Why consumer direct works for us (part 2)

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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Good get, Zooted Guy. Was actually referring to the North logo on the toolbox, but good eye anyway. America may run on Dunkin (which I will never understand) but November runs on Empire.


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