Inventory : the Guessing Game

Stocking inventory for Starlit is always an interesting guessing game.  Sure, we have past data and industry knowledge of what might sell – certain designers and certain publishers do very well.  In addition of course there’s BGG and ‘buzz’ on specific games that help us get an idea of how much demand there might be for a game.  However, it’s all educated guesses at best and sometimes you guess wrong and there are real costs involved.

Let’s Do Some Maths

Let’s have some fun with maths.  Say, on average 50 games come out a month (are solicited to us).  Of those 50 games, a certain percentage will not sell in the store.  Let’s say 80% of the games will sell a copy, 20% are low demand.  So, of those 50 games, 40 games will sell, another 10 won’t at full price.

If we brought in every single game, ignoring our knowledge of the business, and assume an average cost of $20 per game; total inventory outlay would be $1000.  40 of those games sell, which means we are looking at $200 of ‘dead’ inventory which will not sell at a profit.  Let’s further say that half of those games (10%) will sell at cost and the other 10% won’t sell ever.  So, you will have sold $900 of the inventory that you bring in at any one time, with $100 of dead inventory.   Now, on the $800 at our regular profit margins, we would generate $400 in gross profit. Actually, much less since there are shipping costs, interchange, labour costs – so we’ll call it $300.  Now, with $100 of ‘dead’ stock, you have instead $200 of profit and $100 of stock that won’t ever move in your warehouse.

Let’s say instead that you bring in 40 games, and assume that your actual guessing ups your sale rate to 90%. So, you sell 36 games for a profit of $360. Your dead stock in this case is actually $40, so your profit is $230 ($90 additional COGs). By bringing in less stock, even though you have ‘missed’ out on the other 4 games that could have sold; you’ve made more.

More Complications

Another thing to note is that dead stock has a cost.  It takes up space in your storage, has to be counted and cleaned once in a while and eventually has to be discarded.  Add to the initial out-lay of funds to purchase the stock and the opportunity cost of dead stock and keeping lower stock is better than not (to a certain extent).  After a few years, those 5 or 6 games start piling up.

So if you are ever wondering why we don’t hold all the games that are coming out, well, here you go.  A simple, simple explanation.

Marketing – the Hidden Cost

One of the major differences I think between a Brick & Mortar store and a an online store is the need for marketing to grow the company.

Build it and they will come – or Not

I’ve noticed there is a belief among those who produce online websites that if they build the website; their customers will magically appear.  It might have been true in the early ’90’s but these days there are so many online stores and other sites out there that it’s nearly impossible to get any traction with external marketing.

Unlike a Brick & Mortar store where walk-by traffic will hopefully generate some sales for you (and thus word-of-mouth, etc); an online store has literally no ‘sidewalk visibility’.  So, instead you have to draw customers to you.

The Cost of Marketing

When we first launched, we spent probably 20 – 30% of our revenue on advertising.  As time went on, this amount dropped as our revenues caught up with our spending but even now; we’re spending nearly 5% of our Revenue on Advertising.  That doesn’t count the time we spend on our social websites interacting with customers or the time taken to write the blog. Or the amount of time we spend tracking and adjusting our spending to optimise our budget.

Contrast that to B&M stores in the Hobby game category who spend a maximum of 2%  on average.  In fact, if you compare the Rent & Marketing percentages of the industry and ours, it comes very close to being even (10% to 9%).  As the title says – a hidden cost because most people (including customers) just don’t understand how expensive it can get.

Oh – one last thing; Price Competition (i.e. being the lowest price vendor) is another common marketing tactic.  There’s a definite cost to discounting in loss margin, though it’s a harder number to quantify due to the unknown slope of the demand curve.

 

Video Reviews – A Business Perspective

It’s been over 5 months since we launched our video games reviews; and I thought for the business readers here it might be interesting to see a business perspective on them.

Cost

The first part is cost.  There are 2 components to this – the financial cost and the time cost.  Financially, videos range from $200 – $400 a video; and that’s only because Rob at Phasefirefilms is a gamer and thus is giving us a great deal.   The other side of this equation is the time cost – and that’s a major cost.  We write all our own review scripts – figure 2 – 4 hours per script written and then another hour editing by a 2nd person.  On top of that, we’re looking at 1 to 1.5 hours for filming.

There’s also the cost of  managing the editing (generally quite small since Rob’s a great editor), reshoots (if necessary) and then putting the video up.   That can run an additional half-hour to hour a week, sometimes a lot faster.

Overall, in a year we’re talking a budget of nearly $10 – 15,000 spent on these videos, an enormous sum for us.

Marketing

What are we hoping to get from the videos? Sales obviously – putting the videos up, we’re hoping to convince customers if a game is for them (or not).  Eventually, we’ll have enough videos covering all our major games that customers can make better informed decisions.

There’s also the promotional aspects of the reviews.  There’s a problem though, because Youtube and BGG  are global websites and thus the videos hit a global audience.  Unfortunately, our customer base are majority Canadians – so there’s a lot of ‘missed’ targeting.    And that’s not a great thing when you’re talking about something that expensive.

We might be able to  get a small portion of that cost back by adding Advertising to the videos; but that just brings a whole slew of problems with it.  And let’s be truthful; we aren’t likely to make that much money here – at a few Cents a click, we’d have to get a lot of clicks to make our money back.

So Outsource

Why do it in-house? Control.  Control over both the content of the video, where it goes and what it’s used for and control over our brand.  Having the videos created by another party just didn’t seem to work as well, in our perspective.  I’d rather pay a bit more and control the content rather than provide it to a 3rd party as we have done so before, with scattered returns.

Bottom-Line

At the end of the day, we’re committed to continuing the reviews for this year.  After that, we’re going to have to take a very close look at the cost and benefits from it.  While it’s a great tool, it’s also an expensive tool and if we can’t get enough utility from it we might just have to stop.

What can you do help? Well, help us promote the videos and the subscriptions.  The more people who subscribe to our Channel, who buy from the videos, the more likely we’ll keep them going.  One thing we have considered, and might need to undertake later this year is to launch a Kickstarter / Indiegogo project to raise funds for the reviews.