How Profit Margins Work in the AV Business and Why You Should Care

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How Profit Margins Work in the AV Business and Why You Should Care


2-TheIvy.jpegOne of my best industry friends, Dave Nauber, who runs Classé Audio today but was my sales representative for Mark Levinson back in 1993, thankfully taught me all about profit margins and how they affect the AV businesses. Back in the day, there was another Mark Levinson dealer located in the San Fernando Valley that was selling big volumes of product that was mostly being dumped in Asia as the dealer was selling it sideways to this non-authorized ("gray market") importer at very, very low profit margins. I found out about this because I got a phone call as a very young, commission-hungry salesman at Christopher Hansen Ltd. in Beverly Hills asking me if I would like to meet this mystery buyer at the famous nearby eatery known at The Ivy, as he would like to place what was going to be a $500,000 order. Not only does The Ivy have the best fried chicken in Los Angeles (or perhaps this side of the Mississippi), but theoretical commissions on $500,000 in gear would pay for a lot more goodies in my life, including paying off my car.

Somehow, I thought to ask both Dave and my boss, Christopher, and both knew what was going on and that it was likely nefarious. Not that I was trying to rat anybody out, but my instincts were that something was fishy in Denmark and I was right. It wasn't long before that dealer got whacked like Paul Castilano in front of Spark's Steak House.

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There was a very good teaching point then that might have even more meaning a generation later as specialty AV boutiques and high-end audio salons struggle to thrive in the United States. At the time, profit margins on A-list electronics were about 40 points. That means if a product retailed for $10,000, then it cost the dealer $6,000 to buy the component plus shipping, which, for say a Mark Levinson amp, could easily be a few hundred more dollars. So, if you, the salesman, gave a 20 percent discount, that left less than $2,000 in gross profit.

But that's not where things end. Next subtract out commission, as I was always a full commissioned salesman, meaning I got about 20 to 25 percent of what was left over. Say $400 more. How about overhead, workers comp, the electric bill, rent, and other overhead? It is easy to see how a discounted sale at 20 percent off of retail left little to no money for the store at the end of the day. This Asian "importer" wanted to buy Mark Levinson gear at 37 percent off, which as I learned wasn't worth the effort. Note: American products sold overseas then and likely still today are much more expensive there than here, thus he was going to make his money on the deal - just not us.

In modern times, a deal selling pallets' worth of premium audiophile products like Mark Levinson to Asia or Europe would be close to impossible to do because modern components can sense where they are based mainly on the electrical voltage. One could argue based on the car dealer model that if you did the volume at no margin, all of the closer-to-retail sales that you made for the rest of the year might benefit from higher profit margins. That is why most car dealers have Fleet Managers, and why they are so good to by cars from, as all they care about is moving volume. But specialty AV dealers are different; they don't work on the same model, nor do they do anywhere near as much volume or floor as much inventory. AV dealers aren't paid as aggressively to sell monthly, quarterly, and yearly volume as you see in the car business, thus further disincentivizing dealers to dump high-end AV gear into foreign markets.

5-OrbAudoio.gifWe've covered the concept of retail margins, but what about how things work on the manufacturer side? AV manufacturers have to make money, too, in order to survive and thrive. Here's how they do it. Let's deconstruct a pair of speakers with an MSRP of $1,000 per pair. They likely sell that pair of speakers to dealers for half that amount of money domestically, with international (almost always prepaid) sales being closer to 55 or 60 points off.

That means in order for the manufacturer to operate profitably, they need to build into the speaker all of their raw parts costs (drivers, neodymium for magnets, woodwork, paint, labor, binding posts, grills) as well as other operating costs (overhead, insurance, advertising, electrical, other utilities, boxes, shipping, storage, salaries, etc.). When you do all the math, it means that a manufacturer needs to have said $1,000 MSRP speaker pair literally finished, in the box, and at the distribution point (likely someplace like Sam-Son in Buffalo, New York, or any number of places in Long Beach) for about $125 to $175 per pair of speakers. That leaves about $325 in profit (or less) per sale on the manufacturer side.

Granted, AV manufacturers sell more total volume speakers than retailers, so one can theoretically work on slimmer profit margins, but when you look at just how thin these margins are, you get a glimpse into how tricky it is to make a living in the world of specialty AV, be it as a retailer or a manufacturer.

Direct or online resellers have things a little better, in that they get to use the entire manufacturer and retail profit margin to make an AV sale. They don't have to give dealers 40 to 50 points of profit in the sale; however, they have the challenge of earning the right to the sale, which is no small burden. That can include: cost per click advertising, a good amount of public relations cost, labor for customer support, costly efforts to process returns and B-stock product, and more. Overall, online and direct resellers help keep prices low and value high in the marketplace, and as such have put additional pressure on traditional retailers to become increasingly competitive, which is a good thing for consumers.

6-TurntableStore.jpgThe question you have to ask as an audiophile or home theater enthusiast is: how much do you value your local retailer? We've heard wide-ranging feedback from HomeTheaterReview.com readers and commenters about specialty AV retailers that range from undying loyalty to outright disgust, and pretty much everything in between.

By all means, you can buy your gear used on audiogon.com, but you can't complain if your local dealer can't justify stocking, flooring, or demoing the latest, coolest audiophile stuff in your hometown. There is no questions that you can shop out of town (and might have to with the current state of dealers in many cities in the United States) but you have to ask yourself if saving roughly 10 percent sales tax is worth costing you local access to gear over an issue your local dealer can't legally circumvent.

Lastly, when you ask for a deep discount, know that while the dollar figure may make it seem like your dealer is making a fortune on the sale, that is often a mirage (not a Mirage M1) for all the reasons listed above. If you want to have access to the latest and greatest in AV in your local neighborhood, you have to have a win/win working relationship with your dealer so that you get what you want in terms of price, service, installation, trade-ins, calibration, and more, while allowing them to make fair living.

When I owned HomeTheaterReview.com, this was a painful dialogue that I had to have with many manufacturers who wanted our ink but never bought ads to help offset the cost of the publication. Some even went so far as to flaunt it. Those were broken relationships and not very valuable on many levels. You should aspire for better with your local dealer, even if you buy some gear online, some used, and even some out of town, because a world without active AV demos leaves the specialty AV hobby in a worse place than where we are today.

How do you support your local dealer? How many visits do you make between buying gear from them, if you buy any at all? We look forward to hearing from you in the comments below.


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