Have you ever wondered what it really costs to make a mixer, or amp or EQ? I donít mean the street price you get deals on. I mean, what does it really cost to make the tools we use in a church sound system and how does the end price affect you.
Letís take an item that has a suggested retail value worth $2,000.00 and work backwards. Now, these numbers will vary from product to product, but the final cost will be very similar.
To begin with, the typical the end user retail margin on products is often from 35 to 60%. For this example, we will use 40%. In the margin, there are costs involved and profits made. Typically, a $2,000.00 item will cost your audio supplier - this include contractors, pro audio stores, music stores and mail order discount outlets - will cost them $1,200.00 into their hands, plus shipping. Oh yes, shipping costs are often paid by your supplier. Some people pass it on and some don't. They call it "The Cost of doing Business." Shipping costs vary, but 5% of the dealer cost in normal. Therefore, the unit should costs the dealer $1,260.00. The potential profit is $740.00
In that $740.00, it includes a salesman, a place of business, telephones and telephone calls, a vehicle, service and repairs, tools, showroom space - if a store - and so on. That $740.00 is what you and your equipment supplier negotiate.
Typically, a contractor will negotiate less as their expenses are much higher and they donít have volume sales help in their cash flow. However, the contractor installs the item and services it on your site. The good ones will supply a temporary replacement item if your equipment fails and often they extend the warranty at no extra cost. Also the contractor will include training, setup, trouble shooting and tuning. Music stores and discount houses donít provide these services and if they do, they cost extra. In the end, a contractor who sells the $2,000.00 item for $1,900.00 isnít making any more profit than the discount house who sells the item for $1,399.00. All you have to decide is if the added service of the contractor is worth $500.00 or 26% of the purchase price of the item. Now, before you answer, recently a church had a 16 month old amplifier that failed. The amp cost $1100.00 to buy. Out of warrantee, the church had to pay for shipping both ways and the cost of repair. Total bill was $285.00. Also, the church had to rent an amplifier for 5 weeks. Total rental was $55.00. Total cost was actually 340.00. The repair cost was more than the value added service of a contractorís selling price or $1,399.00. All this to say, buying from a discount house or a music store doesnít really offer you any long term deals.
As mentioned earlier, the margins for audio products vary. After the initial set margin price, there is a gray pricing area. This can be from 2 to 15%. This figure is based on two factors - quantity and quick pay. The gray area margin is rarely passed on to the consumer and it is often used by larger contractors to "buy a project" (an expression used when a larger contractor steals a project from their competetors with prices that seem to be below dealer costs). If a store doesnít like the competition, they will sometimes take a big risk and borrow money, buy quantities of a few hot products to get people into their store and sell the items for less than what their competitors can buy the item for. And yes, the distributor is often in on the scheme, and because of the competition acts as written in different countries, the distributor is protected and so is the dealer discounting the product. Sometimes these schemes fail and entire chains of stores go out of business. Sometimes these schemes work and these store then become so strong, that before long, they too stop the deep discounts and service begins to slip. - but that is another story.
As we continue this example, the quick pay is 5% therefore, the item which has a suggested list price of $2,000.00 costs $1,197.00 to get it out of the warehouse/distributor.
Now, not all audio products come from a distributor. Some sell direct, but be assured, the cost of warehousing, transportation, service and marketing are always included. These costs are varied too. Typically, these figure are from 35% to 50%. For this example, we will use 40%. Therefore, a $2,000.00 item will cost $684.00 to get it into the warehouse. As you can see, this pie is getting smaller. Remember also that sales and marketing comes from this part of the pie. That also includes the cost of doing trade shows, seminars and dealer support, which can be very expensive. At some shows, a small company can spend as little a $10,000.00 or as much as $2,000,000.00.
The next level of cost change begins with the manufacturer. A manufacturer often cuts this part of the pie into 3 equal parts. Raw materials, labor and profits. If we divide this pie into thirds, that means that a $2,000.00 item actually cost $228.00 in parts, $228.00 in labor costs to assemble it and $228.00 in profits. True, not all audio products follow these exact numbers but it wouldnít be unreasonable to say that a $2,000.00 loud speaker has only $250.00 in parts, especially if the loud speaker company makes their own raw drivers - of which most speaker companies donít.
Part of going into this kind of detail is to help explain how some audio equipment is made and how a $1.00 part can have a major impact of a products survival in the market place.
Letís look at a mixer that is no longer made and built in the late 80ís and early 90ís. It came in 8, 12 and 16 channels. The inputs were not very good but the features were good and so was the price. They used "Quazzy" balanced inputs. What that means is that the mixer uses pin 1 as ground, pin 2 as hot and pin 3 had a resistor or diode which was connected to ground. For many portable sound systems, this mixer worked fine. But in a church, it was plagued with RF and hum problems. The manufacturer offered a field repair of $90.00 per channel or, for the 8 channel mixer a cost of 720.00, which was almost the purchase price of a new mixer.
I did a little home work. With some R & D I estimated what the parts that would be needed to make this price point mixer really work good for a church. As best as I could figure it, it would cost about $12.00 per channel to build in the added improvements. At $12.00 per channel, the $950.00 would have to increase in cost to $1,792.00. Remember, the street price of $950.00 can be as low as $600.00. With the fix, the best street price would be about $1,200.00. A modest mixer fix would double the cost of the mixer to you.
In general, an item that costs $1.00 to make will has a suggested retail price of $8.77 and $10.00 worth of improvements will have a suggested list price $87.70 higher and $100.00 worth of improvements will add 877.00 to the retail price.
Like cars, audio equipment manufacturing is very much automated. A $2,000.00 mixer which has only $228.00 worth of parts would cost you $3,000 to make.
In another article, Iíll try to cover how these changes and cost affect the quality of today audio equipment and what are the trend. This also leads to another question. Who designs and decides what is included in a mixer, amp or EQ? Well, that is for yet another article.
Joe De Buglio
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