SCHIIT AUDIO: DOES IT MAKE SENSE TO SELL ON AMAZON?

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Jason Stoddard was having a hectic but interesting summer. In June 2015, Stoddard was spending half of
his time at Centric, a marketing agency that he had founded in 1994, and the other half working at Schiit
Audio, which he had co-founded in 2010. Schiit Audio started out as a hobby business focused on personal
audio components—electronic systems designed to make high end headphones sound even better. In the
previous year, the company had grown to 13 employees and US$4.5 million1 in sales, which was a stark
improvement from its start in Stoddard’s garage just five years earlier. Although the company’s growth
pleasantly surprised Stoddard, he had several pressing concerns, including deciding if the company should
have a presence on the Amazon Marketplace, and, if so, whether there was a way to leverage it for higher
profits. Another question was whether Stoddard could provide the leadership that the company needed
while splitting his time between his two ventures.
Schiit Audio’s philosophy was to provide value to consumers by circumventing the typical high-margin
distribution channels of audio products. Most of the retail price for an audio product was absorbed by
representatives (who sold to retailers) and the retailer’s own margin. For instance, an audio product that
cost the manufacturer $100 to produce, could retail for $500 to $1,000 through the traditional audio industry
channel system, for a combined markup of five to 10 times the manufacturer’s cost. Stoddard viewed the
system as inefficient and the markup as unnecessary, given that the Internet allowed brands to reach
customers directly. Relying on his experience at Centric, Stoddard felt he had the ideal skill set to build
Schiit Audio into a direct-to-consumer brand. Centric had developed exciting early digital advertising and
social media projects for its own technology clients, and Stoddard loved the challenge of using his
marketing skills to promote Schiit Audio’s products.
Schiit Audio’s direct-to-consumer model allowed a much lower markup (2 to 2.5x), meaning more of the
consumer’s dollar was spent producing the product. Despite its logic, the direct-to-consumer model was
not widely used for audio brands. The Tennessee-based company Emotiva Audio Corporation was the one
example of this model that Stoddard was closely familiar with. Apple Inc. and Bose Corporation acted like
direct-to-consumer companies, although they also used distributors, and their websites included a wealth
of product information that helped lead consumers toward making online purchases. Marketing directly to
consumers was part of Schiit Audio’s identity. However, even though the company’s website was
generating a large portion (70 per cent) of sales, 15 per cent came from international distributors and another
15 per cent through the Amazon Marketplace. International distributors paid for the product up front and

1
All currency amounts are in US$ unless otherwise specified.
were responsible for sales and service. They also set their own prices, at substantially higher levels than US
prices. In contrast, the Amazon Marketplace allowed brands to operate their own online store and reach the
large number of Amazon.com Inc. (Amazon) customers. However, with limited time available to manage
two different companies and relatively low Amazon Marketplace profit margins, Stoddard was wondering
if continuing to use this channel made sense.

A BRIEF HISTORY OF SCHIIT AUDIO

In 2009, Stoddard was given a personal audio (i.e., audio played through headphones) system as a gift.
Stoddard, a discriminating music lover, was disappointed with the sound quality that emerged from his
headphones and wondered how it could be improved. Stoddard’s background in audio design—dating back
to building speakers while he was studying engineering in college and progressing through senior
engineering roles inside and outside the audio industry afterwards—gave him the confidence to try
designing and building a product that could make his headphones sound even better.
After putting in hours running the agency, Stoddard began tinkering with audio designs in his garage
alongside his friend and colleague Mike Moffat. Moffat, who teamed with Stoddard as co-founders, had a
depth of experience in audio design, particularly digital technologies. At the start, they viewed it as a fun
project for weekends, which eventually became a hobby business: “Maybe it will make a car payment for
us someday,” remarked Stoddard.
The audiophile segment of the market consisted of customers who prioritized sound quality. These
p
consumers understood that sound quality depended both on the headphones themselves and on what the
headphones are plugged in to. While consumers can plug headphones directly into many handheld devices
(phones, mp3 players, and laptops) there are two main electronic components that determine sound quality:
the digital to analog converter (DAC) and the headphone amplifier. The standard components that are built
into products like phones and laptops tend to be of low cost and quality since they generally are not designed
for an audience passionate about listening. This is where Schiit Audio’s products add to the listening
experience, connecting to the customers’ devices to improve the sound quality that comes out of their high
performance headphones.
As the two friends came closer to fully developing their first audio system, they realized they needed a
name. Stoddard’s wife Lisa suggested they use the mildly vulgar pun “Schiit” because Stoddard commonly
referred to his work by that term, as in “You always say you have Schiit to do, why don’t you call it that?”
t

Stoddard liked the controversial name, even though he knew some consumers would object. “This isn’t
about getting everyone to like us; this is about getting some people to love us.”
The personal audio market had grown consistently with the rise of the headphone market through the early
2000s. Mainstream brands such as Beats (later acquired by Apple Inc. in 2014) and high-performance
audiophile headphone brands such as Audio-Technica, Beyerdynamic, and AKG drove the market’s
growth. As the headphone industry was projected to continue growing, e-commerce sales were expected to
capture a larger portion of the market (see Exhibit 1). Schiit Audio did not manufacture headphones, but its
products were closely related to the headphone market since their products were used with high end
headphones (i.e., these are complementary products). The company had several competitors, such as FiiO
and AudioQuest, offering DACs and headphone amplifiers. These companies offered their products with
wide ranging price points (from slightly below to far above Schiit Audio’s prices) using a variety of
distribution approaches.2

2
FiiO, accessed November 20, 2020, https://www.fiio.com/; The Quest Group, AudioQuest, accessed November 20, 2020,
https://www.audioquest.com/.
The company competed mainly in the audiophile market, where products tended to have high price tags.
Some audiophile headphones were priced at over $5,000; a few reached over $50,000. In fact, in the
headphone amplifier and DAC segments, some products had a price-is-no-object clientele, with products
selling in limited quantities at over $100,000. Stoddard wanted to position his company as a force against
obscenely high prices, while still offering customers pristine sound quality. Another distinction he aimed
toward was US-based manufacturing—local to the company’s Los Angeles, California headquarters, when
possible. This was nearly unheard of in the consumer electronics industry, especially for products sold at
relatively affordable prices, starting below $100. Virtually all of the company’s components were made in
the United States. However, the combination of US-based manufacturing with affordable prices could only
be financially manageable using the direct-to-consumer model. To protect the company’s profit margins,
Stoddard insisted on little discounting beyond their everyday prices and having the shipping costs covered
by the customer. Said Stoddard: “No sales, no promos, no discounts, no loyalty programs.”
The Schiit Audio brand had developed a fun, snarky personality that its fans loved (see Exhibit 2). The
company’s website offered visitors the detailed technical information that audiophile customers sought, but
product information was communicated with a quirky, irreverent tone: “We have a strange name. We’re a
lot flippant.” The company’s logo was a stylized capital letter “S” that appeared on all products, avoiding
widespread display of the company’s full name and preserving the Schiit name as an “inside joke” to those
who recognized the logo. In terms of promotion, Stoddard focused on what he called micro-social. For
example, Stoddard maintained an active presence on the audiophile website Head-Fi, initiating and diving
into conversations about his products and the latest technological trends in personal audio.3 Consistent with
his efforts to keep costs—and thus, prices—low, Stoddard avoided conventional advertising campaigns.
Financially, the company had maintained profitability every year since its founding, although the two co-
founders did not draw a salary before 2012. In 2011, the last year operating from Stoddard’s garage, sales
reached the $1 million milestone. Sales doubled the next year (2012), and achieved consistent growth
through 2015. With regard to finances, Schiit had become somewhat predictable. Over this same period,
the company saw dramatic growth in online searches for the company’s name,4 although searches for the
terms “headphone amplifier” and “DAC” were relatively flat.5

SPLITTING TIME

Could Stoddard continue to split his time and provide the leadership his company needed? The two
company offices were only 6.5 kilometres from each other, but Stoddard’s attention was always shared,
rather than focused on one company. When working at Centric, he would often have to step out to take calls
related to Schiit Audio. Even so, Stoddard was feeling a loss of control by not actually being there:
The main thing is the disconnection. It can be good and bad. On one hand, you’re not obsessing
about one business all the time. On the other hand, you miss things, like when I got a text from my
wife that Alex had run the forklift into a sprinkler at Schiit. I didn’t think much about it because
the sprinklers out in front of the business were breaking all the time, and sometimes drenched the
cars. So I just let it go and didn’t think about it much. Much later, when I came in, to see the back
doors open, half our stock in the alley, and the fire department on premises, I finally realized she
meant that Alex had run the forklift into one of the fire sprinklers inside the building!

3
“Head-Fi.org Forums,” Head-Fi, accessed June 15, 2020, www.head-fi.org/forums.
4
“Explore: Schiit,” Google Trends: Explore, accessed June 15, 2020, https://trends.google.com/trends/explore?date=2010-
01-01%202015-12-31&geo=US&q=Schiit.
5
“Explore: headphone amplifier,” Google Trends: Explore, accessed November 20, 2020,
https://trends.google.com/trends/explore?date=all&geo=US&q=%22headphone%20amplifier%22; “Explore: DAC,” Google
Trends: Explore, accessed November 20, 2020, https://trends.google.com/trends/explore?date=all&geo=US&q=DAC, both.
Stoddard sourced most parts himself during this time, which made organization and communication a daily
challenge, but he did not mind the extra work: “I actually really enjoy doing Schiit. I can come up with lots
of weird stuff and we build some of it. This is a terrifically fun company, it’s gotten much bigger than I
expected.” By the summer of 2015, when Stoddard was seriously considering transitioning completely to
Schiit Audio, his passion for the audio business had become clear. Stoddard had resisted the need to make
a decision for a couple years, during which time Schiit Audio had become more profitable than Centric, but
he was mindful of his wife’s advice: “It’s really important to do what you enjoy.” However, running a
marketing agency also provided great satisfaction for Stoddard, which made it difficult to decide what to
do: “I really like the creative side. I like the design side. Doing brand development is fantastic. . . . Basically
when I’m only doing one thing, it makes me nervous. I like to spread out what I’m doing.”

INVENTORY CHALLENGES

Over the previous three years, demand for Schiit Audio products had increased considerably thanks to
positive word of mouth and a barrage of enthusiastic press coverage, including an article in The New York
Times titled, “A Sound System as Resonant as a Concert Hall.”6 Stoddard had formed relationships with
suppliers located near the company’s office, in the Los Angeles area. However, his relationships with
suppliers did not always guarantee good service. For example, the company was receiving increasingly late
and faulty shipments of chassis, the aluminum casing that protected the electronic components. These late
and unusable chassis led to product stockouts and lengthy delays (sometimes months) getting fast selling
products to customers. Then, to make things even worse, this supplier raised prices.
Alex Martin, Schiit Audio’s director of operations, found it a challenge to keep the manufacturing process
operating while maintaining quality. Keeping each product in stock was a constant dance. First, chassis would
be late—or bad quality. Then, circuit boards would be late. Schiit would have boards and no chassis, or chassis
and no boards. With increased demand and these supplier challenges, keeping products in inventory was a major
challenge. At one point, 90 per cent of the product lineup was out of stock, leaving only slower selling products
available. The company was forced to leave its long-time chassis supplier, opting for a simpler, more consistent
chassis construction with a new supplier. At the same time, Schiit Audio aligned more closely with its existing
circuit board partner to help keep the boards coming predictably. Stoddard and his team were optimistic that
these changes would get stockout concerns under control in the coming months, though these challenges had
made it tough to start developing some of the new products Stoddard had been dreaming up.

SELLING ON THE AMAZON MARKETPLACE

Another big question gnawed at Stoddard and his team: What to do about Amazon?
Amazon encouraged brands like Schiit Audio, who were selling on the Amazon Marketplace, to use Freight
by Amazon (FBA). With FBA, Schiit shipped products to Amazon for warehousing and then shipping to
purchasers when ordered. Schiit Audio could conveniently send large shipments to Amazon, who then
managed individual deliveries to customers. Of course, Amazon charged fees for warehousing, shipping,
and referral—that is, for finding Amazon consumers. Amazon charged 8 per cent referral fees for consumer
electronics, in addition to various other fees for pick and pack, shipping, and returns. Return rates (the
portion of consumers who returned their purchased product) on Amazon were 8–12 per cent (and even
higher around the holidays) compared to the 1–2 per cent that Schiit Audio was accustomed to when selling
direct. The costs of processing this small number of Schiit.com returns typically amounted to approximately
5 per cent of Schiit.com revenue,7 which was substantial—but a far cry from Amazon’s fees. Stoddard

6
Roy Furchgott, “A Sound System as Resonant as a Concert Hall,” New York Times, September 12, 2012, accessed May 28,
2020, www.nytimes.com/2012/09/13/technology/personaltech/a-sound-system-as-resonant-a-concert-hall-tool-kit.html.
7
Returned products needed to be checked and cleaned, and, in some cases, products were damaged.
commented on the total percentage that Amazon demanded from Amazon Marketplace retailers: “Want a
rough number? For consumer electronics, expect your real costs [including returns] to be about 25–30 per
cent. . . . and good luck figuring out what all the fees will be from the start.”
Amazon Marketplace fees seemed to become more substantial and more complex every year. All Schiit Audio
products (see Exhibit 3) were available on both the Amazon Marketplace and the company’s website, and
priced the same ($49–$2,000) despite considerably different margins. However, product sales on the Amazon
Marketplace skewed heavily towards less expensive products (much more so than did Schiit.com sales).
Stoddard was wondering if he should even bother selling products on the Amazon Marketplace. Was there
a better way to do it? Stoddard and his team considered these questions and reviewed the main reasons for
staying with Amazon.

Advantages of Using Amazon

Reach
Amazon allowed Schiit Audio to reach customers who might otherwise never consider buying directly from
the company. In fact, product search activity on Amazon was quickly approaching and surpassing Google
as the most popular product search destination online.8

Customer Trust
According to Stoddard, customers seemed to trust Amazon:
There are a shocking number of people who won’t buy anything if it isn’t on Amazon. . . We’ve
got a weird name. Some people don’t respond well to that, but they will try it on Amazon. For
someone just starting out, they don’t know us; it’s much more comforting to go to Amazon and just
buy it. If it doesn’t work out, customers know they can send it back.

Logistics
Making a few bulk shipments to Amazon was relatively easy since products were warehoused until sold to
customers. This was far easier for Schiit Audio’s small staff than making hundreds of individual shipments
directly to Amazon customers.

Disadvantages of Using Amazon

High Fees
There were also clear challenges with selling on the Amazon Marketplace, including high fees and reduced
margins. Schiit Audio was a direct brand at heart, providing value to the customer by avoiding channels
members (and their margins). How was diverting 25–30 per cent of the purchase price to Amazon consistent
with its original goal? It was also time-consuming to get Amazon product listings right. Schiit Audio’s
Amazon Marketplace business was also affected by out-of-stock items, as Stoddard explained:
If you can’t keep products in stock, your search results will cease to exist on Amazon, and then
you’ll have to work your way back up. If you don’t have products in stock, competitors will still
be available on Amazon, and Amazon will be more than happy to funnel the sales over to them.

8
Dan Alaimo, “Amazon Now Dominates Google in Product Search,” Retail Dive, September 7, 2018, accessed May 28, 2020,
www.retaildive.com/news/amazon-now-dominates-google-in-product-search/531822.
Shipping Costs
Schiit Audio had exclusively used FBA when selling on the Amazon Marketplace. However, Marketplace sellers
also the choice of using the Fulfilled by Merchant (FBM) option for some or all products. Using FBM, Schiit
Audio would be responsible for shipping individual marketplace orders to its customers. Schiit Audio expected
that FBM fees would be approximately 75–90 per cent of the cost of using FBA (with shipping as an additional
cost to Schiit Audio). FBM marketplace listings were also less visible on the Amazon Marketplace because,
unlike FBA, they were not eligible for Amazon Prime shipping. Within Schiit Audio, the thinking was that using
FBM for relatively fast selling, lower-priced products would mire the small company in logistical headaches and
shipping costs while reducing Prime visibility and not cutting fees dramatically when compared to FBA.

Inventory Management
Managing inventory across both the Amazon Marketplace and the company’s own website was also
challenging. Selling directly was more profitable, yet some inventory was being diverted to the Amazon
Marketplace. Lisa Stoddard, who operated her own company that sold primarily on the Amazon
Marketplace, also routinely helped with day-to-day operations for Schiit Audio. She did not feel that
Amazon was an ideal partner: “It might not make sense for Schiit to be on Amazon right now. We [Schiit
Audio] can’t keep our products in stock.”
Stoddard and his team saw some key differences between customers shopping on Schiit.com compared to
those on Amazon:
The Schiit.com customer is essentially pre-sold. They probably have already heard of us—actually,
a lot of them already own other pieces of our equipment. They’re comfortable working with us and
[with] what they’re going to get. …The Amazon Marketplace gets us to a new customer. We get a
lot more experimental people and new customers through Amazon, who might eventually become
schiit.com customers.

TO AMAZON OR NOT TO AMAZON?

Stoddard and his team had to make a decision regarding their future plans to sell on the Amazon
Marketplace—or not. Lisa Stoddard priced her own company’s products on the Amazon Marketplace
considerably higher to offset fees. Amazon was by far her company’s biggest channel in terms of sales
volume. Would that be a better strategy for Schiit Audio as well?
Stoddard thought about how he measured success: “We’re not a highly metrics driven business. . . I don’t
think we’ve ever actually set any specific goals.” However, the Schiit Audio team did closely monitor
several key Amazon indicators, including return rate, customer ratings (all products were at or above 4 out
of 5 stars), sales volume, and margins.
Stoddard even considered leaving Amazon completely (which he called the nuclear option). “We’ve got
enough challenges on our own without worrying about Amazon,” he thought, but had to acknowledge,
“We’re getting new customers through the Amazon Marketplace. That’s valuable.” The future trajectory of
Amazon also weighed on this decision. If Amazon’s dominance continued to deepen, cutting off the
company’s Amazon presence could limit long-term growth.
How should Schiit Audio use the Amazon Marketplace (if at all)? What else should the company do to
improve performance?
ASSIGNMENT QUESTIONS

1. What are the advantages and disadvantages of the direct-to-consumer model?

2. What are the financial realities of direct-to-consumer ventures?
3. Searching for the legitimacy threshold in new ventures: how does passion (or
lack of it) affect the trajectory of a venture? How should Stoddard pursue his
own career goals?
4. Assuming Schiit Audio continues selling through the Amazon Marketplace, should
it modify pricing or the product line-up offered via this channel? Or should the
company end its partnership with Amazon?
 EXHIBIT 1: HEADPHONE SALES IN THE UNITED STATES (IN US$ MILLION)

All Channels E-commerce

6,000 700

5,000 600

500
4,000
400
3,000
300
2,000
200
1,000 100
0 0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Sales Projected Sales Sales Projected Sales

Source: Prepared by authors based “The Retail Market for Headphones in the US Market Size 2002–2026,” IbisWorld,
December 2018, accessed April 13, 2020, www.ibisworld.com/industry-statistics/market-size/the-retail-market-for-
headphones-united-states.

EXHIBIT 2: SCHIIT AUDIO PROMOTIONAL POSTER

Source: Company files.

 EXHIBIT 3: SCHIIT AUDIO PRODUCT LINE, FALL 2014

Source: All products shown but graphics excerpted; company files.