Saturday, November 12, 2022

Price's Law or Exponential Incompetence

You are probably familiar with the 80/20 rule, or Pareto's Principle. I've written about what I call Altuchers Rule or 80/20/20 (20% of your 20% are your core clients). Now let's look at Price's Law, and how it might be useful in thinking about small business. The law states half of the total contribution is made by the square root of the total number of participants. If the language sounds vague, it's because it was originally about contributions to academic papers. It has been applied to the workplace somewhat successfully though and if you've worked in enough places, it certainly rings true. It's horrifying, but not surprising.

I've had small business colleagues complain about the productivity of their staff, with complaints getting more numerous as their business grows. In small business, the owner is usually a workhorse. Employees are reluctantly hired to carry some of the load. We want to do more and employees allow us do that, sorta kinda. As you grow your staff, you look around, and realize the same people as before are doing most of the work, or perhaps one more of the several you recently hired. Maybe if we hire another couple people, we can break through this? Price's Law says good luck.

To give you an example, if you have a staff of six, under Price's Law, two are workhorses, and four are contributing a minimal amount of work. You tried to hire good workers, but it didn't work out like you expected. Twelve employees and eight are just getting by. Ten thousand? Only 100 performers. We grow into increasing inefficiency. This is not new, but it's shocking if you don't have broad work experience. It's also why very experienced owners are reluctant to grow. They know the inevitable outcome. I can tell you stories of dead wood, both people I worked with and the pain of realizing that I was the deceased wood.

Many successful owners are used to being in the competent category, and probably never had time to look around to see the under performers. Under performers are still contributing, but there's a tendency for them to naturally obfuscate the differences between them and the performers. People are taught that if they can't stay busy, they should at least look busy. "If you can lean, you can clean." Incompetent managers are no different, so there's a lot of smoke in organizations, with new projects and initiatives, but not a lot of fire. Managers are not immune to Price's Law.

So what can we do about this as small business owners? 

First, let's be clear that the so called incompetent still contribute, just no more than is absolutely necessary. There's even a grievance movement afoot to work in this fashion. I would also argue, this is the nature of most people. Most people are working out of necessity, not passion. If you're that individual, find out what you're passionate about and seek out that feeling in a field that works for you. 

When it comes to hiring, you can and should attempt to hire around the incompetent, looking for top performers. We don't owe anyone a job and there is no assumption business is some sort of employment socialist utopia. We don't want these under performers, who need to go find their passion. We just end up with them.

Of course, if the person doing the hiring is incompetent, you'll get more incompetent workers. There is some research indicating that low performers can't even identify top performers and end up hiring people at or below their competency. The competent are so different, that the incompetent not only can't identify them, but are turned off by them. It's important to allow the performers to hire and insist they look for the appropriate signs of competency. As if the performers didn't have enough to do already! In my experience, you're likely to be only 50% successful with your hiring, but that's still better than Price! 

Second, most people just do what they're told at a job. They're afraid. They're unsure of what needs to be done. Some are waiting for you to instill competence into them with training and direction. You can bend the competency curve with some attention to their needs. Unfortunately, I think most of us are crappy managers, also known as being incompetent. 

Most of us started a business because of passion for something, and that something probably wasn't managing people. When it comes to training and experience in America, a good manager or good management training is damn rare. I've had such poor managers in my work experience, that it often came down to meshing with personalities, rather than discovering good leadership. I certainly don't claim to be a great leader myself.

If you have an employee who is not naturally competent, it's awfully hard to turn them. It's what we look for in individuals we want to groom to become managers. Do they identify problems? Do they take the initiative to solve them? Can they perform over time or do they lose interest? Can they work independently or do you constantly need to tell them what to do next?

Third, assuming you are stuck with the square root of your employees being competent, reward competency. Don't lose those people. Most large organizations can't identify them, because, as we now know, they're incompetent (also don't forget Dunning-Kruger). With wages going up dramatically, it's hard to compensate the competent more, when the pool of resources is tapped. 

There is some resistance to increased compensation for performers. I have bumped up against push back against increased compensation for performers, as there's a socialist element in the culture that equates uneven compensation, for whatever reason, as unfair. I've had employees compare paychecks and question why one person was paid a dollar more an hour than another. This is considered normal now. They expect wage transparency, and uneven compensation is an uncomfortable discussion. 

So there you have it. Really this is just a name to describe what you already knew. If you disagree with this, if your experience differs, you are probably a great manager. You can identify and hire talented individuals with skills and ambition like your own. You can encourage, train, and compensate your staff to a high level of performance. You are the function of the square root of the rest of us. I look forward to your book.

Friday, November 4, 2022

Witchcraft

We were talking in a mentorship forum yesterday about how we decide what to buy. Of course there are metrics, but then I mentioned witchcraft. We use witchcraft. Another mentor chimed in that he too used witchcraft! What is witchcraft?

It's tradecraft really, but not a skill or metric. Witchcraft in this context are the many subjective elements of any given product, a product we have never seen. Here are some of those elements:

  • Publisher reputation. How do I feel about them? I like making money, but I'll buy more or less depending on how I feel about the publisher. It's sometimes personal. 
  • Safety stock. Is this product likely to run out? Am I being told it will run out? I just placed a top up order of Root, because it was clearly the last shipment for the holidays. Is this a top tier product I don't want to run out of? I don't want to be out of anything D&D, for example, so I don't mind ordering beyond my normal threshold. Nobody with cash reserves loses money on Magic overstock; eventually it sells for more than you bought it for ... if you can wait.
  • Customer Demand. Do I know of a predicted high demand? Is there buzz? Are there known problems? What are my customers saying? How is game room attendance? I look up every Games Workshop release on Reddit to hear the buzz. Is this a re-packaged boring product? Is it a good value? Are the rules good? Are they crying because they want it, but can't afford it? 
  • Frosthaven lands in the US
    Do I Have Room? It was clear in this forum that some of us have reduced our gaming space due to increased inventory. If I order a lot of this product, will I have room? I have a pallet of Frosthaven on the way, but if I had more than one pallet, it would be a space problem.
  • Is the Theme Popular or Not? Cat themed games do well at the moment. Political and sports games always do poorly for me. Games with great miniatures often sell, even if the rules are ho hum. What if I was offered Cathaven, a beautiful miniatures game of cat politicians playing baseball? Oh no!
  • Is it Devalued? Is the publisher known for discounting their product? Is it a commodity product sold like stocks? Most CCGs are known to be hot or cold before they're even released. A devalued product might still get purchased, but as a one shot. It's disposable. A company like Games Workshop is so good at protecting their brand value, I can always clearance their miniatures and make all my money back, unless it's a book, cards or dice. 

Upcoming Magic: The Brothers' War Set Booster with Commodity Pricing

  • Is It Limited? AEG allows for early retailer release of some of their board games. Some of these games are just alright, but when the Internet is removed from the equation, and I get a true regional demand for a product, I realize that even an alright game will sell very well as an exclusive. A game in which I might normally order two copies, now sees me ordering two cases.  Sometimes premium product is a bit of a downer, like a lot of Wizards of the Coast Premium store exclusives. Just because supply is limited, doesn't mean demand is high.
  • Is It Already Out? Sometimes you'll find the "new release" already being sold on Amazon or it's a Kickstarter left over. Sometimes distributors will sell a game as new that's actually just a reprint. If it wasn't for boardgamegeek, and past experience, I often wouldn't know! We are a front list driven trade, so old stuff is death.
  • Can I Afford It? What does my Open to Buy worksheet say? Some buys, like Kickstarter orders, are only an option when I have disposable income. If you pay in advance, you may not have the cash this week. Q4 doesn't have me backing many Kickstarter projects, as I save to pay off my debt.
  • Does It Solve A Problem? I might be looking for a product line. For example, I would love to find a line of miniatures bags that are well priced, well stocked, and always available from distribution. I don't have the volume to order from a dedicated bag company. On the other hand, I don't need another dice manufacturer.
  • Packaging. Is it difficult to display? Is it in a tube? Does it come in a plain cardboard box (chess sets). Does it need to be put in a display case? Display cases are the kiss of death and there's limited display case space. 
  • Theft! There are product lines we don't carry because they attract professional thieves. We'll no longer carry caps, wallets or purses, for example. If you can imagine it on a blanket in front of a train station, I don't want it. And yes, our stolen goods were being sold on a blanket in front of a train station.
  • Offensive. Will this cause controversy or do I find it personally offensive? Is it racist, sexist, overly sexual, or otherwise out of step? Some games intentionally try to push buttons, and honestly a lot of people love them. Cards Against Humanity was practically demanded by customers, and we sold nearly 2,000 copies of it. Do I feel good about that? Nope. Do I feel bad enough to give back the $90,000 we made with that line? Nope. Do I cary it now that it has cooled off? Nope.
  • End of Life Issues. Can I get rid of it easily at the end of life. If you sell online, are there restrictions on where you can sell it and at what price? Board games are easy to clearance, but Role Playing Games die on the vine. 
There you have it, some witchcraft!

Thursday, November 3, 2022

8 Thoughts on Retail Purchasing

I'm co-hosting an AMA on retail purchasing for new stores today and thought I would summarize my purchasing advice. I've been purchased 14 million dollars of games since 2004, and purchasing is now my main function working from home. Here's some advice:

  1. Focus on What Works. 80% of my sales are from 10% of publishers, roughly 30 of them. Get right with this 80% and you've achieved most of your purchasing objectives. It's not an issue of "if" but "how much."
  2. Pre order Most Things. I pre order everything. You might decide to only pre order from the aforementioned 80%. The primary reason to pre order is: a) I almost always get what I want, b) I almost always hit the street date, and c) It frees up my time. I do not look at "dailies" or pay attention to most marketing communication from distributors. I have instructions to auto-ship orders when they hit "free freight."
  3. Back Order Essentials. I have $62,000 of pre orders, but only $900 of back orders. We are a front list driven trade, so the new is vastly more important than the old. I place my orders online by hand, so I regularly see what's back in stock.
  4. Track Your Purchasing. I use an Open to Buy (OTB) spreadsheet to track every purchase so my purchasing budget is balanced. I know when my inventory is bloated (most of the time) or when it's lean (almost never).
  5. Budget and Cash Reserves. I don't budget, (OTB is not a budget tool, just a tracking tool), but I have a cash reserve. Even if I'm following my Open to Buy spreadsheet, variations in monthly sales can leave me in a hole. Having a $150K sales month followed by a $100K sales month means that even if I kept my inventory stable in month one, I'll still have problems paying bills in slower month two. If my purchases were good, I'll resolve it in the future. In the short term, I probably have about $25K of bills I can't pay without a reserve.
  6. Your Best Hat. Purchasing is just one hat you wear, and it's easy to rush purchasing decisions between other tasks, maybe while standing at your point of sale system. Make purchasing special. Find a quiet place where you won't be interrupted with a stretch of time to contemplate what you want. With more time comes more options. You can go off script and open direct to retailer accounts or back Kickstarter projects. Prioritize purchasing and purchasing will expand and reward you.
  7. Buy For Your Particular Sales Team. You are probably your sales team, but think about the product you're ordering. If you have a mostly passive sales staff, the product you buy will need to sell itself. Product will need to be obvious. If you have a demo program, you'll want games that demo well, meaning you will have to be part of game demos, including attending trade shows, conventions, and local game nights. The more active your sales team, the more you will sell, but know what works for you. Purchasing is not aspirational.
  8. Exhaust Port. You can't get another portion if you haven't finished what's on your place. Have a system for clearancing dead product. There's no shame in an in-store clearance section. Game conventions are great for moving bulk overstock. And of course there's the Internet. The system is in a closed loop and you need to move the dead stock to buy new stock. If you personally move your mistakes, you'll get better at buying decisions.


Tuesday, November 1, 2022

Gaming A Broken System

Out of college I took a job for a short time as an assistant teacher at a school providing therapeutic services to kids. These kids had autism, severe learning disabilities, and most common, trauma that resulted in emotional outbursts. These were kids that were unable to be served in mainstream schools, or so it's said. It would be the most challenging job of my life, which is to say it was awful. I left as soon as I was accepted to graduate school, and I still remember the look of disappointment on those little terrors. It haunts me.

Kids were expected to improve and be mainstreamed back to regular schools, age out, or for many, end up in a group home when their behavior devolved. Most had messed up home lives or in utero drug addiction. My job was to try to get these kids to learn anything, while not hurting anyone. Some kids were super bright, and I was able to teach a unit on The Hobbit and some elementary Japanese.

Some kids were not so gifted. We had one kid, Tom, who was completely unable to focus. Tom was rewarded with a piece of candy for every math problem he attempted. Eventually I developed a reward system using trading cards, and we got rid of the candy. For now though, Tom would sit at his desk, do a problem every ten minutes and eat his candy. He would laugh at the other kids, "Suckers!" Tom was gaming the system. He was clearly in it for the candy rather than the education. I never forgot Tom.

Sometimes I feel like Tom. I'm a store owner crushing it right now. The system is broken. Suppliers are in disarray. Most of my suppliers cannot properly send me an invoice, provide tracking numbers, or cash my checks in a reasonable fashion. These would seem like core competencies, no? 

I regularly find myself dividing up pre orders in fear that a distributor can't deliver. Often they can't, because of logistics, lost orders, or they didn't pay their bill and got cut off. Focusing my job as a buyer and finance, has hyper focused me on these two areas. I get the impression that a metaphorical Harry was keeping their systems together, and everyone has lost their Harry. One does not simply replace their Harry. And nobody really understands what their Harry does until he's gone.

Meanwhile publishers are moving to Amazon in droves to avoid the bottlenecks. I am the little boy eating his candy and calling everyone sucker. I am master of a broken system, not just due for replacement, but actively being replaced while I'm blissfully unaware, crowing about my success while on a massive sugar high. This is where it becomes imperative to have good publisher relations, direct accounts, Kickstarter orders in the pipeline, and an ear to the ground. I am Tom, but I am also Harry. 

I would mention how unstable the game trade seems right now, but has it ever been stable?  That's the one certainty in all this. Time can be defined as just one damn thing after another. Such is the game trade.


Sunday, September 11, 2022

Game Store Investing

The feeling of long term store ownership might be described as failing upwards. There are regular setbacks, characterized by the phrase, two steps forward, one step back. The saddest thing ever, I think, would be to look up after ten or twenty years, and see things exactly the same. You are the same. The store is the same. The money is the same. You are the victim of a Buy-A-Job. Top stores, those failing upwards, are run by owners who believe they are heading in a positive direction and they work towards that progress. How do you work towards progress?

First, invest in yourself. Besides paying yourself from day one, which means having a larger startup budget, you want to invest a percentage of your income for retirement. This might seem extravagant, but honestly, when else will you do it? Retirement savings can also be used for buying a home, college, or a number of other investments in yourself. Starting younger means you won't have to scramble when you've finally "made it" in this trade.

Investing in yourself also means learning new skills. This is going to happen anyway when you first start a business, but regular personal development of your skillset is harder over time. I'm currently paying someone for graphic design work and I'm about to hand over my website to an employee. This is mostly because I've lost interest. I'm instead working on learning Spanish and RV repair. My eye is not on the ball.

Second, invest in your store. Avoid purchases that don't add value. My investors describe this as "pimp value," or what today we might call flexing. Buying a van and wrapping it as a billboard, a vintage pinball machine, or yet another rubber statue is pimp value. Now that we've tripled our inventory and seen what true investment can do for us, pimp value is clearly seen as net profit deferral. Avoid pimp value. Flex with profit.

The most solid store investment you can make is more inventory. Even bad inventory that underperforms is better than pimp value. Avoid spending money on Other Peoples Property. We spent $160K expanding our game space to a second floor, just in time for the Magic boom to end. We paid it off during COVID, and event attendance may never fully recover. When we one day move out of our space, our landlord will likely tear down our second floor. It's that idiosyncratic to our operation. 

Third, use systems to invest. Give yourself a salary based on a dynamic number. My salary is based on the low end of the average range of a retail store manager. This lets me increase it over time without feeling like I'm taking too much. This is not all of my take home pay, but it's the baseline I can take, even during hard times. After you have a salary, take a percentage of your income and invest it in a 401K or IRA. The ideal number is supposedly 15-20%. If you can't possibly imagine doing that right now, try 1%. Then increase it slowly. Anything is good.

After you've paid yourself, repeat this process with your business. Take another percentage for operational improvements and inventory increases. This is easy to do during your windfall months, like the summer or after the holidays. A 10% inventory increase has been my guideline for a while. I'm always progressing if my inventory is increasing. This also lets me play with inventory performance metrics as a means to increase profit. It's not just more stuff, it's an engine for profitability and a way to keep me engaged.

Pro Tip: Take 10% of your net profit and put it aside for improvements and repairs. Early on when profits are thin, it might seem all your profit goes to improvements and repairs. Eventually you'll get a handle on entropy. The goal is to find yourself sitting around a table with staff and scratching your heads because you don't know how to improve the store further. You've done all the projects on your white board so you'll need to get creative. This is where you want to be! Watch your store become a leader in the field, rather than worrying about a broken toilet.

These might seem like small things, but that's the point. You sacrifice a small amount here and there for big results later. Finally, don't be afraid to take home your net profit. Remember that the R in ROI is Return. If you aren't taking money out in the form of profit, I think you're doing it wrong. Enjoy your life. Develop hobbies outside of gaming. Take care of your health. Plan a vacation that's not to a trade show. You don't need to take pride in your success, but you certainly don't owe anyone an explanation.

Wednesday, September 7, 2022

The Best of Times

After 18 years of running a small business, there hasn't been one "best" time, but instead a series of them. Of course, my best of times, might be hell for you. My wife used to take math classes for fun, case in point. So what are my best of times?

Figuring It Out. Learning the trade from scratch was a glorious time, breaking the code of my trade. I'm still doing it. In retrospect, I paid about as much for that education as my parents paid for my college education. My startup loss budget, AKA my informal education, was over $50,000. Figuring out the trade also included understanding customers. Some of those early customers are still with me. Some have loaned me large sums of money. One is a long time investor. Learning games was also part of figuring it out. I learned about 100 board games, several miniature games, and half a dozen role playing games. I don't do that anymore, nor do I want to, but I look back fondly on this time.

Survival. Squeaking by with a few days of cash flow made me feel lean and mean. Extra money tended to be more liability than opportunity. I remember being on vacation in Mexico and essentially bouncing a Friday payroll, rolling it over until Monday. Business as usual. We had super thin labor. We relied on December to get us out of debt nearly every year. I did this for so long, I would have told you "this" is what owning a small business is about. It is for most. It taught me discipline, but if I analyze it clearly, there's also some psychological trauma. There was a baseline of constant pressure to perform. It can be addictive.

Just a Taste. I overbuilt, over-invested, and there was a potential energy built into my business, like a large rubber band being slowly twisted. In year eight it unwound and after years of just getting by, we finally cracked the expense nut and saw net profit soar. It continued to soar for years to come. Scraping by for eight years and finally having some extra cash was glorious. It didn't feel like a reward for hard work though, it felt unearned. I did enjoy the vacations and outside hobbies this provided. It was a nice distraction from imposter syndrome. 

Break Out. COVID saw my return as the sole proprietor for several months, building a new POS on my dining room table, delivering games to customers, creating an online store, and re-hiring staff to take it all over. Imposter syndrome was cured when it was just me again and I didn't fall on my face after a lot of years away from the counter. I can still do this! It gave me the confidence to work from home, plan my long term working road trips, and believe that what I built had a strong foundation. We had strong policies and an equally strong business culture embodied by wonderful employees.

The Last Day. One day I will sell the business, hand it off to my son, leave it to employees, or liquidate at a tremendous profit. They say the two happiest days of owning a boat is the day you buy it, and the day you sell it. I imagine a small business is no different. I'm another 18 years away from that day, if I'm lucky, but I imagine it will feel like victory.

Sunday, August 14, 2022

Frosthaven: A Retailer Kickstarter Analysis

Frosthaven is the largest Kickstarter I've supported. It's also the most transparent. You can tell what retailers have paid for it, and thus it's an interesting public case study of my costs, both what I paid and the lost opportunity, related to retailers backing Kickstarters. 

I have a modest amount of Frosthaven on order compared to my peers, a shipping pallet worth. I have 30 games coming, along with a small number of add ons, which we will ignore for this exercise. The cost per game is $80, which is pretty good for a game I'm selling at the market price of $250 (market price is now more like $275). However, my shipping costs for this pallet is $480. I've never paid this much for shipping. I can divide that shipping by 30, the number of games coming, bringing it to $16 per game, or a total cost per Frosthaven copy of $96.

Selling a $96 game for $250 is the occasional win we get with Kickstarter. A 62% margin is very good and a definite outlier. You might be thinking, will I actually sell any games at that $250 price point? 13 copies of Frosthaven, or nearly half are pre sold with cash up front, which is a good strategy for mitigating the opportunity cost. It's also important in the calculations to come.

What is opportunity cost? This is where we see this game isn't so great for retailers, not that Cephalofair is to blame. Every inventory dollar I spend has to perform, measured by my turn rate. My overall turn rate is a strong 4.6 per year. It's generally agreed that healthy stores should be in the 3-5 range. An example of turn rate is if I have a $100 game, on average, that game will sell 4.6 times, providing me gross sales of $460 over a years. This is using the price of the game, not the cost, but we'll get to that later.

If I pay for a game up front, like with Frosthaven, I lock in my money for a period of time, and thus lose the opportunity to turn it with other inventory purchases. This loses me money with hopes of offsetting it with sales of that game when it eventually shows up. The goal then is to pay for the project as close to the shipping date as possible, AND to pre-sell as many copies as possible, to shift that opportunity cost to consumers. It's less of an opportunity cost to an end user, since they only lose out on the fun for that period of time, and not money.

My Frosthaven order was $2,880. I placed the order April 1st, 2021 and expect to receive it by the end of December, 2022. That's 21 months without having $2,880 to invest in my business with a pretty sure thing investment in inventory. However, I pre-sold 13 copies, reducing that amount by $1,248, leaving my an opportunity cost of $1,632. 

That $1,632, locked in for 21 months, would have grossed $13,138 at cost. To get the actual money lost, we can assume that $13,138 bought other averagely successful product at a 45% margin. We need to calculate this because I want to get a net profit amount, which I generally, back of the napkin know from gross sales, not gross costs. $13,138 would buy me, on average $23,888 in product over the life of Frosthaven production and shipping. The ghost of what coulda been.

From $23,888, I can calculate a net profit percentage. For retailers it's generally in the 5-11% range. Let's assume a normal period with an 8% net profit range. $23,888 x 8% = $1,911 in profit. The opportunity cost for backing Frosthaven is $1,911, more or less. How does that compare to the profit I'll make from Frosthaven? 

That's far easier, since we have actual numbers, assuming I don't have to clearance Frosthaven later at a discount. $250 minus $80 cost equals $170 per game x 30 copies = $5,100 gross sales, times 8% net profit percentage = $408 of net profit. As we can see, the $1,911 of lost opportunity cost is not offset by $408 of net profit from Frosthaven. We have a net loss, assuming opportunity costs, of $1,503. I will be really happy to see my $2,890 of (additional) gross sales in December, but if you missed out on Frosthaven, you're probably ahead as a retailer. You might have a lower turn rate, or lower profit margin, in which case you might actually make money? I'll let you do your own math.

Edit: Should I consider the pre sale of 13 copies of vapor ($2,210), and the 4.6 turns of that money, to offset this cost?  

This assumes you have opportunity costs. This assumes you have other product you could have bought instead that would have performed at an average rate. A lot of us are increasingly not able to identify average performing game trade inventory, as we have all the good stuff in our trade. This also assume money has value, which at the time of placing this order, it honestly didn't. Rolling in government money I didn't want to give back, locking in a sure thing for a 21 month return was like buying a game trade bond, when you're used to playing the stock market. 

I think the best way for a retailer to handle Kickstarters is first, try to back projects where you pay upon shipping, and second, consider this money to be separate from your purchasing budget, which removes it from thoughts of opportunity cost. Perhaps call it marketing, where good money goes to die. Backing Kickstarter projects makes my store stand out from competition. It's a flex, a power play, because who has $1,503 to lose on one game?