PRO-AUDIO SALES AGENT PROGRAM

After nearly 18 months of experimenting with the Pro-Audio Sales Agent Program,

Steve Marsh was pondering the difficult assignment of re-evaluating the Pro Audio

Sales Agent Program. The program had 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 the PSX-360, which retails for about

$12,000. The PSX-360 accounted for about 70% of Pro-Audio's total revenues. It was

sold primarily to major recording studios and professional musicians throughout the

country through 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 PSXs 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-360 unit, he simply went down 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 within 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 at

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.

* This case was prepared by Gerald Smith, Carroll School of Management, Boston College, Chestnut Hill,

Massachusetts 02467. Copyright 2001. Gerald E. Smith.

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The implementation of the plan was as follows:

(1) 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. This designation allowed Pro-Audio to get around

any possible violation of the Robinson-Patman Act.

(2) 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.

(3) 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.

(4) Ofcourse, 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? "

(5) 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 the decision. But, of course, now all of

that was gone, since the transaction was handled only from the factory.

(6) 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

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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 retailer's

ability to sell and deliver the product.

1. Major Facts / Major Problems: (List them) - - - 2. Possible Solutions: (What is your approach to solving the problems listed above? Explain)

- Solution A: - Solution B:

3. Possible Solutions: (Discuss the advantage/disadvantage of solutions listed above) - Advantage A: - Disadvantage A: - Advantage B: - Disadvantage B:

4. Choice and Rationale: (Explain your choice and why selected) - Solution A or B

5. Implementation: (How would you proceed with the solution selected?) - Be creative, think about how you would solve the problem, and take time in development of your answers.