Saturday, April 4, 2015

Profit Margins (Tradecraft)

An article has been making the rounds online about a poll stating Americans think the average company has a 36% net profit margin, a number so grandiose that that it's five times reality. Granted, this is from the American Enterprise Institute, so it was probably written with the intent that I twirl my handlebar mustache and adjust my monocle as I declare to Buffy how the common people just don't understand us.

The net profit margin for retailers in the game trade is in the 5-8% range. Retail in general is in the 1-9% range, with gas stations at the bottom and jewelry stores at the top.

I've written about this a lot, from the $100 board game that buys me a cup of coffee to the $1 can of Coke (net profit of 7 cents).

A 36% profit margin is basically assuming we get half the price of an item, plus some hand waving to cover costs, hand waving that comes nowhere near to reality. The devil is in the hand waving. Believe me, my initial business plan looked a lot like this. I nailed my sales projections, but I had no freaking idea about various costs, the 100 different office supplies, and the price of simple things like electricity that's three times more expensive than what I pay at home (per square foot).

Why is this important? It demonstrates that business is more fragile, with a smaller margin of error than most people think. If my rent, wages or miscellaneous expenses go up 10%, that's an inconsequential amount with a 36% profit margin. I can suck it up, right? But if my net profits are in single digits, that may have just wiped out half my profits. The ignorant free market crusader might claim that's economic natural selection. But this type of data shows they fundamentally misread the ecosystem.

There's also an educational component to this. In grad school, one of my professors half joked that Buddhist-Christian dialogue existed to avoid the Christians killing the Buddhists. Hey, we're just like you! I believe there's a similar undercurrent going on in American business. As income inequality is perceived as caused by all business, big and small, some education avoids a torches and pitchforks scenario. I know from online discussions that I am perceived as the man just as much as some Chevron executive, even though I make a modest, middle class salary. When they're smashing windows and looting in Berkeley, they're not doing it based on a spreadsheet of whose been naughty and nice. We're all bourgeoisie in their Marxist fantasy.

When all business owners are in the same boat, we end up circling the wagons. When they make it clear it's them versus us, we're far less likely to want to get to the bottom of crony capitalism and corrupt tax law. We're too busy installing security shutters and investing in new camera systems. That's not a metaphor. That's actually what happens. In reality, we have none of the power they associate with business and all of the burden. The real "powers that be" designed it that way.

11 comments:

  1. The people living in the"Marxist fantasy"also expect your prices to increase accordingly.

    I'm surprised at the walmart number to the point of disbelief, to be honest. Kind of curious which sector all the corporate profit is coming from.

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  2. Follow the money.

    http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html

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  3. My guess would be banking/real estate plus a few select fields, at the moment probably healthcare/pharmaceuticals and hightech.

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  4. So, that page says banks make a 0% profit margin. There's something wrong with the metric if that's true.

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  5. Here are the top 10 by net margin, the important number. There's a lot of discussion about how banks moved from a fairly low profit margin business (a boring business) to the super lucrative position they're in now:

    Industry / Net Margin

    Real Estate (General/Diversified)
    34.38%

    Financial Svcs. (Non-bank & Insurance)
    34.14%

    Tobacco
    22.42%

    Banks (Regional)
    22.23%

    Investments & Asset Management
    19.11%

    R.E.I.T.
    19.01%

    Bank (Money Center)
    18.90%

    Transportation (Railroads)
    18.29%

    Software (System & Application)
    17.34%

    Drugs (Pharmaceutical)
    15.95%

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  6. We all know that executives wages are taken out before the profits are actually reported... And in cash flow businesses like Walmart, banks and Amazon those can be significant as a small percentage of the whole - the economy of scale continuing to work until system failure is reached and teh investors are left holding the bag (Global Crossing anyone?)

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  7. Proving once again that the American Public as a whole is pretty much clueless. Unless of course the survey was written in such a way that they thought they were answering gross margins, and not counting all that silly overhead nonsense.

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  8. CategoryOneGames.comApril 6, 2015 at 10:08 PM

    Margins would be much better for game stores if you could actually set your own pricing for things like Magic where Packs could easily be around $5 a pack in some areas. Also it would be better if MSRP was raised when they raise how much they are charging retailers.

    I'm always amazed at stores like Derious CCG which sells 3 packs for $10 and boxes at bare bones pricing and must make up their profit in quantity over pricing. I'm also amazed at a store like that which doesn't have their inventory cataloged, making me wonder how they file their COGS and taxes each year? It appears they have to do unique things like getting their name known through Youtube, making money off of Youtube videos and creating unique things like their CCG Crate business. But still, their margins are so paper thin, where is the money? Same goes with a company like Gaming Goat.


    Take Utah, everyone charges full price for Magic packs here, I can't imagine how much it would change the balance of power if a discount store opened and how many people would flock to it because of the discount.

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  9. I worked at GameStop corporate. They make something like 4% margin, and most of that comes from the buy-sell-trade model.

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  10. 3 packs for $10 seems to be about the normal at an LGS in my area (central Pennsylvania) and it may be because WalMart sells 3 booster blisters for $9.99 all over the place, stocked by a third party. If LGS are selling for MSRP in Utah and people are actually buying them up, I would consider it lucky.


    As a player, I learned a long time ago that buying the singles I want and need is much more cost-effective than cracking packs or boxes and I would never pay MSRP for a booster unless drafting and there are prize packs or store credit to be had because the value is rarely there; it's like buying scratch-off lottery tickets to me (and I'm very unlucky, it seems).

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  11. Deriums didn't have their singles inventory cataloged early on, but if you watch the more recent videos since last Fall, they have computers setup in the store with customers browsing and appear to have their singles in a POS system of some sort nowadays. They do seem to be slowly evolving, trying new ideas and getting by well enough for their standards.

    Deriums has a very specific focus, primarily on Magic, and aren't stocking lower turn board games, rpgs, miniatures and the like. I believe they've partnered with MassDrop on occasion, have the CCG crates, and also appear to crack a lot of boxes for singles sales and weekly giveaways on their YouTube channel and buying singles/collections to flip (which, in my experience, is where the most money is).

    We also don't know what the overhead costs are for them. To me, it appears that they don't do much to take care of their shop and put money back into the physical appearance or operation of the storefront. I also recall a video or so on their YouTube where their heating was broken for some time in the middle of Winter and the employees were wearing their winter coats inside to stay warm which would have been completely unacceptable to me, if that lasted for more than a day without being repaired.

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