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

kemmler3D

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I worked for a consumer audio business for several years, from 2012-2015 and 2017-2020. It was a tiny company and we aimed directly for the middle of the market, say $100-300, which for our target customer, was expensive. Mainstream. (I won't say which one but you can probably figure it out if you're good with Google.) So much of what I say won't apply to bigger companies, or higher-end ones.

However, it might be good to know a little bit of what goes on behind the scenes. I see some assumptions about the biz that are not quite on the mark here and there, so maybe my experience can "lift some veils".

None of this is actually secret (it would be common knowledge for anyone employed in the industry) but isn't well-known outside of it. This audience has a lot of professionals in it so a lot of this might not be news to you. Also, I only worked at small volumes. Our company was a startup and about 10 people. My view of the industry would pale in comparison to someone who worked for Bose, Logitech, UE, etc. But these were some of my observations.

  • The cost of building a consumer audio product is generally no more than 30% of retail. 30% COGS (cost of goods sold) is virtually a maximum for items sold at mainstream retailers.
    • Our company's COGS were higher than this, which was a problem. It didn't allow for us to recoup our costs, make enough money to pay our expenses (like salary, electric bill), and also leave something for the retailer. The rule of thumb for us in the US was retailers will ask for half of the retail price, or more. That leaves us to make our cut from the remaining half.
  • Retail price is free to deviate upward from COGS in an unlimited fashion.
    • We all know Beats headphones. Undoubtedly they don't cost more in parts than an MPOW or Anker set. But people will pay more, so they charge more. What people will pay is much more important than how much something costs.
  • Except for outlier brands, marketing expenses don't have a lot to do with COGS / product quality.
    • It's common to attribute high cost / low performance equipment to "too much spent on marketing, not enough on R&D". This is only true for the absolutely massive brands that can afford to saturate the airwaves. You can name all of them because there aren't very many, and their advertising works.

      When a small brand (sub-$100M in revenue at the lowest) spends money on marketing, they generally intend to (need to) make the money back in short order. They can't make the sale on name recognition alone. (I can go further into the math on this, but the numbers don't work unless you can shovel money at your audience for years at a stretch before making the sale.) Unless you can outspend Sony or Apple for 2+ years without going under... forget this strategy.

      Smaller brands have to compete on actual product features, reviews, and quality in general - which means that taking significant budget out of COGS to buy ads is often self-defeating. These brands do spend a good deal on marketing, but it tends to come out of profit margins, not COGS.
  • Very few audio brands operate their own factories.
    • You can probably name most of them. Even big reputable names do not manufacture all of their own parts. Almost all consumer brands are simply re-selling or contracting out to overseas factories. (This isn't a bad thing - it's really hard to competently manufacture many types of components like drivers, cables and housings under one roof, and usually inefficient. But if you assumed XYZ brand did everything in house from soup to nuts, you very likely assumed wrong.)
  • Most Chinese factories and engineers are perfectly capable of producing high-end equipment... but their customers don't ask for it.
    • Would you rather make $50 per unit on 100 units, or $5 per unit on 100,000 units? Yes, so would they. Niche applications are not of interest to most manufacturers, especially in China, because marketing to high end audiences isn't (at least a few years ago, it wasn't) as easy for them. They mostly operate on a B2B model focused on high volume orders. A major reason for that is switching production lines from product to product is costly. They much prefer to make 10,000 of something mainstream and fast-moving than 10 runs of 1,000 that might (or might not) sell for a high price. Many can do either, but prefer a few large contracts over many small ones.

      The factor that drives "Chinese (or insert the country of your choosing here) audio is low quality" attitudes is actually the customer. I will never forget the man who walked up to a booth attendant in Hong Kong on a sourcing trip. He skipped the formalities and brusquely said to the woman: "Show me your biggest speaker. Biggest and cheapest. I want, BIG, CHEAP and LOUD." This was actually at a booth that had some items approaching hi-fi. Too bad. But they make what they can sell.

      In truth, this man did understand the mainstream western consumer pretty well, but it's not nice to say it out loud. :)
  • Economies of scale are really important.
    • Speaking of factories. Factories that are willing to do small runs are often less established, working with new suppliers themselves, and therefore can run into QC issues. This combined with low quantities pushes up the price of small-run products even more. Niche products are more expensive in large part because the cost per unit goes way up when you fall below 50K or 10K units per run.
  • Audio companies are not all as sophisticated as you'd like to think.
    • You don't need a degree in anything to start an audio brand. Many companies don't even employ any engineers or design their own products. Many audio execs would be totally lost reading threads here, and have the critical listening skills of a shriveled potato. They're in the role for business, not functional reasons.

      If you find yourself wondering "Did they even measure XYZ before shipping this" the answer could actually be "no".

      This is far from all companies, and I do think it speaks to the sophistication of ASR and DIYaudio and similar forums, than it speaks to laziness or malfeasance on the part of manufacturers. Although, that is a factor too.

      The people who do actually design and build speakers tend to be quite sophisticated and skilled. You don't drop $100K on an injection mold on a hunch. The people making decisions about speakers, what to sell, how to price them, etc - often have less knowledge than a serious hobbyist. They may or may not follow the advice of knowledgeable people. They may just ask their golf buddy what they think of the sound. So, I'm here to confirm that your thoughts of "I could surely do better" are sometimes correct.

      edit: A note on people working in audio companies who aren't experts in audio. Product development and management (among others) are important skills that most businesses can't live without. And you don't need audio expertise to be good at them. Audio companies simply suffer from the same problems as any other technical business - sometimes management ignores engineers at the wrong time. Or engineers don't speak up at the right time. You may have heard the results of such failures here and there. :)
  • Shipping costs are a huge factor.
    • This won't surprise anyone, but keep in mind that the manufacturer has to ship all the big / heavy parts of a speaker at least once or twice before they ship it to you. This adds up and there is a disproportionate incentive to keep the size and weight of a mainstream speaker down. Really everyone knows that heavier parts tend to work better (housings, magnets, etc.) but the cost explodes due to logistics costs, not just quality / tolerances.
  • Packaging costs are probably a bigger factor than you think.
    • There are undoubtedly mid-low-end IEMs where the package costs more than the IEM. In fact it's not even hard to do this. You can source a low-end IEM for $2 and put it in a $3 box without going out of your way. It goes on Amazon for $20 or so and oddly enough everyone seems happy.

      However, it's possible to spend a significant fraction of COGS on packaging even at the higher end. $10 worth of box (printing, foam, nice manual, etc.) is not hard to do. When the COGS of that product are around $100 you're actually ultimately paying nearly $30 or $40 for the box. Best to keep it for resale value, then... ;)
  • Big retailers can't focus on sound quality or sell SOTA gear.
    • I do mean "can't". A major retailer like Target, Best Buy, Walmart etc. isn't set up to focus on extra-high quality sound like ASR members are looking for. The buyers at these stores are good at their jobs. And they do have ears. But their job isn't to offer the absolute highest-end gear. It's to make sure they make good money on the shelf space allocated to audio. They do this by ensuring they stock the type of thing their customers are likely to buy. To do THAT, they look for items that already sell, or brands that are well-established. This also excludes state-of-the-art stuff, which is by definition new, and therefore unproven.

      If the thing that sells well happens to sound good, they'll stock it. They may use sound quality as a tie-breaker between two equally salable goods. But they aren't in the business of introducing the best sound to people.

      If you want excellent sound, you need to look for a specialty shop or a DTC online marketplace (e.g. Amazon). If you want anyone in retail to know and care about audio, well, follow the advice of many people in this thread exhorting you to support local specialty shops. They are the only ones who can afford to care.

Edit: Cliche: "wow, this blew up". I will update later with some clarifications and responses to comments here! Glad this is interesting to read.

A note on DIY: When you build your own gear, you pay a lot more for parts. But DIY is often apparently cheaper for high-quality speakers? Why? because you don't have to pay for: Overhead (unless you rent or buy a workshop), wages (unless you pay yourself for your time?), sales taxes (you're not selling it, right?), shipping (except the parts to your house, and often wood comes from the local DIY store), etc. This should illustrate directionally why gear costs what it costs. In some cases even with high-end equipment, parts cost is a small fraction of what it costs to develop, build, and deliver the item to you.

Note: COGS doesn't include R&D or other costs of running a business. Some have noted that the Genelec teardowns don't reveal any unobtanium or incredibly fancy innards. Sure, but they have spent decades learning how to put those things together properly - at significant cost. I would personally rather pay $100 for $10 worth of parts combined in the best way possible, than pay $100 for $50 worth of parts assembled by drunk baboons. YMMV.

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. I personally wouldn't say something is overpriced until you hit 10:1 or more. If you try to list all the costs (other than parts and R&D) that companies need to bear, you will get bored of writing before you think of them all. From employee health insurance to RoHS certification, it all costs money, and either you the consumer pay for it, or the company goes under eventually.
 
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Dunring

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Well said, I got the Venture Electronics VE Monk for $10 on Amazon and happy as a clam when I'm out using them with the phone. They came in a plastic bag with spare pads, and hear on Aliexpress can be even cheaper. They sound nicer than some $40 ones from Sony, and bet they pour incredible money into their marketing budget.
 

Chrispy

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I've had the view of most businesses selling foreign made products (or large portions of them) in my years as a customs broker/international freight forwarder. But generally trying to come up with what a consumer might consider a value product based on retail without all the background....meh.
 

Peluvius

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Good post. Certainly consistent with my experience across a range of industries.

I do wish they would stop putting stuff in such fancy packaging and make it sound a bit better....

I look at companies like Topping and MiniDSP and wonder how much "extra" it cost them to design great sounding stuff. I wonder how financially viable they are also I guess....
 

DonDish

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Very very interesting post! These guys knows how to gharge thats for sure.!

I always had a thing for the higher ends of tooling. All my life I strived for a better toolbox. Lindstrom pliers, australian iron wood planers, japanese saws. I draw some too. So thats handmade W&N no7 sobel hair brushes + a millon others. Always expensive top quality stuff.

I had a job at a hardware retailer. We had the option of buying stuff we sold at cost + 5% for a max of €1000 a year. Suddenly I knew where all my money went. €80 wire cutters where below €20 included VAT. I never knew and it just blew my mind about it. This experience was revelatory and changed me as a consumer for ever. Hell, I knew these people were making money, and they are supposed to, but not at this scale. No way! Im more cautios now for sure.

Its sad that shops are disappearing. Always cool to do some windowshopping, listening to audio gear and once in a while talk to a knowledgeable salesman.
Then again, internet is so much better and usually if not always cheaper. So wadda u say? Killem all? :D Sadly with no retail stores, webshops will probably eat up the difference :D Dont we all love capitalism :D

Best you can do is to be consious and mindfull of your money. If used properly places like ASR and similar could help you with that.

About my high end spending. Im not a master of all trades, not at all. Im just on the better side of mediocre. When it comes to my gear I could tell you a better story behind every single one of them. Isnt there some way to make money from that?
 
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darkinners

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Excellent post! As someone in a similar business (not related to audio) I agree 100%, especially the //I can do better// part.
Sometimes(most of the time) product design involves a lot of compromises.

A certain design may sound/function better but does that design feasible for making 10,000 units per month in a factory setting?
Or a 10% cost increase with certain tweaks, will that increase the sales 10% and more? It's all a business decision.
 

Koeitje

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Very few audio brands operate their own factories.
  • You can probably name most of them. Even big reputable names do not manufacture all of their own parts. Almost all consumer brands are simply re-selling or contracting out to overseas factories.
This is also true for whitegoods. If you learn to recognize certain parts (like filters, or hinges) you can easily see what manufacturer was hired to do the actual production. In Europe you will see a lot of store brands that are clearly made by Bosch or Whirlpool for example. Even brands like SMEG have third parties produce some of their products and its not hard to see who is producing those products.
 

Angsty

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I was at a lab a few days ago taking a tour. The guide handed out several types of electronic sensors to us and asked which were the most expensive components. After several guesses, he pointed out that the decorated plastic bags the components came in were more expensive than the sensor components themselves.
 

Feargal

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Also companies buy reviews and awards. Most magazines aren't independent at all. I see this in the car industry too where magazine titles will quite obviously favour certain brands.

And especially in the ultra "high end", the customer willingly pays the absurdly inflated cost partly because that's how they buy all goods, and if high-end product A is discounted by 50% then they assume there's clearly something wrong with it and won't buy it. Genuine quality or independent reviews don't really come into it.
 

Feargal

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This is also true for whitegoods. If you learn to recognize certain parts (like filters, or hinges) you can easily see what manufacturer was hired to do the actual production. In Europe you will see a lot of store brands that are clearly made by Bosch or Whirlpool for example. Even brands like SMEG have third parties produce some of their products and its not hard to see who is producing those products.

Oh boy, the whitegoods market is an extreme example! There are really only 5 main companies making domestic appliances and own the vast majority of major brands. What people assume is a good brand doesn't really match with reality any more.
 

PeteL

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  • Most Chinese factories and engineers are perfectly capable of producing high-end equipment... but their customers don't ask for it.
  • Packaging costs are probably a bigger factor than you think.
    • There are undoubtedly mid-low-end IEMs where the package costs more than the IEM. In fact it's not even hard to do this. You can source a low-end IEM for $2 and put it in a $3 box without going out of your way. It goes on Amazon for $20 and oddly enough everyone seems happy.

      However, it's possible to spend a significant fraction of COGS on packaging even at the higher end. $10 worth of box (printing, foam, nice manual, etc.) is not hard to do. When the COGS of that product are around $100 you're actually ultimately paying nearly $30 or $40 for the box. Best to keep it for resale value, then... ;)
Fun fact. I asked for a test sample to a Canadian packaging manufacturer, a small cardboard box. The quote was 5 times what I was getting from a Chinese shop, but not only that the edges weren't ninety degree, there was folding gaps, glue spills, it looked terrible. When I mentioned the flaws, the answer I got was: "Well you can't expect the same quality than China". I was stoked, I already knew not to expect them to compete in price, but even in quality, there was simply no such expertise and technology locally even if I was prepared to pay multiple times more.
 
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Koeitje

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Oh boy, the whitegoods market is an extreme example! There are really only 5 main companies making domestic appliances and own the vast majority of major brands. What people assume is a good brand doesn't really match with reality any more.
I spend almost 8 years at a major online retailer dealing with returns on whitegoods, so I have some insights in the actual numbers with a big sample size. In Europe the classic brands are still the best in terms of durability, at least within the 2 year warranty period. So that's BSH (Bosch & Siemens), Miele, Electrolux (AEG, Electrolux, Zanussi). We stopped selling certain types of products from specific brands (not the ones I mentioned) because they were just bad. So we would sell a washing machine or fridge from brand x, but wouldn't sell dishwashers from the same brand.
 

Saidera

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I absolutely enjoy reading anything that reveals how an industry works, or what it's like to work for some company, or which products have a higher incidence of failure, or where the food we eat was grown, or how a factory manufactures a particular product, in short, any insights into how anything works or is done, which can then be adapted and applied to a range of situations. Too often such information is released only in a form that may be entertaining but carries little practical use. The secrets and the wisdom are revealed only by the most generous companies and broadcasters.

This post maybe indirectly encourages people to consider building their own electronics from scratch, and also to obtain things second-hand, thereby avoiding the overpricing, marketing, outsourcing, 'BIG, CHEAP and LOUD' domination, QC issues, niche high cost, shriveled potato critical listening skills, shipping and packaging, none of which strongly support consumerism. And maybe more consumers are considering environmental impact too.
 
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Palladium

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Fun fact. I asked for a test sample to a Canadian packaging manufacturer, a small cardboard box. The quote was 5 times what I was getting from a Chinese shop, but not only that the edges weren't ninety degree, there was folding gaps glue spills, it looked terrible. When I mentioned the flaws, the answer I got was: "Well you can't expect the same quality than china". I was stoked, I already knew not to expect them to compete in price, but even in quality, there was simply no such expertise and technology locally even if I was prepared to pay multiple times more.

It's funny that my Chinese made Midea washing machine has 2 years full warranty, while everything else that is at least 50% more expensive to vastly more expensive only offers 1.

And yeah it's really rich to complain about quality of Chinese goods when you don't even have a foot across the low quality door, let alone at quality per $.
 
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