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 🙂

Cashflow, Retail Prices & Kickstarter

I was recently thinking about Kickstarter again, with the number of new and interesting projects popping up on that site for funding.   Now, having helped fund a few games – none of which have arrived; I’ve started trying to figure out at what level (on a purely mathematical basis) a discount would work for us.

The Calculations

The question is ROI here, and to do that, we’d need make a few assumptions on:

  • Timeframe – amount of time from funding to delivery of a project
  • Number of copies purchased
  • Turn rate of inventory
  • Gross Profit Margin Percentage

So, let’s say we invest $100 in a Kickstarter project to purchase 12 copies.  It takes 6 months for a project to be delivered and we have a turn rate of 4 and are using our Gross Profit Margin of 50%.

So for example, if we manage to acquire 12 copies at a turn rate of 4; the $100 investment is actually invested for 3.5 years (delivery time & time to sell all pre-purchased copies).  Invested normally (i.e. into other stock), that’d be a gross profit of $700 on $2,100 of revenue.

Here’s a little chart based on gross margin that we’d receive if the $100 was invested in ‘normal’ stock.

Years
Turn Rate 0.5 1 1.5 2 2.5 3 3.5
4 $100 $200 $300 $400 $500 $600 $700
6 $150 $300 $450 $600 $750
12 $300 $600 $900

So, those 12 game copies would have to make $700 of gross profit, or approximately $58 each. That’d be about a 90% discount on an MSRP of $65.

Let’s say we only get 4 copies on a $100 investment in Kickstarter.  That means it’d sell out in 1.5 years from now.  The Kickstarter-games would then have to generate only $300 in gross profit- which again works out to be about $75 each.

Conclusion

With there continuing to be a constant flow of games via publishes in the ‘normal’ channel; I just can’t see a reason to invest in Kickstarter anymore as a retailer.  The time delay between purchasing a game and having them come out is a significant opportunity cost – at a turn rate of 4; we forego $100 in gross profit.  As such, a game has to ‘make’ back that amount in discount for us immediately; which seems almost impossible and still be profitable for the publisher.