Friday, April 27, 2018

Mexican Coke and You (Tradecraft)

The joke is I don't need to sell a lot of games because I'll make it up in snacks. But what if that was true?

Mexican Coke is often cited as the big seller, and we sell a lot of it, over 775 bottles in the last year. 58,000 calories or enough to power a human for a month, albeit with severe diabetes and malnourishment. That might sound like a lot of Mexican Coke, but concessions are only 3% of my sales. However, for some stores, that percentage is a LOT higher.

That's because concessions are sold during events, and event space has a narrow range based on event sizes, which is constrained by the hard costs of real estate. My estimate is between 50 and 100 seats for events is a normal range in the industry, 50 being the Magic number where you hit the WOTC top tier. If you haven't built for 50, you researched poorly. This means concession sales have a limitation regardless of how many other things sell in the front of the store.

A million dollar a year store is likely to sell roughly the same amount of Mexican Coke as a two hundred thousand dollar a year store. The percentage of sales for those concessions will obviously be much higher for the smaller store. Concessions is no joke, and in fact, serious business, when it's a huge part of your business.

This is likely to be perceived by customers. If you shop at a small store, and most stores are small, you rightly perceive your Mexican Coke purchase is significant. When Internet trolls give supposedly bad game store advice about concessions, their observations may not be wrong.

This might also be the cause of friction between those focused on events and those of us, like me, who see it as a marketing expense. Events are necessary for me, critical for my success, but I don't actually sell significant amounts of stuff at events. It's what I often refer to as "the tail wagging the dog," when event policy begins to dictate store policy, the marketing department telling the CEO what's up. When stores become afraid of offending event participants as an existential issue.

Well, if Mexican Coke pays the rent, it IS an existential issue. If events are the store, and concessions are more like 15% of your sales rather than 3%, then I can certainly see why that's critically important to you. So much of this trade seems to be about event management versus selling stuff, and this might be because of the scale of most of the stores. So bottom line is the joke is on us. Maybe selling snacks to keep the lights on is a more viable strategy than we first thought.

Thursday, April 26, 2018

Small Ponds, Mastery and Imposter Syndrome (Tradecraft)

I've talked about this before, but a couple thoughts come to mind about Imposter Syndrome. The term describes how:
...people doubt their accomplishments and have a persistent, often internalized fear of being exposed as a "fraud".
First, anybody in the game trade suffering from imposter syndrome should note how very small our trade is. You shouldn't really have imposter syndrome in a trade so small it doesn't have an insurance classification. The pond is tiny. Keep that in mind when you feel fraudulent about being a big fish. Game trade delusions of grandeur lack the usual trappings of success.

Second, mastery is complicated and in this field it's neither automatic nor shown recognition. If you read and internalized Malcolm Gladwell's Outliers, you might expect the 10,000 hour rule to kick in. You do the work, around five years worth, and you obtain mastery, right? Nope. A new study shows that's partially true in some areas, but in professional work, that time only accounts for 1% of mastery.

So in the game trade, you could be just as much a fool in year ten as year one, or what's more likely, an even bigger fool! In small business, your chance of failure never really declines after the first few years. Your chance of failure in year five is the same as year fifteen. Mastery in retail does not come from time served.

This means there's little recognition in small business about mastery. There are no master level stores, or special categories for the top tier stores from Wizards of the Coast. Got enough folding tables for fifty people? You're top tier at Wizards of the Coast. Butts in seats baby.

Recognition instead comes from like minded peers, and if you aren't networked with like minded peers, you're likely to have a bad case of imposter syndrome. Also, in this small pond, mastery is not a well defined category. I know some brilliant store owners whose opinion I greatly respect who make a very small amount of money. I judge them on their ideas, not their income. A million dollar club certainly wouldn't demonstrate mastery in this field, although there are useful commonalities that could be helpful.

Tuesday, April 24, 2018

Tale of a Loan

I write in the book about the story of how I financed the business, primarily through a home equity loan. Over the first six years of owning the store, my home value soared to amazing heights, enough so that just making mortgage payments was enough to justify anything I was doing. Then the market crashed in 2008 and by 2010, my house had plummeted well below what I had bought it for, leaving me, as they say, underwater.

Having survived the financial crisis with the business intact, I knew everything was negotiable, including blood sworn contracts. We had re-negotiated our store lease because of a downturn in the economy. Financial institutions like Capital One were canceling business credit cards left and right, entirely based on "economic conditions." That made finances even tighter. I like to bring them up as a fair weather lender, because I have no doubt they'll do it again.

Everyone was making a deal and the companies that had done the most damage with their collateralized debt obligations were getting bailed out by the government. The homeowner? Oh yeah, screw them. Helping a home owner would be "moral hazard," otherwise known as allowing them to play by the same screwed up rules as financial institutions. We couldn't have that.

So I took it upon myself, much as I did with my lease, to renegotiate my mortgage. They wouldn't talk to me until I was far behind, so I got far behind. I stopped paying my mortgage for eleven months, with otherwise stellar credit. There were eleven months of threats, but I was willing to walk, a key point in negotiating. I offered to send them the keys; jingle mail was the term that was coined. Eventually they blinked on my first mortgage, and while I was at it, I renegotiated my second, leaving me with zero equity (which has since grown by a few hundred thousand dollars).

That was eight years ago, and what I found trying to refinance for our construction loan was I was poison. There were two parts to this. First, no underwriter knew of a homeowner who essentially "short sold" their house while keeping it. They didn't know what to do with me. There was no check box on a form to handle my situation. That meant risk, which meant they wouldn't even return my brokers phone calls.

The second problem was Citimortgage refused to formally finalize the settlement on the second mortgage. If you tried to call them, they wouldn't talk to you because you weren't their customer, yet they continuously reported payments as late. If you claimed the mortgage was paid off, they wouldn't confirm. They held me hostage out of spite. Eventually they sold off my loan, as they often do, which opened my up to the possibility of a new lender.

And that's where we are today. I just closed on a small home loan from my local credit union to pay off one of our construction lenders and put much needed cash into the business. With Citimortgage in the rear view mirror, they could no longer hold me back, and with 7 years of good credit since the re-negotiations, it was far enough in the past to not matter.

And yes, I'm both proud and a little ashamed of this whole endeavor. I have stared moral hazard in the face and in a way it has turned me into a shrewd dirtbag, much like the bankers I negotiated with. Everything is negotiable in a pinch. I'm not a serial dirtbag, burning bridges for financing on my way to the top, like some powerful people in the news, but it's in my bag of tricks. What I truly value are personal relationships, and those I can't imagine burning unless my life depended on it. My survival over the last decade has been very much about those personal relationships.

Friday, April 13, 2018

Consultants and Preparation (Tradecraft)

"A consultant is someone you ask the time and they take your watch as payment."

I learned this saying as a teenager and found it amusing, but there's a kernel of truth to it. You want to know the time, you have the tools at your disposal, but you don't know how. My free advice, because I'm not a paid consultant, is learn to use the tools. Here's where to start:

Write a business plan. What, you've never written a business plan? What a great education! It's a research project, one where everything you learn will have a direct impact on years of your life. You can't spend too much time writing a business plan. Write it from scratch and get feedback. Find a SCORE member to vet your plan and share it with people who know more than you. It's like your first script in the movie business; try to get it in front of people who can help you make it happen. I talk a lot about the business plan in my book, without actually writing a plan, because that exercise is something you should do yourself.

Also write a marketing plan. Budget money for marketing based on a percentage of your expected gross sales. Nowadays, with social media and online advertising, as little as 1% can make a huge difference. When I started it was recommended you spend 2-3% of your gross on ads, but that included a lot of cable TV, radio ads, print ads, and the dreaded Yellow Pages. My advertising last year was .76%, and I have a hard time justifying spending more. My advertising budget my first year in business, 15 years ago, was 4% of my gross. I actually paid more in marketing my first year in business than I did last year with four times the revenue. Create a plan, try to make it more diverse than just Facebook, which is a boat filling with water, and create a schedule. Spend more money when you think sales will occur.

Network with peers. Facebook is key nowadays, while 15 years ago it was Delphi forums. A good group to start is Opening A Tabletop Game Store. From there you can branch out into many other places, where more than likely the signal to noise ratio won't be as good for you. Find like minded individuals. Compare notes and triangulate when given advice. There is good advice you can use, good advice that doesn't apply to your situation, and bad advice. Two out of three things you hear will be useless. Note the people giving you good advice and pay attention to them. They are your spirit animal.

Read a lot. I have a blog post here with resources. My advice, which almost nobody does, is delve into reading about retail and not just the game trade. Some of the stuff I lecture on at trade shows is right out of retailing books, illuminating rocket science to most people in the game trade. Many older retail books have the details wrong for today, but the strategies are generally solid. I also keep up on retail news by getting Retail Dive in my inbox, which covers retail trends. Get out of the game trade bubble and remember you're now a retailer. Diversify away from distributors early.

Consultants? If you do all of these things, you'll probably be able to tell time. It's unlikely you'll need a consultant. If you're like me, a completist who's never satisfied until they know every angle, you might find peace of mind by budgeting a little money to bring in outside help. I spent a thousand dollars on a feasibility study when I first started, a gut check with the goal of making sure the numbers in my business plan were likely to work in my proposed locations. Since we're making up revenue projections, it's good to have some clarity on whether that's feasible. One of your final questions is: Can I do THIS, HERE. Worst case scenario is your consultant tells you the time you already knew and you're out a grand, which nowadays isn't even a lot for a nice watch.

Thursday, April 12, 2018

Rules of the Game (Tradecraft)

My shifts at the store start at 10am and I'm out before events start. I like my days to be quiet, and most of my customer interactions are the lunch crowd, a group of regulars I've enjoyed for over a decade. There are people who shop at my store who have no idea who I am or remember me fondly from olden days. Events, and the vast majority of sales, occur in the evening so when I started noticing new signs in the store, I knew what that meant. That particular behavior or policy confusion was happening.

While in grad school in Buddhist studies, we briefly touched on the Vinaya, which included the code of conduct for Buddhist monks and nuns. These were not top down, high concept, engraved on stone tablets, but rather hundreds of rules created as needed to tweak behavior. These are rules to allow people to do their spiritual business without being distracted or disrupted by the unruly, which might be other monks or perhaps their own tendencies. It's stuff as granular as not leaving a chair outside after you've used it. This kind of stuff might seem granular, but 2,500 years later, it offers a historical insight into what people were actually doing, since only crazy people create rules for problems that don't exist (a singularly modern American problem).

I run my store much like this. Part of Third Place Theory is creating a welcoming place where common activities can be engaged in without it being overly restrictive. There is no promise people will get along and the fact they won't get along with everyone is part of the deal. You will play games with people you don't care for, whose politics you disagree with, whose culture is not your own. Mission accomplished. Civilized society shall continue as we break down tribal barriers.

Our code of conduct is the unwritten and unspoken, "Don't be a dick." This does require staff to occasionally tell people, "Hey, you're being a dick," but it's rare when people show shock there's not a sign banning their dickish behavior. This did require some training of staff early on, and some staff were getting steamrolled back in the day. New staff can occasionally panic a bit and get a little too animated when people break the rules. Assertiveness training is a thing. Calling people out for bad behavior is not something we teach people nowadays. It's a damn shame.

What you will learn from reading the Vinaya or running a game store is people will generally skirt right up to the edge of the rules, and then take a step or two over. A Vinaya example is "Not to purchase another floor carpet as long as the former is not six years old yet." Imagine the conversation: "Joe, we told you when you started with us you could have a floor carpet and replace it when it's worn out, but your desire for fancy stuff is getting in the way of your goals, so now everyone has to give away new carpets if they're less than six years old. Joe, you're literally why we can't have nice things. No Joe, I used literally correctly this time." We have the same issue with policies where we need to finally put up a sign because there are those who will abuse the system otherwise. My guess is Joe the Monk wasn't the only one with new carpets, just as we don't create new rules for that one guy who brings product from the retail space into our Game Center.

Saturday, April 7, 2018

Wages (Tradecraft)

I was messing around in Excel, thinking about how many employees a store could reasonably expect to have at various sizes. My store is in the reasonable range of staffing, but I have mostly part time people I would love to transition into full time. They don't quite fit this model as California minimum wage is 45% higher than the national rate (plus they tend to make over even that). Still, I wanted a model that would fit the nation.

Below is what I came up, a model that's more something you would find in a player's handbook than a business plan. It's not exactly how a business would operate, but it's a baseline. It assumes some things:

12-15% labor costs. As a percentage of gross sales, a range of 12-15% is optimal so I included both 12% and 15%. I tend to skew lower.

Manager salary of $40,000 a year. That is a pretty low number, but this is a low earning trade, so I went with this number at the bottom of the curve. For California, a non exempt employee would make around $44K salary, so it's even higher here.

Note that at $200K-$300K, the manager can't even earn $40K without taking profits, which assumes these stores are always owner-operated buy-a-jobs. This model also assumes a multi million dollar store is still paying managers $40K, which probably won't happen, as we see a stratified management structure.

FTE Compensation. This assumes a full time minimum wage salary of $15,080 a year. Again, not an ideal compensation rate and in California it would be $22,880, but it's a place to start.

1:8 Manager Ratio. Another number from the retail trade which may not track exactly with what we're doing is having one manager for every eight line employees. For the vast majority of stores, this will never be a problem, as it kicks in at well over a million dollars a year in revenue (perhaps 5% of stores).

Profit Margin. Ask the general public what they think a retail store nets and they'll be wildly optimistic. When I made a post showing how my 10% net profit broke down across my business, the response was willful disbelief. Game stores make in the 5-10% net profit range. One year I mentioned in a trade show presentation I had an 11% net the year before and the audience broke out into applause. This number is only useful for imagining total compensation (below).

Total Compensation. Assuming the owner is also the (first) manager, you can figure out what a business owner is likely making by adding that $40K salary to profit. Pew Research says the range for middle class tops out at $125K, which could be a king's ransom in the Midwest but is pinching pennies in a big coastal city. You can play games with this, such as realizing a store owner needs to make $1.25 million dollars a year with an average (7%) net profit rate to break the middle class ceiling. Good luck with that. I think the average store nationwide is probably in the $350K range, which is just barely middle class, which means half of store owners are likely living in poverty.

Feel free to nitpick. It's a model. Remember that level 10 game store owners need to seek out and challenge the Master of the Broken Wind in mortal combat to proceed to level 11.

Thursday, April 5, 2018

Hedonic Goods and Your UVP (Tradecraft)

I'm brainstorming for an upcoming presentation, so here are some thoughts about game stores and the UVP:

Game retailers are in the business of selling "hedonic" goods. That's a fancy way of saying we sell crap you don't need. We're not in the need game, we're in the want game. Hedonic goods are products that provide pleasure, fun and enjoyment. Because we're in the want game, we can't operate a store like we're in the need game, selling utilitarian goods.

We have to provide something special that ties into that pleasure, fun and enjoyment. We are part of the product experience and we need to provide a level of value that enhances that experience through our value proposition. We can't run a traditional store with a traditional value proposition and we're in danger if we simply rely on a Useful Value Proposition. What we need is a Unique Value Proposition.

The traditional value proposition in retail, the one you still see with utilitarian goods, is the three legged stool. You've got reasonably good service, reasonably good selection, at a reasonably good price. When was the last time you chatted about a new brand of potato chips to the cashier at Wal Mart? How many special orders a day do you think they take at the grocery store? How often do you think people say "I'll just buy that cheaper online" at the gas station? The biggest mistake you can make running a hedonic store is to running it like a utilitarian store, although plenty of utilitarian stores attempt to go beyond the traditional model to make shopping with them special.

When I first opened my store 2004, I ran it using this traditional model. I focused on customer service, I stocked every game I thought anyone could possibly want (more than was smart), and although I held the line at MSRP, I would regularly buy liquidated goods to offer the occasional great deal. I had no events, no game space, and although I worked many hours a week, I was home by 6 each night. My traditional value proposition in a hedonic market was an extremely limiting model. I had to master every traditional metric to stay afloat. It worked, but it was not the future of retail and I didn't want it to be my future.

Every game store owner intuitively know the traditional value proposition is not an effective model for them. My traditional value proposition worked because I was running a traditional retail establishment with proper capitalization. Most new game stores tend to be undercapitalized and utilize new tools to squeeze profitability out of nearly nothing. They've got a useful value proposition, and although it's a brittle model, it works with enough sweat.

A useful value proposition offers something important to the hedonic customer beyond the traditional three legged stool of the traditional value proposition that's so easily replicated on the Internet. The most common useful value proposition is in store events and a fairly tight focus of inventory and knowledge in one well understood arena: Magic: The Gathering. Even today, a good percentage of game store owner chatter is about what's happening right now with Magic: The Gathering. Those who aren't completely reliant on this useful value proposition right now likely started with it, so it's deeply ingrained in store owner culture.

There are other areas of the Useful Value Proposition that the average game store engages in. This is stuff I still talk about on my website, since my marketing presence hasn't gone beyond this level:

  • Engaging displays
  • Multimedia wonders
  • Clean-Well Lit-Friendly
  • Demo game library
  • That guy/gal
Developing a Useful Value Proposition is why game stores exist, but it's also a baseline for retail survival in this age. Stores like Sears and Toys R Us failed to be useful. They barely managed to maintain a traditional value proposition, yet alone providing a useful service, and unique was beyond their wildest dreams. With enough money and momentum, such as with giant corporate retailers, a traditional model is still sustainable for a while longer. For the rest of us, developing at least a Useful Value Proposition is basic survival. But is it enough?

As giant retailers struggle to define UVP as Useful Value Proposition, top game trade retailers are struggling to find their Unique Value Proposition. As we lack money and momentum, we need to find safety in a rapidly changing retail landscape. We not only fight against Internet retailers, who sell things, our core business, as a loss leader, but the Useful Value Proposition store is constantly fighting against new game trade competitors. The barrier to entry for new stores is incredibly low and it doesn't take more than some folding chairs and a magic binder for them to suddenly become useful.  Some retail markets see a steady stream of pop ups, in a tug of war with their customer community. Useful simply doesn't cut it any more. 

It should also be noted that a true Unique Value Proposition is built on shifting sands. What's unique today may be only useful tomorrow. My first business was running a BBS system with hundreds of subscribers. This was before the Internet. We had a captive audience. We were unique. When the Internet began opening up to the public, we spent thousands of dollars becoming a hybrid BBS, with Internet access, our own domain with email and for a time it worked and we maintained our UVP. 

The next change was customer direct access to the Internet and many BBS systems became Internet service providers. However, we were still paying off debt from our last investment in our UVP. The shifting sands buried us and we weren't able to adapt fast enough. Most of those ISPs are gone now, as their entire business model became a commodity offered by the telephone and cable providers. The value of a Unique Value Proposition is only as difficult as it is to replicate by competitors. However, investing in a Unique Value Proposition is treacherous, but worthwhile, as you are at least miles ahead of the Useful Value Proposition businesses. While you're trying desperately to adapt and grow to new trends, the Useful retailers will be left in the dust (which is what I believe will happen).

So what's a Unique Value Proposition for hobby game stores? It's something a pop up store can't replicate without resources or money. It lives in the philosophy of Third Place Theory, providing a social outlet in a cold world. It's embracing "experiential retail" as their unique model. Examples of a UVP:
  • The coffee shop, bar, restaurant
  • The mega event center
  • The vertically integrated store
  • The liquidation king
  • The taste maker (supercharged demos)
Some of these examples are self explanatory and many are uniquely positioned, but the one I want to mention, because it doesn't require a bunch of capital or connections, is the taste maker. This is an area pioneered and talked about by game retailers Steve Ellis and Travis Severance and it basically requires a strong emphasis on demoing games at a very high level. 

Imagine what would happen if you had 3-10 demo tables and every month you taught customers the games on those tables, rotating them every 30 days to keep them fresh. Several things occur: 

First, you've created a unique experience in your store and the ripple effect of your sales efforts creates demand in your community. Rather than sitting back and waiting for customers to come in, you are creating the demand by showing off a pleasurable, fun and enjoyable product. 

Second, you have turbocharged employee knowledge, which puts you well beyond the traditional value proposition in retail. If you have three tables of demo games a month, it means every staff member has learned 36 new games that year. Increase the number of tables and you increase the power of this model.

Third, and the biggest reason to give this a chance if you're on the fence or dubious, is the massive increase in sales. Sales skyrocket upwards of 400%. You start focusing on finding new product for the hopper. You take larger stakes in games you know from experience you can sell. You stop dabbling with product and focusing on a system, rather than a stream of board games, ten a day at the current rate. You have created a Unique Value Proposition in your hedonic arena.

The taste maker model requires a staffing level and management expertise most stores will struggle to obtain, and thus it's unique and not simply useful. A general rule of thumb is if it's easy and cheap, it's simply useful. If it's hard or expensive, it's likely unique. The key is to not find yourself tapped out of resources with your unique value proposition when the next shift occurs, or you could find yourself running a BBS in the age of the Internet.