Sunday, November 18, 2007

Oil and Games

One of the topics that nobody will discuss in the game industry forums is prices and margins. They're afraid of getting in trouble as an industry for price fixing, something usually preceded by a bunch of people getting together and discussing such things. As this is more of a one-way medium for the most part, I think we're fairly safe from the feds (as I look over my shoulder).

There are changes going on in the game industry that are upsetting its very structure. The cost of oil has thrown a monkey wrench into the works and it's threatening to break the model (I hope). In econo-speak, the game industry model doesn't deal well with inflationary pressures. Everyone is feeling their costs rise substantially due to the cost of oil, fuel for the trucks and ships that move the games we play. Because of the flawed industry structure, everyone is expected to pass on these costs, except the retailer.

Discount/Freight Model

Starting at the beginning of this problem, the game industry is stuck in a discount/freight mode. They're obsessed with discounts, which translate to margins. Margins have shrunk over time, but the baseline margin nowadays is 50%, referred to in retail as keystone. Most store owners believe 50% is necessary for survival, although overall, across all lines, we're around 45-47%. This is considered a trend that has harmed the retail tier of the industry.

For example, When I buy a $50 board game for my store, I expect to pay $25. We've gone over this before, but there is a small profit inherent in that $50 purchase, around $4 or so. Squeeze that 5% margin by selling me that game at $27.50, like Days of Wonder does, and the store makes significantly less money.

The problem at the manufacturing end is the cost of production has gone up and they're afraid to raise their retail prices. Rather than raise that $50 game to $52.50, possibly alienating their customers, they attempt to squeeze that money out through the tiers of the industry, lowering the margins for the distributors and ultimately the retail store. In the case of Days of Wonder and their train games, they did both. The retail store can try to raise the game to $52.5o, and I often do, but the concept of an MSRP, a manufacturers suggested retail price, widely known and available, makes this difficult. How do you compete with an online discounter that sells a $50 board game at 30% off when you sell it for even more than the established retail price? I don't think it's an option.

This assumes a certain level of good will on the part of the manufacturer. The general feeling is that manufacturers are all hoping to one day lower discounts and put retailers over a barrel once the retailer can't do without their product. I think is is generally not the case, but certain companies (cough, Upper Deck, cough), deal in such predatory price practices that it tarnishes the industry and makes retailers suspicious. For example, the World of Warcraft card game had a reasonable, albeit low, discount when it first came out, but since then the margins have been squeezed by Upper Deck. You want the next release? We'll you'll pay a couple bucks more now. That doesn't exactly build good will (bastards).

Distributors have been loathe to meddle with discounts too much, because they're much more replaceable than a top selling board game. If one distributor mucks around, I can go with another, and I often do, even with the distributors that I love. There are lists of items that I buy from only one distributor because of their prices and some items go back and forth as discounts and retail prices ebb and flow. Although the number of distributors is shrinking each year, there are still a good number of options. Instead, distributors have discovered a more transparent mode of passing on their costs, shipping.

Part of the odd game industry discount structure is the use of free freight as an incentive. If you buy $300-$350 in games at one time, they'll ship it for free. The cost of shipping has gone up tremendously, leaving the distributors and manufacturers in a pickle. Shipping is no longer an incidental expense. They've been forced to adjust their free freight limits or add flat fees to their "free shipping." For example, Wizards of the Coast has free freight at $300, but there's now a $5 charge on all orders. At least this seems honest.


So what's the solution? Ah hah! I actually have a solution this time! The solution is to dump discounts and MSRPs. In the game industry, items outside of the discount model are known as NPI's, or Net Priced Items. Everyone pays the same for these items and the retailer can choose how much to charge for it. Let the market set the price. Net priced items are usually black sheep, mass market schlock, and often close in price to what you would pay at Wal-Mart. It's the industry's way of saying, "Look, you asked us for this crap, and we paid an arm and a leg because we have no leverage, so here it is dufus, do with it as you wish."

Net priced items work well, provided the manufacturer/publisher doesn't declare a MSRP. There's more than one way to make such a declaration. For example, the World of Warcraft CCG came out as a net priced item, but Upper Deck sold the cards on their website at a certain price, creating a de-facto MSRP. That MSRP put the discount at around 38-40%; total crap. Net priced items only work when everyone is on board with them.

CCG's are a good example, since all CCG's are net priced items in the marketplace. The discounts have been so marginal for so long and the online price pressures so effective in pushing down prices, that the price of CCG's vary tremendously from store to store, even in the same town. One store may sell a booster pack for $3.99, while another without much local competition or next to a school might sell it for $4.99. Boxes of cards are all over the map too, with $145 boxes of cards sold online for $5 over cost. It's what the market will bear and it sorts itself out.

For example, I sell single packs of Magic for $3.99 and boxes of 36 for $99.99. I sell WAY more single packs, despite the average cost of boosters bought by the box being $2.78. I've learned that pack customers and box customers have different price expectations. I learned this on my own, through trial and error, without a distributor telling me what to do. I learned that $109.99 is too much for a box and nobody will buy a single Magic booster for $4.19 (although you can do this with games played by younger kids). The retail price of a booster is set in stone in the customers mind, reinforced by the MSRP, while the retail price of a box of boosters is more fluid.

The toy industry is a good example of net priced items. The whole concept of discount and net priced items and free freight don't exist. There is the wholesale price. In fact, they just say the price. Everyone knows it's wholesale, we didn't just fall off turnip trucks. The price I pay for the Love Me Tender singing Thomas the Tank Engine is $10. I can charge $20 if I think a 50% margin is a good markup and my competitors are priced similarly.

As for free freight, I always pay for shipping, unless I'm getting a special promotion. I can choose to add freight costs into the price, probably adding another 5%, but I can adjust as shipping costs rise. I would be foolish not to, unless competition forced me into it. I might charge $22 for Elvis Thomas if I think the market can bear it, and when shopping at toy stores, I see the range of prices. Nobody blinks. Nobody throws a fit in the train aisle claiming Love Me Tender Elvis has a clear MSRP of $20.

Unfortunately, I don't know how the industry can do this unless the biggest distributor, Alliance, simply does it. Or maybe Hasbro (aka Wizards of the Coast, Avalon Hill, etc.) does it. It scares the hell out of many retailers, but I would welcome it.


  1. Gary, we rarely pay for freight, which is the single easiest and best thing you can do to keep your prices close to keystone. I make it a point to always ask that question first before ordering, and most of the time we're set up with a good program that allows for free shipping or, at least, some sort of product offset. I understand that we have quite a disparate stock from you and our that orders aren't always the same size, but it concerns me that you're not getting the shipping deals that help keep your prices lower. We should compare and contrast to make sure you're not getting hosed.

    Is paid shipping standard for most toy manufacturers?

  2. Quote -when shopping at toy stores, I see the range of prices. Nobody blinks. Nobody throws a fit in the train aisle claiming Love Me Tender Elvis has a clear MSRP of $20. -Quote

    People generally know how much they will pay at any given store and are already prepared for it. People who shop at, "Toy Stores," per se either do not care about,pricing or are ignorant of it.

    A lot of specialty store purchases have to do with loyalty to the store/owner or the effects od supply/demand.

    Some people do not trust the internet and refuse to do business over it.

    The problem is, it is like gas stations. People know where the less expensive, exactly the same gas in the pump stations can be found. Eventually word gets around about who is cheaper. And, if everyone gets together and sets prices, it is called price fixing.

    Not knowing exactly how it works, I am surprised you do not have an online store component of your brick and mortar.


  3. Net price only works the way you want it to within limits, as you've seen with Magic. As part of my Christmas shopping I've been investigating Transformers. Hasbro technically sells Transformers at net, but it was trivial for me to find out what the internet considers to be the expected retail price (hasbro actually lists an "aproximate" price on their website instead of a "suggested" price, the weasels).

    When I went looking in the stores I found that Target charges that price while the Toys R' Us next door charges more. Guess which one gets my business?

    To me, the solution is for manufacturers to either raise the SRP or eat the increased costs themselves. Anything else is simply burying their head in the sand and hoping someone along the chain doesn't notice.

  4. I rarely pay for freight on games, but most toy free freight limits are thousands of dollars or don't exist. My point was that I would happily pay freight for games if there was a way to pass along the costs, like I do with toys. I can charge anything I want, of course, but the price model for games includes an MSRP, unlike toys.

    As for net priced toys in stores, I'm not talking about Target or Toys R Us. People who shop mass are accustomed to price shopping. I'm talking about specialty toys, like specialty games. There is a thriving specialty toy market in the East Bay among small, independent stores.

    The Internet will always be cheaper because some bozo will always sell stuff at near cost out of their basement until they inevitably go out of business and another bozo takes their place. You can't chase those sales (or customers who buy there).

  5. foolish humans and your freights. know not you the magic of portals?! no oil is used with portals... sure a couple sheep get sacrificed and maybe the hair from a hairful hairmonster of hairiness is needed for the ritual ... but thats why you buy that stuff by bulk at your local Costco... wait a minnit... i think THEY get their stuff transported via oil-using freight aparatuses (or is that aparati?)... curse you Oil demon and your oily demony oily demon ways!