In the digital world that doesn't add a how lot for things like customer acquisition and shipping.

Hi Lee,

1st- Which industry did your participants come from? Maybe for some types of accessories but I can assure you that for mass market electronics these margins don't exist, even on paper. As far as high end audio goes there are several other dealers on this forum I'd like to hear if any of them can sell at retail, I want to shake their hand!

2nd- You posted this in a high end forum so I was looking at it from that perspective, otherwise it has no relevance here. Yes, its easier with cheaper, smaller items to sell direct but we still get back to my main point which financial; you need a certain amount of cash to produce and to pay for the returns and absorb the costs. That's where this direct sales model can fail or succeed, specially with these startups by inexperienced entrepreneurs. We're not taking Amazon here, what will you do when the vendor doesn't have the cash-flow to refund your purchase? Look at the net, plenty of complaints regarding this kind of problem. If the manufacturer has the cash and is willing I don't see any reason why you shouldn't be able to get a $10k DAC direct, but they'll never sell that item at cash prices. Money also has a cost and you'll be charged that premium.

3rd- My comments were general not specific to Light Harmonic.

4th- Knowing a little about 1 product doesn't tell you anything about the company's finances or prove a track record.

5th- Who said you're buying wholesale? You have someone, experience unknown, competence unknown, product unknown, throwing a couple of figures out there and you're already counting your savings? You should know by now that there's no bottom to mass market tech toys. Things can go either way.

You don't have to pay the dealer or distributor anything and I'm not trying to defend the value of dealers or distributors, just pointing out the realities of business and the market. You have to still cover the manufacturers cost of sales and that will bring up the price too, there's no way around it, and that's if the manufacturer is competent enough to sell direct.

6th- I haven't seen you biz plan so I can't tell if its reality or fantasy based like some of your other assumptions. If it was that easy to go it alone manufacturers would have all done it by now, I know this from my own experience. Sales and marketing are their specialty and require the right people to pull it off. Amazon wouldn't exist if manufacturers could sell direct. Who's more efficient than Amazon at retail? Look at their balance sheet, they're still loosing money but they survive because they have access to other people's cash. Who else can do that? Do you think that Nikon, Canon, Sony, Panasonic, etc. don't want to sell everything direct? They don't do it because they can't at continuos, sustainable levels.

Things might be different in the future but for now the old sales model is alive and kicking. The biggest change I can see in the industry which has already happened is distributers becoming retailers and manufacturers by passing distributors and selling direct to retailers for an extra margin. In both cases the msrp should theoretically drop somewhat but not to the levels that you're talking about.

david

 

[Lee]

Lee, thanks for your article. On another site I pointed out the distinction between crowd funding and a manufacturer direct sales model. They are not necessarily the same.

However, when all is said and done, I would not be recommending to my son or daughter that today they go and start a retail audio dealership, unless they have a lot of money they are willing to lose. To me it looks like a very tough business and seeing how many dealers who were prospering 25 years ago and who are not in business today, I think the statistics will bear that out. I'm not sure that a business that requires a large retail space (that is high rent) and keeping a reasonable inventory (which is constantly getting out dated by model changes) and should require intelligent and knowledgeable sales staff (not minimum wage Best Buy people) can stay in business competing with the internet (drop ship and no inventory and no retail space - much more limited staff per $ of sales).

When I started as an audiophile back in the '70's I regularly went to shops to see and hear what was new. They were the primary source of information on audiophilia. Today, most all those shops are closed and essentially no new ones have replaced them. They no longer have a monopoly on knowledge. You can and do ask advice from your buddies on the internet. Also, there is a thriving market in used equipment which thanks to typically good care taken by the owners can hardly be distinguished from new, except by model number.

There are other models, such as the one I patronize and give my business, the audio consultant. In some ways like a doctor who practices concierge medicine, it is not for everyone and is not a model that can easily be reproduced at scale.

Correct, crowd funding is a subset of a manufacturer direct sales model. But as we pointed out in the article both are important to bring in new customers.

 

[puroagave]

Okay, interesting perspective so let's address these point by point...

First off, we used real numbers from participants in the industry. So the value chain analysis is on target. Since the article has run, the comments I am getting are that the numbers are accurate. But as we said in the article, this is a composite and pricing/cost data varies by brand and type of component...

I don't know who your "industry participants" are but I agree with David your value assumptions are flawed.

Who 'owns' the design of the end product and what prohibits that mfr from mass producing it on the backs of original investors? you've essentially paid for his R&D on future products that will be sold for benefit the mfr and not the "investors"

if proprietary technology is used to insure compatibility with only that mfrs designs, you've essentially tied yourself with this Co. in perpetuity whether you know it or not - essentially making it obsolete if it cant be used with other gear.

scam artists, Ponzi schemes, etc. are too fresh in the minds of general public that have been burned before by paying up front for goods and services that weren't as promised or never delivered - i would think this would be the biggest hurdle.

I for one do benefit from brick & mortar dealers, no print review much less 'internet recommendation' will replace the advice/service a good dealer provides not to mention access to loaners and in home equipment trials an internet store can never deliver.

 

[Lee]

Hi Lee,

1st- Which industry did your participants come from? Maybe for some types of accessories but I can assure you that for mass market electronics these margins don't exist, even on paper. As far as high end audio goes there are several other dealers on this forum I'd like to hear if any of them can sell at retail, I want to shake their hand!

2nd- You posted this in a high end forum so I was looking at it from that perspective, otherwise it has no relevance here. Yes, its easier with cheaper, smaller items to sell direct but we still get back to my main point which financial; you need a certain amount of cash to produce and to pay for the returns and absorb the costs. That's where this direct sales model can fail or succeed, specially with these startups by inexperienced entrepreneurs. We're not taking Amazon here, what will you do when the vendor doesn't have the cash-flow to refund your purchase? Look at the net, plenty of complaints regarding this kind of problem. If the manufacturer has the cash and is willing I don't see any reason why you shouldn't be able to get a $10k DAC direct, but they'll never sell that item at cash prices. Money also has a cost and you'll be charged that premium.

3rd- My comments were general not specific to Light Harmonic.

4th- Knowing a little about 1 product doesn't tell you anything about the company's finances or prove a track record.

5th- Who said you're buying wholesale? You have someone, experience unknown, competence unknown, product unknown, throwing a couple of figures out there and you're already counting your savings? You should know by now that there's no bottom to mass market tech toys. Things can go either way.

You don't have to pay the dealer or distributor anything and I'm not trying to defend the value of dealers or distributors, just pointing out the realities of business and the market. You have to still cover the manufacturers cost of sales and that will bring up the price too, there's no way around it, and that's if the manufacturer is competent enough to sell direct.

6th- I haven't seen you biz plan so I can't tell if its reality or fantasy based like some of your other assumptions. If it was that easy to go it alone manufacturers would have all done it by now, I know this from my own experience. Sales and marketing are their specialty and require the right people to pull it off. Amazon wouldn't exist if manufacturers could sell direct. Who's more efficient than Amazon at retail? Look at their balance sheet, they're still loosing money but they survive because they have access to other people's cash. Who else can do that? Do you think that Nikon, Canon, Sony, Panasonic, etc. don't want to sell everything direct? They don't do it because they can't at continuos, sustainable levels.

Things might be different in the future but for now the old sales model is alive and kicking. The biggest change I can see in the industry which has already happened is distributers becoming retailers and manufacturers by passing distributors and selling direct to retailers for an extra margin. In both cases the msrp should theoretically drop somewhat but not to the levels that you're talking about.

david

David,

I will go into more detail tomorrow but I'm sleepy and headed to bed. I do have a few quick comments.

1. All the data we used was from the high end industry on expensive components. We talked to dealers, distributors and manufacturers. We did a value chain analysis as I was trained to do by McKinsey. All that means is that we considered all costs ("inputs") into price and we normalized to a $1.00 cost of goods sold. I've done many of these and some on the risk cost side have been published. By way of history, I developed the first spreadsheet-base sales commission model for Andy Singer back in the 90s so I have a long history of understanding audio profit margins. I used to build cash flow models for Wall Street for large $ M&A deals.

2. The wholesale assumption is more or less correct and we stand by it. In our analysis, wholesale represents the cost to the distributor or $3.00 so the $4.00 the customer pays is at least very close to wholesale.

3. The old sales model is alive but it smells funny. I have been going to the Rocky Mountain Audio Fest and other shows for nine years now. You know industry people talk about in the hallway? They talk about how depleted the customer base is and how concerned they are about bringing in "new blood". The old sales model is bringing in many future audiophiles into the dealer. Change needs to happen.

Customer is King is the solution to this problem.

It can be crowd funding like Geek or Pono or it can be Manufacturer to Customer like Schiit Audio.

4. I agree that often products don't sell at full MSRP but sometimes they do. But it is consulting practice to assume 100% pricing as a baseline. In the case here, Geek can also have sales so that still makes for an "apples to apples" comparison. In fact, the $300 Geek Out device is now selling for $200 by way of example.

5. We do include the extra costs (we estimated $1.00 extra, pretty conservative given the $1.00 cost of goods sold) for the manufacturer direct model. See the second value chain chart. So we are adjusting for that. Digital sales create low customer acquisition costs and easy access to local market knowledge.

Bottom line: we obviously differ here but I appreciate greatly your comments and civility.

 

[Lee]

I don't know who your "industry participants" are but I agree with David your value assumptions are flawed.

Who 'owns' the design of the end product and what prohibits that mfr from mass producing it on the backs of original investors? you've essentially paid for his R&D on future products that will be sold for benefit the mfr and not the "investors"

if proprietary technology is used to insure compatibility with only that mfrs designs, you've essentially tied yourself with this Co. in perpetuity whether you know it or not - essentially making it obsolete if it cant be used with other gear.

scam artists, Ponzi schemes, etc. are too fresh in the minds of general public that have been burned before by paying up front for goods and services that weren't as promised or never delivered - i would think this would be the biggest hurdle.

I for one do benefit from brick & mortar dealers, no print review much less 'internet recommendation' will replace the advice/service a good dealer provides not to mention access to loaners and in home equipment trials an internet store can never deliver.

Rob, going to bed but I will address your comments in the morning.

Please keep in mind that with Vess's new, more conservative assumptions we still get a 2.25X differential. The point holds.

 

[ddk]

David,

I will go into more detail tomorrow but I'm sleepy and headed to bed. I do have a few quick comments.

1. All the data we used was from the high end industry on expensive components. We talked to dealers, distributors and manufacturers. We did a value chain analysis as I was trained to do by McKinsey. All that means is that we considered all costs ("inputs") into price and we normalized to a $1.00 cost of goods sold. I've done many of these and some on the risk cost side have been published. By way of history, I developed the first spreadsheet-base sales commission model for Andy Singer back in the 90s so I have a long history of understanding audio profit margins. I used to build cash flow models for Wall Street for large $ M&A deals.

2. The wholesale assumption is more or less correct and we stand by it. In our analysis, wholesale represents the cost to the distributor or $3.00 so the $4.00 the customer pays is at least very close to wholesale.

3. The old sales model is alive but it smells funny. I have been going to the Rocky Mountain Audio Fest and other shows for nine years now. You know industry people talk about in the hallway? They talk about how depleted the customer base is and how concerned they are about bringing in "new blood". The old sales model is bringing in many future audiophiles into the dealer. Change needs to happen.

Customer is King is the solution to this problem.

It can be crowd funding like Geek or Pono or it can be Manufacturer to Customer like Schiit Audio.

4. I agree that often products don't sell at full MSRP but sometimes they do. But it is consulting practice to assume 100% pricing as a baseline. In the case here, Geek can also have sales so that still makes for an "apples to apples" comparison. In fact, the $300 Geek Out device is now selling for $200 by way of example.

5. We do include the extra costs (we estimated $1.00 extra, pretty conservative given the $1.00 cost of goods sold) for the manufacturer direct model. See the second value chain chart. So we are adjusting for that. Digital sales create low customer acquisition costs and easy access to local market knowledge.

Bottom line: we obviously differ here but I appreciate greatly your comments and civility.

Lee,

1- Andy had plenty of money in the 90s, customers used to flock to his store and Lyric's from all around the world and happily paid retail, those days are long gone. Plenty of money in Wall St., very little here in Main St., the models aren't the same.

3- We agree, high end audio marketed to the same old audiophile market is an exercise in futility as are most of the show today. There are other vibrant markets out there but the average high end dealer can't access it nor can compete with specialized dealers who understand lifestyle and have the advertising money and knowledge to tap into that market. But that still doesn't make the old model obsolete, but it needs to be tweaked.

Customer is KING model is great and I love it but it takes money to pull off, can't do it without sufficient funds! And that's assuming that you have the wherewithal to reach the target customer customer to make him KING! Unrealistic for many manufacturers. How many famous brands use the customer is KING model direct vs using distributors and retail outlets for that purpose? As a manufacturer (not audio) I've played that customer is King game with some well known national chains, never again! That's the domain of the retailer.

Any reason not to be civil?

david

PS This cartoon depicts the current state of affairs in high end audio retail.

 

[Al M.]

When I started as an audiophile back in the '70's I regularly went to shops to see and hear what was new. They were the primary source of information on audiophilia. Today, most all those shops are closed and essentially no new ones have replaced them. They no longer have a monopoly on knowledge. You can and do ask advice from your buddies on the internet.

Not that the latter is necessarily of any use. I have read several opinions on internet fora that the NAD M51 DAC is well comparable to the Berkeley Alpha DAC. I've had both DACs at home to try out, courtesy of Goodwin's High End, and the Berkeley easily beat the NAD, it is simply in another league. I even preferred my 20-year old Wadia 12 DAC to the NAD, except in bass performance. Sure, the NAD is a very good converter, but it was simply no comparison. Trust me, I would have loved to save 3 grand by going with the NAD instead of the Berkeley, but the reality check in my own system told me otherwise.

Again, if I would have bought the NAD M51 on advice of peers on the web, I would have made a costly mistake. By the way, at Goodwin's the Berkeley easily outsells the NAD despite its much higher price, a price however that in relative terms is still ridiculously cheap given the stunning performance/cost ratio. In fact, it is their best-selling DAC ever since the advent of digital several decades ago.

(As a side note, I threw in the well-reviewed Hegel 25 DAC into the comparison at home as well; nice DAC but no thanks.)

 

[Al M.]

By the way, Goodwin's High End still thrives as a store after many decades in business. Their success demonstrates that, when done well, the old sales model is far from dead.

 

[Lee]

Not that the latter is necessarily of any use. I have read several opinions on internet fora that the NAD M51 DAC is well comparable to the Berkeley Alpha DAC. I've had both DACs at home to try out, courtesy of Goodwin's High End, and the Berkeley easily beat the NAD, it is simply in another league. I even preferred my 20-year old Wadia 12 DAC to the NAD, except in bass performance. Sure, the NAD is a very good converter, but it was simply no comparison. Trust me, I would have loved to save 3 grand by going with the NAD instead of the Berkeley, but the reality check in my own system told me otherwise.

Again, if I would have bought the NAD M51 on advice of peers on the web, I would have made a costly mistake. By the way, at Goodwin's the Berkeley easily outsells the NAD despite its much higher price, a price however that in relative terms is still ridiculously cheap given the stunning performance/cost ratio. In fact, it is their best-selling DAC ever since the advent of digital several decades ago.

(As a side note, I threw in the well-reviewed Hegel 25 DAC into the comparison at home as well; nice DAC but no thanks.)

Al, I think we are on the same page but again not everyone has $5K to spend on a DAC. We need to reach new customer "segments".

My friend Ed has the Berkeley. Wonderful sound.

 

[ack]

I figured some here might like this new article. In it I examine using real world data why the new crowd funding models are doing so well and why they can help the high end audio business.

I hope you enjoy it.

http://thehighfidelityreport.com/death-of-a-salesman-lh-geek-out-campaigns/

I found your article interesting... a couple of things I would like to point out:

1) the cost-to-consumer is not 10X over cost-to-manufacture, in this industry, with the Dealer Is King model; the accepted factor is 5X on average, with few exceptions of it being higher (e.g. clearly overpriced/over-hyped products; and let's leave import duties out); and in some cases, it's as low as 3X (e.g. Spectral and probably Berkeley).

2) There is another variant model, that of the non-local dealer (not a grey market), where trans-shipping across dealer boundaries is allowed (encouraged?) by the manufacturer and beneficial (to a certain degree) for the consumer (e.g. the stuff that MusicDirect and similar sell); in those cases, the consumer benefits from long in-home auditions (30 days in some cases) not necessarily afforded by a local dealer, no tax, lower prices, even attractive financing options (MusicDirect is now running no-interest-for-3-years-over-$2500 offers, this week), but gets no meaningful advice, or set-up help.

I like #2 because it helps keep local dealers "in check" with prices.

 

[Lee]

I found your article interesting... a couple of things I would like to point out:

1) the cost-to-consumer is not 10X over cost-to-manufacture, in this industry, with the Dealer Is King model; the accepted factor is 5X on average, with few exceptions of it being higher (e.g. clearly overpriced/over-hyped products; and let's leave import duties out); and in some cases, it's as low as 3X (e.g. Spectral and probably Berkeley).

2) There is another variant model, that of the non-local dealer (not a grey market), where trans-shipping across dealer boundaries is allowed (encouraged?) by the manufacturer and beneficial (to a certain degree) for the consumer (e.g. the stuff that MusicDirect and similar sell); in those cases, the consumer benefits from long in-home auditions (30 days in some cases) not necessarily afforded by a local dealer, no tax, lower prices, even attractive financing options (MusicDirect is now running no-interest-for-3-years-over-$2500 offers, this week), but gets no meaningful advice, or set-up help.

I like #2 because it helps keep local dealers "in check" with prices.

1. We know about the 5X rule but that is looking at total costs whereas we have used $1.00 as cost of goods sold (smaller number) so apples to oranges. Again, we used real observed data from mfrs, distributors and dealers.

2. We did not use the MusicDirect model since we did not have access to their data and we wanted to make the article more readable by contrasting and comparing two paths. Might be worth a follow-up on hybrid models.

P.S. My friend just received a VPI Classic from Elusive. They setup the tonearm before shipment. So some setup is possible. Our local dealer actually charges (!) for turntable setup.

 

[Lee]

I don't know who your "industry participants" are but I agree with David your value assumptions are flawed.

Who 'owns' the design of the end product and what prohibits that mfr from mass producing it on the backs of original investors? you've essentially paid for his R&D on future products that will be sold for benefit the mfr and not the "investors"

if proprietary technology is used to insure compatibility with only that mfrs designs, you've essentially tied yourself with this Co. in perpetuity whether you know it or not - essentially making it obsolete if it cant be used with other gear.

scam artists, Ponzi schemes, etc. are too fresh in the minds of general public that have been burned before by paying up front for goods and services that weren't as promised or never delivered - i would think this would be the biggest hurdle.

I for one do benefit from brick & mortar dealers, no print review much less 'internet recommendation' will replace the advice/service a good dealer provides not to mention access to loaners and in home equipment trials an internet store can never deliver.

I can address your points:

1. Crowd funding is different from venture capital as a product is being offered instead of pure "equity". Geek retains the IP here as well they should.

2. Little financial risk is borne by the investor as both kickstarter and indiegogo refund your money if the financial goal is not reached. There is some risk around product delivery and quality but remember it's in kickstarter's interest to only accept reliable companies or their "exchange" is tarnished. The stats on actual deliveries are very positive for these exchanges. It's extremely rare for delivery failure.

3. On the product risk side, one must be familiar enough with the brand and prior product success to make a judgement as to whether to invest but this is not really any different than buying a product from Audio Research. My bet is the more established companies will raise money easily and new companies may struggle. But it's up to the "investors" as to how much risk they want to assume.

4. The dealer can certainly add value we have said repeatedly. We are decidedly NOT arguing for the dealer to go away.

 

[Lee]

I should add that we have seen as much as $20.00 to the consumer in the ultra-luxury segment. No surprise that the mega-expensive tables and amplifiers are often deeply discounted in the actual transaction. We also saw that reviewer sales often skew the numbers dramatically there.

However we tried to be conservative and show a reasonable composite of typical margins.

But even if you assume the cost advantage is just 2X manufacturer to customer, then you still are not arguing against the main theme of the article.

It's been fun to see all the pushback from distributors and dealers but that is human nature. If I were a distributor I'd like to hold onto my $2 or the $1.50 that Vess proposes. The dealer would like to get that $5 or $4.50 under Vess' scenario.

But we are suggesting something radical. Let's give that money back to the consumer, lower the price, and reach a whole new audience.

The alternative is to maintain status quo and watch the customer base die off and sales dwindle just as we are witnessing in classic music (I do classical recordings). Worse yet, fewer people will enjoy high quality sound.

 

[ddk]

I should add that we have seen as much as $20.00 to the consumer in the ultra-luxury segment. No surprise that the mega-expensive tables and amplifiers are often deeply discounted in the actual transaction. We also saw that reviewer sales often skew the numbers dramatically there.

However we tried to be conservative and show a reasonable composite of typical margins.

But even if you assume the cost advantage is just 2X manufacturer to customer, then you still are not arguing against the main theme of the article.

It's been fun to see all the pushback from distributors and dealers but that is human nature. If I were a distributor I'd like to hold onto my $2 or the $1.50 that Vess proposes. The dealer would like to get that $5 or $4.50 under Vess' scenario.

But we are suggesting something radical. Let's give that money back to the consumer, lower the price, and reach a whole new audience.

The alternative is to maintain status quo and watch the customer base die off and sales dwindle just as we are witnessing in classic music (I do classical recordings). Worse yet, fewer people will enjoy high quality sound.

Ultra luxury brands you're talking about with global presence have other cost structure, nothing to do with the cottage high end industry.

Its not a pushback from dealers and distributors, you're arguing that these sales channels are already dead and that's not true. Business practices have changed for sure, and some have done it better than others. But to claim that the manufacturers should now go direct and adopt the Customer is King Model is what I don't see possible, not for a very very long time. With that model only very few will survive and as consumers we'll lose many choices and will be forced to buy what the few provide. Its great for somethings but crappy for high end audio industry. You can definitely lower prices on some products but on the whole costs have gone up everywhere and government seems hell bent on extracting what they can from everyone. High end is a low volume luxury item, there has to be a certain amount of margins along the way to keep businesses afloat, its just not worth the effort otherwise. I promise you that even dropping prices by 30% won't have a significant effect on volume in this arena.

Classical music sales have been dropping off for a very long time, its a cultural and education issue, nothing that pricing can change. High end is a hobby not a necessity, it will die when its obsolete and that's that.

david

 

[garylkoh]

It reads to me (a manufacturer) like an article designed to drive the nail into the coffin of our industry.

Anyone reading the article will go - "What? If I pay $10 for a high-end product, $8.50 is going to go into the pockets of someone else?" You make it sound like everyone is making a killing at the expense of the customer. Perpetuating this will result in the customers thinking that they can call the manufacturer and negotiate to buy at $3. It's seemingly "informed" articles like these that are driving audiophiles into trying to get deeper and deeper discounts, refusing to buy new, and killing the industry. You say that the dealer can add value and you are not arguing for the dealer to go away, but this mis-information is what kills the industry.

If you were a McKinsey consultant, you should know better. There is a great difference between gross profit and net profit - and then there is the issue of operating cash flow. Wall Street banks have unlimited access to capital, but in this business, a short cashflow crunch can kill you.

For a manufacturer, the $1.50 gross profit has to cover -

• rent (including production facilities, warehousing facilities);
• utilities (including internet, telco services);
• labor overhead (medical insurance, administrative time - you don't expect a production tech to work 100% of his time in the office)
• inventory management (there are over 3,000 different parts we keep in stock to build with) ;
• logistics;
• customer service;
• breakage and obsolescence (components fail and are replaced);
• travel and entertainment;
• research and development (someone's got to pay for building countless prototypes);
• demo and review stock

At the end of it, I am lucky to break even....... and when that happens, then there is no money to purchase the inventory of component parts to build the next batch of products. If you have a growing business, you also have growing inventory. To be able to keep anything in stock, you need to sell at at least 100% over cost of parts in order to purchase the parts to build more products..... unless you get your customers to fund the production, pre-pay and wait 6 months for the product.

Pop Quiz: To be able to design the next $10 product (which may cost $100 in research and development), how many $10 products do you need to sell?


For a distributor, the $2.00 gross profit has to cover (in addition to market knowledge):

• rent (including warehousing facilities);
• logistics (import duties, freight, handling);
• order management, accounting and invoicing;
• advertising, trade shows, entertainment;
• sales management (for a country the size of the US - you will need sales reps who will take from 7% to 13% of gross);
• cost of sales (unless you have millions in the bank to finance the dealer's late payments - up to 150 days - you'll factor your invoices or provide bank financing to dealers);
• shipping and handling (almost all dealers demand free shipping from the manufacturer/distributor)
• warranty (back to back with the manufacturer, but the distributor will need to keep some back-up stock and then ship the broken product back to the manufacturer to fix);
• breakage (FedEx drops parcels 6 feet in their automatic sorting system);
• obsolescence (oops - the manufacturer has just released a new version of the product you have inventory of)
• returns (from dealers and/or end-consumers)

Pop Quiz: If as a distributor, I am selling $1million per quarter to dealers, how much money do I need in the bank to keep carrying on business? (Make some assumptions about how long do dealers take to pay, and how far forward I need to pay manufacturers before I get goods delivered)


For a dealer, the $5.00 gross profit has to cover (in addition to creating product demand):

• rent (including warehousing facilities)
• utilities (including business costs, fees, etc.)
• cost of sales (commissions, discounts)
• staff cost (sales, logistics, technical, administrative - including medical, overhead, etc.)
• customer service (delivery and installation, consultation - phone and in person)
• advertising and marketing
• breakage and obsolescence
• trade-ins
• depreciation - that's why so many dealers have showrooms that look so old and tired

Pop Quiz: Customer buys a $5,000 DAC, we take his old DAC as trade-in for $2,000. How long can he keep the salesman (whom I pay minimum wage) on the phone answering questions before I make no profit at all?

For a manufacturer, eliminating the distributor doesn't mean that he automatically gets another $2 in profit - it means that he sells much less and increases his cost of sales. Ultimately, it will mean worse products because he will be spending time, effort and resources trying to make sales instead of designing and building a better product.

 

[asiufy]

Wow, just wow! Beautiful post, Gary!
Thanks!

alexandre