Going Direct - The Gold Rush in Today's Specialty Audio-Video Business Has a New Set Of Rules

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The boo-hooing about how bad the economy has been for the past year or longer continues on with most companies blindly cutting marketing, advertising, development and human resource costs as a desperate act of survival. Bean counters are now corporate rock stars (and increasingly CEOs) while entrepreneurs with forward-thinking ideas are told to "shut up" as few companies are willing to think beyond closing out their month despite the fact that consumers are demanding more performance and better products for a lot less money.

There is one group of companies who are delivering just what the consumer ordered and they are the direct resellers. No one category is booming more enthusiastically in these very difficult economic times with the reasons being many. Direct resellers know that they can design, make and build products affordably. There are "OEM" manufacturers here, in Asia and elsewhere that will make you top-level equipment that competes favorably with the most lofty high end products on the market today - at one third to one fourth the cost. Direct resellers know that AV reps are not salesmen - they are stereotypically lazy order-takers who want seven to 11 percent of the cost of the product for the right to get a traditionally distributed product into local, brick and mortar stores. Direct resellers of high performance AV products know what most AV companies don't - dealers are both entitled and lazy themselves. They demand 50 point profit margins, yet unlike other businesses, invest the profits in their own pockets instead of building more consumer demand. Traditional dealers think that the AV manufacturers must create the demand and still give fat margins, which is the main reason why high performance AV gear is so expensive today.

Without question, today's high end specialty audio-video products are expensive - and consumers don't care. The ones spending the money are the ones calling the shots today. The gear consumers are buying today is value packed. The big-ticket stuff they are buying is often used, thus leaving traditional dealers wondering if they should have learned how to build a better, more loyal client base. Some suggest that train has already left the station.

Look at a current Oppo Digital $499 Blu-ray player as a perfect example of a little guy beating the billion dollar electronics companies. Unlike say Sony or Samsung - Oppo makes a disc player for five hundred bones that plays every HD disc other than HD DVD. That includes SACD, DVD-Audio, Blu-ray, DVD-Video and beyond. It has a good video upconverting chip inside of it and get this... it can be upgraded in the aftermarket to have even better DACs inside of it for the audiophile in you. While the Oppo doesn't have on-demand video server functionality like some of the bigger brands - Apple TV is the best download platform on the market today and the asking price for one of those is as low as $225. Audiophile cables cost more than that. Consumers appreciate the strong value and ask the question "do I need better than this". Personally, I own a $2,000 Sony ES Blu-ray player and you do get slightly better video performance because of the superior build quality and separate power supplies for audio and video; however I do wish it would play SACDs and DVD-Audio discs. Consumers today aren't looking to make compromises the way they were willing to do just a few years ago.

Selling direct isn't for every company and respectfully most aren't firing on all cylinders. Some companies easily run out of product to sell as they don't have the might to order enough gear to meet consumer demand. Others can't keep up with the ever-changing feature sets offered at increasingly lower prices by the big electronics manufacturers. There is an increasingly disturbing trend of companies that think they can resell out-of-the-catalog Chinese-made speakers to consumers for huge markups without submitting the products for review at the more critical AV publications and without any meaningful marketing. For many of these companies, you have no idea if you are getting speakers better than the guy who stops you on the street and says "I just finished installing an audio system at this nightclub around the corner...."

Considering how many traditional brick and mortar stores that have gone out of business or that have morphed into a "hybrid dealer," I would serious consider going direct or offering a "hybrid" distribution model myself if I ran an audiophile company. Dealers won't invest in a B-list or C-list AV line no matter what kind of doughnuts your rep shows up with. Who cares to invest in another $8,000 stereo preamp when nobody ever walks in the front door to buy it? If I ran a small audiophile company I would offer a hybrid distribution model. This isn't for every company but if you have less than 20 dealers that realistically order more than $5,000 in gear once per month then respectfully, you don't have much of a business anyway. Because the art of the demo is basically dead - I would pay to dominate the showroom much like cereal companies pay to have the best shelf space at Ralph's or Safeway. Most dealers are cheap and lazy which is a fact you have to accept, so if they pass your credit test - you floor the gear for them but you show the entire line. You buy the lighting. You buy the acoustics. You determine what demo material is played. You design and create the equipment racks. You put your signage up. You load up the music server with only the best music and movies and you then rip the knob off. The dealer plugs his or her best customers into a demo that you control many of the details of so your products are always shown correctly - not as part of some Frankenstein nightmare audiophile or home theater system.

Once you setup even just a few good dealers with an incredible demonstration - now you get ready to send out the in-field demo. This demo system can be used by your brick and mortar stores too. This rig consists of five systems of electronics, cables, source components, CDs, DVD-Audio discs, SACDs and maybe even a music server. You could even offer speakers for people to audition if that is what you sell. The consumer pays the shipping. The gear comes in custom flight cases and has a 30 day in-home demo period. If it's low-cost gear - the consumer installs the equipment. If it's super premium gear - the company sends a factory rep to set up the system, to voice the system and to present the demo. The consumer pays a modest fee for the setup and all of the shipping which is credited back to them if they buy the equipment. The new-school audio company also keeps a large menu of used gear and the trade-in values so that if the consumer wants to make a purchase - the upgrade process is done and the old gear is FedExed back to the parent company for sale on eBay or Audiogon. Some might just be recycled to cut down on landfill waste.

Companies that think when the economy comes back, things will be back to normal are lost in an audiophile fog. The new economy has a whole new set of rules. The first one is that the consumer is king. Never forget that. The next one is: you better be good at creating consumer demand. Orb Audio spends over $1,000,000 on Google Ad Word ads per year. They make many time that a year in bottom line profit. Show me a traditional retailer or small audiophile company that sets aside that kind of marketing budget and pulls that kind of profit out even in a down year? There aren't many.

Everything is different. The days of selling exclusively to Baby Boomer audiophiles are ending as the Boomers are starting with Social Security. This is not to say that you can't still sell them gear, but it's not the same as the sale of that Adcom GFA-555 that I made back at Sassafras Audio in Bryn Mawr, Pennsylvania. The best new school AV companies know what Bose knows (keep your speaker insults to yourself - we are talking about marketing and distribution here) which is how to multi-channel market better than any company I can think of in the entire economy. Small AV companies can do the same but they must - and this is not a suggestion, this is a stern warning - play by the new rules set by the consumers who buy upper-echelon audio and video products.

  • Comment on this article

  • By ivan

Dear sir...a 50% margin...in today's video world? I think you have been tippling at the wrong well.
Most of the "Direct" vendors make product that, while affordable, doesn't REALLY compete with performance and/or support(lets see them support something that is 20 years old, like Audio Research). What they do is make it good enough so that people won't take the time to actually compare the product in a store that offers better, plus service. And THAT is the dumbing down of audio that happens when everyone raves about a product without doing a direct comparison with a known high performer. Everything is reasonable now days, and some things truly exceptional, and because of the huge amount of product available, people read rather than listen or look.. With the help of the magazines and online reviewers, the brick and mortar stores that DO the demos are being given short shrift, because the demo is "dead" according to them, and that is an increasingly popular statement. So why should people even bother to search out professionals, when everything they need to know can be found on the Internet. Do you really believe someone who sells the OPPO is going to compare it against something significantly better, or is he just going to take the sale and go on to the next guy? Because the OPPO is "good enough" and doing a comparison is too much like work.
So, we who care will continue to demo and compare, educate and illuminate and the people who buy the stuff online because of lots of reviews, will NEVER get to hear exceptional...just good enough.

  • By Jerry Del Colliano

Ivan,

I think you missed two key points.

1. There is NO video line offering 50 points but salespeople PUSH video because customers buy it and it doesn't take the passion, education and emotion to sell like say a product like Audio Research.

2. Companies like Audio Research are NOT who I am talking about in this article. They have good national and international distribution. I am thinking more like Naim, Pass Labs, Linn, Sutherland. This isn't for the biggies like Krell, Meridian, Lexicon, Mark Levinson etc..

I TOTALLY agree with you that Audio Research has THE BEST long term support for their clients. They bench test and actually PLAY every component that comes back to them for service. Right here in America. THIS is something I am willing to pay more for. Its just great value.

  • By Robert

I take plenty of offense to the tone of this article due to the fact that I have been in this industry for 29 years and have yet to achieve those 50% margins that us fat, lazy brick and mortars scream for! I got home at 11
pm last night due to my unwillingness to leave a customers home until their system sounded as good as I knew it should. How would these folks even have any chance of good sound without the service I provided?
Which direct to customer companies offer any in-home service? Oh, I forgot, none that I have ever heard about. Before dismissing the whole industry you should stop to think about the myriad of people who do want service and expert advice. They are willing to pay for the results they want to achieve that they would otherwise never take to time to get. They value their time above other considerations and are willing to pay the difference to get the improved results provided by skilled design and installation.
There are plenty of brick and mortar stores going away, but not just in our industry. Poor business practices are a problem in all areas of specialty retail. This just leaves more room for those that do have a set of high values and offer honest advice, professional service, great demos and the comfort of knowing that there will be someone to help them with any future concerns or wants.
The industry is evolving, as it always has, and there are people who are perfectly suited to a lower priced, mail order model, but there are very many who are not. Part of our growth has been due to our success with the elderly population. Most we have interacted with would be very unlikely to do research and make a purchase online. They are far more comfortable coming in to tell us what they want, then asking for our help to see that they get what they really need.
I would never have stayed in this industry for this long if greed were my primary motivation. I worry about every bill due, the mortgage bill, tax bills etc, just like every business person. I have never seen
a company in this industry make any where near 50% profit over even a single fiscal quarter. I drive my 12 year old SUV to deliver gear and am happy to make a modest living doing something I love!

  • By Jerry Del Colliano

Find me 100 specialty AV dealers out of the 3000 in North America that spend on marketing and creation of new clients.

Cello didn't do it when I was there. Chris Hansen didn't do it when I was there yet I spent upwards of $10 to find a qualified subscriber to HTR's email name. That's not even a client or somebody with an ROI.

Dealers are stereotypically cheap, lazy and entitled. Are the ones who aren't - ABSOLUTELY and you might be one of them.

Conversely - go try to call on dealers with a hot new product and see what response you get from dealers nationally. "I am not this" "I can't that".... And in terms of consumer demand - they DEMAND the manufacturer pays for it. Very few dealers do things like Definitive Audio's June event for their consumers. There's a reason why Mark Ormiston's dealer is the best in the nation. He invests.

  • By James

The issue with specialty A/V or straight audio manufacturers is the same one that faces all other manufacturers of durable goods. You spent a lot of money finding one customer but now you have to find another because that customer is only going to buy an expensive stereo or widget only once every five to tens years. This is evident by the advertising on this on-line magazine. How does a manufacturer get the attention of a new customer? By getting reviews of sites like this that tells them they made a mistake and need to upgrade to the latest and greatest. This only works until the upgrader realizes that the incremental improvements did not justify the extra expense.

  • By Jerry Del Colliano

Hold on there big boy.....

I think you have HomeTheaterReview.com confused with the audiophile print mags when you say that we make people feel bad about the gear they have and then force them to upgrade. That's not us. That's the print books that are still trying to make a living selling to a Boomer clientele who is increasingly on Social Security.

We are about creating NEW customer demand. Our power is from the "long tail". If somebody looking for a Blu-ray player or a new HDTV - finds us and learns what Meridian or Audio Research is - then we've something VERY VERY VERY different than the audiophile books.

I want to be VERY clear about this point.

  • By Yogi

I cant agree more with Robert.

  • By Jerry Del Colliano

I want to clear up an issue that some AV companies have called me about today....

Selling direct isn't for EVERY AV company - its just a new way companies are finding niche opportunites in today's market. Many top AV companies have VERY GOOD and highly established dealer and rep networks. I wouldn't bail on these systems if I were them yet for every company that has this kind of network (think Stewart, Runco, Kalidescape and others) there are 20x that don't have many dealers at all and reps that don't push the product very hard. The main reason for this is the lack of consumer demand. Trust me if every dealer in an area was calling for XYZ product - the rep would be taking orders one after another.

Another key point is that somehow people think I am suggesting that I am NOT in support of brick and mortar stores. NOTHING could be more off of the truth. I am telling consumers CLEARLY that while buying direct has its advantages (and I do it with the likes of Amazon personally) I also STRONGLY support my local vendors for many things that I buy in my life. Consumers who like having an active demo at their local AV store should consider the cost of having that before they simply shop for price on the Internet. You have to pay more for the demo.

  • By Matt Good

I want to go on record and say without the hard working reps out there, this business would be much worse off. Otherwise we all would be shopping for A/V at Wal-Mart. The key is finding customers that care about sound and quality. If you want cheap - go for it! But after many failures and no allowance to Upgrade, the customer would feel cheated. There will ALWAYS be a spot for "better" items.

  • By Jerry Del Colliano

Not all reps are bad.

Many are TRUE professionals and help grow the business.

There are quite a few who suck. I am sure Matt would agree.

  • By Ryan Miller

As a relative newby to the industry I took great interest in your post, and the ensuing comments. I will chalk this one up to sensationalism in challenging the existing paradigm of AV integrators. I will codicil my comments through the lens of my current experience. I would venture so far to say that the majority of AV integration companies are lifestyle business'. The comments regarding lazy, order takers may have been a bit harsh, as I have met many dedicated, effective, professionals. Now I do applaud the contribution in forcing organizations to explore marketing opportunities. What I have found is that many companies are not marketing their true "value proposition" to their target audience. I am not sure if these same organizations have drilled down far enough to know if their audience has changed. Economic downturn or not. As a self professed divergent thinker, marketing is a component of filling the sales pipeline instead of attempting to upsell a big box store client.

I look forward to more sabre rattling.

  • By Ryan Miller

As a relative newby to the industry I took great interest in your post, and the ensuing comments. I will chalk this one up to sensationalism in challenging the existing paradigm of AV integrators. I will codicil my comments through the lens of my current experience. I would venture so far to say that the majority of AV integration companies are lifestyle business'. The comments regarding lazy, order takers may have been a bit harsh, as I have met many dedicated, effective, professionals. Now I do applaud the contribution in forcing organizations to explore marketing opportunities. What I have found is that many companies are not marketing their true "value proposition" to their target audience. I am not sure if these same organizations have drilled down far enough to know if their audience has changed. Economic downturn or not. As a self professed divergent thinker, marketing is a component of filling the sales pipeline instead of attempting to upsell a big box store client.

I look forward to more sabre rattling.

  • By Ryan Miller

As a relative newby to the industry I took great interest in your post, and the ensuing comments. I will chalk this one up to sensationalism in challenging the existing paradigm of AV integrators. I will codicil my comments through the lens of my current experience. I would venture so far to say that the majority of AV integration companies are lifestyle business'. The comments regarding lazy, order takers may have been a bit harsh, as I have met many dedicated, effective, professionals. Now I do applaud the contribution in forcing organizations to explore marketing opportunities. What I have found is that many companies are not marketing their true "value proposition" to their target audience. I am not sure if these same organizations have drilled down far enough to know if their audience has changed. Economic downturn or not. As a self professed divergent thinker, marketing is a component of filling the sales pipeline instead of attempting to upsell a big box store client.

I look forward to more sabre rattling.

  • By Ryan Miller

As a relative newby to the industry I took great interest in your post, and the ensuing comments. I will chalk this one up to sensationalism in challenging the existing paradigm of AV integrators. I will codicil my comments through the lens of my current experience. I would venture so far to say that the majority of AV integration companies are lifestyle businesses. The comments regarding lazy, order takers may have been a bit harsh, as I have met many dedicated, effective, professionals. Now I do applaud the contribution in forcing organizations to explore alternative marketing opportunities. What I have found is that many companies are not marketing their true "value proposition" to their target audience. I am not sure if these same organizations have drilled down far enough to know if their audience has changed. Economic downturn or not. As a self professed divergent thinker, marketing is a component of filling the sales pipeline instead of attempting to upsell a big box store client.

I look forward to more sabre rattling.

  • By Ryan Miller

As a relative newby to the industry I took great interest in your post, and the ensuing comments. I will chalk this one up to sensationalism in challenging the existing paradigm of AV integrators. I will codicil my comments through the lens of my current experience. I would venture so far to say that the majority of AV integration companies are lifestyle businesses. The comments regarding lazy, order takers may have been a bit harsh, as I have met many dedicated, effective, professionals. Now I do applaud the contribution in forcing organizations to explore alternative marketing opportunities. What I have found is that many companies are not marketing their true "value proposition" to their target audience. I am not sure if these same organizations have drilled down far enough to know if their audience has changed. Economic downturn or not. As a self professed divergent thinker, marketing is a component of filling the sales pipeline instead of attempting to upsell a big box store client.

I look forward to more sabre rattling.

  • By Me

Great article . . . Right on dude. The future has already changed.

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