We recently received an e-mail asking us to discuss our typical sales and our margins / pricing strategy. I declined to discuss our sales figures since I am still somewhat uncomfortable discussing sales in public. It’s competitive information that, while I understand is interesting for our customers, is also potentially dangerous to discuss. It’s also a misleading number to mention to customers – revenue is only one side of the equation. And being online, with a low margin business, it’s actually the less important part of the equation.
On Pricing Strategies
The second part of the customer’s question though, on pricing strategies, is something I feel comfortable discussing. Pricing strategy in the board game industry for retailers can be viewed in context of MSRP:
- Above MSRP – maximising profit margin per sale; generally useful if you expect very low demand and very low competition
- At MSRP – status quo pricing. Moderate but stable levels of profits generally occur here
- Below MSRP – generally to maximise revenue, not profits. Margins are impacted; the amount dependent upon the discount. The goal in this strategy is to reduce your overall cost per game
- Below Cost – only viable if your major business isn’t actually sales of the board games. An example would be Tanga and Amazon in our business – their revenue streams include advertising to supplement the revenue they lose by selling below cost.
Obviously, we’ve (and pretty much every other online game store) have taken the below MSRP / revenue maximisation model. The goal is to gain as much revenue as possible while lowering cost. Of course, the trick is working out exactly what your margins need to be for your expected costs (which; in many cases is variable as well).
On Pricing Tactics
Of course, strategy is just the overall picture. Beneath that, you have pricing tactics. There are numerous pricing tactics available, but Im just going to discuss the one that was enquired about.
Our erstwhile questioner asked about loss leaders to which we replied a negative on its use. The goal of loss leaders are to generate traffic, allowing the retailer to upsell the customer. A really good loss leader generates repeated visits from the same customer, allowing the retailer to continually gain a share of the customers wallet. Bread & Milk in a supermarket are great examples of this. After making your trip to pick up the bread and milk, you’ll likely end up continuing your grocery shopping. And of course, after a few days, you’ll be back to get more bread and milk, continuing the cycle.
However, look at board games. Our most popular seller – Settlers of Catan is generally purchased singly or with its expansion. Customers don’t stop to purchase ‘Steam‘ or ‘Dominion‘ or any other board games, because that’s not part of their shopping list. In addition, you aren’t likely to see them back for weeks, even months as they enjoy the game. So your loss leader is just a loss.
In addition, most of our other customers aren’t here for Settlers / Ticket to Ride / Carcassonne. Instead, they’re here for the other 1,500 plus games we stock. We can’t guess which one’s they’ll want, so it’s actually better strategy to provide a low price for everything and just not the most popular products.
Oh, and one other piece of information to consider – the bestsellers continue to make up a significant portion of our sales. At last look, Settlers of Catan (not including expansions) made up about 2% of our revenue. Creating a loss leader out of the game would significantly increase our breakeven point.
Of course, the entire reasoning for not using a loss leader is based on the assumption that the revenue from returning ‘loss leader customers’ is less than the cost of goods sold to all other ‘loss leader customers’. It is, so far, an unfounded assumption but it’s not one that I’d be willing to risk the company to challenge.