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Companycase12(distributionchannels)ICONACOUSTICS:BYPASSINGTRADITIONThedreamLikemostentrepreneurs,DaveFokosdreamsalot.HeimaginescustomerseagerlyphoningIconAcousticsinBillerica,Massachusetts,toorderhislatest,customer-madestereospeakers.Heseessalesclimbing,cashflowing,andhundredsofhappyworkersstrivingtoproducetop-qualityproductsthatdelightIcon’scustomers.Likemostentrepreneurs,Davehastakenalongtimetodevelophisdream.WhilemajoringinelectricalengineeringatCornell,Davediscoveredthathehadastronginterestinaudioengineering.Followinggraduation,DavelandedajobasaspeakerdesignerwithConrad-Johnson,ahigh-endaudio-equipmentmanufacturer.Withinfouryears,Davehaddesigned13speakermodelsanddecidedtostarthisowncompany.Daveidentifiedamarketnichethathefeltotherspeakerfirmshadoverlooked.Thenicheconsistedof“audio-addicts”—peoplewholovetolistentomusicandappreciatefirst-ratestereoequipment.Theseaffluent,well-educatedcustomersaregenuinelyobsessedwiththeirstereoequipment.“They’dratherbuyanewsetofspeakersthaneat,”Daveobserves.Davefacedonemajorproblem–howtodistributeIcon’sproducts.HehadlearnedfromexperienceatConrad-Johnsonthatmostmanufacturersdistributetheirequipmentprimarilythroughstereodealers.Davedidnotholdahighopinionofmostsuchdealers;hefeltthattheytoooftenplayedhardballwithmanufacturers,forcingthemtoacceptthinmargins.Furthermore,thedealersconcentratedononlyahandfulofwell-knownproducerswhoprovidedmass-producedmodels.Thiskeptthosefirmsthatofferedmorecustomizedproductsfromgainingaccesstothemarket.Perhapsmostdisturbing,Davefeltthattheestablisheddealersoftensoldnotwhatwasbestforcustomers,butwhatevertheyhadininventorythatmonth.Davedreamedofofferinghigh-endstereoloudspeakersdirectlytotheaudio-obsessed,bypassingtheestablisheddealernetwork.Bygoingdirectlytothecustomers,Davecouldavoidthedealermarkupsandoffertop-qualityproductsandserviceatreasonableprices.ThePlanAttheageof28,Davesetouttoturnhisdreamsintoreality.SomecustomerswhohadegottentoknowDave’sworkbecameenthusiasticsupportersofhisdreamandinvested$189,000inIcon.Withtheirmoneyand$10,000ofhisown,DavestartedIconinarentedfacilityinanindustrialpark.Themarket.Approximately335stereo-speakermakerscompetefora$3billionannualU.S.marketforaudiocomponents.About100ofthesemanufacturersselltothelow-andmid-rangesegmentsofthemarket,whichaccountfor90percentofthemarket’sunitvolumeandabout50percentofitsvalue.Inadditiontocompetingwitheachother,U.S.manufacturersalsocompetewithJapanesefirmsthatofferproductsataffordableprices.Theremaining235orsomanufacturerscompetefortheremaining10percentofthemarket’sunitvolumeand50percentofthevalue–thehighend–whereDavehopestofindhiscustomers.Icon’sMarketingStrategy.Toservetheaudio-addictssegment,Daveoffersonlythehighest-qualityspeakers.Hehasdevelopedtwomodels:TheLumenandtheParsec.TheLumenstands18incheshigh,weighs26pounds,andisdesignedforstandmounting.Thefloor-standingParsecis47incheshighandweighs96pounds.Bothmodelsfeaturecustom-madecabinetsthatcomeinnaturalorblackoakandAmericanwalnut.DavecanbuildandshiptwopairsoftheLumenspeakersoronepairoftheParsecspeakersperdaybyhimself.Inordertohaveanadequatepartsinventory,hehadtospend$50,000ofhiscapitalontheexpensivecomponents.DavesetthepriceoftheLumenandParsecat$795and$1,795perpair,respectively.Heselectedthesepricestoprovidea50percentgrossmargin.Hebelievesthattraditionaldealerswouldsellequivalentspeakersatretailattwicethoseprices.CustomerscancallIcononatoll-free800numbertoorderspeakersortogetadvicedirectlyfromDave.IconpaysforshippingandanyreturnfreightviaFreightExpress–round-tripfreightforapairofParsecscosts$486.Daveofferstopayforthereturnfreightbecauseakeypartofhispromotionalstrategyisa30-day,in-home,no-obligationtrial.Inhisads,Davecallsthis“The43,200Minute,NoPressureAudition.”Thetrialperiodallowscustomerstolistentothespeakersintheiractuallisteningenvironment.Inadealer’sshowroom,thecustomermustlisteninanartificialenvironmentandoftenfeelspressuretomakeaquickdecision.Davebelievesthattypicalhigh-endcustomersmaybuyspeakersfor“nonrational”reasons:Theywantaqualityproductandgoodsound,buttheyalsowantanimage.Thus,Davehastriedtocreateauniqueimagethroughtheappearanceofhisspeakersandtoreflectthatimageinallofthecompany’smarketing.Hespentover$40,000ondistinctivestationery,businesscards,abrochure,andasingledisplayad.Healsodesignedalaminatedlabelheplacesjustabovethegold-platedinputjackoneachspeaker.Thelabelreads:“Thisloudspeakerwashandcraftedby[thetechnician’snamewhoassembledthespeakergoeshereinhis/herownhandwriting].MadeintheUnitedStatesofAmericabyIconAcoustics,Inc.Billerica,Mass.”Togetthewordout,Daveconcentratesonproductreviewsintrademagazinesandontradeshows,suchastheHighEndHi-FishowinNewYork.Attendeesattheshowcastballotstoselect“TheBestSoundattheShow.”Intheballoting,among200brands,Icon’sParsecspeakersfinishedfifteenth.Amongthetop10brands,theleastexpensivewasapairpricedat$2,400,andsixofthesystemswerepricedfrom$8,000to$18,000.AreviewerinanissueofStereophilemagazineevaluatedIcon’sspeakersandnoted:“Theoverallsoundwasrobustanddynamic,withaparticularlypotentlowend