Monday, July 21, 2008

Demand Curves

Success in retail, from what I can tell, revolves around the black art of purchasing. The ultimate goal is X+1, or having the exact amount of product you need for customers plus that one for the shelf, just in case. Determining X is something store owners labor over, yet when it comes down to it, it's often a guess based on a factors such as past success of similar products, stated customer interest (horribly unreliable), the season, who else is selling it and at what discount, and the almighty pre-order, in which cash on the barrel head provides the true demand indicator. Guess wrong and you've royally hosed up your cash flow.

Most new releases are pretty boring affairs. With limited marketing by game companies, most games take customers by surprise. A new expansion for Munchkin or Zombies, for example, might sell half a dozen copies, but it's not like people are calling the store looking for them. The curve is pretty gentle and we can order one or two at a time, since nobody will miss its absence. When a re-stocked copy appears, it's like it's new all over again for the next customer. The more marketing, however, the more steep the demand curve.

Three products that seem to have the most interesting curves are Games Workshop's Warhammer 40K products, Dungeons & Dragons and Magic: The Gathering. All three of these have substantial marketing associated with them and lots of plugged in customers, eagerly awaiting the next release. My thoughts on this are that in the game industry, the more sophisticated and thorough the marketing effort, the more steep the curve. When I say steep, it means the demand spikes on the release of the product, followed by a downward curve. A perfectly marketed product would sell nearly 100% of all product on the release day, with little demand beyond that. It's a lot like releases of new movies, in which opening day receipts are enormous followed by a rapid decline.

The 40K demand curve is pretty close to movie blockbuster steepness. I've noticed that the vast majority of Games Workshop product sells the release weekend, with a small percentage comprising follow-up sales. It's something GW is aware of and they're trying to put their heads around how to flatten the curve a bit. The problem for a store owner is that if you under-order, there's no time to replenish product, since the demand has ceased in the 4-5 days it takes to re-fill the shelves. If you over-order, there's no excess demand to "sop up" your sloppy mistake. It's a very profitable product line, but its ordering precision is razor sharp.

Magic: The Gathering is similar in demand, but more predictable. It's agreed among many store owners that 50% of a Magic set's sales will occur in the first 30 days, with the remaining 50% taking place during the lifetime of the set, often a couple years. When one of my distributors was punished for not following WOTC policies, the punishment was loss of the first 30 days of releases. We knew exactly what that meant. Unlike 40K, the demand for Magic is generally established and predictable.

Dungeons & Dragons, in contrast, has a strong, yet flatter demand curve. It sells strongly on release, but the product continues to sell strongly for many weeks and months to follow. I attribute part of this to the "supplemental" nature of many D&D products, in which you may need a product, but not at the moment. That tends to flatten the curve. In contrast, 40K products tend to have pretty sharp distinctions about whether you'll ever need it. The majority of customers don't buy army books or models for armies they don't play.

So why is all this important? It's all about cash flow. The cost of bringing in any of these releases runs in the thousands of dollars for a store like ours. If a buyer misjudges the demand curve, and a release sells in 8 weeks instead of 4 weeks, the store is in trouble. The cash flow tied up in that one mistake may be the profit for that month, or if it's a big screw up, next months rent. I had trouble in June because a big part of the D&D 4 release had 14 day terms from my book distributor; and it was shipped a week early! This means I had a week of sales to come up with the cash. Much Chicken Little behavior on my part ensued.

One positive element of this process is that mass market has a hard time competing against us at our own game. Every product line in the store has its own unique demand curve, mostly determined by the local customer base, the core of which is a unique group of individuals in a small, ten minute drive time radius. Sometimes a game can survive in a store with just one gaming group or a couple of customers. Dropping a product line might occur after learning a game group has switched gears or that the key customer has lost his job. Try that at Wal-Mart. You can't even track this locally. A store across town will have different "demand curve signatures" for each game.

This also means that the purchaser is the "key man" in specialty retail. Lose the store's institutional knowledge and there will be much pain in re-learning it. Someone retail savvy who works the same store, such as a manager, could learn it, but an uninitiated new person is just as likely to screw it up while simultaneously driving the business into the ground. I think I have a manager who could pull it off, so I've rescinded my instructions to liquidate the entire lot in the eventuality of my stepping in front of a bus.

P.S. I really wanted to write a post entitled "general time horizon" but all that came to mind was something depressing about game store profitability.

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