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

[kemmler3D]

Very nice insights into the business. Promoting to home page....

Thanks Amir, glad that this is interesting to read!

 

[kemmler3D]

Great write up, very informative

Thanks Punter, your "the truth about..." posts tend to be really great as well. I think the truth about recording one was pretty spot on, but it's an absolutely huge topic to cover. I think the history of how tape revolutionized the industry was incredible, but what's happened to the industry after digital came on the scene could fill another 2 such posts.

"The truth about DAW software" could easily be its own entry. Anyway, big fan, thanks.

 

[kemmler3D]

Most of post #1 is not only logical but applies to other industries as well.
The only thing that does not fit with my experience (in a completely different industry) and that i see often mentioned is that of shipping costs. I don't believe that one.
Shipping costs for something with such value per kg/vol as any audio product needs to be completely irrelevant. Even in my industry with products worth 5eur/kg is. Even sometimes in urgent cases raw materials are freighted by plane...
Then from the shop to the customer could be a different story and i have no idea, but if today you can buy a bottle of shower gel shiped to you for a couple of euros, i also doubt that shipping a dac ads tremendously to the overall cost.

In consumer goods weight and size become a much bigger problem in DTC online selling than anywhere else. The reason is the seller is obligated to pay for parcel shipping to the end user (the most expensive type of shipping) and they are also obligated to pay for (about 1-10%) of those items to be shipped ANOTHER TWO TIMES if they take returns and supply replacements of defective products. (once to get the return, another time to get the replacement to the user)

Even for a relatively small unit, this means (say) $60 has evaporated from your bottom line on a $100 speaker that may have only generated $40 in margin to begin with.

I probably made a mistake highlighting the freight costs during and after manufacturing, those as you note are quite low in comparison.

However, brands that sell direct to consumer get absolutely hammered on shipping costs. Ever wonder why there are no 40lb speakers that cost $100 available DTC? It's because it costs more than $100 just to ship the damn thing.

 

[dtaylo1066]

Audio or hi-fi is an ever changing and evolving business. Indeed most companies are rather small in terms of revenue and number of employees. In general, production in the U.S. or Europe cannot compete in price with production in China or a few other nations. Historic brick and mortar retail channels, the good old stereo store, have mostly vanished, and on-line commerce is the rule of the day. Even with the collapse of retail and the attendant exit of the retailer's margin, manufacturer profits have not changed much due to the squeeze on prices and the cost of production and shipping.

If you want to get rich, starting an audio company is far from the best track to take.

In high-end audio my experience is most companies are started out of passion for the industry and product. Consolidation has been necessary to keep some of the larger brands alive, a result of the economies of scale.

The rise of dedicated Chinese audio companies, such as Topping, will prove a death knell to many free world brands. Where in the past it was Chinese factories building for or supplying free world companies their parts or models, we know have start to finish Chinese brands of high quality and low cost. Consumers vote with their wallets, so these brands will depthcharge a bunch of familiar U.S., European and Japanese brands.

 

[kemmler3D]

Audio or hi-fi is an ever changing and evolving business. Indeed most companies are rather small in terms of revenue and number of employees. In general, production in the U.S. or Europe cannot compete in price with production in China or a few other nations. Historic brick and mortar retail channels, the good old stereo store, have mostly vanished, and on-line commerce is the rule of the day. Even with the collapse of retail and the attendant exit of the retailer's margin, manufacturer profits have not changed much due to the squeeze on prices and the cost of production and shipping.

If you want to get rich, starting an audio company is far from the best track to take.

In high-end audio my experience is most companies are started out of passion for the industry and product. Consolidation has been necessary to keep some of the larger brands alive, a result of the economies of scale.

The rise of dedicated Chinese audio companies, such as Topping, will prove a death knell to many free world brands. Where in the past it was Chinese factories building for or supplying free world companies their parts or models, we know have start to finish Chinese brands of high quality and low cost. Consumers vote with their wallets, so these brands will depthcharge a bunch of familiar U.S., European and Japanese brands.

Unfortunately I do not find much to disagree with here based on my experience.

 

[odarg64]

I'd be interested in reading an analysis of shill marketing in the consumer audio business - i.e., whether or not magazine and some online 'reviewers' (e.g., on Head-Fi) receive compensation for reviews, possibly in violation of the law. I have my suspicisions. I also suspect it would be difficult to prove.

 

[Operandi]

I don't really disagree with you here. I shared this because people seem to be interested in why products are price or designed the way they are. Ultimately there may not be anything you can do with that information, but people like discussing it all the same.

I do think knowing about economies of scale is actionable though. For example, the Sony MDR-7506 arguably punches above its weight (and so do a few Sony headphones) because Sony's manufacturing & parts cost is absurdly low compared to niche brands. An uninformed shopper might assume all mass-produced items are bad and all smaller, niche products are good, due to a misguided hipster mentality. The truth is a little more complex and it helps to know about it.

That goes both ways. Those were the first headphones I ever bought (MDR-V6). I thought they sounded pretty good so I thought the next logical step would be the Byer DT-770 and I was kinda underwhelmed. That said the Byers were 10x more com, feel like their 2x better made, and are built in Germany. I ended up selling the Byers because I wasn't really happy with either of them (or any headphone I've tried but thats another story) so the higher quality of the Byers wasn't worth it to me. If it was something I was goign to use a lot I'd say the extra price of Byers would be easy to justify however.

As a non audio example where I drop why more expendable income in, mountain bikes. A equally speced bike from a small company like Ibis will likely cost more than a Trek or Giant but because they are smaller company and they don't need to make 100,000 of model they iterate quicker and take more risks when designing a product. If feel like its the same with all hobbies, the subjectiveness of audio just makes it a bit trickier.

 

[kemmler3D]

I'd be interested in reading an analysis of shill marketing in the consumer audio business - i.e., whether or not magazine and some online 'reviewers' (e.g., on Head-Fi) receive compensation for reviews, possibly in violation of the law. I have my suspicisions. I also suspect it would be difficult to prove.

Given the scale of cases the FTC doesn't take on, I am not holding my breath for enforcement on this. But it would be surprising if audio reviewing were a totally squeaky clean business... is any category really free of paid reviews?

 

[Billy Budapest]

I thought BOM always was <10% on anything at all ? A car for example?

I was using BOM to approximate COGS (which would also include labor cost as well as AVC and fixed costs). It’s been a while since my undergrad Econ and business school accounting classes!

 

[OWC]

I have over 15 years of experience in consulting all kinds of companies in this industry (big and small).
There is not much to add for me to the start-post to be honest.
I can't disclose many companies because of NDA's, but yeah the majority of them don't do much inhouse.
I personally find point 7 about "sophistication", spot on!

One thing the topic started probably also ran into, is how much better off big companies are when everything can be done in bulk.
The competition is quite uneven in that regard.
That 30% number plummets, so badly that labor is often orders of magnitude higher, that also counts for high-end products.

This is also were many startups struggle, scaling up from a nice (and sometimes awesome) idea, to real production.
Since this really changes the company of "developing" something, to producing.

Many many years ago, the real eye opener for me, was when I dove into some books about how marketing actually works.
Seen from a science and psychological point of view, not from a business point of view.

If anyone here really wants to understand how speakers and acoustics work in commercial products, those books are an absolute must read!
For example, what most people (here) don't realize at all, is that there are a lot more priorities than just plain and raw "audio quality" (whatever that even means).
That seems obvious maybe, but it also doesn't seems crossing a lot of people's mind judging or even reviewing those speakers or other audio equipment.

 

[Hipster Doofus]

Thank you…typical of corporate race to the bottom thinking. No wonder whatever the SINAD old equipment has an appeal for build quality…

 

[Billy Budapest]

As a non audio example where I drop why more expendable income in, mountain bikes. A equally speced bike from a small company like Ibis will likely cost more than a Trek or Giant but because they are smaller company and they don't need to make 100,000 of model they iterate quicker and take more risks when designing a product. If feel like its the same with all hobbies, the subjectiveness of audio just makes it a bit trickier.

Yes, that too. Smaller companies assume greater risk because in part they do not have the benefit of economies-of-scale that large manufacturers do. However, they can be a lot more nimble than larger companies and can turn on a dime to incorporate new ideas, technology, production processes, etc. They often have to borrow money to do this and on less favorable terms than large companies. So, they often have to price their products higher because of the above, also coupled with the fact that their production capacity isn’t as high.

However, some small startups are able to compete in the budget space. See U-Turn Audio and Schiit for good examples.

 

[OWC]

Audio or hi-fi is an ever changing and evolving business. Indeed most companies are rather small in terms of revenue and number of employees. In general, production in the U.S. or Europe cannot compete in price with production in China or a few other nations. Historic brick and mortar retail channels, the good old stereo store, have mostly vanished, and on-line commerce is the rule of the day. Even with the collapse of retail and the attendant exit of the retailer's margin, manufacturer profits have not changed much due to the squeeze on prices and the cost of production and shipping.

If you want to get rich, starting an audio company is far from the best track to take.

In high-end audio my experience is most companies are started out of passion for the industry and product. Consolidation has been necessary to keep some of the larger brands alive, a result of the economies of scale.

The rise of dedicated Chinese audio companies, such as Topping, will prove a death knell to many free world brands. Where in the past it was Chinese factories building for or supplying free world companies their parts or models, we know have start to finish Chinese brands of high quality and low cost. Consumers vote with their wallets, so these brands will depthcharge a bunch of familiar U.S., European and Japanese brands.

Yes and no, the total audio industry as a whole is quite a substantial one.
The issue is that the certain segments are quite saturated, there are still a few niches here and there.
The second issue is that it's also heavily controlled by some monster companies.
They have either enough money to buy anything they want, or market the sh*t out of you so nobody even wants your products.

When I used to work for a smaller company this happened a few times, were big companies sponsored well known famous people for like $400k.
That was just for a few months.

Their product wasn't better, in fact, the opposite, but this is not the kind of money a mid-size (or small) company "just" has lying around for a marketing campaign.

That being said, it looks like the market has been shifting a lot the last few years (also during covid).
Creating more niches from smaller companies.

 

[Vacceo]

You seem to be comparing apples to oranges.
The prices you quote are not comparable, as they are given without taxes in the USA and include approx. 20% VAT in the EU.
The approx. € 600 additional costs in the EU for the handling costs, transport, provision of support in the EU etc. seem very fair to me.

If you import the devices from the USA, you pay about 20% import sales tax, regardless of customs.

A couple of years ago I bought a GPU and a CPU in the US. Customs and transporte incluido, It was still cheaper than here.

 

[Brianc]

I don't really disagree with you here. I shared this because people seem to be interested in why products are price or designed the way they are. Ultimately there may not be anything you can do with that information, but people like discussing it all the same.

I do think knowing about economies of scale is actionable though. For example, the Sony MDR-7506 arguably punches above its weight (and so do a few Sony headphones) because Sony's manufacturing & parts cost is absurdly low compared to niche brands. An uninformed shopper might assume all mass-produced items are bad and all smaller, niche products are good, due to a misguided hipster mentality. The truth is a little more complex and it helps to know about it.

Good point about assumptions regarding mass market products. For too long I let my snobby music tastes (dislike most mainstream stuff) influence my views on the products I listened with, i.e. I shunned most mass market audio gear--would have been worse if I'd had the wallet to buy the high-end stuff.

 

[OWC]

I don't really disagree with you here. I shared this because people seem to be interested in why products are price or designed the way they are. Ultimately there may not be anything you can do with that information, but people like discussing it all the same.

Some nice reads for starters to get into the whole why and how;

Contagious: Why Things Catch On by Jonah Berger
As well as; Invisible Influence: The Hidden Forces that Shape Behavior, also by Johan Berger.

Although this isn't hardcore literature yet, it gives already so many insights as well as starting points to dive deeper.

What I also find a fascinating read when I started diving into these things, was;
Stumbling on Happiness by Dan Gilbert

Although the title suggests it's about 'happiness', it's more about how our frontal lobe works.
For example why we can feel, taste or hear things that aren't actually there at all.

Directly connecting to the field of psycho-acoustics as well as the first two other books.

 

[Kevinfc]

I have a question for any of you that may know. When talking about mid-priced audio devices like DAC’s and small amplifiers, what would the typical number of units sold before a replacement product arrives? As an example, the average number of units sold for devices in the range of a Topping D10s or a Topping PA5?

I’ve always been interested in what economies these products live in.

 

[Vacceo]

Another factor is covering the costs of R&D. That is, I'm sure, a factor for Purifi ir Hypex. I really have no idea how expensive is the whole process and how long it takes to recoup.

 

[OWC]

Another factor is covering the costs of R&D. That is, I'm sure, a factor for Purifi ir Hypex. I really have no idea how expensive is the whole process and how long it takes to recoup.

are we talking about the "actual" costs of "R&D" or the "artificial" costs of R&D?

 

[Vacceo]

are we talking about the "actual" costs of "R&D" or the "artificial" costs of R&D?

Picture the costs of Lars Risbo tinkering with woofer designs and different materials, measuring equipment, electronics...

Or Jack Oclee-Brown trying different waveguides, electronics, cabinet shapes...