Toronto, Ontario, Canada

It's the sales, silly!

2023-01-19

The industry has lost several important modular manufacturers in the last year or two, and there's been some talk about why. I obviously don't know all the details of what happened in any company except my own, and at least one of the biggest examples on everybody's mind is pretty clearly an exceptional case, with the founder making a career change for personal reasons not directly related to the general business climate. But I recently heard a claim made that it doesn't matter to the health of the industry whether individuals buy Eurorack modules this year because the "real" problem killing manufacturers is supply-chain disruption. I want to speak against that.

For North Coast Synthesis Ltd. in particular, the real issue is absolutely sales - and sales in 2023 are especially important, not compensated by sales in previous years. If I don't sell more this year then I won't be able to stay in this business next year. Only my customers, not the global supply chain, will determine that. Customer choices to buy or not, do make a difference. Those choices make nearly all the difference.

I will not disclose the absolute numbers, but here is a plot showing sales and profits in relative terms year by year for North Coast Synthesis Ltd. in every completed year since I started the company.

summary of sales and profits

This plot is by fiscal year ending September 30, which is how I do my accounting. That means the bar labelled "2022" is for the period from October 1, 2021 to September 30, 2022. I do not have reliable numbers for fiscal year 2023 yet, but I can say that things were very slow over the Christmas holidays. Fiscal year 2017 was a short one: I started the company in January 2017 and opened the storefront in August 2017, so I was really only open and making sales for two months of that fiscal year.

The stacked bars on this chart represent sales, that is the total amount of money coming in from my customers paying me for orders, both "retail" customers (who buy from me through my online storefront, in person at events, and so on) and "wholesale" customers (the dealers around the world who carry my products). The "Other" category is sales of my own goods and services other than Eurorack modules and kits - such as consulting and custom work. I've excluded shipping charges, which don't apply to the large majority of orders I process and are normally passed on to the customers at cost anyway. "Revenue" would be almost the same thing as sales, but would include those and also a few dollars here and there of incidental stuff like foreign exchange profits and provincial sales tax commissions; revenue is not shown on this chart.

The "Profit" line includes everything, all revenue minus all expenses for a net profit or loss. I had a net profit in fiscal years 2019, 2020, and 2021. But although there have been a couple of individual months when the company cleared enough profit to cover my personal living expenses, I've never had a whole year with enough profit to do that. I've had to dip into personal savings every single year since starting the company, and I obviously can't do so forever.

The important thing to notice in this chart is that sales fell off a cliff in fiscal year 2022, after reasonable growth in every previous year. Sales, the demand side, not the expenses on the supply side. I was still filling every order I got and making a marginal profit on every order I filled. I just didn't have enough orders to fill, and in particular, I had far fewer orders than in the previous two years. The drop in sales in fiscal 2022 basically represented a three-year setback in the company's growth.

It is true that there were supply problems too. I've certainly heard of other manufacturers having to discontinue products, or just not restock them for a long time, because of being unable to get the parts that go into the products. But that wasn't my problem in 2022. I had stock, plenty of products on my shelf; I just couldn't sell them.

There was an indirect way the supply chain affected me, which was that I had to spend more money to get some of the parts I needed even though I was able to get them. The price of jack sockets skyrocketed during the pandemic, for instance. I also ended up buying some things I couldn't use - like a batch of TL074 chips that turned out to be counterfeit (eventually refunded, but a big waste of time), and a batch of microcontrollers that were not really right for the Gracious Host, but looked like they might be the closest match I could get so I ended up buying them as insurance against the possibility of not being able to get any others and having to redesign the module again. These issues increased my expenses and they're one reason profits were down in 2021 despite sales being up. But the sales numbers on the chart don't include expenses. Expenses were not the reason sales were down, and not the main reason profits were down. The direct effect of lower sales was much more significant than the indirect effect of higher expenses.

Looking at the different categories within sales, it's visible that "kits wholesale" dropped significantly between 2021 and 2022, and I think that may not really be as big a deal as it looks. Dealers often order for more than a year's worth of sales in advance, so there were dealer orders placed in 2021 (anticipating a post-pandemic sales bump) for kits that weren't really being sold to the dealers' own customers until some time in 2022. If we tracked the eventual sales to the end consumers instead of the money as I actually received it, then it would probably make sense to move a lot of that orange bar from 2021 into 2022, and then the sales drop in 2022 would look less painful. It would still be a problem, though, because I need a few more years of solid growth just to get to the point of covering my food and rent. A smaller drop, or even just very slow growth, is still a major setback when I'm not making a living. And note that all categories were down in 2022 except the very small "other"; the "kits wholesale" drop was not the only thing going on.

The "assembled retail" category concerns me more. From my point of view, assembled modules sold through my own storefront are the core expression of the North Coast Synthesis product line. Everything else is an extra. And assembled modules sold through my own storefront have declined every year since 2019. The customer move toward kits may simply be an indication that times are tough and everybody wants a product with a lower sticker price (never mind whether DIY is really any cheaper), and the move to buying through dealers may actually be a good thing because it shows I'm expanding my dealer network and reaching a larger potential market. Both these shifts mean smaller margins, though - a smaller percentage of each sales dollar actually becoming profit I can use to support myself. And then with smaller margins I need sales to grow even more to reach the goal of being able to make a living at this.

I think some of the year-to-year fluctuations can be explained by the popularity of new modules. Customers in this business always want the newest module, and even though I'm still selling all the module types I have ever sold, whichever one is newest seems to set the tone for overall sales. I haven't yet compiled, and am not sure I would publish, a similar breakdown by module model number instead of by kit/assembled. But I know that the MSK 013 Middle Path VCO, introduced in the Summer of 2020, sold well at introduction and that boosted both the end of fiscal year 2020 and the start of fiscal year 2021. That module alone may be a significant part of the reason those two years were relatively good ones despite the pandemic. But it is old enough now that it's no longer the new big thing, and overall sales seem to be driven primarily by the new big thing. There is constant pressure to develop and release new modules.

The current newest module, the MSK 014 Gracious Host, has not sold well since its introduction in the Spring of 2022 - and although this does not show up in the sales numbers, having few sales of the Gracious Host especially hurts because it was a disproportionately expensive and time-consuming module to develop, with a lot of work going into writing, debugging, and documenting the firmware. I had to buy some specialized test equipment to get the USB communication working, and after shipping a few I discovered a critical problem with flash drive compatibility and ended up offering (although most did not take me up on this) to ship whole new replacement modules to everyone who had gotten a bad one. With that module I bet a lot on the idea that a feature-packed digital module would sell more units than the simpler analog modules I've been doing, and it turned out not to be the case. It doesn't seem reasonable to think that the Gracious Host will ever earn out its development costs.

For the next module, the MSK 015 quad VCA which I'm hoping to introduce this year, I'm going back to analog and filling in the last remaining significant gap in my product line. Development has gone smoothly. I'm on what I hope will be the last prototype now before I can start production, and I think it's reasonable to hope this will sell more units and especially will sell more assembled units.

The VCA would have to be a huge seller to save the company all by itself, and I'm not depending on that. Much of my development work now is actually going to guitar and bass pedals. While writing this I heard back from a tester in Europe that he just received a prototype I sent him. That will probably become a product eventually. I'm hoping that if I can break into the pedal world, the simply much larger market there will make it easier to get sales to the point where I can survive.

I'm also exploring possibilities of expanding that "other" category. Consulting and custom work potentially pay quite well and there's potentially a lot of room for growth there.

Updates on new module development and many of my other projects go on my Twitch channel, with live streams every Monday at 6pm Eastern Time. In a small way, that can be a revenue stream, too. I am very close to reaching the criteria for the level of Twitch access at which I could sell subscriptions to my channel, and if I could do that then I could at least cover the hosting costs for my video archive. Just a couple more viewers in the weekly streams for a month or two would do it - and then it could be an important marketing channel for the synth modules and other things.

The world doesn't owe me a living, and neither does the Eurorack market, individually or collectively. Times are tough and it makes perfect sense that everybody needs to pay for basic necessities before they can think of spending money on hobbies. Even when someone does manage to find some money these days for new synthesizer gear, there are many struggling small manufacturers, and there may not be a particular reason to support me as opposed to some other small manufacturer. It's inevitable that we'll keep losing small manufacturers whether I'm one who survives or not.

By the same token I don't owe it to anybody to stay in a business where I can't make a living nor even a profit. I'm making neither an appeal nor a threat today, and I'm especially not requesting advice on how to run my business. The point of this posting is that at least for me, and probably for other small manufacturers, the current troubles are absolutely not primarily caused by "supply-chain disruption." That's a bogus excuse and a distraction from the real problem. The real problem and the reason I'm looking for other things to do with my time now, is on the demand side. I just am not selling enough of the products I am able to make, even though I am still able to make them, and I need more sales in 2023 or there won't be a 2024. It's the sales, silly!

All about levels || New Gracious Host firmware ideas

Comments

Hmmm I thought I posted a comment a few days ago, but I guess it didn't go through. I wonder if software modular systems are a significant reason that sales are falling off? Just in the past 3 years or so, VCV Rack, it's MiRack iOS fork, and others like Voltage Modular by Cherry Audio have really matured. And many of the modules that they offer are software versions of real hardware. There have also been a massive number of non-modular softsynths coming out that are nearly 100% replicas of hardware, such as the V Collection by Arturia and probably 10+ synths by Cherry Audio in the past 3 years (all of which I believe are $30-50 launch price). I really think this has changed the market. As well as the various semi-modular hardware which has been released in the past 4 years, for prices between $300-$1,000 (not to mention all of the things that Behringer has announced since 2020 but has been unable to ship). There will always be wealthy people who want to pay $200+ per module, but a lot of regular folks just can't afford to put $3,000+ into building a bare bones modular system, especially when they can get a lot of the same results for $200 in software. It sucks, I wish I had a lot of extra income to build a wall of modular...
Armand Hammer - 2023-01-23
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