Price Elasticity

I've been thinking about this term a lot this week. Price elasticity refers to the range of prices that a retail store can charge for a product, without alienating a customer. Some games have more elasticity than others, but all games have far less elasticity than other types of products. In the rest of the retail universe, there is far more elasticity than in games. How much is a gallon of milk? Poll a bunch of people and you'll get a large range of numbers. If you're a presidential candidate, you're probably wildly off. Milk is a commodity item, but how about other specialty trades? Toys have a lot of price elasticity, and consumers tend not to notice a whole lot. The cost of a Blokus game sells at our store for $30, but you'll find it at many toy stores for $35, and even upwards of $50 at fancy toy stores in boutique communities in Marin.

What creates price inelasticity in the game trade is the MSRP, the manufacturers suggested retail price. This price is reinforced by the manufacturer, who publishes this price on their website and often sells the game direct to customers at this price. There's nothing inherently wrong with an MSRP, but the game trade goes a step further and tightly controls the cost of the product sold to the retailer. This is done with discounts, averaging around 45% or sometimes net pricing, where the item costs "X" but you can charge what you want for it. However, the benefits of net pricing are often destroyed by the MSRP. An item might be net priced at $40, meaning the "keystone' amount to charge for it would be $80, but when the manufacturer turns around and sells it for $70, a de-facto MSRP is created, they deny the retailer the ability to sell it at a price of their choosing. I would also argue that manufacturers are forced to sell direct to customers at MSRP because of the inefficiencies of the game distribution system. Fix this, or remove it, and manufacturers can forgoe all that hard work.

This discussion is nothing new, but what I'm coming to realize is that the game trade, which is continually shrinking their margins for retailers, is limiting the ability of retailers in the types of stores that can be successful. The game store model that work is a well defined promotional model involving large amounts of unproductive game space to promote product. Those who don't want to go that route, or can't afford it, are forced to put great efforts into promoting their stores through community involvement our other tangential activities besides selling games. These working models and outside activities are fantastic; nothing wrong with them, but in the past they've been the domain of exceptional, top tier stores. Now they're required for basic survival of ALL game stores. It's a sign that the model is distressed.

In contrast, a retail model with greater price elasticity is able to charge more for a product in exchange for more versatility in their store operations. A store could exist in an expensive downtown area, for example, or in a lucrative but high cost shopping mall. In fact, game stores that do this tend to sell the games with the highest price elasticity, board games, often reinforced with other high elasticity products, like toys. Board games sold to consumers and not hobbyists have much higher price elasticity, as they shop infrequently and aren't dedicated to board gaming as a hobby. Meanwhile, straight game stores must pimp their product like circus geeks to hobbyist consumers who are well informed by the manufacturer of precisely what their product costs, a model that is increasingly obsolete for real-estate markets with rising rents. What works in the MidWest for a modest store with low costs per square foot only works for an exceptional store in expensive urban areas.

The solution is to give up on the obsolete model based on cheap fuel (the free freight model) and for everything to be net priced. Everyone pays freight. Everyone gets their product at "x" amount, whether you spend a thousand dollars a year or a hundred thousand dollars a year. If a distributor wants to offer further incentives or discounts, that's their decision. Once the benefit or penalty of free shipping is removed, a rising cost that forces distributors to shrink margins, the playing field would be de-leveled. A level playing field is not what we want. We want a variety of true costs that works against MSRP, the enemy of price elasticity and store creativity. Then we'll have more of a chance to run a variety of different types of stores that will promote and reinvigorate the hobby.