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.

 

Limited Stock and Higher Pricing

This Christmas, we are trying  something entirely new for us which is repurchasing and reselling games that are out of stock / have limited stock in Canada.  Due to the numerous exclsuvie distributorships and the increasing popularity of board games, some ‘hot’ games have become extremely scarce very quickly.  For example:

7 Wonders: Duel – we received about 25% of our pre-order (which had been sent in months ago).

Pandemic: Legacy – Just a really popular game that F2Z hasn’t managed to keep in-stock.

With games like these, rather than not selling the games at all, we have been picking them up from secondary distribution sources (i.e. other retailers) and reselling them to customers.  Obviously, this means that these games are being purchased at a cost significantly higher than what we would normally see if we picked them up via distribution and we have to then pass on the costs to you, the customer.

It also is why in many cases, our stock of these products is limited and the prices so high. We’ll see how this works out this year, but it’ll be interesting for sure.

Sucking the cashcow dry

Mayfair Games has updated the Settlers of Catan game with a new, 5th edition  Guess what they changed? A few graphics and a difference facing on the box.  What else did they do – they increased the base price to US$50.  Why? Because they’ve got a hit game and can reap in all the money they want / can and as they move towards a mass market, their regular competition of Monopoly and Risk provide recycled games with lousy components too at a high price. Why wouldn’t they do this?

On the other hand, you get more puzzling examples of this in the industry all the time. Take the entire Tash-Kalar debacle. When first released in North America, it was priced so high even the developer spoke out against it.  Now that it’s been re-released, it’s significantly cheaper – but the initial buzz has faded away and sales are much slower.  What could have been a good, on-going game when first released has become just another has-been game.

Cards Against Humanity is another prime example.  They’ve refused to sell to most retail stores forever and last year, promised to start a retailer program.  As far as I know, only a select few stores have been allowed in on the retailer program, leaving the vast majority of retailers in the cold.  What are they up to? Same thing – sucking the cash cow dry.

That’s not to say it’s just publishers who do this. Let’s be clear on this – most brick & mortar retailers these days are expanding and running Magic the Gathering games like crazy, desperate to get as much money as they can from the blockbuster sales the game has been doing.

If you look at these example, the big difference between all of these is control.  Mayfair Games controls Settlers of Catan and can update and sell the game at any price that they want, for as long as they want.  Same with CAH.  However, with Tash-Kalar; the designer pulled the IP away and made a new version since he had the control (eventually) while with Magic, retailers don’t control the product or the distribution, just the price. So you see a price war driving prices down.

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.

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.