Summer Slowdown – Fixed & Variable Expenses

General, the Summer is our slowest period.  We see the lowest number of sales during the months of May to August (excluding a few cons that we do); but overall it’s slow.  This means we don’t have a lot of orders to ship out and even less revenue, so we have to reduce expenses. Now, I’ve discussed expenses with regard to hard and soft costs (fixed & variable expenses); and how it’s easy to adjust variable expenses, but let’s talk about what we can / do adjust.

By itself, Cost of Goods sold and distributor / shipping expenses will adjust themselves. We don’t have as much shipping expenses when we don’t have to ship as much and of course,the COGs drop too.  Overall, the directly related cost in managing individual orders have dropped.

The other major variable cost is our staffing cost. All the staff these days are on hourly wages, so theoretically it’s easy to cut their hours to match the amount of work / orders going on.  However, there’s a social cost to this that extends beyond pure the accounting side of the business.  There’s a tacit understanding when you hire someone that you’ll be providing them a specific amount of work, work which they then count on to pay their bills.  Sure, there’s some flexibility in detailing the fact that yes, they are part-time workers; but if you want them to work for you long-term; you can’t just cut hours at short notice to the bone.

There’s also the problem of rustiness – while we have a small business, it’s relatively complex in the sheer volume of things that need to be done.  None of the jobs are that difficult, but remembering all the different tasks especially if you don’t do it regularly can lead to rustiness / forgetfulness.  You then have to pay for people to not be good at their job while they relearn the tasks.

That’s part of the reason why, even if revenue is down, while we do reduce hours; we don’t cut it to the bone and end up with a lot of ‘extra’ hours for our staff.  This makes summer a great time for projects like stock counting, product weighing and reorganising our shelving and figuring out new processes.  It is make-work in some ways, but it is necessary make work.

Not to say I wouldn’t mind saving a bit of money and not stressing about finances during this period…

Expense Pie Chart for 2012

Before we start, I should post a few explanations on the chart.  Firstly and most importantly, this is one business, structured in our own particular way so take it with a grain of salt.  I’ve also compiled the various expenses into categories that make sense to me, but I’m sure can be confusing.  A few of the more / less obvious ones:

– Bank & Credit Card Fees including credit card processing fees, bank & credit card interest

– Exchange rate costs are basically losses due to the fluctuations in the exchange rate.  It’s pretty much a COGs expense (sort of, it’s calculated and fluctuates based on the exchange rate at the point that we sell the item).

– Import & Logistics Costs are mostly costs resulting from bringing the games over the border.  Again part of the Cost-of-Goods-sold realistically speaking

– Accounting, Legal & Insurance costs are so high due to the fact that we hire a bookkeeper; so their fees are included here.  In another company, that might be slotted under Payroll.

 

Financial Expenses Pie Chart 2012
Expenses Pie Chart 2012

As a comparison (of sorts); you should check out Black Diamond Games Blog Post on Game-o-nomics for a B&M store.  Note, our pie chart is based off expenses while theirs is based off revenue; so expect some differences.  Overall though, you can see our payroll expenses and COGs are much higher while our Rent costs are significantly lower.   Of course, our IT expenses are much higher and to make up for the shortfall in walk-in traffic, our Marketing Expenses have to be higher too.

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!