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

[andromedaaudio]

Besides all those things gary mentioned , the exposure you get by doing direct sales is virtually 0 , most( rich) people just want to go into a shop hear it and buy what they like .
They don't want to go through the " buy over the internet and return within 30 days thing" , this might work with cheap products but not with expensive speakers for example , you couldn't sell the returned product as being new could you
The selling of things is a another business , the manufacturer makes the product ( which costs a lot of effort )and the distributor / dealer makes the effort to present it in such way it sounds the best ,for example by presenting it in a special designed customer listening room ,and hereby persuades people to buy the product
IMO a salesperson should do what he does best and a manufacturer his speciality
But they come in all shapes and sizes , some are good and some not

 

[ack]

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.

You are right, they set up my VPI's arm as well...

 

[Al M.]

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

alexandre

Yes, this was an excellent post! It should be a good education for some who complain about "high profit margins".

When 20 years ago I bought the Wadia 8/12 transport/DAC combo a buddy of mine offered, after I had auditioned the combo at the local dealer, that through back channels I could get new units cheaper than at the dealer. I turned him down. Call me dumb for not grabbing that opportunity -- I was just trying to be fair to the dealer. I had auditioned there, and if everyone would go for back channels, there would at some point be no dealers anymore to audition at.

If you are not fair yourself, you have no business whatsoever complaining about the unfairness of this world.

 

[WLVCA]

Very interesting discussion.

I think Lee is absolutely correct, the old model is dying. How can you debate the subject when the number of local audio dealers has declined so rapidly over the past few years? Seems that the answer is clear.

The market for super high end gear is narrow by definition, market is limited to those who can afford it and are also willing to pay the price. Perceptions here are skewed because there is an abnormal concentration of super high end buyers (and sellers). Not a criticism, just stating the obvious - and super high end is the focus of the What's Best Forum.

Almost all of my gear was purchased online - some direct from the manufacturer and some from resellers like Amazon and some from specialists like HeadRoom (headphones). Admittedly my gear is middle market.

The larger market direction today is better indicated on Head-Fi. Certainly headphones and related gear are the hot growth segment of the audio market.

There is room for a select number of high end dealers but they are located in the very largest metropolitan areas with the highest concentrations of wealth - NYC, Boston, SF Bay Area, Los Angeles, etc.

 

[Lee]

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

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]

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.

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:

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.

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.

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.

5. In a crowd funding model in a digital world, customer acquisition is relatively cheap and easy. Kickstarter has its own sort of PR machine and geek succeeded largely due to social media efforts from Gavin. It hasn't stopped Larry Ho from designing and building his high performing DACs though in either the LH Labs or Da Vinci lines.

 

[Lee]

Besides all those things gary mentioned , the exposure you get by doing direct sales is virtually 0 , most( rich) people just want to go into a shop hear it and buy what they like .
They don't want to go through the " buy over the internet and return within 30 days thing" , this might work with cheap products but not with expensive speakers for example , you couldn't sell the returned product as being new could you
The selling of things is a another business , the manufacturer makes the product ( which costs a lot of effort )and the distributor / dealer makes the effort to present it in such way it sounds the best ,for example by presenting it in a special designed customer listening room ,and hereby persuades people to buy the product
IMO a salesperson should do what he does best and a manufacturer at his speciality
But they come in all shapes and sizes , some are good and some not

There is huge exposure from crowd funding. In fact Geek feels it has allowed them to reach audiences outside of high end audio as tech people tend to support kickstarter. Remember Geek has received huge support from folks like audio blogs such as Part-Time Audiophile, the mainstream high end press, and others via social networks. Stereophile has written multiple articles even as they have some anxiety about reviewer influence.

 

[Lee]

Very interesting discussion.

I think Lee is absolutely correct, the old model is dying. How can you debate the subject when the number of local audio dealers has declined so rapidly over the past few years? Seems that the answer is clear.

The market for super high end gear is narrow by definition, market is limited to those who can afford it and are also willing to pay the price. Perceptions here are skewed because there is an abnormal concentration of super high end buyers (and sellers). Not a criticism, just stating the obvious - and super high end is the focus of the What's Best Forum.

Almost all of my gear was purchased online - some direct from the manufacturer and some from resellers like Amazon and some from specialists like HeadRoom (headphones). Admittedly my gear is middle market.

The larger market direction today is better indicated on Head-Fi. Certainly headphones and related gear are the hot growth segment of the audio market.

There is room for a select number of high end dealers but they are located in the very largest metropolitan areas with the highest concentrations of wealth - NYC, Boston, SF Bay Area, Los Angeles, etc.

My view is that the high end audio biz can save itself by focusing on portable audio, turntables & vinyl, and computer audio. Each of those areas is ripe for low-cost entry level products that perform well (many exist already). Over time some will get hooked and want even better sound and find their way to the local dealer.

I'm not convinced that the industry's current structure will result in anything but a depleted customer base.

On a more positive note, look at Ayre. Manufacturer of high quality components. They are working with Pono to offer a reasonably priced hirez portable player using such nice features as minimum phase. And yep a kickstarter!

How many Pono buyers will be impressed enough with the sound to buy an Ayre QB-9?

 

[andromedaaudio]

I meant exposure in the sense of actually listening to the product , reading reviews or having heard of it doesn't cut it in the end , if you want exactly the product that's best designed according to your desires/wishes sonically
A piece of paper (review ) doesn't make a sound

There is huge exposure from crowd funding. In fact Geek feels it has allowed them to reach audiences outside of high end audio as tech people tend to support kickstarter. Remember Geek has received huge support from folks like audio blogs such as Part-Time Audiophile, the mainstream high end press, and others via social networks. Stereophile has written multiple articles even as they have some anxiety about reviewer influence.

 

[Lee]

I meant exposure in the sense of actually listening to the product , reading reviews or having heard of it doesn't cut it in the end , if you want exactly the product that's best designed according to your desires/wishes sonically
A piece of paper (review ) doesn't make a sound

Ah, I see. There is some faith required for a geek campaign or one such as Pono. In both cases they raised significant amounts of money (pono still underway of course but at $1.7 million after less than two days!). That product risk is part of the risk you take in sending in money "ears unheard" in a crowd funding campaign. In Geek we have to have faith that the folks that built the Da Vinci know how to make a good DAC. Little risk there imho. In Pono we have to have faith that Ayre can make a good music player. Little risk there imho.

Every "campaign" on kickstarter will surely depend on things like the product, the design, the quality of parts and manufacture, the team behind the product, and the stability of the company behind it all.

 

[Lee]

They don't want to go through the " buy over the internet and return within 30 days thing" , this might work with cheap products but not with expensive speakers for example , you couldn't sell the returned product as being new could you

Please note we specifically carved out the case of more expensive items being better handled by the Dealer is King model.

emotiva does seem to do rather well with its speaker and component lines however.

 

[microstrip]

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

Great post Gary. I felt the same as you, and as I regularly get dinners and invitations to drinks and shows from distributors and dealers I know where a good part of the profit goes.

 

[andromedaaudio]

I need to read the article more carefull , the 1 $ parts labour cost doesn't apply to speakers that's for sure , not to high quality high end speakers

Please note we specifically carved out the case of more expensive items being better handled by the Dealer is King model.

emotiva does seem to do rather well with its speaker and component lines however.

 

[Lee]

I need to read the article more carefull , the 1 $ parts labour cost doesn't apply to speakers that's for sure , not to high quality high end speakers

Keep in mind that $1.00 is a "unitized" number. The absolute value could be $1,000 or $10,000.

 

[Lee]

Great post Gary. I felt the same as you, and as I regularly get dinners and invitations to drinks and shows from distributors and dealers I know where a good part of the profit goes.

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

 

[andromedaaudio]

Like in 1/10 of the retail price , I am quite confident that with" quality" loudspeaker manufacturers its much higher than that

Keep in mind that $1.00 is a "unitized" number. The absolute value could be $1,000 or $10,000.

 

[Lee]

Like in 1/10 of the retail price , I am quite confident that with" quality" loudspeaker manufacturers its much higher than that

Another way to look at it is that assuming a $10K speaker, all-in costs plus net profit to manufacturer is $3,000. Very reasonable assumption based on the data that was given to us. in fact we have seen instances where the corresponding number would be $2,000.

 

[mep]

Lee-I think your argument may be good for someone who is looking to buy a fairly inexpensive audio doo-dad such as a cheap DAC. I don’t think you can break the established model of manufacturer/distributor/store/consumer when it comes to selling big, expensive, and/or heavy audio components. Who is going to fund Kickstarter for a $10,000 speaker let alone a $100,000 speaker or a $200,000 speaker that weighs over a half of a ton? There’s a big difference between a DAC that you are only shelling out $100 for and you can fit it in your pocket vice typical audiophile gear that is expensive to very expensive.
So, take your chances with cheap DACs that you have to wait months or years to see if you will ever actually get one after you have shelled out your relatively small investment. Let’s see if you can pull that off with expensive gear that most audiophiles wouldn’t dream of purchasing until they could hear it in person.

 

[Lee]

Lee-I think your argument may be good for someone who is looking to buy a fairly inexpensive audio doo-dad such as a cheap DAC. I don’t think you can break the established model of manufacturer/distributor/store/consumer when it comes to selling big, expensive, and/or heavy audio components. Who is going to fund Kickstarter for a $10,000 speaker let alone a $100,000 speaker or a $200,000 speaker that weighs over a half of a ton? There’s a big difference between a DAC that you are only shelling out $100 for and you can fit it in your pocket vice typical audiophile gear that is expensive to very expensive.
So, take your chances with cheap DACs that you have to wait months or years to see if you will ever actually get one after you have shelled out your relatively small investment. Let’s see if you can pull that off with expensive gear that most audiophiles wouldn’t dream of purchasing until they could hear it in person.

As we mentioned several times above, we are not making an argument for doing away with the Dealer is King world for expensive components. We agree on that.

For Geek the turnaround time is around 8-9 months, roughly the same with Pono.

Think about it this way...sacrifice some very low end sales to the dealer on items are likely barely worth their time for the slim profits anyway and in exchange focus on expensive components and let the Geeks/iFi/Schiit/emotivas of the world sell a much less expensive product. The upside is a wider audience of people exposed to great sound. Then a few or so out of a hundred "get the bug" and after progressing in age & career & income bracket eventually start joining WBF and debating the fine points of two box power conditioners.

 

[Lee]

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.