Saturday, August 15, 2009

Butts in Chairs

Movie theater tickets seem to be pretty expensive. Then I analyzed how much it costs per evening, per seat to cover the costs of our game center. The calculations include all of our overhead, divided by our game space, spread out over our average capacity. The average capacity is the number I'm not sharing. However, I can tell you that we need $11.50 in sales for every butt in a chair. It breaks down like this:

Do you make it? That's the most obvious question. Do we cover those costs? The answer is: kinda. The model for game centers that most stores adopt is a kind of pray to play. I pray that when you play in the back, you will somehow be inspired to spend $11.50 with us. Some events have fees, but never as high as $11.50. People would simply stop coming, which begs the question: "Is it worth it?"

Well no, it's not, from a strictly financial perspective, but we do it anyway. The way it ends up working is we have "halo" customers that spend money in excess of $11.50 and pay for those who don't pay. Those who don't pay, or "under pay," but play, contribute "meat space" to the game center, inadvertently providing paying customers with a value add in the form of opponents. Sometimes paying customers spend a lot one week, and nothing for a while, but eventually it all seems to work out to be a somewhat workable business model. You wouldn't want to invest in it, if you didn't love it, but it's sustainable.

There are also customers who buy from us because we have game space, kind of like supporting your local charity. ARF, the thrift store a couple doors down, does great business because they support a cause that people care about. Overall, adding game space increased our sales by 60%. Then again, the expenses of the larger location amounted to around 60%.

This model reminds me a lot of health care and auto manufacturing. Medicare pays hospitals 7% less than the real cost of services, but hospitals make it up by charging insurance companies more. Some would say over-charging. American auto manufacturers spent the last decade making SUV's and charging inflated prices for them, while they mostly lost money on their small cars. In other words, one group of people is subsidizing the behavior of another group of people. How's that working for us?