Avionics News February 2017 - 22
MARGIN CALL
Continued from page 21
avionics manufacturer has its own dealer rules and requirements,
said Rick Garcia of Gulf Coast Avionics in Lakeland, Florida.
"But they all require their dealers to sell a certain dollar amount,"
he said. The quotas vary with the OEMs, but most are computed
on dealer cost, not suggested list price.
Some impose their quotas by requiring dealers buy (and
keep in stock) a certain number of units in a given time. For a
dealer of some volume, like Gulf Coast, that entails a sizeable
investment. And selling it doesn't happen by sitting back and
waiting for customers to taxi up to the shop. "We invest a lot of
time, money and effort in our marketing, going to trade shows,"
Garcia said. The principles of supply and demand suggest that a
dealer's cost should relate to the number of units the shop sells,
with higher volume earning a lower cost.
Most manufacturers employ a version of this with tiered
incentive or rebate programs. Meeting the qualifying sales
thresholds is what drives Cincinnati Avionics in Batavia, Ohio,
said Chuck Gallagher. "I'm sure I have some minimum sales
requirements, but I don't know what they are."
Upon reaching the threshold, the shop receives the specified
dollar or percentage rebate, usually as a credit memo for the
purchase of more units. Some have tiered thresholds, with
greater rewards for higher sales figures. Every OEM is different.
Upon reaching the threshold, some tie the rebate to percentage
of total sales for the period. Others offer different dealer
discount percentages at each tier.
Regardless of the mechanism, "larger shops hit these
incentives easier than smaller shops," said Gallagher, but
reaching the sales goal is only part of the requirements.
"Most manufacturers have requirements that include a list of
equipment that counts (anything sold over the counter usually
doesn't) and the completion of the warranty registration when
the equipment is installed."
But wait, there's more. "A lot of manufacturers have
advertising co-ops based on net sales," Gallagher said. "You
can earn 3 percent on your net sales, and they will co-op half
your advertising costs for you. In conjunction with a rebate
program, you can also buy demo equipment for your lobby or
demo airplane."
But there's no free ride. "Some manufacturers have a tight
relationship with their dealers," Hanf said. "They hold you
to certain standards and expect certain levels of training,
equipment, and insurance, and to promote the brand." Success
with this model depends on the regional sales reps. Beyond
their technical expertise and connections, they keep their fingers
on the economy's pulse. "If the shop, or the industry, is having
a slow year, they won't cancel your dealership," he said. "On
the other hand, if the dealer is a nonperformer, called out by
customers or numerous warranty claims for shoddy work ..."
22
avionics news
*
february
2017
Other manufacturers, hungrier for market share,
are experimenting with customer-direct sales. "On the
experimental side, there's no way around factory direct
because (the manufacturers of noncertified avionics for
amateur-built aircraft) usually don't have dealer networks,"
said Pahan Ranasingha of Avionics Installations in Port
Orange, Florida. "But their pricing is structured so we can
sell their equipment at the same price."
Factory-direct sales of certified avionics is a different
ballgame. It is an experiment that may result in unexpected
consequences, especially if customers turn to mechanics
with no avionics experience to install the hardware,
configure the software, and properly return the aircraft to
service. Then there is the vexing and unique compatibility
issues presented by middle-aged aircraft filled with an
unpredictable combination of equipment.
But the most vexing problem facing dealers today is
retail pricing. Every manufacturer has a different dealer
margin, according to Hanf, defining it as the difference
between what the dealer pays and the suggested list price.
"But no one is selling it for list." Each dealer has to
determine retail prices that will keep the shop competitive
with other shops - and sustain the business itself.
Nationwide publications - and the internet - have virtually
eliminated the geographic influence on retail prices. With
their economies of scale, "larger shops can do it for less,"
Hanf said. And when his customers see the lower prices
online or in industry publications, offered by such shops on
the other side of America, "they ask why I'm so expensive."
"Because they are competing with each other, the large
shops are setting the market price," Ranasingha said. Using
hypothetical numbers, suppose a manufacturer introduces
a new box with a suggested retail price of $20,000 and a
dealer cost of $15,000. To stay competitive with their peers,
the big shops go immediately to the floor and advertise it
at $16,500. "And that becomes the market price, and small
shops have trouble keeping up. Because we're competing
with large shops, we have to consider the OEM rebate as
part of the sales price," he said, describing his shop as
medium sized.
There seems to be no real solution to this consequence of
completion. If OEMs require their dealers to sell equipment
for the suggested list price, shops will modify their
economic algebra so they can install it for "free." Without a
list-price requirement, shops could sell the box for $1, and
make up the difference on the cost of installation.
This paradox of capitalism exists in every market, but
its challenges are more visible when the marketplace is
changing. What the industry's future will be depends
on how manufacturers and their dealers respond to the
changes, and the only certainty they can depend on is that
economic stasis is not an option they can achieve. q
Table of Contents for the Digital Edition of Avionics News February 2017
No label
Avionics News February 2017 - Intro
Avionics News February 2017 - No label
Avionics News February 2017 - Cover2
Avionics News February 2017 - 1
Avionics News February 2017 - 2
Avionics News February 2017 - 3
Avionics News February 2017 - 4
Avionics News February 2017 - 5
Avionics News February 2017 - 6
Avionics News February 2017 - 7
Avionics News February 2017 - 8
Avionics News February 2017 - 9
Avionics News February 2017 - 10
Avionics News February 2017 - 11
Avionics News February 2017 - 12
Avionics News February 2017 - 13
Avionics News February 2017 - 14
Avionics News February 2017 - 15
Avionics News February 2017 - 16
Avionics News February 2017 - 17
Avionics News February 2017 - 18
Avionics News February 2017 - 19
Avionics News February 2017 - 20
Avionics News February 2017 - 21
Avionics News February 2017 - 22
Avionics News February 2017 - 23
Avionics News February 2017 - 24
Avionics News February 2017 - 25
Avionics News February 2017 - 26
Avionics News February 2017 - 27
Avionics News February 2017 - 28
Avionics News February 2017 - 29
Avionics News February 2017 - 30
Avionics News February 2017 - 31
Avionics News February 2017 - 32
Avionics News February 2017 - 33
Avionics News February 2017 - 34
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Avionics News February 2017 - Cover3
Avionics News February 2017 - Cover4
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