Saturday, July 11, 2009

Margin and Mass

I started with a simple question: Why are Heroscape miniatures of such a higher quality than Dungeons & Dragons miniatures? They're the same price and they're both made by Hasbro/Wizards of the Coast. The answer was supplied on Facebook by a game industry person who used to work for Wizards: It's margin.

The profit margin for Hasbro on a mass market item like Heroscape is 70%. Wal-Mart or Target takes 30%, while Hasbro gets that fat 70% back. This is compared to the game industry, where I get around 50%, the distributor gets 10% and Hasbro would get 40%. If you make twice as much money on a product, you can potentially sell a higher quality item.

The down side to selling to mass for a company like Hasbro is that the mass market only wants product that will allow them to survive with that 30% margin (Wal-Mart regularly hovers around 24%). If I need a 50% margin to survive in my game store with items that must "turn" (sell) 4 times a year, Wal-Mart must turn twice as many items to make up for their diminished margin. If Black Diamond Games could only stock items that sold 8 times a year, it would be a very different store.

You would first kill all the miniature games. You might keep some mini starters, but why push a game that you can't support further? Then you would dump all role-playing games except D&D and the core books for half a dozen games. The board game selection would be viciously pruned, dropping our 500 games to about 50. Collectible cards would include Magic, Yu-Gi-Oh and Pokemon with the occasional one-off, like Naruto. Anything that sold would be stocked in depth, as 8 turns a year, on average, means even the slowest selling item would likely be stocked in 2's and 3's. Don't even get me started on the schlock we would have to sell to attract the general public.

In other words, look at Target, Wal-Mart and the RPG section of Borders and that's what we would have to become. We have a different business model, one that the big boys can't replicate without bringing along all of our specialty store problems. Try selling a specialty board game without having product knowledge. Do I need the 5-6 player Settlers of Catan Cities and Knights expansion if I already have the regular 5-6 player Settlers expansion? Can you explain the differences between Hero and Mutants & Masterminds? How do you read a force organization chart in a 40K codex? When is your next D&D event? Good luck with that Wal-Mart.

There are upsides to mass market though. My understanding is that the manufacturers give "rebates" to mass market stores for advertising their products. You might make a few more "points" on your margin through this strategy. Also, there's some level of returnability on mass market products. In many cases, the manufacturer is just borrowing space from the retailer. The retailer gets an opportunity to make their 30% and what doesn't sell is sent back! This is also true with a certain percentage of books from larger book distributors, so Barnes & Noble can take a bigger chance on the latest D&D book. What doesn't sell gets returned. Every once in a while the game industry asks the question: How much margin would you give up for returnability? It always depends on the strings attached.

The flip side of this whole argument is that for years I thought Hasbro and others were "screwing" us with their prices. I figured they were giving a much better discount to mass market, but it turns out they weren't. True, we don't have advertising incentives or returnability, but the bad margin we get is the bad margin Target gets, as far as I can tell. Still, Clue and Scrabble don't sell twice as well as Settlers of Catan and Carcassonne, so we can't absorb that poor margin. Some stores consider them a "merchandising" expense, and sell them for a few bucks over cost. Other stores, like us, see them as a "convenience" item, and mark them up accordingly, risking alienating a familiar touchstone with new customers.

Although I wouldn't mind the volume of traffic in a store like Wal-Mart, I definitely appreciate being able to sell the more interesting, slower selling product. Clearly though, the mass market has found a more profitable model to work with, just not as fulfilling.