Exchange Rate Issues

I did a quick twitter feed recently that we will need to raise the price of our games soon, due to the exchange rate.  A picture says a thousand words, so here you go:

Canada - US Exchange Rate in 1 year
Canada – US Exchange Rate in 1 year

Now, this is the spot rate; add another 2 – 3 cents for the actual exchange rate you pay.   For us, we’ve been using an exchange rate for $1.05 for a while now (the reason why it often seems we had a higher price than our competitors who were pricing in at par); but with the recent surge we’re going to need to adjust our rate to $1.10.

As you can see, that’s actually still below the ‘actual‘ rate and it’ll only be for products that we bring in new.  We’ll be updating our pre-orders of course,  but for now older products are going to be a steal.  From all indications, the exchange rate is just going to get worst – so we might even have to adjust again in a few months!

Long story short – buy now!

Growth vs Profitability

The larger you grow, the more profitable you become right? After all, that’s why companies decide to grow after all.  Unfortunately, real life isn’t as simple as Economics 101.  Real life is vastly more complicated and growing your company can actually reduce your profitability.

Staggered Costs

Costs, specifically how costs accrue in a staggered manner is one of the reasons for this.  Fixed costs are the perfect example of, and most commonly known; cause of this.  Let’s take rent – when you move from one rented building to another; your cost increases.  Since most commercial ‘professional’ leases come in multi-year formats, you have to rent with growth in mind.  As such, if you were renting for 3 years; you have to envision and plan for your companies size in 3 years.   If you expect to be doing double your business by year 3, you can’t rent a building that is suitable only for your size now.  Which means your profit (if you have any) in year 1 is going to be lower than those in year 3 just because you have to plan for growth in year 3.

Now, rent is a simple fixed cost example which most people can see and understand.  However, let’s take another example – cardboard recycling.  Having someone drop by to pick up our cardboard each month costs $40.  Obviously, as we grow and receive more products, we need to recycle more cardboard.  At a certain point, we have to do more than 1 pick-up a month. So that’s another increased cost, but it’s not gradiated at all.  A 2nd pickup might give us enough space to grow for another year, but the cost increase (the additional $20 for another pickup) is fixed.

Increased Complexity

Complexity increases with growth.  As you grow, the number of balls in the air increases and the ‘shape’ of those balls can change.  When you’re smaller, many of the problems are simple to manage.  As you grow though, what used to be a small problem increases in size as well and can become a major issue.

For example – refunds.  Refunds are simple right? A customer asks for a refund, you refund him.  Except; what if the customer asks for a refund on a card he longer uses? Normally, this is not something that would happen; but as your business size grows the number of exceptions/one-off cases increase too.  As these one-off cases are just that, one-off’s; you can’t even write processes or procedures to handle them.  You have to deal with them individually – and as such, the amount of time required to deal with them increases as well.  Get enough ‘one-off’ cases; and you can find yourself spending half a day doing nothing more than fixing unique problems.

If you’re doing that, you aren’t doing something else just as important – so you have to add more hours, which means more cost, which can mean lower profitability.   Again – things like this happen in ‘staggered’ formats; each addition coming after a certain cliff happens.

Changing Expectations

There’s also an issue of differing expectations – as you grow, you’ll find expectations for your company change too.  The type and kind of service expected from an organisation that is 1 person large compared to one that is staffed by 100 is very different.  More often than not, meeting those expectations require increased levels of management & bureaucracy, which results in increased cost.  We found this out when we went from 2 to 3 employees.  You’d think adding 1 more person wouldn’t be that much more complex; but to keep us as professional, we had to increase our bureaucracy levels significantly.

Economies of Scale

So what happened to economies of scale? Well, there is obviously some of that.  Renting a 5000 sq ft warehouse is cheaper per square foot than a 1000 sq ft warehouse.  When you finally reach optimum capacity, your margin will have improved.  However, its the interim period where things are expensive.  So remember, growth is not always the route to greater profit.

Hidden Costs

There are a number of hidden costs involved in running your own business.  I’m not talking about accounting or financial costs – I talk about them a lot anyway – but less ‘tangible’ costs.  These are often hidden, from casual onlookers, from employees, from customers that make running a business more of a challenge than most people realise. Here’s a few hidden costs:

Your Time

When we first launched the site, I worked between 70 – 80 hours a week usually.  Some weeks, I worked more than that. These days, I’m doing a more manegable 50 – 60 hours on average.  That is still a huge chunk of time, however you look at it especially when you consider most jobs talk about 35 – 40 hours as ‘normal’.

Your Boundaries

 

Other people get to put away the business when they get home.  You don’t.  I’m always on-call if the site goes down (I get a text message if it ever does and I can on it right away, whatever time of day it is).  Even when you do want to take a break, more often than not your mind will circle back to the business, to what you need to do now or tomorrow or the next day.  The boundary between work and personal life blurs and becomes very hard to tell, and this is often a necessity to get your business successful.  Perhaps later, it might separate again but for the first half-decade at least; it’s a constant intrusion.

Your Health

You know all that time stressing about the business, working those stupid hours? Yeah, it takes a toll.  An ‘in-joke’ among some friends are that I’m as often sick as I am healthy.  Not too much of an exaggeration as I’m highly susceptible to colds.  Between stress lowering your immune system, lack of time to exercise / eat well and having to work even if you are ill; you will find yourself getting ill and staying ill longer than you used to.

Your Relationships

Look at all the above.  Guess what that does to the relationships in your life?  If you’re ill, tired, thinking of your business and working on it all the time, the relationships in your life get strained.  You have to have an understanding family and friends as you won’t see them as often, and when you do; often what you’ll want to talk about (whether they are interested or not!) is the one thing consuming your life – your business.  It’s not necessarily healthy mind you… but it happens.

Your Hobby

This is for those of us who made a hobby our careers.  Sure, you might still game – you might still enjoy to game.  However, you just can’t find as much time.   It took me quite a few years to learn to book time out to actually play games, and even these days; I often end up playing games not because I think I might like them but because I want to learn them for the business.   It sucks some joy out of gaming, and committing to learning whole new systems just make me cringe – after all, I could learn a new board game in the time it takes me to learn the intricacies of Warhammer / GURPs/ etc.

Your Future

I know I said I wasn’t going to talk money, but I wanted to bring up personal money.  If you move from a relatively well paying job to working for yourself, unless you are extremely lucky, the chances are you’ll be ‘losing’ money almost immediately.  It’s hard to make as much money (especially in this industry) as you’d earn working for someone else.  At best, a Game Store manager earns $45,000 a year.  A freshly graduated IT worker earns $70 – 80k a year.  A freshly graduated Accountant (before they get their certification!) $55 – 60k.    And chances are, you aren’t even a fresh graduate.  So… how much ‘lost’ funds are you looking at? And it just keeps adding up, year after year….

I don’t want to sound like a downer here, but there are costs to choosing the lifestyle we live.  Some grate more than most, some can be ‘trimmed’ but they are all there.  If you choose to go down this road, realise there are further cost beyond just the upfront capital that you could lose…

Free Shipping & Margins

We provide a Free Shipping Promotion on the site for orders over $175.  It seems quite high when you consider that in the United States, it’s often at $100 or $125.   Of course, we do live in the 2nd largest country in the world with a tiny population, making our overall cost of shipping much higher.

In fact, it generally it seems takes between $8-10 to ship across the United States (with a business discount) while in Canada we’re looking at a minimum of $17 from edge to edge.

Our $175 Free Shipping Offer

So, let’s discuss the $175 free shipping level.  On a $180 order, we make about 37% in gross profit – or $66.  The rest goes direct into paying for the stock to replace the games purchased.  Now, on this order we have to pay our gateway fees for the credit card charges of approximately $6.   So, we now have $60 total in gross profit.

A Free Shipping order is generally quite a large order so our average shipping cost is about $18 per order.  On top of this, we need the box and packing material, an estimated $2 per order.  Total cost of shipping is about $20 for each shipment.

That brings out total gross profit on this Free Shipping order to $40.   So on a $180 order; we make $40 Gross Profit; before you start counting operating expenses like salary, rent, electricity and marketing expenses among others.

The $100 Free Shipping Offer

So, let’s do the maths again on a $100 Free Shipping Offer.

$100 of product = $36 in Gross Profit.  Take another $3.00 off for Gateway Expenses, and that’s $33.

On $100 of product, due to the smaller box size we’ll call it an average of $15 to ship plus $2 box cost and packing material.  That’s $17 in shipping; so that’s $16 in gross profit.

How does Chapters do it?

If you’re like me, and you buy from Chapters, you probably have received packages of books that are only 1 or 2 books wide.  At a $29 free shipping option, it seems impossible for them to do this.

However, Chapters has a few advantages over us:

  • Volume – Canada Post provides volume discounts.  We just aren’t anywhere as big as they are so our discounts are only a fraction of their discounts
  • Better Margins – again, it’s worth noting that their margins are much better on books than ours on board games
  • Smaller Boxes – means smaller shipping expenses.
  • Multiple Warehouses – and here’s the other equation – it costs a lot less to ship within a province (or two adjacent provinces, etc) than it does to ship across the country.

In time, as we grow we’ll probably revisit the Free Shipping policy.  The trick is to get our shipping discounts to a point where it makes sense.  I expect it might be viable in 2 – 3 years time, if we grow sufficiently.  Till then, bear with us!