Discounting, MAPs and distribution

I was recently at a distributor’s event and was chatting with a few retailers as you do. As always, the talk returned to things like MAP, discounting and sales. Not surprisingly, most retailers are against discounting from MAP (whatever that is in Canada) for any reason.  Since we started as an online retailer, we’ve got a bit more of a nuanced view on this.

Let’s be clear here:

  • Many of our customers purchase from us without ever using our available game space and/or game library
  • A small percentage of customers use our game space, but most do so to play RPGs (our smallest ‘main’ category, even including miniatures)
  • In terms of revenue per square foot, board games are horrible.  We make more sales per sq foot in terms of dice or sleeves or (nearly) CCGs.  The only product line we hold that does worst for us is clothing (and we’re slowly getting out of that line).
  • MAP programs are a one-size fits all solution. What is a ‘good’ price for one market might not be great for another (see different costs for different cities).
  • Retail space is expensive. Especially in Vancouver.  A nearby location on Main & 12th on the corner is currently asking for $60 per sq ft per annum.  If we paid that, we’d be looking at over $16,500 per month.  At our current 50% markup, we’d need to make CAD$50,000 a month just to cover rent.  If we did a 25% markup (what the US does for many online stores), we’d need to be doing $66,000 a month to cover rent. If you assume rent is 1/3 of your expenses, you’re looking at needing to do nearly CAD$2 million annually to just breakeven at 25% markup.

These numbers are why most retailers balk at the idea of ‘discounting’ to match US online store pricing. To just make a little bit of money, you’d need to work incredibly hard.  Now I’ll admit, our numbers are high because we’re in Vancouver, but when the generic call is to ‘discount or we won’t buy from you’, you can see why retailers get upset.

It’s also why many retailers switch focus to CCGs. Margins might not be great (at least in terms of booster boxes) but regular sales of booster packs and great margins on singles mean that it’s significantly better for them to concentrate there.  It’s why we’ve focused development of our sales / events to CCGs in-store at this time (it’s easy to grow from $0…).

However, MAPs also create their own problems (outside of their legality in Canada). If we want to sell / discard old stock (like Android Netrunner’s chapter packs that are no longer going to be in rotation), we can’t.  So we’re stuck with dead stock which any good retailer would want to get rid but can’t.  Worse, it hits online & hybrid stores significantly more – after all, if we just kept the sales in-store, it’s not as if most publishers would ever know.

On the other hand, without MAPs, businesses like Amazon who sell the D&D Core Books for cents over our cost can destroy entire product lines.

If we do have to have MAPs (and it seems like the way this is going), it’d be nice to have them on a rotating basis.  Since the entire industry is front-list driven anyway, keep the MAPs up for the first 3 months or so. After that, games should be taken off it.  This breaks up purchasing by customers who want / need it now and allows businesses to dump bad / old stock without issue.

 

The difference $20 makes

One thing that’s particularly interesting for us is the way sales on Fortress Geek and Starlit Citadel differ, particularly in terms of the average item ordered.  On Starlit, quite a few products used to sell in the $30 – 40 range.  On Fortress Geek, that price drops significantly and most products that sell are in the $12 – 25 range.  So, a $20 difference.

What does that mean?

We do 5 orders a day on Fortress Geek, each at say $15 on average.  Revenue = $75

We do 5 orders a day on Starlit Citadel, each at $35 range.  Revenue = $175

Assuming we make 40% margin on both, gross profit fir FG – $30 and SC – $70.  If our margin on SC is only 20%, the gross profit is still $35.  Same number of orders, but higher revenue and even with a lower margin, we still make more gross profit.

Of course, cost of goods isn’t the only thing that counts towards gross profit, but it illustrates the point effectively.  On the other hand, it’s easier (in some ways) to sell a product for $15 rather than one for $35 – but online, the difference is marginal.

Changing Marketplace

Why bring this up? Well, partly because of the changing marketplace we see in board games too. We’re seeing a giant split in games, with some of the most popular games in the $10 – 20 range (Sushi Go, Love Letter, the Android: Netrunner Packs, etc.) and a gulf till we hit a lot of the more popular ‘big’ games (Imperial Assault, Mage Knight, Caverna).

Interestingly, the games in-the-middle have stalled for the most part, the one’s in the $40 – 50 range have stopped selling as often – Ticket to Ride, DominionSmall World .  There’s not been a breakout hit in that price category in the last 2 years for the most part unlike previous years, which has meant that we are often processing more orders than ever (for the smaller games) and yet not really making that much more.

It’s a weird thing, and just an artifact of the industry which has been gearing towards ‘bigger’ games or ‘micro’ games.  Of course, this could change very easily with the next set of releases.

Mathematics of the Business

Sometimes, I wonder how many people spend the time to do the proper numbers for running a business in our industry.  I thought I’d put this out there since we seem to see quite a few individuals looking to do the low (low) cost route in Canada.  So, I thought I’d put up a little document for people to look over.  On the left is your typical B&M markup of 100%, on your right is the markup that a business like Cool Stuff Inc. in the South has – 30%.

I’m also using a very basic salary number here and winging a lot of the expenses – the 60% cost for salary is high but not uncommon among B&M stores.  I am also putting the packing numbers in there along with the inventory numbers, just to give an idea of the kind of workload difference you’d expect.  Obviously, it’s not viable to sell online at 100% margin but it does give a good comparison of the difference in workloads and inventory you’d have to see.  Turn rates of 6 are also really high, but I’m going to assume you are able to do so with such low prices.

The Numbers

 

Average Order Size $90
Gateway Processing Fee 2.80% $2.52
Shipping Revenue 15
Product Revenue $75
COGs (% Margin used) 100% $37.50 30% $57.69
Gross Profit $34.98 $14.79
% of expenses Salary equals 60%
Total Expenses No. of Orders required Revenue Minimum No. of Orders required Revenue Minimum
 $                        22,000.00  $        36,666.67              1,048  $   94,339.62                 2,480  $    223,158.55
 $                        40,000.00  $        66,666.67              1,906  $ 171,526.59                 4,508  $    405,742.82
Pack rate 5
No.  of Hours Packing Hours per Week No.  of Hours Packing Hours per Week
 $                        22,000.00                 209.64                4.03               495.91                   9.54
 $                        40,000.00                 381.17                7.33               901.65                 17.34
Inventory Requirements
Turn Rate 6
 $                        22,000.00  $        15,723.27  $      37,193.09
 $                        40,000.00  $        28,587.76  $      67,623.80

 

Bottomline

Is it viable? Of course it is.  Coolstuff is down in the USA – but they’ve got 10 times our population.  To make a decent living with the number of employees they have, they probably have a very large customer base and have to pack in more efficiencies (e.g. being able to lower their COGs, their gateway expenses and increase the packing rate).

However, using our current numbers which are somewhat inflated for a small business getting started. To make just $40,000 in salary (and breakeven everywhere else), you need to do $400k in revenue and spend nearly 17 hours just packing boxes.  You’ll also need at least $67,000 in inventory – in reality, I’d guess you need more like $80 – 90k.  That doesn’t include things like receiving, purchasing, updating the website, dealing with customer service, etc.  The cost of dealing with all that means you end up working very, very long hours.  It’s also why you might note that many of the online stores down in the States had really old websites – the margins were never there to update them.

As many FLGs owners say – the online game is a lot more work for a lot less money quite often.  If you win, you can win big like CSI but there are only a few winners, especially if you are going down the lowest cost route.