November 1998

Why Go Factory Direct?

When I started my business, I was extremely optimistic and hopeful that it would grow and prosper. This was my chance to make it in a field that I actually cared about. I used my own limited capital resources to finance the operation, as do most entrepreneurs. I thought that I could use the proceeds from sales and feed them back into the business to further capitalize it and "grow" myself into a respectable revenue stream. After all, many of us have seen this done when a small enterprise like a dry cleaner or restaurant does a great job and opens up more outlets to satisfy an expanding customer base. I wanted to use the same strategy for my business.

Man, was I wrong. If I ran a restaurant, I could directly market to and serve (no pun intended) my customers. My clientele would be drawn from the surrounding community. By providing a superior product and service and implementing the right marketing plan, I would stand every chance to be successful. This cannot be done in the high-end-audio business.

In order to sell product, a company must have distribution. It doesn't matter how good the product is. The manufacturer has to have a way to get it into the customer's hands. The way this has traditionally been done in the audio business is with dealers. This avenue is essentially cut off from the small manufacturer. But Bruce -- what are you saying here? Just because you're a lousy salesman, don't blame the dealers because you can't convince them to carry your products.

Let’s be real. That's how it looks on the surface, but once you scrape off the dust, a different picture emerges. There are only about 50 to 60 major audio retailers, and they sell most of the high-end equipment in the entire US. That's just over one dealer per state, not very many outlets at all. Many more exist, but they sell only a small percentage of the equipment. The customer base is very small and geographically spread out. Only in a few major population centers are there enough customers to support a specialized audio dealer. Much equipment is sold via mail order.

What influences the major dealers into carrying a particular product? My customers are my agents and report back to me what dealers tell them. They inform me that the dealers say they don't want to carry my products because they are not heavily advertised. So the few dozen primary outlets of distribution only want to carry products that are heavily advertised. Let’s look at the economic dynamics of that statement.

To advertise my products heavily in the major print magazines, I would have to spend at least $500,000 per year. Most small companies don't have that kind of money for advertising. In other words, you have to buy your way in from the start. You can’t grow your way in, as I had initially hoped. The small manufacturer is therefore effectively locked out.

So the only dealers available to me are very small -- those not in the group that sells the vast majority of equipment. In the last three years, about three-fourths of the dealers that I have done business with are gone -- out of business. The rest never reorder. No product moves out the door. It’s not possible to survive under these kinds of conditions, and I submit that this is exactly what the major manufacturers want.

I have tried for three years to work within "the system," but it doesn't seem to want any part of me. The only real option available is to become a renegade and sell factory-direct. I am now a pariah, a troublemaker, a scourge. Hey, I kind of like it. Maybe I'll get a tattoo and have my nose pierced.

When competition is limited, the consumer always loses. Choices are restricted and prices are kept artificially high. New technology is the fire that keeps industries thriving. Most of the new developments in high-end audio are brought to the marketplace by small manufacturers. They think, as did I, that their superior performance will give them an edge and they will succeed. Unfortunately, it doesn't work that way.

You can visit Transcendent Sound's website at www.transcendentsound.com .

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