"Secrets" about the consumer audio business you may find interesting

[dtaylo1066]

Attack? How is this even an attack?

I didn't even question what you were saying, the only thing I said is that it might differ per country since a couple of those points were either not at play, or smaller.
Nothing less, nothing more.
I even very clearly stated that it is not my expertise except the one contact that I used to have?

I don't understand even the whole emotional response here, so I will just dismiss it.
Kind of a weird dramatic response to something I don't even disagree with, and never even said I did.

Was just asking or pointing out some things.

Btw, the link you're showing (which I also bumped into) also shows some countries with zero tax.
There is some interesting literature that shows how small tax is in certain (big) countries.
So I am confused what you're trying to show here?

None of us is attacking, and I have no axe to grind with you, bro. I am simply pointing out you chose an example and made a statement that is not true. No different than if I had said tubes sound better than solid state, and you chose to ask me to support with data and you showed me data to the contrary.

I will also admit to a certain historical and peersonal sensitivity to this issue. Example in the U.S.: Hear a person say that a beer company is gouging them and making a killer margin because a draught beer at a bar is $6 and they know they can buy a keg for $120 at a liquor store. Let's say the beer company has sold that keg to a distributor for $70, and the distributor sells it to the bar for $100. The bar sells 120 16-oz draughts from that keg for $6 each, for a gross to the bar of $720. Despite that gross, the restaurant's overall margin is low due to very high costs of business, for which it has a 30-50% chance of going out of business in five years. So no one in that chain of business has a huge margin.

The beer company I worked for did about $11 billion in annual world-wide revenue, and net income was around $1 billion.

 

[Doodski]

The bar sells 120 16-oz draughts from that keg for $6 each, for a gross to the bar of $720. Despite that gross, the restaurant's overall margin is low due to very high costs of business, for which it has a 30-50% chance of going out of business in five years. So no one in that chain of business has a huge margin.

My accountant/boss for a couple of years also owned a strip bar and he advised me that he needed ~23% margin to pay all wages and overhead and the rest was profit. It was a very busy strip bar that was full of customers from opening to closing everyday. I went there dozens of times and was always amazed at how full the pub always was. Women, men, bikers, businessmen and all sorts went there for lunch and dinner and to watch the peelers. We actually hired some pretty fine strippers from that pub for our annual 4 days fishing derby boat cruise.

 

[dtaylo1066]

My accountant/boss for a couple of years also owned a strip bar and he advised me that he needed ~23% margin to pay all wages and overhead and the rest was profit. It was a very busy strip bar that was full of customers from opening to closing everyday. I went there dozens of times and was always amazed at how full the pub always was. Women, men, bikers, businessmen and all sorts went there for lunch and dinner and to watch the peelers. We actually hired some pretty fine strippers from that pub for our annual 4 days fishing derby boat cruise.

Are you saying you kept abreast of the club's economics?

A strip club typically has a minimal investment in food vs typical on-premise establishment. Almost all patrons drink alcohol and multiple drinks per visit, which is quite profitable. Alcohol beverages are by far the most profitable items for a bar/restaurant. Dancers pay is mostly tips not hourly wage, which is low. Most clubs also charge a cover, so they are making $5 or $10 a head just by the patron walking in the door. Thus they can be very profitable. And I doubt they are buying Mola Mola DACs and Revel speakers through which to play their music.

I think I shall return to comments on audio.

 

[Doodski]

Most clubs also charge a cover, so they are making $5 or $10 a head just by the patron walking in the door.

Not in British Columbia Canada. The entrance fee is zero. At least it was when I was frequenting strip pubs there. It was the best strip club scene that I've ever seen anywhere. Yes, me and my boss discussed the economics of operating various kinds of businesses. He was a accountant for the businesses and when they where being sold he bought them as he had a commanding view of the books and saw opportunity. He bought a strip pub and 2 audio video stores. I managed one of his stereo stores.

 

[kemmler3D]

Interestingly, I just bought some large and heavy items (5 48x63x18-or-24 wire shelves, total cost >$1000) and the shipping options were:
- "Parcel": $359.37
- "FedEx Standard Overnight": $1144.14
- some "logistics" company: $59.08

You can guess which I picked The items showed up 2 days after the order, on a palette.

I think the lesson here is that if you (as a company) regularly ship large and heavy items it can be a lot cheaper than regular shipping.

Freight shipping can (and should be) the most economical option for shipping heavy things, but isn't practical for many residential deliveries or return shipping. If you can palletize, have a loading dock, and don't care much about exactly when the package is picked up and dropped off - it usually easily beats parcel shipping.

If not, it can get ugly. I recently got an online quote for freight shipping a 90lb box with 2 speakers in it. >$600 for CA to TX. The speakers are worth $300 on a good day...

Generally for audiophile shops (not electronic markets) to be profitable they need to have markup of 35% at least, usually its between 40-60% to maintain healthy business

Correct IME

What would be cost to the retailer as percentage of the MSRP for an inexpensive DAC around $200?

30-60%, probably $80-120 depending. Generally no more than $100 but small retailers with poor sales might have to pay more.

 

[JohnPM]

In that sense, a 3:1 retail to COGS price is arguably very fair or even low, especially for firms that do any R&D at all.

3:1 would be about the bare minimum for a conventional channel approach of in-territory distributors who feed the retailers, probably too low to be sustainable unless there are some very patient, deep-pocketed backers. As a UK example, retail price £1 means:

Value Added tax 20%, so retailer gets £0.833
Retailer margin for slow-moving goods typically 40%+, so distributor gets £0.595 or less
Distributor margin typically 30%+, so manufacturer gets £0.457 or less
Manufacturer gross margin needs to be above 40% to have anything to actually invest in development, sales, marketing, etc. so COGS < £0.327.

If manufacturing is sub-contracted there's a further margin to take into account, if it's not there's a lot of capital investment in production to find and then amortise. Then there are the margins of the component distributors and the component manufacturers to take into account, volume is everything to drive those down. There are a lot of mouths to feed and rents to pay between the raw materials and the consumer. On top of that generating awareness of the brand so that anyone is actually interested in buying it in the first place can be very costly and for a new brand can take a long time.

 

[kemmler3D]

Something that didn't make it into the OP but should have:

A note on Direct-to-consumer (DTC): DTC allows COGS to rise to 50% or more because there is no retailer margin to worry about, or the retailer/marketplace commission is much lower, around 10-20%, usually 15% instead of 50%+. Ideally this means more high-quality stuff in the box for your dollar. This is most likely how e.g. VTV or Buckeye are able to offer the same high-quality parts at lower prices than NAD. However, it is not practical for many brands.

If consumers get better gear by cutting out the middleman (so to speak) and brands still get their margin, then why hasn't this model completely taken over?

The main reason is that most people online shop at the big marketplaces. Amazon, eBay, Newegg, and so on own a very large share of the online consumer electronics market. After Amazon et al, the share of traffic that's left to individual online stores is in the single digits. That makes marketing difficult and expensive if you don't already have a good reputation and/or a built-in audience somehow. With marketing costs and Amazon's 15%, it's hard to maintain a high COGS.

However, the online giants still don't actually own a majority of the TOTAL market. Brick and Mortar is far from dead despite the headlines. And if you aren't in a small niche, you will want to sell to mainstream people at some point. Most of them are shopping at Costco, Best Buy, or something like that ... you get a much, much bigger piece of the pie if you sell there than fighting for clicks on Amazon, which again is still a much bigger slice of the pie than your own website.

But to sell in those stores, you need to give the retailer half of your MSRP or more. Which if your COGS are already 50%, means you are now effectively a charity with Best Buy as the main beneficiary of your efforts. No thanks.

DTC only works if you can sell enough units on your own website and Amazon/eBay/Drop without very heavy marketing costs, and you don't need to sell in-store ever.

 

[Vacceo]

The computer industry is really good at this. From the days of Windows 3.1, I told my wife "I refuse to buy a pre-built computer"! I started building with 386 machines and I always came out cheaper than buying. Each of my children built their own PC (except my daughter...hmm). Here we are in 2022 and I believe I've built my last dedicated PC ...as the cost of goods have come to a point that it makes no sense to DIY anymore.

Cost-wise, absolutely. Fun wise, I spent a couple months with a water-cooled loop.

Hi-fi is a nerd market, and that is probably factored by designers and manufacturers.

 

[kemmler3D]

3:1 would be about the bare minimum for a conventional channel approach of in-territory distributors who feed the retailers, probably too low to be sustainable unless there are some very patient, deep-pocketed backers. As a UK example, retail price £1 means:

Value Added tax 20%, so retailer gets £0.833
Retailer margin for slow-moving goods typically 40%+, so distributor gets £0.595 or less
Distributor margin typically 30%+, so manufacturer gets £0.457 or less
Manufacturer gross margin needs to be above 40% to have anything to actually invest in development, sales, marketing, etc. so COGS < £0.327.

If manufacturing is sub-contracted there's a further margin to take into account, if it's not there's a lot of capital investment in production to find and then amortise. Then there are the margins of the component distributors and the component manufacturers to take into account, volume is everything to drive those down. There are a lot of mouths to feed and rents to pay between the raw materials and the consumer. On top of that generating awareness of the brand so that anyone is actually interested in buying it in the first place can be very costly and for a new brand can take a long time.

Indeed, couldn't have said it better myself. 30% is pretty much the ceiling for any business that expects to survive for more than 1 production run. Ultra-efficient firms might be able to sustain a higher COGS but we're talking IKEA-level vertical integration with a private company's tolerance for low profit margins. Not sure any such thing exists in manufactured goods and outside of commodities.

 

[sergeauckland]

Cost-wise, absolutely. Fun wise, I spent a couple months with a water-cooled loop.

Hi-fi is a nerd market, and that is probably factored by designers and manufacturers.

DIY now only makes sense for the satisfaction of building one's own, or to get something that's not available commercially. For any 'standard' item like an amplifier or DAC, one can't ever buy the parts for what one can get a finished item with a warranty on-line. Loudspeakers are about the only item where it might just be possible to achieve something comparable with a commercial item, for similar money, provided one values one's own labour at zero. Mass production with automated robotic assembly and test ensures low prices and high quality.

S

 

[John Atkinson]

Packaging costs are probably a bigger factor than you think.

When I was the editor of Hi-Fi News & Record Revewi in the early 1980s, I started "The Hi-Fi News Accessories Club" where we designed and sold products for which there were no or few commercial equivalents, (One was an op-amp based unity-gain buffer were the output could be either in correct or inverted absolute polarity.) Our goal was to keep our margin to the minimum possible.

It was an education. The most expensive part was almost always the shipping packaging, followed by the chassis, the power transformer, and - to my surprise - the percentage charged by the customer's credit-card company. We very quickly stopped accepting payment by Amex as they charged twice the percentage than Visa/Mastercard, which meant we lost money on every sale!

John Atkinson
Technical Editor, Stereophile

 

[Peluvius]

When I was the editor of Hi-Fi News & Record Revewi in the early 1980s, I started "The Hi-Fi News Accessories Club" where we designed and sold products for which there were no or few commercial equivalents, (One was an op-amp based unity-gain buffer were the output could be either in correct or inverted absolute polarity.) Our goal was to keep our margin to the minimum possible.

It was an education. The most expensive part was almost always the shipping packaging, followed by the chassis, the power transformer, and - to my surprise - the percentage charged by the customer's credit-card company. We very quickly stopped accepting payment by Amex as they charged twice the percentage than Visa/Mastercard, which meant we lost money on every sale!

John Atkinson
Technical Editor, Stereophile

I used to wonder back then if the AMEX model was sustainable given how proportionately high their fees were, clearly it was. Although these days I think their model offers a wider range of products, some of which attracts lower fees.

 

[Scrappy]

My accountant/boss for a couple of years also owned a strip bar and he advised me that he needed ~23% margin to pay all wages and overhead and the rest was profit. It was a very busy strip bar that was full of customers from opening to closing everyday. I went there dozens of times and was always amazed at how full the pub always was. Women, men, bikers, businessmen and all sorts went there for lunch and dinner and to watch the peelers. We actually hired some pretty fine strippers from that pub for our annual 4 days fishing derby boat cruise.

>Peelers! Ha!

 

[Vacceo]

DIY now only makes sense for the satisfaction of building one's own, or to get something that's not available commercially. For any 'standard' item like an amplifier or DAC, one can't ever buy the parts for what one can get a finished item with a warranty on-line. Loudspeakers are about the only item where it might just be possible to achieve something comparable with a commercial item, for similar money, provided one values one's own labour at zero. Mass production with automated robotic assembly and test ensures low prices and high quality.

S

For PC, DIY is more like building a Lego model. A speaker is several orders of magnitude harder to put together than plugging a RAM to a motherboard.

I trust Jack Oclee-Brown far more than my hands.

 

[Doodski]

For PC, DIY is more like building a Lego model. A speaker is several orders of magnitude harder to put together than plugging a RAM to a motherboard.

Don't discount your skills and knowledge with PCs. That took some time to acquire.

 

[Vacceo]

Don't discount your skills and knowledge with PCs. That took some time to acquire.

Nah. Back when there was no ATX standard and my father worked on his 286, that may be true, but nowadays, it's like building a Lego. The water loop took time, but that was a vanity project.

 

[Doodski]

Nah. Back when there was no ATX standard and my father worked on his 286, that may be true, but nowadays, it's like building a Lego. The water loop took time, but that was a vanity project.

When some important command comes along that I am not privy to and I get it from somebody that is worth something. It happens.

 

[kemmler3D]

The most expensive part was almost always the shipping packaging, followed by the chassis, the power transformer, and - to my surprise - the percentage charged by the customer's credit-card company. We very quickly stopped accepting payment by Amex as they charged twice the percentage than Visa/Mastercard, which meant we lost money on every sale!

Thanks for replying John, and I'm curious what the CC rates were back then? These days they're mostly below 2.9% plus a few cents per transaction...

Nah. Back when there was no ATX standard and my father worked on his 286, that may be true, but nowadays, it's like building a Lego. The water loop took time, but that was a vanity project.

+1 to this. Have been building PCs for a long time but since the early 2000s and before, they have been LEGO kit difficulty. Now, it's much more expensive if you happen to step on one of the bricks, and just as painful, but no harder.

With speakers there are plenty of ways for it to go wrong even if you buy a kit. With PCs, as long as you use the right voltage setting, and don't bend any CPU pins, it's hard to mess up. The manufacturers have kindly ensured that every thing that plugs into another thing has a unique shape. You really just have to look at the thing, look at the slot, and from there it's fairly self-explanatory.

Forget about building the speaker, I would say simply measuring a DIY speaker build to check if you built it right is actually harder than building a working PC. Either the PC boots or it doesn't, and if not you simply remove parts one by one to find the bad one. You don't really need to understand what the parts do, even.

I would say extreme overclocking (and I mean extreme, not just hitting the "AI Tuner" button) is at the level of complexity of designing your own (fairly normal) DIY speaker, but it's still easier because it doesn't involve physically constructing anything.

 

[kemmler3D]

DIY now only makes sense for the satisfaction of building one's own, or to get something that's not available commercially. For any 'standard' item like an amplifier or DAC, one can't ever buy the parts for what one can get a finished item with a warranty on-line. Loudspeakers are about the only item where it might just be possible to achieve something comparable with a commercial item, for similar money, provided one values one's own labour at zero. Mass production with automated robotic assembly and test ensures low prices and high quality.

S

I have vague plans to use 3D printing to construct a speaker that wouldn't be economical to produce commercially. There's even a chance that there are some performance benefits to doing that. Spheroid shapes are easy with 3D printing, hard with any other manufacturing method I know of. And as we all know a sphere is a superior baffle shape.

But it's not easy to beat commercial gear with DIY from what I can tell. I expect to value my time at less than zero if the numbers are to work out on this project.

 

[OWC]

DIY now only makes sense for the satisfaction of building one's own, or to get something that's not available commercially. For any 'standard' item like an amplifier or DAC, one can't ever buy the parts for what one can get a finished item with a warranty on-line. Loudspeakers are about the only item where it might just be possible to achieve something comparable with a commercial item, for similar money, provided one values one's own labour at zero. Mass production with automated robotic assembly and test ensures low prices and high quality.

S

I totally don't agree with this, but it heavily depends on what market-price you're aiming for.

For anything that is like <$150, nope, and you're right. (from a small business point that is not even possible)
But if you have been following most measurements done by Amir or Erin, and look up what parts some of those manufactures are using.
For some brands it will costs you 1/3 to 1/2 with a bit of creativity and skills.

Actually I have never bought a speaker or an amplifier in my life.
Always made or build my own.

What I have done an awful lot, is taking apart many commercial products.