Why consumer direct works for us (part 2)

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I'll warn you now, this one's long. 

In part one, we mostly discussed how retail works best when retailers have product on hand to present and sell to customers, and to share the lifting to make more overall inventory readily available to consumers. We also looked at how brand promotional strategies influence sales velocity of stock in retailer inventory. 

To finish off that last bit, let's look a bit more at inventory turn velocity, since a keen retailer really cares about that more than almost anything else. Let's keep the math really simple and say that you are a retailer who has $1000 available to spend on inventory. You sell two different products, A and B. Each one costs you $500 and retails for $1000. Product A is manufactured by a company that has tremendous promotional support: they sponsor teams, run ads on web sites and in magazines, they sponsor regional teams, they have in-store POP displays, and they have sales reps who run dealer training. They also let your sales staff buy Product A for $400 for their own personal use, which assists their familiarity with and enthusiasm for selling the product. Product B is an exceptionally high quality product, wonderfully made using a higher domestically sourced content. Product B's manufacturer invests in lots of product testing to make sure their designs and execution are what they claim to be, and they have excellent product information available. Alas, they spend no money on team sponsorship, ads, reps, employee purchase deals, etc. If you know about them, they are in your consideration set, but their brand awareness kind of sucks. 

You sell one of Product A most weeks, but during the busy season you sell 3 a week, for a yearly average of 1.5 sales per week throughout the year. Your $500 of working capital has turned into $39,000 of gross margin in a year. In contrast, you average one sale of Product B every other week, turning the $500 of capital allocated to Product B into a whopping $13,000 of gross margin in a year. 

Which one would you stock and sell in your store?

Please note that while Product A is certainly not meant to be a November product in this case, neither is Product B. Product B is obviously more like a November product than Product A is, but that's as far as it goes. 

What have we missed so far in this example? That's right - which product is best for the consumer? And that depends entirely on the consumer. For a lot of consumers, Product A's market presence, and the proof of concept afforded by race team usage, plus the shop's enthusiasm for the product make it a great choice. A lot of people they know use Product A and most of them seem to enjoy it. But for a lot of other people, the emphasis that Product B puts on product over promo is worth it. Their rational decision is to make an educated decision based purely on the product's inherent attributes, regardless of externalities. Note that I absolutely call both decisions rational here - buying for a legitimate reason that exists is rational. Buying a black wheel because it's orange and you prefer green anyhow is irrational. Buying something because you like Contador and he uses it? Totally rational. 

But here's where we're able to bend light a little bit. Let's compare the wheel set we shipped to Jon yesterday (pictured above) with a close retail equivalent. Both use the same rims - the excellent HED C2. Jon's rims have White Industries T11 hubs, Sapim Laser and D-Light (on the rear drive side) spokes and brass nipples. They include tubeless rim tape and steel skewers, and cost Jon $840 delivered to his door. The comparison set uses bladed steel spokes (which, do the math - if they were CX Rays or DT Aerolites they would say that loudly, so they are a generic spoke), a house brand hub made by Novatec, include tubeless rim tape and titanium skewers, and list for $1400. 

We're not saying that the retail equivalent set is a bad set of wheels, as it's not. It only comes in one spoke count combo, so it may not be right for you, where Jon's wheels happen to be 20/24 but are available in 3 other options for the same price. We do, however, think that Jon's wheels are the superior product. The hubs are better (we know from a lot of direct experience), the spokes are possibly a draw but I'd pick ours for my own wheels, and you can buy several pairs of titanium skewers (and a car payment to boot) for the $560 difference between the two. You'll never find ours on closeout for 30% off, but even if the equivalent does go on sale for 30% off (with free shipping), ours is still $140 less and, we think, a demonstrably better product. 

Note that our strict cost of goods on Jon's wheels is roughly twice (maybe more) what HED's are for the $1400 Ardennes FR. Some of that is inefficiency on our part - HED is their own source for HED rims, where we buy them less efficiently. But our hubs cost probably 3x what theirs do, and we're comfortable saying that all of that is borne out in a superior product. And our spokes cost more, partly because they're name brand spokes and partly because we buy them by the 1000 and not by the 10000. 

BUT, if we sold our wheels through a retail channel, it would put the two nearly at price parity. The cost of goods difference they enjoy (and again, let me emphasize that this is some part relative inefficiency on our part but we're also paying much more for a much better hub product) goes into all the stuff that Product A gets in my original example. 

I've recently written of Mike's good council to me, in that our path more or less allows us to steadily build the universe of customers who get us, our products, and how and why we do what we do. The guy/girl who's going to respond to what Product A brings isn't in that universe. The person who would respond to Product B is a closer fit. But for the people who really do get us, we've built a compelling case for ourselves. We'll make you wait two weeks or so for the 100% custom product you want (our standard wheels ship much more quickly, and are awfully awfully nice), but we're also there for what I'd immodestly call an off the scale level of pre- and post-sales support, which only a handful of shops in the world equal. And a better product for 40% less is kind of nice. 

That was long, for which I apologize. It's Friday, have a nice weekend. I'm spending my weekend learning to weld. Pretty darn psyched for that.

Who can ID the sticker on the tool box behind the non-drive flange of the rear hub in the photo?

 


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  • Dave on

    Thank you for the comments, Five-O and AC.Topics for the blog, as much as anything else, reflect what's relevant to our customers and our business at any given time. Any thought that the blog is obligated to be The Journal of Cycling Science is misplaced. That's a part of our scope because we choose to make it such. There's ample evidence that we've changed what info the cycling public expects from suppliers and manufacturers, and our fingerprints are everywhere in forums and online discussions about aerodynamics, tire dynamics, tubeless tires, brake heat testing, and others. For right or wrong, we take a great deal of credit for popularizing the knowledge that a rim's interior dimensions are more meaningful than the outer dimensions – we beat the drum so loudly, for a long time. In general, the testing that we do is expensive as hell and equally time consuming. The materials bill for the tubeless tire test, accounting our time spent on it at $0, was in the thousands. And I spent probably 50 hours on the thing. For a company of our size to take on that scale of a project and do it to the level we did is far from usual. Companies our size usually spend their time and effort on "brand ambassadors" and getting "rad" pictures of their stuff on Instagram. Which may ultimately be a better route to sales growth. Who the f knows? All I know is that we've done more better testing, that's more relevant and useful to more cyclists, than other other outlet I've seen. Our cx tire test was better by orders of magnitude than what magazines did. Our aero tests have become part of the informational DNA. It's a rare day when we don't get an email that says "just found your company, read your blog, love what you guys are doing." It's a rare week when we don't get an email from a shop looking for their pricing on a set of Rails or even Nimbus Ti wheels, and we still get very regular requests for EP pricing from shop employees. We have to address these, and quite frankly some of these blogs are posted so that we can answer some of these emails with a link to a blog. Because we answer every single email, personally, thoughtfully, and completely. The world takes it very much for granted that there are these HUGE (and very malleable) margins in cycling stuff. While that may generally be the case, it sure isn't with us. We often flirt with the idea of just going completely open book on our cost of goods. On one hand, some people probably assume that our cost of goods on a set of alloys is probably $200, but just a set of Nimbus Ti (or T11 – they cost the same) hubs costs way more than that. And the rest of the stuff ain't free, either. We don't get to build a set of wheels, put them in a box, and go drink martinis at lunch – it's a grind to make it work.The other side of that coin is that a lot of people are suspicious of our stuff because the price is lower than they expect. The example in this very post represents what we have to address on a daily basis – "how can yours be better when they're so much less expensive?" Just the number of times we have to explain that Nimbus Ti hubs share every working part with T11s/CLDs could send a person to a padded cell, but it's what we need to do to grow the business. Sometimes we do tech stuff (plenty of which has been done recently – the posts on tire installation and why we discontinued the Rail 34 are deeper tech than most companies ever do), sometimes we do business informational stuff (product announcements, etc), and we often have a need to speak to business dynamics. We'll take it as a mark of significant success that people come here and take it for granted that there will be fresh, expertly executed, completely trustworthy tech info – what other outlet can even say that about itself, much less a company's site??? But it is, after all, our blog, and our number one most important way of communicating the entirety of that message. The next post will be about our rim/nipple/spoke interface protocol. It will, again, be more tech than most companies ever share. We'll keep stuff to ourselves, simply because we've developed a competitive advantage and I drove myself absolutely NUTS for like half a year getting things to the point where they are. But it's all related – this bit of tech allows us to do a thing with product management (use Lasers and D-Lights instead of CX Rays – or some inferior bladed spoke – in standard builds) that saves customers money. And we've shown the testing that we did to prove the aero impact. Just saying "you know what, bladed spokes it is!" like everyone else does would have been an easy out. That would have made wheels cost more, to no consumer benefit in the products where it makes much more sense to use round spokes. Developing the ability to build with thin gauge round spokes as well as we do is a big thing. Everyone else says "oh, of course you need bladed spokes, harrumph harrumph" but the real story is that they don't want to use the spokes we do, despite their benefits, because it takes more time and work.

  • AC on

    Agree with Five-O mostly. I have a set of your Rails and a set of Pacenti's on CLDs from your. To me, you're hitting several sweet spots. Better quality for the $ by being consumer direct (and by not asking me to fund your advertising via discounts to masters teams), and for Rails, being at a comfortable price point between China direct and Zipp/Enve pricing. I look at the latter and think yeah, maybe the rims have some minute incremental advantage, but your testing has convinced me its not significant, plus I run disc brakes so it's even less likely to be noticeable. And I know for certain that I received better hubs on your builds, and likely a better, more attentive job of building the wheels.There are so many things wrong with the bicycle industry, it is absolutely poised for disruption. Glad to see you guys initiating some of it.

  • Zooted Guy on

    Empire Tea and Coffee.

  • PC Mountain on

    I've never seen these guys say they make the best wheels on the planet. If anything they're super low-key, humble, and objective. They don't act like any other cycling company I've ever seen and that's a positive thing.

  • knock knock jokes on

    Knock Knock!Who is there?ManillaManilla that?Pepper. to know more you can visit here



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