Reference no: EM131786528

(Background)

After nearly 18 months of experimenting with the Pro-Audio Sales Agent Program, Steve March was pondering the difficult assignment of re-evaluating the Pro-Audio Sales Agent Program. The program has been extolled by some as “creative” and “pioneering”, and an important effort to stem the tide of discounting that seemed to be harming the overall studio equipment industry. To others the program was seen as an administrative nightmare that “basically caused the sun to come up in the West, instead of the East.”

Pro-Audio is a manufacturer of electronic sound processing equipment. Its leading product was an advanced digital reverb unit called PSX-360, which retails for about $12,000. It was sold primarily to major recording studios and professional musicians throughout the country though an exclusive network of approximately 50 leading professional audio retailers.

In early spring 1998, Steve Marsh began to note some disturbing trends regarding selling activity in the PSX-360’s retail channel. First, he noticed an increasing dependence on orders from two of PSX’s largest dealers. One dealer was in Los Angeles and the other in New York, and by April, these two dealers accounted for 70% of the company’s total sales of PSX products. More troubling was the growing number of complaints from other PSX dealers that they were losing sales to other dealers outside their territories, and often linked the lost sales to heavy discounting being offered by “major dealers in LA and New York”. In fact, if a customer really wanted a PSX unit, he simply went to the local dealer to get information on the product, and then would call around to other dealers around the country, get the lowest quote and have the unit shipped UPS for arrival in 7-10 days.

This was troubling to Pro-Audio for a number of reasons: First, it meant that a majority of PSX dealers were spending time and money educating and selling potential customers, but then would lose the sale at the last minute to a small number of distant large dealers. Second, customers buying the unit from a remote dealer were not receiving any after-sale support, training or service, since the local dealer was not involved in the transaction. Third, and most important, was the concern that the strong product image of the PSX-360 would be damaged by the persistent discounting a retail. Clearly some type of decisive move was needed.

After months of discussion among Pro-Audio management, it was decided to implement the new Sales Agent Program. Its objectives were (1) To eliminate discounting by controlling the retail price of the product; (2) To increase sales by canceling exclusivity agreements and opening up additional non-exclusive dealers in the same territory.

The implementation of the plan was as follows:

Effective June 1, 1998 all Pro-Audio dealers were terminated and encouraged to sign a new contract with the company, where they would now become “Retail Agents” instead of stocking dealers. The designation allowed Pro-Audio to get around any possible violation of the Robinson-Patman Act.

Instead of stocking units in inventory for immediate sale and delivery to the customer, “retail agents” could now only keep a demonstrator model in their showroom. When a customer wanted a product, the order would have to be placed directly to the factory, through the “retail agent”, and would have to be shipped to the customer directly.

Since Pro-Audio was not equipped to handle open credit arrangements for the public at large, the stipulation was made that a customer would have to pay cash or bank check in advance before the order could be processed.

Of course, since all sales were now transacted directly from the factory, Pro-Audio could now control price, and the price was fixed precisely at $12,000. This was positive to the retail agents, because they could now be assured of making a guaranteed margin of $4,000 per unit sold. It was theoretically impossible for another retail agent to undercut a competing retailer in price, because the price was fixed at the factory. As Steve Marsh put it in his press conference announcing the program: “Now instead of competing on price, the new retail agents will compete on salesmanship; on how good they are at finding, prospecting, demonstrating, and closing a customer sale. And if a competing retail agent somehow manages to sell to a studio in your back yard – then shame on you; how could you let that happen?”

On the other hand, with the price fixed a customer could not negotiate with his local retail agent, which stifled the expectations of most studio purchasers. Because of the high cost of this type of equipment the standard purchase process in the industry was to negotiate a deal with the retailer – perhaps a trade-in of old equipment, a discount for taking delivery by a particular date, or extended payment terms being available from the dealer to ease the purchase decision. But, of course, now all of that was gone, since the transaction was handled only from the factory.

Finally, since Pro-Audio now sold products to retail customers directly, the change to the Sales Agent Program required a change also in accounting. Instead of counting a unit sold as $8,000 in net sales (at wholesale prices), now the unit would be entered as $12,000 in retail sales (at full list price).

The Pro-Audio Sales Agent Program has been in operation now for 18 months, but new issues are emerging and new questions are being raised. First, sales have not grown significantly under the new plan. Second, despite the factory’s control over pricing there are still persistent rumors that some retailers are finding ways to get around the fixed pricing clause. Should Pro-Audio enforce this particular provision and cancel the errant retail agents? Third, Pro-Audio is getting more and more feedback that the program is administratively cumbersome at the retail level, and deters the retailers’ ability to sell and deliver the product.

QUESTION TO BE ANSWERED:

What would Steve Marsh recommend at the nest Executive Committee meeting?