Audio Economics 101

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November 21st Written by 

The factory direct business model is a double edged sword. On one hand, there are strong advantages to selling direct to the final customer. At least one middleman (the dealer) is eliminated. This is beneficial from both cost and communication standpoints. 

On the other hand, it takes more work by the customer to make such a purchase. More research, more discussion and more thought. In most cases customers won't actually see (or hear) what they are buying until it arrives at their door. And oh yes, more uncertainty! 

What are the numbers behind the two methods? 

In typical consumer electronics retail distribution the cost to manufacture the product is usually between 1/5 and 1/8 the retail list price. In the factory direct model, those figures would be between 1/3 and ½ the final selling price. In a retail channel, the dealer takes between 30% and 80% margin depending on the brand and the product type. Distributors, if involved, add their own costs. 

There is no dealer in the factory direct model but this type of business must still maintain a customer interface if only in the form of a phone or email presence. Also, factory direct operations usually have lower volumes so unit production costs are higher. 

But there is more to retail selling than just the store overhead. Stores carry product that consumers ask for. In order to create that demand, there is a large overhead cost in advertising and marketing. Factory direct operations do not create demand, they make themselves visible. 

This is an important distinction because it defines who your market is. Retail selling is done largely to people who have to be told what to buy. They are told in ads, reviews and by salesmen on the floor. Factory direct buying is done by people who know what they want and do their research in order to find a suitable product. 

There are vastly more people who can only buy retail than people who have the inclination and the experience to buy factory direct. Factory direct will therefore remain for niche products sold to informed customers. These niche products have very little chance of expanding into mainstream distribution due to the cost inflation which would have to occur. 

Even allowing a great deal of leeway for the economies of production which would accompany much higher volume, the extra layers of cost and complexity involved in distribution would sink most specialty products. It might be possible to ship the product but it is extremely difficult to deliver, on the retail floor, the product expertise that went with it at the factory. 

The bottom line is, buying factory direct can be a great way to go and perhaps the only way to go if you know what you want and what you want is a unique, high performance product at an affordable price.

 

Read 31279 times Last modified on Wednesday, 25 December 2013 16:43
Published in Industry
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