Size vs Quality

I’ve talked about target markets before and how we end up structuring our business to serve each of our target markets better. One thing I have been seeing again and again (often by those who aren’t marketers) is the mistake of confusing size with quality.

Size

You must have seen the various advertisements out there that say ‘Get 6,000+ subscribers in a week’ or ‘Reach 100,0000 readers everyday’ or their like.  The main thrust of these advertisements / methods is that more is better – get a lot of subscribers / viewers / readers / etc. and you’ll do well.  Really.

Except that’s not always the case.  In fact, unless you are in a mass market business (e.g. shirts, pants, food) you can often find you’ve spent a lot of time or money (or both) and generated very little return.

Quality

Why’s that? It’s a matter of quality / target market.  Many of the above ‘quantity’ methods that are promoted focus on providing a large amount of subscribers / readers / fans / etc. – but few of them will actually buy from you.  There can be a number of reasons for why someone is not a valid ‘target’ like:

  • income level
  • age
  • location
  • personality (especially if you are running ‘free’ or ‘contest’ promotions constantly)
  • etc.

An Example

A great personal example of size not necessarily translating to purchases – our video reviews.  We have over 5,000+ subscribers at the time of writing to our video reviews on Youtube with over 1,000 views within the first week of a video being posted.  In comparison, we have only about 1,000 or so newsletter customers.  Yet in terms of conversions, our newsletter beat our videos by a vast percentage.

Now it’s not just the fact that the two are different mediums (customers read our newsletter for release dates, information about our site, etc. while the videos are more informative / educational in nature) but also the matter of targetting.  Newsletter subscribees are interested in purchasing from us – there’s no ‘fluff’ in the newsletter to attract non-customers; while the video reviews attract numerous non-customers from around the world.  In fact, the majority of our subscribers aren’t even Canadian (and with shipping rates being what they are, are automatically non-customers for the most part).

The Caveat

It’s not to say all these promotions / methods / tactics don’t work.  They obviously can and do for some businesses.  They can even provide a great initial boost to a site that is attempting to find a market.  And with the way Facebook and other social media systems work, that initial boost (the seeding) can be extremely important.  It’s just understanding the limitations and likely problems you will run into using these methods.

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.

The Big Boys Have Come to Play

One of the more interesting aspects about e-commerce is traffic generation, specifically search engine traffic generation.  There are basically two ways to gain traffic from a search engine:

  • Paid Listings
  • Organic Listings

Paid Listings

Paid listings are simple – you pay the search engine, they stick you in the search engine.  Most search engines use a blind auction method of placement – that is; you put in a bid maximum and the search engine decides who is on top / 2nd / 3rd.  There are additional complexities like page quality and the like, but at the end of the day, it’s all about who has the deeper pockets / is willing to take a higher loss.

Organic (Unpaid) Listings

Organic listings on the other hand are all driven by algorithms (with some manual updating).  There is an entire industry based on beating the system, pushing a particular website / page to the top of a search listing.  The individuals who are good at it make a lot of money doing this.

Over the last few years (most apparently in the last 3 years), there has been a trend by the search engines (Google in particular) to provide additional ‘weight’ to larger retailers.  As if they didn’t have enough of a headstart on us smaller retailers, many of these sites need only toss a product up on their site for it to list in the top page.

We’ve seen this in particular with Settlers of Catan.  We’ve gone from having a relatively high position for the keyword name (at least in Canada) to being dropped down and down and down.  It’s also reflect somewhat in our sales – we used to sell a ton of the game during Christmas, now we move a couple of copies a month.  It’s not a matter of price here – it’s a matter of position / visibility and with the big boys all beginning to stock the game, it’s become a not so great bestseller for us.

The Big Boys

This entire issue is compounded by the fact that attracting the general public to an online store is more difficult with other ‘generic’ advertising methods.  Newspaper advertising, banner advertising and the like is very expensive and generally not effective at all in our experience.  The cost for customer acquisition in this manner is prohibitive.  So, SEO worked for us but with the changes in the algorithm it’s become more and more difficult to achieve any form of ranking in the gateway products.

I guess it says something about the entire industry that what we used to consider ‘our’ games have now gone mass market, such that major retailers have started stocking these games.

Of course, some of this plays into the search engine’s overall plan.  If we can’t achieve rankings organically, we might have to advertise (paid listings) which obviously helps their bottomline, if not ours.

Marketing – Target Markets

What’s a target market? It’s a group (or groups) of customer(s) that a business has decided to aim it’s products and marketing to.  This group can be as small (left-handed, redheads who walk with a limp) to as large (women) as you desire, though generally it’s a good idea to focus your marketing on a reasonable target market.  Part of the process of creating a business plan involves defining your target markets, preferably with an idea about the market size.

Why are Target Markets Important?

No non-commodity business or product can be the one thing that is required by all customers.  Sure, if you sell salt, you might be the monopoly (or heck, oxygen) and not worry about your target market; but for the rest of us, we have to define these markets so that we can structure our businesses to suit them.

Are you a discount store? Well, then you have to sacrifice personalised customer service (to some extent), location and aesthetics.  Maybe even stock levels.  Are you a B&M in a shopping centre? Your product line is going to be very different and have a higher focus on the general public than the discount store.  And so on.

By defining your target markets, you can then adjust your store to meet their expectations – everything from pricing to product mix to location.  By meeting all their needs, you create goodwill and brand loyalty because you are ‘their store’.  To them, it seems you are perfect – while to those outside of your target market, you might be mediocre at best.  Mediocrity means that converting these untargetted customers, these poor fits take a lot more effort (and dollars) than those who are already targetted.  In an e-commerce site, you can see this is in low conversion rates.  In a physical store, it’s during the sales process when you realise that you are putting in a ton of effort and still getting very few sales.

Apple does this really well – to their die-hard loyalists, they are perfect.  Beautiful products, seamless integration, good customer service and a status symbol all rolled into one.  To others, they are over-priced, control freaks that have created a cult.

The Untargetted

The hardest part of having a target market, of understanding who we are focusing on also means letting go of the idea that everyone should be our customers.  There are individuals, even groups of individuals, who we just can’t / won’t focus on.  Doing so might be a detriment to other customers (example – by some reports, Yu-Gi-Oh players can be a horrendous group to have in-store); while others just have products or needs that we can’t meet (example – a RPGer looking for 40 year old product).

At the end of the day, letting customers go is difficult.  We see the loss revenue, the loss opportunity and want to win their custom.  Yet, meeting these untargetted markets need can be more costly than its viable.   It could be a matter of timing (bringing in a new product line) or it could be a decision, but we have to remember why we chose to target the markets we did in the first place.  Learning to let go is a hard lesson to learn and one that most of us have to relearn on a regular basis.

Letting Go

Once you let go of these untargetted customers, realising they just aren’t going to buy from you, you can (or should) realise that there’s often space enough for your competitors.  If some customers won’t buy from you, perhaps they are better suited to your competitors? Perhaps you should point them in that direction..  It’ll keep them happy and leave you focused.

Motivation – Vision & Mission

Having worked in fthe field of marketing for a number of years, one of the major recommendations that many marketing consultancies and marketing managers give is to ‘write out a vision & mission statement‘.  For those who have luckily managed to miss this bit of corporate speak, from Wikipedia:

Vision: outlines what the organization wants to be, or how it wants the world in which it operates to be (an “idealised” view of the world). It is a long-term view and concentrates on the future. It can be emotive and is a source of inspiration. For example, a charity working with the poor might have a vision statement which reads “A World without Poverty.”

Mission: Defines the fundamental purpose of an organization or an enterprise, succinctly describing why it exists and what it does to achieve its vision. For example, the charity above might have a mission statement as “providing jobs for the homeless and unemployed”.

The Negatives

As you can probably tell, I’m not a huge fan of this.  I’ve gone into too many meetings where after hours spent discussing ‘what is the Vision’, ‘what is the Mission’; the end result is a bunch of non-definitive gobbley-gook that uses the most popular lingo of the week.  Sure, there’s lip-service given to making sure everyone involved ‘buys-in’ to the vision, that everyone’s views are a given but the truth is quite often these exercises are just good ways to pad a consultants bill.

Worst, it can often tie a business down.  So many startup companies begin with an idea and end-up veering off course (quite successfully too).   A written vision or mission statement; if slavishly followed, can tie someone down to a course that might not be viable.

Lastly, all too often what you view as your vision / mission is often just internal fluff that has no bearing on what customers / suppliers / government agencies view you as.  Do you know what Apple’s vision statement is? Do you care so long as they continue to produce shiny new i-things?

The Positives

All that being said, a clear vision and mission statement can provide guidance when needed.  Zappos emphasizes customer service above all else – letting profitability fall by the wayside in their goal to create a truly memorable customer experience.  Johnson & Johnson used the guidance of their vision statement to pull off one of the fastest and most comprehensive callback during their drug-tampering crisis.

Perhaps more importantly, these vision / mission statements help guide hiring and thus the development / preservation of your company culture.  It’s not really a problem when you have a 2 or 3 person team; but when you are hiring your 100th employee making sure they have the right mindset to work for you becomes much more important.

So What’s Ours?

As you can guess, I’ve never bothered to write either statements.  I have a general idea about where we are going and what I’d like from the company and beyond that, I’ll just see what the world brings.

Video Game Reviews – The Journey

As many of you know, we are raising funds to increase the number of videos we will shoot for Season 2 of our video reviews.  As a business, we can slot the ‘cost’ of making the video reviews into our marketing budget as an expense, but as you can probably tell from the IndieGoGo fundraiser, shooting 52 reviews a year is expensive.  16 reviews = $7,000; so you can do the math on what 52 reviews cost us this year.  It’s the reason why we cut down to 26 next year from self-funding and are having additional videos directly funded by our supporters.  Truthfully, it still probably isn’t a good ROI on our marketing expenses but there are other considerations beyond pure direct ROI.

The Beginning

I first started looking at producing video reviews over 4 years ago in 2009 when both the technology and our business had grown to a point that I had some funds for marketing.  It was there I first ran into the huge cost involved in shooting video reviews — at least in the format that I wished to shoot the videos.

Of course, we could just buy a camera and shoot the reviews without editing/formatting, but as you can tell from the site I’m leery of doing relatively ‘unprofessional’ work.  There have been notable successes in the ‘amateur’ format, but more often than not it just fails.  With cost ranging from $400 – 500 for just a pure video shoot without casting costs and script writing, I just couldn’t afford to do it back then.

The First Attempt

In early 2010 I met a young theater student at the VSO.  After some discussion, I made an offer to pay for the shoot for our first attempt at video reviews.  She had done some work with videography before and had some contacts which she intended to use.  So I provided the games and we scheduled time to look at her storyboards.

Things went well at first, if slowly.  A basic storyboard for a couple of the first reviews appeared and then exams came along, and she dropped off the map.  Months of silence followed before we talked again, at which point she opined that she had no time to do the work and returned the games.  By this time, it was late 2010 and I just gave up on the project, having to deal with other problems.

Sponsorship

At the same time, we were sponsors of Board to Death from when they first launched in late 2009 till late 2010.  As a new video review site, they had no prior ‘affiliations’ which meant it was possible for us to make an arrangement with them.  In addition, they were a Canadian company which was always nice to see. However, over time I grew dissatisfied with the sponsorship due to my lack of control, both over the branding aspects of the videos and the overall format.

Strange Co-Incidences

By 2011, with the hiring of Kaja to the company I was beginning to get ‘breathing room’ once more to look at this project.  Our first major convention together was Cos & Effect at UBC.  At the convention, a new webseries production was touring the vendor tables promoting their first season.  Dressed in some really cool costumes, they seemed like real geeks and, as importantly, knew what they were talking about.   I struck a conversation with both Rob & Joanna, being the curious type, and blathered on about how hard it was to shoot reviews for our site at a reasonable cost. At that time, Rob offered to provide a quote at a more reasonable cost and we agreed to follow up the discussion after the convention.

The Second Run

Our first set of videos in 2011 were a test run.  As a business, we needed to know if it was a viable addition — both in amount of work, the cost and the new processes we needed to make it an on-going project.  We also needed to iron out potential problems with scripts, the shoot times and our game selection.

It was also Kaja’s first big project, and we decided to set some overall objectives for the videos.  We came up with a few:

  • the reviews should be professionally shot and edited to provide a ‘clean’ feel
  • we’d use 2 reviewers instead of 1 to reduce the ‘burden’ of the script
  • videos should be short.  Each video review should be 5 – 7 minutes in length
  • they had to be consistently released and couldn’t be a one-shot project

With those objectives in mind, it was a no-brainer to hire Joanna to co-host.  As a professional actress she could handle the scripts with ease and she had solid geek credentials as well.  Her co-host was decided to be Kaja rather than me as she is significantly more articulate. In addition, I am somewhat uncomfortable with such a public ‘image’.

The first 3 months of videos we shot managed to reach most of those objectives. We had some issues with script length and regularity, but the first test run worked well enough that I was willing to commit to a full year’s worth of video reviews for 2012.

The First Season

The first full year of the reviews was always going to be rough.  Shooting each review (or block of 4 reviews like we do) ended up taking more time than we had expected, both in the need to write and edit the scripts as well as reviewing the final products.  Our earlier reviews had a tendency to get too long and we had to spend some time working out the best way to condense data, often by condensing rule information.

At the same time, in our first year we needed to cover both newly-released games as well as old classics.  So we had to balance shooting newer games with much older ones such that we had a proper library of reviews.

An additional finding for us all was the need to balance the types of games we reviewed in each ‘block’: too many rules-heavy games made up for very long shoot nights, so we needed to make sure each shoot had 2 ‘light’ and 2 ‘heavy’ games.

Lastly, we had to deal with games sent to us for reviews.  At first, we took any games that were given to us and reviewed them.  This actually caused problems in scheduling, with other ‘better’ games sometimes pushed back as we had to review donated games.  Nowadays, we’ve got a better procedure but in the beginning we ended up caught out due to our early willingness to take whatever was offered.

The Second Season

So why did we cut our season in half? Not surprisingly, it had to do with money.  As I mentioned, the ROI for the videos was just not there, at least not for another 52 videos.  We just couldn’t justify the cost and the budget for it, not when we had so many other expenses.  Part of the reason was that the number of viewers within Canada was significantly lower than I had expected, especially compared to the total viewership.  On the other hand, we wanted to open the door to extra videos beyond what we could self-fund if there was a demand for it — and thus the IndieGoGo project was born.

For me, Season 2 will be interesting.  While I have a mostly hands-off relationship with the video review project, I do provide some input to Kaja & Joanna.  To me, Season 2 allows us to focus on newer games especially, since we have begun to receive demo copies of games from publishers on a regular basis.  At the same time, I’d like us to film more expansion reviews as this seems to be another gap in the current review climate.

Pricing & Company Strategies

One of the most famous examples of generic strategies is Porter’s Generic Strategy theory.  For those of you who have never seen it; here you go:

Porter's Generic Strategies

One of the reasons why I brought it up today is to discuss pricing.  If you see the above; generally you can see that there are 2 major options – either a cost or a differentiation strategy.  Within cost strategies, you can try be cost leader in the general market (everything to everyone ala Wal-Mart) or you can focus on a smaller market and be the cost leader in that area (e.g. Future Shop in its attempt to corner the electronics market).

The Game Industry

At a glance, you’d think Starlit Citadel was taking a cost leader or cost focus strategy.  Actually, we attempt to focus on differentiation as much as possible.  A lower price than MSRP is to keep us competitive, but the free shipping offers,  rewards program, video reviews and our borad selection are all ways for us to differentiate ourselves.

Not every business can or will want to pick a cost-focused strategy.  As a cost leader, you need to always be driving cost down.  To do that, you need:

  • Capital to get better technology
  • Highly efficient logistics
  • Low cost base

We have like one of the three (efficient logistics).  A low cost base requires would require us to move to a small city, preferably in Alberta or Saskatchewan (lower minimum wage).  Neither of which we are interested in doing.  And as for capital… well, we just aren’t at the size to make most of the capital / tech purchases cost-efficient.

At the end of the day, even those companies that compete on price (e.g. Wal-Mart & Target) end up differentiating themselves in other ways because customers do not just buy on price.  There are always other considerations, whether it’s brand, selection or other benefits.

It’s why Porter’s diagram is just ‘general strategies’; as you dig deeper in and it’s all differentiation strategies.  You have to be different, and price just isn’t enough.

 

On Revenue Growth

When I’m thinking about how to grow the business, and specifically how to grow revenue I often find it useful to break down Revenue to it’s components parts.  The basic formula for revenue in an online environment for a specific period is:

Revenue = Number of Sales * Avg. Sales Value

Break it down further, it becomes:

Revenue = (Number of Visits * Conversion Rate) * Avg. Sales Value

That equation can further be broken down into:

Revenue = (Number of Unique Visitors * Avg. No. of Visits) * Conversion Rate * Avg. Sales Value

Aiieeee!!! Maths

Not really.  You certainly can work out any business’s revenue if you had all these component parts, but as a business owner you think of them more as levers.  You push on them to increase Revenue, which is generally a nice thing. We’ll get into when it isn’t a good thing soon…

So let’s talk about each of those components in more detail.

Visits: Visits are simple – it’s the count of every single warm body (or eyeball in our case) that visits the site.

No. of Unique Visitors – instead of counting each warm body that comes into the door, you’re counting each individual. So if a customer likes to visit you twice a week, and your period is a week, he’d only be counted as 1 Unique Visitor. Simple no?

Avg. No. of Visits –  Let’s say you have 10 customers, each who visit you twice a week.  And 10 customers who visit you once a week.  Your avg. number of visits would be 1.5 per unique visitor.

Conversion Rate – This is the number of customers who actually buy compared to those who actually just visited

Avg. Sales Value – Relatively self explanatory.

Pushing the Levers

So, how do we push the levers? Well, let’s see:

No. of Unique Visitors – this is the simplest and the one most people think about.  It’s worth remembering that you have both new visitors and return visitors.  New visitors can be increased by Advertising, Public Relations, Social Media, etc.

Return Visitors are a bit more difficult.  These are generally your existing customers – so good customer service, regular e-mails,rewards programs, etc work well in keeping the customers we have.

Avg. No. of Visits –  Here, your goal is to increase the number of times someone visits your site.  The general idea of course is that the more time someone spends in your store / website; the more likely they are to buy.  How do you do that? For an online store, it’s by hosting good content.  The blog, the videos, reviews, etc all contribute to this.

Conversion Rate – This is a huge topic; but at its simplest you are looking at removing any obstacles your customer might have before and during the purchase process.  So, helpful video reviews or customer reviews, trust signs like PayPal, a good Privacy Policy all contribute to making the purchasing process less painful.

Avg. Sales Value – Upsell, upsell, upsell.  This is obviously easier in-person than online, but there are things we can do.  Offering sleeves if you’re buying Dominion, expansions for Arkham Horror, related products are all ways to increase your average cart and thus increase revenues.

Manipulative? No…

All kidding aside, the goal of any good retailer is to make you spend more money in their store.  Sometimes, it’s for the good (e.g. pushing sleeves for Star Trek : Fleet Captains because we know the sleeves are thin), other times we’re just enablers.  The trick of course is to make sure we never get too pushy and put our customers off.

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.

 

Marketing ROI

I’ve been working on some figures to get a better idea of what we’ve been spending our significant marketing budget on (nearly 4% of our revenues is dedicated to marketing); and I thought I’d discuss Marketing ROI again.  It’s a concept that has gained significant popularity in the last 20 years; mostly driven by the need to actually justify the existence of a marketing department and it’s budget.

It’s actually an area that I have found interesting for years – I did my Masters thesis on accounting and marketing and the lack of integration more years ago than I’d care to admit.  Understanding what generates the most revenue for you in theory allows you to then adjust your tactics and spending for future years.

Marketing ROI simplistically is the return on each marketing tactic.  For example – how much revenue do o our advertisements on BGG return? How about theSpiel? Or 2d6?  The equation at its simplest is ROI = Revenue Generated / Cost

The Simple

At first glance, this seems rather easy to do.  You have an Analytics program in-place.  Customers who clicks through from an advertisement is registered as coming from that advertisement.  If you make a purchase, you then can attribute that purchase to that customer.   Take that number and divide it by the cost and you have your ROI numbers.

Moderately Complex

Well, not exactly. We have to add in a few factors to this like:

  • time-lag between awareness to purchase
  • contribution of other advertising efforts (e.g. maybe they decide to buy only after they see a Facebook post about a new game they liked)
  • Free Shipping costs (we do actually still pay shipping after all)
  • Indirect Costs (e.g. time cost of set-up and management)
  • Seasonality and time period

All of these factors have to be tracked down and entered if you want a more accurate cost and the amount of revenue generated.

Oh my head hurts

Then there are those factors that really complicate matters like:

  • Non-attribution by Google Analytics (they have been stripping out data for a while now)
  • Lack of cookies (customers might wipe their cookies or refuse to take them at all)
  • Cookie expiration (they only last for so long, so a customer who buys after the cookie expires is no longer tracked by that method)
  • Passive interaction (e.g. seeing our banner advertisements in BGG but only clicking through Google)
  • Branding efforts (like our videos where the goal isn’t to necessarily generate revenue immediately but increase awareness)
  • Design changes on the site (hey, we made that button bigger; maybe it’ll help with our ROI)

In many cases, a lot of this data can be tracked down if you have the budget.  Branding efforts can be given a monetary value by surveys; design changes by doing A/B testing, etc.  To get more and more detail though, it’ll cost you more revenue and time and at a certain point the returns just aren’t there.

It kind of reminds me of Galaxy Trucker – you can spend all your time building up your ship or perhaps take a bit of time to peak at the future, but at the same time you’ve got competitors hard at work as well.  You have to balance both the building phase; the knowledge phase and the speed of your work or else you’ll just be left behind.  Oh – and be just a little lucky 🙂