Cost of Sales
Materials and $130 $281 $561 $931 $1,445
packaging
Shipping $43 $83 $157 $226 $322
Total $173 $364 $718 $1,157 $1,767
Gross Profit $130 $290 $581 $997 $1,571
Gross Margin 43% 44% 45% 46% 47%
Expenses 1991 1992 1993 1994 1995
New property and $3 $6 $12 $15 $18
equipment
Marketing $13 $66 $70 $109 $135
General and $51 $110 $197 $308 $378
administrative
Loan repayment $31 $31 -- -- --
Outstanding $30 -- -- -- --
payables
Total $128 $213 $279 $432 $531
Pretax Profit $2 $77 $302 $565 $1,040
Pretax Net Margin 1% 12% 23% 26% 31%
WHAT THE EXPERTS SAY
OBSERVER
JOHN ATKINSON
Editor of Stereophile, a consumer magazine for audiophiles in Santa Fe, N. Mex.
One function of dealers is that they become your first customers. They'll tell you right away if the product isn't selling and why. They become your beta test site, and by selling direct Fokos doesn't have that.
More important, if you look at all successful mail-order companies, they devote a large portion of their budget to promotion -- and have something like a major advertising program or a direct-mail catalog. You have to advertise continually before people will take you seriously. Fokos's promotional efforts, in contrast, are largely onetime events. The general wisdom in this industry is that product reviews are good as part of your overall promotion, but if they are your sole means of promotion, the risks are too high.
OBSERVER
ROBERT BLATTBERG
President of Blattberg Consultants, a Chicago-based marketing firm that does extensive work with direct marketing
Fokos is making a classic mistake that a lot of entrepreneurs make: he's underestimating what the distribution channel can do for him. There's a reason for the 100% markup dealers charge: They advertise. They provide an easy way for the customers to find the product. They deal with product returns. They service the product after the sale. They hold inventory. Those are all problems that Fokos himself now has to deal with.
And dealers offer a forum for customers to compare products. There's no way Fokos's potential customers can do that. I'm sympathetic to some of his points, namely that dealers sometimes set up unrealistic listening environments, push products that are better sellers or have higher margins, and so on. But he also has to realize that there's value there.
Can he continue to generate enough leads simply through reviews and word of mouth? He should think about more advertising and possibly direct mail. His advertising should create an image of him as a guru. That's what people are really buying: a special product designed by a special man in a special market.
COMPETITOR
FRANK REED
Chief executive of Boston Acoustics Inc., a loudspeaker manufacturer in Lynnfield, Mass. Reed formerly held prominent positions with two industry giants, Advent and KLH.
Fokos suggests that the quality of his product is demonstrated in the expensive components he uses. But the cost of his components doesn't really relate to the quality. It relates to his inefficient economies of scale.
He says the retail audio market is stifling, but it isn't as cutthroat as he contends. I don't believe any single manufacturer has 10% of the market. He says it saves a lot of money to sell direct. But I suspect his costs of sales -- advertising, freight costs -- will be as high as those the guy selling through dealers has. He says he didn't want to sell through dealers because it offers limited distribution. Why can't he have a small network of esoteric dealers and supplement that by selling direct wherever he doesn't have a retailer?
OBSERVER
KATIE MULDOON
President and CEO of The Muldoon Agency, a New York-based direct-marketing firm
There are two types of successful direct marketing: a onetime product that has high margins and is marketed with lots of space advertising, or a continuing business built on an entire product line, often sold through catalogs. Fokos's business is neither. He might be better off attempting to strike some sort of cooperative venture with an established catalog, like Sharper Image, a venture that would allow him to tell his story without bearing the whole cost. Credibility is essential if he's going to sell direct. And he doesn't have a famous name. A company like American Express might be able to make a direct-mail campaign work for him because it would be endorsing him.
FINANCIER
HENRY MORGAN
Partner, Innovative Capital Partners, in Waltham, Mass.
I agree with Fokos's assessment of dealers. I'm an investor in Cambridge Soundworks (another direct seller), and I've seen that audio retailers always want to push something new. So your product doesn't have a long life cycle. I agree that for Icon, selling direct is probably the right way to go.
But I think Fokos is overestimating the size of his market. His projections of about $3 million are high -- $1 million is more like it. He doesn't have the name recognition right now that would give his products clear superiority over some of the stuff people currently like to buy.
Also, I don't think this is a price-sensitive business, and I think he has to get at least 50% margins. Or else he can't support himself or afford to advertise effectively. He has to raise his price, and he must get his costs down. He's very fussy about how he buys components, but a lot of that quality he's striving for isn't going to be perceived by the customer.
Also, in direct marketing, customers want quick, reliable delivery time. Fokos has to have enough inventory to fill orders quickly. He has to eliminate some of the glitches he's already experienced with his suppliers.
