Tuesday, September 11, 2012

Kickstarter Opportunity Costs

Kickstarter requires money up front so the publisher can go out and make the thing. That might not be a big deal to the average consumer, but from a business perspective, cash flow is opportunity, and a lack of that cash is a lost opportunity. This is not bistro math stuff where you figure you make $20 an hour so you should pay someone the $10 for the hour it takes to wash your car, this is real money, working day in and day out.

For example, I've spent a great deal of time working to improve my terms with my supplier. It allows me more time to pay the bills, which allows me to take bigger risks with their products. My 45 day terms with Games Workshop means I can now bring in a 45 day supply of their game, rather than the usual 30 days, or the 25-45 day random range of a credit card purchase. It gives me a competitive edge, allows me to plan for their "spikey" release strategy, in which products sell like mad in increasingly smaller amounts of time, and it also allows room to carry that debt so I can buy products from other companies.

In the Kickstarter scenario, I essentially have negative six month terms. I pay up front, then wait six months or more for the product to be produced, and then sell that product over the next 6-12 months due to the large quantities required to be purchased. With an average turn rate of 4, buying 4 copies of a game is a year supply unless it's really hot.

So let's look at a real example. Numenera is a far future RPG by Monte Cook. I'm a big Monte Cook fanboy, so I know for sure I'll be able to sell these, including one for myself. The base Numenera retail level is 3 copies for $125. Three is an acceptable number for retailers, so no problems there. The book has a planned release date of Summer 2013. Let's call that Gencon, AKA August 2013, roughly a year away.

I will most definitely sell those three Numenera copies, despite the fact that all the "alpha" gamers I know are supporting it. It's the highest funded RPG to date. However, that $125 is not working for me during that year while Numenera is being produced. So how much am I really paying for Numenera in opportunity costs, with my money tied up? It goes back to my average turn rate.

If I sell an average of 4 copies of an item a year, that $125 could have been working for me, turning over four times. I could have purchased $500 in product in that year with my Numenera money, creating roughly $1,000 in sales, with a roughly $500 "gross" profit. So that $125 purchase just cost me $500 and that's before I even have the product.

Once I get my three copies, on average it will take me 9 months to sell them using my 4 turns a year example. That's an additional opportunity cost as copies of the book sit on the shelf, not producing income. That third book cost $94 in lost opportunity, the second $62 and the first, assuming it took three months to sell, $31. So stocking up had an opportunity cost of around $187 on top of my $500. Remember, in the game trade, I can get away with ordering one copy at a time. However, there's also no returnability, like the book trade, meaning if I order those 3 copies and they don't sell, I'm out of luck. Most of my print RPG products via Kickstarter are in the "out of luck" category because of large quantities.

So a $687 opportunity cost when I order just three books a year in advance. Is it worth it? Is there a scenario where I could better use $687?  If I had waited for distribution to get the book, which could take as little as a few days after Kickstarter supporters, would I be better off? Of course. Is there any scenario where this would make sense for a retail store?

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