Economies of Small

I've worked for and with a lot of different companies. All have either been big, or doing everything they can to get big. It's like an unwritten goal of every business - to be number 1 or 2 in your industry and somehow harvest that leadership position. 

Dave and I talk a lot about growth, but never about getting Big. Part of the reason is that Big is a really far away point on the map, but the other part is that we're not sure we want to go in that direction anyway. We like being small. For one, it makes it a lot easier for us to differentiate against the big brands (which is a lot harder to do if you're a big brand yourself). Counterintuitively though, we choose to differentiate on price. One of those things they teach you over at the B-schools is that to compete on price, you need to be big. Wal-Mart, P&G, Annheuser-Busch InBev, Trek - all of them have the size that allows for some Economies of Scale. Bigger companies enjoy greater buying clout from suppliers, and can defray marketing activities across more units, products and even brands. There's also a credibility component to size. I used to work in marketing for an IT company where I learned that "nobody gets fired for buying IBM." Similarly in cycling, no sponsorship coordinator is going to get razzed for signing on Reynolds or Easton to supply a team's hoops. 

But with scale comes - appetite. Big companies have to continue to feed that beast all the time - marketing, inventory and distribution, overhead, staff, legal fees, R&D - all of these expenses figure into the price of the merchandise you buy from the big brands. So naturally, the margins on the products from these brands are set accordingly - they have to cover all these expenses before they can turn dollar #1 in profit. That's why the big brands with Economies of Scale sell wheelsets and frames at twice the price of smaller outfits like us and Williams and Neuvation and Revolution. Ironic, isn't it - that all these economies result in far more costs for the companies than savings for their customers. Their big beasts are hungrier than our little varmints. We don't have to double our costs to arrive at a price for retail distribution, and then insist that retailers double the price again in order to maintain "pricing integrity." 

We go about setting our margins differently. I'll oversimplify it (only by a little), but the way we set margins is to determine what's the minimum amount of profit we'd need for this transaction to be worthwhile for us. We don't double our costs or follow a strict margin percentage across the board. To do that would assume that selling a frame takes the same amount of energy and time as selling a set of wheels, which isn't the case. And by "selling" I mean not just closing the transaction, but merchandising on the site, answering questions before the sale via email, prepping or building the product once it's sold, packaging and shipping. Each of those steps takes time and costs money. Wheels are a lot easier to sell but complex to build and onerous to pack and ship. Frames are harder to sell but prepping for shipping is much quicker. And bikes? Lucky for you we consider them the cost of doing business at this point. If we charged you minimum wage for all the time that goes into sourcing, selling, spec'ing, fulfilling, shipping and then answering questions about a bike, you'd be better off getting yourself a tight little R5ca and save a few bucks.

Which brings me to rims, which we're now selling independent of wheelsets. They're available in the current pre-order which closes on Monday 5/30. We've never sold them before. Compared to wheelsets, they're naturally easier to prep for sale since they don't have to be built. And they should be easier to sell than framesets since they're the same rims from our carbon wheelsets. But what we don't yet know is how much support they'll require - how many questions we'll get about how to build them into wheelsets, if will build one into a wheelset and send another as an unbuilt rim, if we can refer a custom builder, if we'll do a custom build ourselves with Chris King hubs and spokey-dokes. We just don't know yet. So we decided to launch rims with a 4 rim minimum, for a couple of reasons. The first is that we think they'll appeal more to folks who either build their own wheels already or have a wheelbuilder in mind for their custom hoops. The second is that if a ton of support is necessary, a transaction with 4 wheels generates double the (however meager) profit as one with two, at which price we're happy to answer whatever questions you have. If rims turn out to be easy-peasy lemon squeezy to sell and fulfill (that is, if our soft costs for selling decrease), we'll gladly lower the MOQ on them and let you order them 2 or even 1 at a time. 

Do we care if we sell so many rims that our wheel sales suffer? We do not. We're not a bicycle frame and wheel company. We're a stuff-racers-want company. 

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Spokey-dokes— you read my mind. I've been bugging them for years to make a version that's compatible with CX-Rays, so far to no avail.


Soon. When are you makign coffeets?

Mike May

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