It’s the time of year for saving money!
One of the constant topics for audiophile
conversation is “Why does this stuff cost so much?” The whole subject recently
came to a head on one of the audiophile forums when an old interview was posted
in which even speaker manufacturer Ashley James attacks audio manufacturers for
excessive margins. Is this true? Are we getting ripped-off? Let’s take a look:
The standard argument for High End pricing
usually has something to do with small sales volumes resulting in higher costs
because of the unavailability of economies of scale, or with “hand-crafted
luxury” (which often means little more than inefficient production) or with
R&D, of which huge amounts are claimed, sometimes even accurately, for
often simple-seeming products. Let’s set all of these things aside as
unknowable in any particular case and examine, instead, the manufacturing
business in general:
The “typical” operating model for most
manufacturing businesses of any kind, in any industry, calls for retail pricing
of 5X the cost of production for most goods and 8X the cost of production for
anything made of plastic. This high cost for plastic goods may have something
to do with the VERY great expense (and capital investment) involved in
producing the necessary production molds, and the considerable expense of
operating, maintaining, and when necessary, replacing them and their related
talk here, though, only about the other model – where the Manufacturer’s
Suggested Retail Price (MSRP) is just, typically, 5X the manufacturer’s cost of
production. The first thing to understand is that, whatever that price may be
(let’s call it US$100), at least 50% of it is likely to be given as a discount
to the dealer for stocking the product, promoting it, demonstrating it (as
necessary), paying someone to sell it, covering the dealer’s overhead, and,
finally, for providing the dealer with whatever profit he may earn.
That would, if it were the
case, leave US$50 for the manufacturer. That 50% dealer margin may not always
be sufficient, however, to get dealers to actually buy and stock a
manufacturer’s products. On the forum, Ashley James gave an example where one
dealer demanded a discount of more than 82% from MSRP in order to make a
purchase. Where that happens, obviously the manufacturer will either see less
in payment for his goods or must lose the sale entirely.
reduction to the amount seen by the manufacturer may be the cost of delivering
the goods to the dealer: Most manufacturers pay the freight on all but the
smallest dealer orders, and this may mean (depending on the goods) another
reduction of 5% or more (of the dealer cost) to the manufacturer’s revenues.
In the audio industry, most
manufacturers can’t afford to maintain an in-house sales force to call on
existing dealers or to bring in new ones, so they hire a “Manufacturer’s Rep”
organization to sell for them. This typically costs them another 7 to 10% of
the dealer cost of their sales, and can leave them with AT BEST (US$100 – US$50
dealer discount ― US$2.50 freight [@5%] – US$3.50 [@7%] Rep commissions
=) just US$44 to cover the entire cost of their operation and give them
whatever profit they may hope to keep for themselves. At US$20, just for the
cost of goods, plus (using 15% of the cost of goods as a reasonable average)
US$3 for packaging, that leaves them only (US$44 – US$23 =) US$21 left, STILL
IN THE VERY BEST CASE, as gross profits to cover all of their facilities costs,
promotional expense, wage and employee benefit costs, taxes, and net profits.
All of the numbers just
quoted were for US domestic sales, only. For international sales, it’s
reasonable to assume that most audio manufacturers will need to engage a
foreign distributor to sell into each particular country. The normal
distributor discount, OVER AND ABOVE, the US dealer discount is 30%, so on
foreign sales, the MAXIMUM amount a US manufacturer is likely to see as its
total gross revenue on a US$100 MSRP sale
is (US$100 MSRP – 50% dealer discount = US$50 – 30% foreign distributor
If we reasonably assume
that the manufacturer’s sales will be (something like) 50% domestic and
(something like) 50% foreign, that means that the manufacturer’s gross profits
on all of its sales will average just US$16.50 on all goods sold. (US$21 on
domestic sales + US$12 (=US$35 foreign gross profit – US$23 for goods and
packaging) on foreign sales = US$33. US$33 divided by 2 = US$16.50)
It is out of that US$16.50
average gross profit on every US$100 of goods at MSRP that the manufacturer
really has to cover all of his facilities, promotional, wages and other costs
and earn whatever real net operating profit will remain to him.
Do you really want to know
why this stuff costs so much, though? To the last reason, add this one: Some
years ago one of the very top High End electronics manufacturers came out with
some wonderful and utterly gorgeous amplifiers, featuring extremely thick
machined aluminum faceplates with even heavier machined aluminum front lifting
handles (each amp weighed well over 100 pounds). When I commented to him that
the amps were beautiful, he said “Well, they ought to be: Those faceplates and
handles cost me US$200 a set, and, at a 5X markup from cost, they add US$1,000
to the price of each amp.” I thought about that for a moment and then asked
“But the amps only retail at US$5,500 apiece; wouldn’t you sell more by cutting
the price to US$4,500 and using just a plain sheet metal face plate and
handles?” His response was that “Quality goods have to look like quality goods;
if I used cheap appearance parts, even if the amplifiers were the same in all other
ways, I might not sell any at all!”
you know, I think he was exactly right: If I’m going to pay thousands of
dollars for a new toy, I want it to LOOK LIKE thousands of dollars; not
anything ordinary. Don’t you agree?
Back in 1977, I worked in an audio store, the Marantz rep told us that the difference in manufacturing cost between a 2220B (20w/ch @ $200) and 2325 (125w/ch @ around $1100) was a huge $7,50. This is a different ball game being from a large mainstream manufacturer but once you know how much stuff cost you begin to wonder if you have a good ratio between value and goods.
It’s hard to justify high prices when emotive can make a $300 amp that puts $1000 amps to shame in both power and quality.
It’s Emotiva, not Emotive. And which $1000 amps, pray tell?
Spot on – although with speakers I have been told its more like 10 times than 5 eg sources I trust tell me its nine times for Magico speakers.
A lot of people are not aware of this and pour over magazines like Absolute Sound drooling about Magico or whatever not realizing there is stuff out these not sold using that model, but rather sold direct, and not send to reviewers, shown at shows etc sold with 100% markup that is just as good or better for a lot less.
I believe now the internet is getting the truth out there over time stuff sold using the old model will go the way of the Dodo.
I most certainly DO NOT agree that audio equipment that looks “expensive” is a good justification for making things needlessly expensive any more that I would expect to pay a considerable premium for a wine only because it has a costly lithograph on its label!
In other segments of the broad “consumer electronics” business there are LEGIONS of product designers and engineers that pride themselves on DRIVING DOWN the cost of products so that MORE consumers can afford access to HIGHER QUALITY products.
The convoluted thinking of too many dreamers that attempt to offer esoteric products to naive consumers at ridiculous price points is not helping either these individual firms nor the wider audio products business. Instead the better run firms, often run by wiser people that have navigated the collapse of one or more previous ventures are targeting price points that are firmly in the grasp of mere mortals — turntables that are well thought out and priced where they compete with a nice bicycle, speakers that one can easily pay for by delaying a domestic vacation, electronics that are down in the range of nicer PCs… These are the things that audio firms ought to use a “price benchmarks” not “supercars” nor “ocean going yachts”!
Frankly I find some of the justifications for ridiculous pricing insulting. In other hobby type expenditures there is far less “magical thinking” attributed to more costly gear — sure a top-of-the-line lens or camera may cost 5-10x more than than a bargain unit but the reviewers uniformly can point to objective evidence that the high quality optics result in greater resolving power and fewer chromatic aberrations. So may a “high performance” specialty vehicle cost considerably more than the “base” model but the ability of that more highly tuned vehicle to acceleration/ brake / corner to a higher degree is also well documented. The silliness of audio reviewers complimenting some esoteric product as “sweeter, silkier, more nuanced” and other sorts of ‘wine review” adjectives has gone on too long. I suppose the long history of “trained palates” leading the masses in believing some rare wine is worthy of 95 pts while pedestrian plunk is worthy of only 70 would be horribly undermined by a firm that reported on the analysis of those beverages through a gas chromatograph or similar lab equipment. In contrast there are firms that certainly DO publish frequency response curves when reviewing all products, unfortunately they probably should also do MORE to publish time domain spectral information and other known factors — think about it, all sane people do accept the FACT that the various ways that DSPs can effect sound are “real” yet too many audiophile oriented reviewers seem perfectly content to do without ANY objective standard of how all the various ways that sound can be altered may or may not be closer to the actual performance of any music…
Manufacturers with territorial restrictions preventing mail order deliberately raise everybody’s cost and, by limiting sales, raise their fixed cost/unit so the price has to be high. Ought to at least allow factory direct sales–except that many antisocial types are in the business and do not want to deal with real people.