Variety in the Constricted Market
I think we can take it pretty much as read that there has been a contraction in the high-end audio market. Not so much in the manufacturing sector, exactly, which is interesting in and of itself, but in the brick-and-mortar audio dealerships — certainly. Today, there are fewer of them than … well, a long time … and I don’t see any evidence that the trend is reversing.
Brick-and-mortar stores are expensive. Rent and utilities alone can run into the thousands — per month. I know of one store that was doing over a million dollars a year in sales was also paying something like $40k/month for their retail space. When the market turned, revenue fell dramatically — luxury items are always the first to get pinched in any budget — and the store laid off its sales staff, liquidated the inventory that it could and eventually closed its doors because it couldn’t make payroll or rent. Common story.
Home-based dealers are very different. For them, the dealership-part of their income is usually only a fraction of the overall take. Maybe a large part (when things are going well), but still. It’s easier to run a home-based dealership. There’s usually no staff. Health care comes from “the other job”, or the significant other’s job. Rent or mortgage on the home is a cost they’d be paying anyway, not an additional cost — and there’s a huge deduction for running a business out of the home. Adopting a just-in-time model with no overstock on large items allows the home-dealer to maintain a relatively low overhead. The biggest issue then is maintaining a product line interesting enough to draw in the appointments and advertising enough to cover the lack of walk-ins that “good” brick-and-mortar stores get as a matter of course. Sounds great, but unfortunately, that formula is a tough one to grow.
Home-based dealers don’t usually have a lot of space to show stuff. I mean, it’s a home, first. People live there. Not every room can be converted to a listening space, or a storage space, so the variety on offer is, perforce, low. All I’m saying is that, while it’s probably financially wise to run a dealership out of your home, it’s also probably never going to become an audio mecca.
Entitlement in the Internet Age
I think “the Internet” killed the audio dealer as much any particular market fluctuation. And not because of online audio dealers, per se. Rather, online mega e-tailers like Amazon, with its always-on-discount policies, sets a sort of expectation with buyers that everything is not only available online but that everything that’s available can be and should be had for less. Savvy consumers, then, shop around.
They’ll go online and “shop” the forums looking for feedback on that gear. They’ll read and re-read anything a reviewer has ever published, picking apart the details like a surgeon trying to suss out everything the reviewer is saying — and not saying. When they get close, they’ll seek out the brick and mortar stores in order to re-validate their decision, and perhaps, actually hear that piece of gear that’s caught their imagination. Then, when they’re ready to spend, they troll the used online audio marts — or call around for the cheapest deal.
- Buyer: “Can I get your price on Product X?”
- Dealer: “The MSRP on that product is $xyz.”
- Buyer: “Yes, I know the MSRP — what’s your price?”
The expectation, of course, is that the dealer will quote a discount. Amazon discounts everything, so why shouldn’t an audio dealer? Especially one that advertises online! That’s the same, isn’t it?!?
Buyers today have an sense of entitlement — “no one pays retail anymore, why should I?” Of course, the fact that the retail price also has embedded in it the costs of the rent and utilities needed to keep the brick and mortar store open — and the salaries of the sales staff — and shipping and importing fees — and a bazillion other costs — well, all that gets lost in the hunt for an additional 2% off. But dealers live on margin — literally. When they discount, that doesn’t come out of the costs to the manufacturer. It doesn’t come out of the cut that the distributor takes. It comes right out of the dealer’s bottom line. Said another way, every discount given robs the dealer of a little bit of his livelihood. Worse, that expectation of his would-be customers means that he has to meet that demand — if he fails to do so, that customer will go somewhere else. Not could go. Will go. Hell, they probably will go anyway, whatever it is the dealer says or does, because sure as shit, someone will quote a lower price. Or one without tax. Or something. What dealer #1 won’t get me, dealer #2 might, and dealer #3 surely will. And if it’s too much hassle, whatever. The customer will just spend that money elsewhere. Like on a new iPad.
To stay in business, the hapless audio dealer has one of two choices. They can discount and hope to make it up on volume. This is a perfectly legit business plan. The success of this model depends, of course, on volume. Low-margin sales means that the “customer touch” also needs to be low and that the deals are almost entirely transactional. Think Amazon, again. This works if the customer already knows what they want, they already did the leg work to find it at the best price and all they have left to do is pay for it, bang, and then the process moves on to the next customer waiting dutifully in line.
Customer service becomes a matter of error checking. Did something not ship? Did something break? Send me an email and I’ll respond within by the next business day. No, really — don’t call, there will be no one actually answering that phone because I can’t afford that. Please leave a message and I’ll respond by the next business day.
Works for Amazon, so why not? Because there already is an Amazon.
There is another business model, the high value business model, that works quite a bit differently.
If you ask a random selection of IT resellers (not high-end audio) where “the profits are” in the IT market, none of them will tell you that it’s in selling boxes. Not even in volume! Sure, box-makers like Dell make a killing selling transactionally. But the actual profits on a given sale? 20%, tops. On a particular box, by itself? 4%. That’s god-awful. By contrast, companies that sell expensive, complicated to use products, like SAP for example, see something slightly different. SAP averages something like 65% per sale — and there is no “box”. If that doesn’t cause your eyes to fly open, you’re not paying attention. Dell has a gross profit margin of 20%. SAP has a gross profit margin of 65%. Which company would you rather be a stock holder in?
Yes, I’m oversimplifying. But the point I’m trying to tease out here is that both companies sell a product. What’s the difference, then, in product? Well, very simply, one is a box and another is a working system.
Return of the Consultant
If there’s a problem, there’s a consultant, ready to hand out sage advice. You know the old saw — ask the consultant a question, about anything, and you’ll always get the same answer: “It depends.” Har har har.
But back in the day, this is precisely what your audio dealer did for you. Yes, at the end of the process there was a bill of materials, but that wasn’t the point. You went to the dealer because you needed something. You kept going back because you learned something. You came away with something more than a box. This “something more” is exactly what is lost in the new Amazon-led, everybody-gets-a-discount I-wanna-be-Dell e-tailing sales model.
Like I said, there is nothing wrong with running your dealership as a transactional, run-rate, business. This is how many resellers make their monthly nut, and as such, it’s invaluable. It’s a predictable revenue stream, if you set it up correctly. But if the low-touch, run-rate, low-margin sales revenue is more than, say, 40% of your business, you’re at risk of losing out on the bigger sale — it just takes too much time to run the transactional business without automation, and as a result, you miss out on the elephant hunt. Elephant hunts (big deals) are more fun, more lucrative, and generally speaking, what brings in the “serious money”. A blend is probably better than either/or, that’s all I’m saying.
So, let’s talk about what’s being left on the table these days. It’s pretty simple, and is actually what SAP (and IBM and Cisco and a host of other bellwether companies) does almost entirely as their business model.
Services are what keeps a customer coming back. At it’s most simple (and most monetizable), it’s contractual renewals around support — annual maintenance contracts. This sort of thing is easy-money for a manufacturer — and is entirely why Apple does it. You don’t think Apple can afford to make 3 years of support standard? Of course they can. But the consumer sees value in the contract — so they sell it and price it accordingly.
Now, SAP does do that, too. But their main nut is more up-front rather than on the back-end. When you buy SAP, something <20% of the total deal size is actually the software that SAP is selling or the hardware you might need to run it, store it, and manage it. No, the bulk of the deal is implementation. That is, consulting dollars.
SAP makes a killing creating a system out of a set of software and hardware components, bundled together with services, to provide some functionality to a customer that can’t live without it. A system that is tailored for a particular customer that needs a particular set of functions accomplished in a certain way. An SAP implementation can take months. And all of those services dollars are extremely high-margin.
It’s a great business model. And while it may not translate precisely into any other business segment, there are still lessons to pull from their success.
One, high-end audio isn’t about boxes, even really big ones. The dealers really need to move customers away from the idea that a given box is going to be the solution to all of their audio problems. That’s manufacturer’s propaganda — sorry, marketing — and needs to be put into the context of a specific consumer by the dealer. What the dealer needs to focus on is, obviously, the system — as a whole.
I’ve talked about the importance of system synergy before, so this shouldn’t come as a shock that I’m coming back to it here. But consider the hapless consumer whose only exposure to a given component is a single rave “review” that he’s read on some online forum. He invests what little he has on hand (and usually more than he ought to) on this particular box only to bring it home, try it out, and have it perform less than ideally. He has no idea why. But do you think he’s likely to run right out to the same dealer that sold him the misfit product when he’s got more money to spend?
I think dealers are missing out here. And no, I’m not dismissing the problems that a consultative approach presents. It’s hard to be a consultant. There are books written about how to be a Trusted Advisor. In fact, there’s an entire industry built around how to be a better consultant. It’s hard stuff and not everyone is good at it. In my day job, this is precisely what I have to do: be a consultant. I have an entire shelf of books on how to be better at it. But the point is, if you want to be “the guy” that consumers will go to, you have to distance yourself from the sale.
This will be the hardest pill to swallow: to be better consultants, dealers need to stop selling — that is, selling boxes. Really. They need to have the testicular fortitude to be able to walk away from a transaction if it’s the wrong thing for the customer. Better yet, they need to be able to walk the customer away from the transaction … and into a relationship — one that will be mutually beneficial to both parties.
I don’t have a magic formula for this and anyone who says they do is full of shit — and trying to sell you something. The point is this: the customer that trusts you, your ears, and your advice, will keep coming back. Your job is get them hooked on the good stuff and convert a transactional customer into someone that values your services. Crack dealer economics.
Quick aside — no, I’m not talking about installation services. That’s gravy. If you can get it, get it. That’s not what I’m talking about, and this is where the analogy breaks down as it comes over from IT into high-end audio. Sure, you can sell installation services — but that’s not the big sale. You want the guy that that’s starting out, and starting small, and over the course of a year or two, ends up eating higher and higher on your food chain. Why? Because he likes your taste in audio, is sold on the value of your brands, and trusts your advice to provide him a path to ever-greater heights of audio nirvana. That’s long term. In the short term, I’m talking about system building and component synergy. This is the real job of the dealer, that is “the consulting service” I was referring to, because, IMO, this is the real value of a dealer.
No, this isn’t monetizable. There’s no line item for advice or consultation. There is no viable way to charge a customer for your time — that is already built into the MSRP of the product. What you’re doing is providing the value that justifies that cost.
Interestingly, this level of service is what we used to expect from dealers, back before the Internets ate many of them up, fractured the market, and over-enabled the consumer base. In my humble opinion, this is where the dealer needs to get back to in order to stay in business.
Obstacles to success
I almost hate to say it, but there’s a lot that stands in the way of a dealer getting back to their core consultative business.
The argument goes like this. A manufacturer that makes it across The Chasm really ought to be thrilled. This success is no joke and worthy of approbation. The problem is that any business that makes it that far also now faces a slide into irrelevancy. Marketing can counteract this. New products certainly help. Taking advantage of market adjacencies is just smart. But still, it’s a slide. Companies that aren’t diversified against or buffered from a market downturn, can quickly find themselves in trouble.
This is precisely when manufacturers fire their “good” distribution teams for ones that will happily flood the market with discounted (and now devalued) product. Distributors, facing the axe, may do the same in an effort to save their position and sign disreputable dealers that will heavily discount products, sell across territories, and likewise dilute the brand in an ultimately pointless and futile effort to preserve profit margins for the manufacturer.
If you’re a dealer, you’ve almost certainly had this happen to you — one of your brands goes rogue, and suddenly, one of your cash-cows won’t sell. At all. It sucks. And when you finally figure out what happened, you’re forced to either drop your prices, or drop the line and liquidate your overstock and demo units. Happens all the time.
Another issue is the review. I’d like to think that forum reviews are the worst of the lot, but that may just be self-serving on my end, so I’ll leave it open. Reviews can be very helpful to a manufacturer, distributor and dealer. Essentially, reviews are ad-copy. You can link them, quote them, use them to promote product. And you should.
But what they’re not is a license to assemble.
A great review of a tube preamp doesn’t guarantee that that tube amp will be all things to all people. Great success with a particular speaker in some reviewer’s system is most emphatically not an indication that such a speaker will work in every room it’s placed in. Reviewers have the gear they have — and unless you have all that gear too (and the room it’s all in), then you have to expect that YMMV. It’s the (very) rare reviewer that has a ton of different products at a variety of price points and can run the gear under review through all of them. I mean, this stuff is expensive. This means your reviewer isn’t likely to have purchased everything. Stuff has to go back. If they don’t have it to hand, they’re relying on memory. Memory sucks ass as a barometer for verisimilitude. I’m not saying you shouldn’t trust a review or a reviewer. But I am saying that “system building” around the component in question is likely not in-scope for a review. For that, you have to go elsewhere. And that step is HUGE and not negotiable.
If you choose to skip that step, well, just remember that there was a reason that cartographers used to put the words “Here be dragons” at the edges of the map — because that’s where you’re headed and who knows what alternative universe that wormhole is likely to dump you into. Take, for example, the forum debates. Those interminable, abominable, pointless debates. You read, get sucked in, start posting … and your soul is promptly sucked out through your fingertips and snacked on by Something From The Great Beyond. Mmm, tastes like chicken.
Folks! It’s noise. Noise! One thing I can’t stand is the noise, noise, noise, noise! Sorry, my inner Grinch came out there for a second. But you know what I’m talking about. It’s those debates that go: Cables matter! Cables don’t matter! You need tubes! No, you need solid state! There’s no winning, and once you’re in, there’s no escape. Michael Lavorgna captured this pretty nicely in a recent post on Audiostream. The long and short of it? Get three audiophiles talking about a topic and you still won’t be able to get a majority opinion — on anything.
What’s an audiophile to do? Well, they reach out to those that seemingly know. Maybe they e-mail me. And if so (God help them), my answer is always:
Well, it depends.
Time to call the dealer
- Manufacturers? Stop cutting off your nose to spite your face.
- Dealers? Retrain your customers.
- Consumers? Find a better way.
The thing that I think is “killing” the audio industry (it’s not, really, but that’s another story) is the fundamental disconnect between those of us that have a clue and those of us that are looking to buy one.
I think the worst case scenario is a bunch of ungoverned know-it-alls, unhappily condemned and now roving the countryside, omnivorously hoovering up the faintest hints of a clue as to the resting place of the latest and greatest widget that will, finally, slay the beast of disquietude. Which is pretty much what we have now.
(And for those of you who would come back and add-on to this some claptrap about “just enjoying the music” or “it’s all about the music” or “don’t you ever listen to music”, please, do everyone a favor and go drown yourself in a giant cup of STFU. If any of that was true, you’d have stopped reading about audio gear shortly after Apple released the first iPod.)
The trouble is, things are too expensive. Money is too tight. And information is cheap. Opinions are even more so. Which means that the stupid are now leading the ignorant and few if any of us are happy.
What we need:
- Manufacturers to crack down on predatory pricing. If there’s an issue with the MSRP for a product being too high because the dealers must embed discounting in order to sell the product, just get over it already and lower the goddamn price. Once the price is what it must be, punish those distributors or dealers that won’t maintain the value of your brand by finding another than will. This will encourage worthwhile dealers to get in, or stay in, the business. Good dealers are what’s going to “save the industry”, but if you keep undercutting them, they’re going to go sell for SAP and eff-you-very-much.
- Dealers need to get better at providing real value. System synergy is a bitch and component matching at a given price point is hard! You need a business plan that leverages that knowledge, and all the work you’ve put in assembling your line and demo systems. Customers that don’t want to support you, can go buy a PC off of Amazon.
- Fellow consumers — we need to stop our whining. Yes, this shit is expensive. It just is. I wish it wasn’t so. But it’s so much more expensive when we fuck it up and have to start over! So. Let’s take a moment. Maybe three. We should all take a deep breath. Ready? Okay. Now, do everyone a favor and set a budget. Then, actually leave your house and go visit your friendly neighborhood dealer — do this before you go nuts on the Internets. Don’t have a local dealer because your predatory shopping practices have run them out of business? Well, you’re not entirely SOL — that’s what road trips and regional audio shows are all about. Do yourself a solid and go talk to some people. You’ll be stunned at how fast a system comes together that not only fits your budget, but provides an obvious and meaningful upgrade path (no, footers are not a meaningful upgrade path). Oh, and as a bonus? It’ll sound awesome. Go home and be happy.
Of course, you should also read everything I have to say, because I’m awesome too. Just so we’re clear.
Is the high-end industry on life support?
Personally, I think this is a particularly treasured chestnut. You can read about it in Stereophile, hear about it from a panel hosted by TAS, overhear it whispered knowingly at audio show by a couple of white-haired men.
They’re all full of shit.
Have you actually been to RMAF? Holy guacamole, Batman. There are a ton of manufacturers out there. And new ones every year are entering the market. High-end audio does something to folks. We humans seem to really need to express ourselves artistically, and don’t kid yourself, anyone willing to spend countless hours soldering circuit boards together because this design must sound better than that last one — that freak of nature is an artist. It’s built-in to the DNA. It’s what we do.
So, no, I don’t think the high-end is in trouble.
I think the current high-end sales model is in trouble, though. A lot of brick-and-mortar shops have closed their doors. And yes, Apple has made everything different. But, in case you hadn’t noticed, Apple isn’t languishing.
I think what’s happening is that a lot of new, entry/mid-level audio manufacturers are realizing that dealers aren’t providing value, but are eating into costs. Perhaps the distributors aren’t viewed as providing the level of advertising support that Google is, or that word-of-mouth might, so, why bother? Without either, prices can come way down — in some cases, over 50%. Good for the manufacturer, good for the consumer, right?
I think things are changing. I’m just not sure it’s for the better.
I think that there is a place for the dealer. Someone that will invest their time and expertise to guide the zombie horde toward the bonanza of brains that their own thrashing will never uncover. A direct-to-consumer marketing approach, I think, is self-limiting. There are only so many Boses, Bang And Olufsons, and Sonys that the market can bear, and even if we can easily jam a few dozen more up there, the capacity isn’t endless. I think that, in the end, direct-to-consumer marketing will allow a lot of companies to get off the ground, but growth beyond a certain point will be impossible. They might get to a cult-status, which is fun, but for most attempting to go beyond that, they will just disappear before they cross the chasm.
For the mid-tier, or for product lines that are already established (that is, they’ve crossed the chasm), this manufacturer-distributor-dealer model may be the only viable method for them to grow and expand. Unless every manufacturer wants to stop specializing and begin selling “whole systems”, which is possible. Peachtree does this.
And then there is the “high end”. Different rules apply when the price to entry means Mitt Romney money. But how many Mitts are there? I think the current failures will mean fewer mega-system dealers. Consolidations of these brands into fewer and fewer mega-brand dealers will mean a fading out of some of the brands that live only in rarefied air. The competition, in close quarters, will strangle that market a bit and choke out some of the non-mega brands. Direct-to-consumer simply won’t work for a $250,000 all-Tidal system when there’s only an Internet storefront to interact with.
Anyway, I think we live in interesting times. But no, the high-end is far from dead. I think we’re — still — in the middle of a market transition, one that will continue to squeeze the middle. The entry-level may go direct. The high-end may consolidate as they lose their dealerships to the contraction. But I wouldn’t rule out the home dealer at this point — there’s simply too much value that they can provide. Whether or not they do may well depend on their segment (high-end vs entry-level) and whether or not their suppliers, or their customers, keep cutting them off at the knees.
I guess we’ll see.