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“At what price does a high-end product cease to exist for the ‘normal’ audiophile?” This question, which I asked in the February 2017 issue, was a follow-up to one I’d asked in our April 2011 issue: “If all someone is offered is a $150,000 pair of speakers . . . that person will walk away from this hobby, or build his or her system by buying only used equipment. Either consumer choice turns the price spiral into a death spiral for manufacturers.”
Yet this issue sees me reviewing a loudspeaker that costs $215,000/pair. Last month I reviewed an amplifier priced at $55,000. In August, Michael Fremer reviewed a monoblock amplifier that costs $118,888/pair. And in September, Art Dudley reviewed a CD player that costs $43,000 and, even at that price, had no digital inputs—it could play only CDs, and could not be used as the core of a digital playback system.
All of these products sounded superb, but I must confess wondering who buys components that cost more than a luxury car. Why does a magazine read by regular middle-class people devote space to products that might as well be made from unobtainium?
The primary answer is that many people who will never be able to buy these products still want to read about them. When I’m asked what criteria I use when deciding which product should be photographed to appear on our cover, I explain that the only reason for a magazine to have a cover image, rather than just a list of what can be found inside (footnote 1), is to tempt someone browsing a newsstand to pick it up and, we hope, buy it. A magazine’s cover is nothing more than an engine to create newsstands sales, period. And not just Stereophile but gear magazines of all kinds put expensive eye candy on their covers—that’s what catches browsers’ eyes, in the few seconds those eyes rest on them. Car magazines don’t put a budget-priced Chevy Cruze on their cover—they feature a $1.5 million Bugatti Veyron. The cover of this issue of Stereophile features Technics’ SL-1000R turntable ($20,000), not PS Audio’s Sprout100 integrated amplifier ($599) or Mytek’s Liberty D/A processor ($995), both of them also reviewed in its pages.
This is not aspirational bias on editors’ parts. When you look at a magazine’s newsstand sales, the key metric is “sell-through,” aka “efficiency”: what percentage of the number of copies of an issue of a magazine shipped to a newsstand are actually sold. A good-performing issue might have an efficiency of 50%; ie, one of every two magazines displayed is purchased. With an unappealing cover, a magazine’s sell-through might drop below 20% (footnote 2). When an issue of Stereophile hits an efficiency of 50%, which it occasionally does, I get a pat on the back from my bosses. By contrast, the issue of Stereophile that sold worst on newsstands in recent years was November 2013, whose cover pictured an inexpensive but high-value NAD integrated amplifier. Readers might wish we gave a higher profile to budget-priced products (see Bruce Stram’s letter in October, p.11), but my continued employment depends on keeping that efficiency number as high as possible.
But why are the numbers of very expensive audio products exploding? As I wrote in 2011, an audio manufacturer that must gross a certain amount of revenue each quarter to cover fixed expenses and meet payroll has a choice of three strategies: 1) sell a very small number of very expensive products; 2) sell a larger number of mid-priced products; or 3) sell a very large number of inexpensive products. In a world of increasing income inequality and reduced inflation-adjusted income, the lowest-risk strategy for the audio manufacturer is Option 1: move upmarket to service the smaller number of very wealthy customers.
Why is this the lower-risk strategy? In 1991, loudspeaker engineer Ken Kantor, then with NHT, answered this question in a post to the now-defunct bulletin board The Audiophile Network: “In general, there are two ways a manufacturer can derive the price of a given product: ‘markup’ (materials) driven, or ‘contribution’ (overhead) driven. . . . Markup pricing starts with materials cost, adds in labor, then multiplies this total by some constant ‘gross margin’ to get the dealer cost. Markup pricing works well for production volumes that are large enough to amortize overhead costs, and is typically used by companies selling more than, say, $2 million annually.”
Many high-end audio companies gross less than that $2 million ($3.7 million in 2018, adjusted for inflation). For them, Kantor offered a different pricing model: “Contribution pricing is useful when production runs are smaller, and sales lower. In this scenario, materials cost is not the driving factor. Rather, the manufacturer uses their sales level and overhead to determine how much a product has to sell for to be worth making. This is an iterative process, as sales volume and price are interrelated.”
Kantor then calculated the price the manufacturer would charge the dealer for the same speaker with the same bill of materials. With the contribution-pricing model, that speaker would cost four times what it would with the markup-pricing model. However, assuming a correct calculation of how many speakers the manufacturer can sell, the risk to that manufacturer with the contribution-pricing model is considerably lower. The upward price spiral is just the inevitable outcome of companies increasingly relying on a business strategy based on contribution pricing. But it marginalizes regular audiophiles like you and me.
Footnote 1: From its Autumn 1975 (Vol.3 No.10) through June 1982 (Vol.5 No.4) issues, almost every issue of Stereophile featured the Table of Contents on its cover. In those years, Stereophile wasn’t sold on newsstands.
Footnote 2: In 2016, the average efficiency of all magazine titles sold in North America was 25.1%.
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