Wednesday, August 13, 2014

Product Pyramid (Tradecraft)

One of my investor friends is a partner in another game store in the Midwest. I've been giving him advice over the last year on how to choose stock. It turns out to be an excellent mental exercise, because although I have a lot of good theory ideas, I haven't always had the opportunity to put them into practice. Sure, I have a store, but I'm set in my ways. With his new store, I'm asked what to stock, how much, and most importantly, why. The why has me thinking, which leads to changes at Black Diamond Games.

One of the bigger changes is the product pyramid. You can get really obsessed with inventory metrics, which I discuss incessantly, but there are important exceptions to metrics. One of these is the product pyramid. A product pyramid has several meanings in retail, but in this case, it refers to a broad pyramid base of slower selling product that's necessary to accelerate the sales at the top of the pyramid. Pathfinder is an excellent example, with three quarter of the sales compromising about 5% of the books (hardcovers). Those three quarters of sales from 5% of the product line couldn't happen without the bottom 95%. Chop the bottom 95% and the entire pyramid collapses.

And the tendency is to chop the base, since it fails to perform under standard inventory metrics. This type of inventory works as a complete system, so you either accept the broad, bottom of the pyramid, stagger along with slow selling top only items, or you drop the line entirely. Knowing which product lines work in this fashion is mostly trial and error. This week the product pyramid strategy was applied to dice.

How much dice should a game store carry? Well, how much money do you have? The answer is as much dice as you can afford. You can't have too many. The broader the selection, the higher the sales rate. That bottom of the pyramid will sell poorly, but customers want selection, demand it really, even if they only ever buy 20% of what's available.

Today we put this into practice one more time by completing our selection of Chessex polyhedral dice. Say it's in honor of D&D 5th Edition if you like, but we now carry every set. Before we were using standard metrics, keeping only the top selling sets. When we first did this, we noticed that sales fell pretty sharply. It took a few years for us to realize why. And a few more years before we rectified the problem (as in we're fixing it now).

The product pyramid doesn't work in every category, but it's another tool in the toolbox to apply to special cases. I wouldn't have thought to apply it in this case if I hadn't been helping out my buddy.

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