Kickstarter Fulfillment

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We have been getting some great press about the Kickstarter Fulfillment service that we offer out of the warehouse. Overall, it’s been quite fun to handle and we are glad to see some great games get out to Kickstarter backers. However, I do want to reassure our regular customers that it’s not something that is ever going to become a major part of the business (at least not in the sense of it taking over the retail side).

For one thing, most of our fulfillment happens during the warehouse ‘down-time’. As we hire part-time warehouse workers, for most fulfillment options we just increase the number of hours that our warehouse personnel work to full-time each day. Even working on our regular orders, we generally can complete about 200 additional games a day which is more than sufficient for most Kickstarter’s.

That’s another point worth mentioning or highlighting. For the vast majority of Kickstarter’s, we are told that Canada makes up 10% of all backers. In our experience, that generally works out to be between 100 – 200 backers at best for a very successful Kickstarter, around 40 – 50 for those that do well. Now, our rates are posted publicly (CAD$3.50 per order fulfilled) but those rates include boxes & packing materials which on average works out to be about CAD$1 in cost. That works out to be about CAD$2.50 before we have to pay staff for their time and of course, any mistakes we make comes out of the total as we pay for reshipments & returns. On top of that, for every Kickstarter quote that we do get, there are at least another 5 that we don’t get and end-up wasting time on. All that time has to be paid for somewhere.

As you can guess, the profitability of doing Kickstarter fulfillment really isn’t high. So why bother doing it?

  • Industry relations – doing the Kickstarter fulfillment, we’ve been in touch with a wide range of publishers and backers, many of whom we’d never have talked to if we weren’t doing this.  As such, it’s a good way of extending our network.
  • Marginal profit – every little bit helps.  If the warehouse isn’t being used at that time, it’s additional marginal use that we can make of it, so the marginal profitability is still worthwhile.  Of course, there’s a certain level before this marginal business start’s being a main business, but in Canada, it would have to be a significant increase.

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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.