There is a perception that audio equipment is overpriced. Specifically, a ‘designer-label’ effect is suspected: that high-end brands conferring status to the owner have massively inflated price tags for no reason other than to confer status to the owner.
Also, there is a concern that audio manufacturer/retailers exploit the Baby Trap: manipulating the fact that punters overspend indiscriminately on what they love (see also weddings).
Further, there is suspicion that they cynically gull a credible market with a Scientific Priesthood Voodoo ploy: customers will pay more for gadgets that appear to contain technology smarter than they comprehend.
A number of engineers and IT alumni believe that ‘audio-grade’ anything is hogwash: pointing out that common or garden electronic components mysteriously double or treble in price when marketed as audio devices. Cables are especially considered culpable.
Among some buyers there is also resentment of glamorous boxes that manipulate buyers into buying with their eyes rather than their ears – the accusation by pragmatists is that the production budget should have been spent ‘where it matters’.
Not all these fears are unfounded.
Money, money, money.
Sadly, this sharp practice has conflated the issues of economics, marketing and technology to the point where any expensive component is automatically assumed to be a rip off, and any cheap gadget is considered good value. Just as when buying clothes, or cars, or anything else, this isn’t always true. Unless you understand exactly what you’re buying – and (equally importantly) how it gets to market – you won’t always get what you pay for.
So let’s look at a typical Far-eastern made, magazine-advertised £1000 audio product you’ve just bought from your favourite audio retailer. Where exactly has your hard-earned gone? Break it down . . .
£167 – 20% VAT
£28 – 7% Import Duty on distributor purchase price
£35 – Shipping
£333 – Dealer margin (typically 33-45% ex VAT))
£166 – Distributor margin (typically 15-25% ex VAT)
In other words – and in round figures – the value of your equipment at the factory gates is about a quarter of the price you typically pay. The manufacturer needs to make at least 100% net profit from this figure, accounting for labour, overheads and marketing.
Optimistically, then, your £1000 purchase is – in stark reality – no more than a £50-75 box of bits screwed together for £25 and delivered to you for £900.
This invariable economic logic should explain why cables are so expensive when they look so simple to make: it’s never been about the construction cost. Having said that, I can tell you from experience that bespoke connectors are much more expensive to make than you might think. And in the case of a relatively fiddly and sensitive cables like the KingRex dual-conduit, cryo-treated USB designs, we are genuinely looking at 6-8 man hours per cable to manufacture, which casts a more credible light on their retail price of £495.
Things vary somewhat from country to country: if you think ‘Rip-Off Britain’ is bad, pity the Germans who have had 19% VAT for longer than our 20% rate, and whose dealers almost uniformly demand a 50% cut of the ticket price.
Things also vary considerably from brand to brand: many manufacturers are seeing the Internet as their distributor and selling direct to dealers. In principle, this lets them spend as much as £200 on the parts in your £1000 component, or drop the price to around £850. It has made many in the industry (and the market) ask: what is the point of a distributor?
Dealers & Distributors: what are they good for?
A good distributor fulfills a number of essential roles: they invest considerable funds in making sure that all products in the product range – in all colourways and options – are available in stock at all times, so you don’t have to wait weeks to get your order. No-one wants that. They should also be the best local repository of technical information about the products they distribute. Crucially, they should offer technical support, repair and servicing of the equipment they carry. They should also make available demonstrator units to reviewers, dealers and customers. Also, it’s their job to pay for and organise advertising, events and shows to promote the brand.
As Kermit might have said as Muppets brand ambassador, it’s not easy being distributor. Brands without distributors – which are becoming increasingly common – have to divide this workload between dealers and makers, and may not to offer instant purchase ex-stock for all items, or local servicing. On the upside, they will be cheaper and/or offer 20% better value in terms of components.
So what does a dealer do to justify their 40% cut? Good question. Obviously they have overheads, too: a glitzy showroom; staff to pay; and they do have to make a fair-sized investment in stock – for instance [plug alert], our catalogue now includes 425 products – and they do have to bear the brunt of dealing with the fussiest, ficklest customers on earth: audiophiles. This can be time consuming. It is not uncommon [whinge alert] for us to spend ten or more hours on multiple phone calls to a customer, followed by four or five hours auditioning with them in the dem room, and end up selling nothing. Dealers are now also being called on to play distributor, too: organising publicity and reviews, etc.
Getting a bargain
It’s also important to realise that not all brands make 40% for a dealer.
The bottom line is that if you’ve seen it advertised (or, sometimes, well reviewed) in a mainstream audio magazine, the dealer is probably on 40%, and your purchase is correspondingly poor value in terms of its construction cost. It’s a win-win for the dealer (customer believes review of expensively distributed product; customer buys product; dealer makes top margin) but poor value for the customer. And just . . . well, boring to see the same old cash-cow brands pushed at the UK market in an economically virtuous circle of margins and reviews, regardless of the product’s inherent merit.
The most exciting products around at the moment tend to be those sold directly through dealers on lean margins: Wyred 4 Sound are a classic case in point of a Goldilocks company – just big and smart enough to be innovative and benefits from economies of scale in terms of production – but small and lean in terms of its distribution model so that end user prices are extremely low relative to their parts cost. You only have to compare its versions of the ICE-Powered amplifiers with the almost identical Bel Canto models lumbered with all the baggage of a pre-internet distribution model to see how dramatic these cost savings can be.
And it’s a very different world in pro audio: there, dealers are often grateful to get 20% margin, and often have to settle for as little as 5%. Again, that makes pro audio brands like Adam and Focal major bargains for domestic customers. Again, that’s why you don’t often – and won’t – see those brands sold by old-school dealers locked into the lucrative but limiting ‘40% or forget it’ mentality.
‘Audio-Grade’ Pixie Dust
In fashion, when ‘paying for the design’ (not just the designer) what you see is what you get. It’s much harder to put a price tag on the crucial design expertise that goes into a piece of audio equipment. Wadia and Linn, for instance, are conventionally distributed products, relatively cheap to produce and by one measure poor value for the customer. But they are smart designs by smart R&D departments. By virtue of elegant internal architecture they are able to make – to a price point – highly competent devices without exotic caps and big-iron power supplies. With that kind of product, you really are paying for the design: overpayment at the point of sale has to be offset against their excellent used resale value.
There are products – particularly cables – that are common or garden items from the Farnell catalogue in fancy dress with bigger price tags. But an audio system genuinely has different requirements and design goals to a toaster or printer. Your hi-fi is largely a real-time voltage amplifier: by definition it demonstrably examines (by making audible) power. Power supplies are crucial to every part of the system. Interestingly, even a computer is not a real-time operating system in the way an audio system is – and certainly it isn’t powered the way an amplifier must be to generate low-distortion output. Particularly with regard to power, audio reproduction and recording components have the bar set far higher than almost any other kind of electronic equipment. It’s not coincidence that many of the more helpful innovations in this industry have spun out of military research into signal transmission in extremis.
So yes, cables are expensive. You might take issue with the concept of ’boutique audio jewellery’ and smoke and mirrors marketing, and what you may perceive to be a cushy deal for those in the food chain – but, customers will still buy with their eyes at least as much as their ears; advertising of all kinds will continue to be duplicitous and manipulative; we dumb humans will still show off their status symbols (by definition, an item you overpay for); dealers of all kinds will continue to make 20-50% margin in order to feed their families; and we will all still spend too much money on what we love. No news there, then.