Sunday, August 14, 2022

Frosthaven: A Retailer Kickstarter Analysis

Frosthaven is the largest Kickstarter I've supported. It's also the most transparent. You can tell what retailers have paid for it, and thus it's an interesting public case study of my costs, both what I paid and the lost opportunity, related to retailers backing Kickstarters. 

I have a modest amount of Frosthaven on order compared to my peers, a shipping pallet worth. I have 30 games coming, along with a small number of add ons, which we will ignore for this exercise. The cost per game is $80, which is pretty good for a game I'm selling at the market price of $250 (market price is now more like $275). However, my shipping costs for this pallet is $480. I've never paid this much for shipping. I can divide that shipping by 30, the number of games coming, bringing it to $16 per game, or a total cost per Frosthaven copy of $96.

Selling a $96 game for $250 is the occasional win we get with Kickstarter. A 62% margin is very good and a definite outlier. You might be thinking, will I actually sell any games at that $250 price point? 13 copies of Frosthaven, or nearly half are pre sold with cash up front, which is a good strategy for mitigating the opportunity cost. It's also important in the calculations to come.

What is opportunity cost? This is where we see this game isn't so great for retailers, not that Cephalofair is to blame. Every inventory dollar I spend has to perform, measured by my turn rate. My overall turn rate is a strong 4.6 per year. It's generally agreed that healthy stores should be in the 3-5 range. An example of turn rate is if I have a $100 game, on average, that game will sell 4.6 times, providing me gross sales of $460 over a years. This is using the price of the game, not the cost, but we'll get to that later.

If I pay for a game up front, like with Frosthaven, I lock in my money for a period of time, and thus lose the opportunity to turn it with other inventory purchases. This loses me money with hopes of offsetting it with sales of that game when it eventually shows up. The goal then is to pay for the project as close to the shipping date as possible, AND to pre-sell as many copies as possible, to shift that opportunity cost to consumers. It's less of an opportunity cost to an end user, since they only lose out on the fun for that period of time, and not money.

My Frosthaven order was $2,880. I placed the order April 1st, 2021 and expect to receive it by the end of December, 2022. That's 21 months without having $2,880 to invest in my business with a pretty sure thing investment in inventory. However, I pre-sold 13 copies, reducing that amount by $1,248, leaving my an opportunity cost of $1,632. 

That $1,632, locked in for 21 months, would have grossed $13,138 at cost. To get the actual money lost, we can assume that $13,138 bought other averagely successful product at a 45% margin. We need to calculate this because I want to get a net profit amount, which I generally, back of the napkin know from gross sales, not gross costs. $13,138 would buy me, on average $23,888 in product over the life of Frosthaven production and shipping. The ghost of what coulda been.

From $23,888, I can calculate a net profit percentage. For retailers it's generally in the 5-11% range. Let's assume a normal period with an 8% net profit range. $23,888 x 8% = $1,911 in profit. The opportunity cost for backing Frosthaven is $1,911, more or less. How does that compare to the profit I'll make from Frosthaven? 

That's far easier, since we have actual numbers, assuming I don't have to clearance Frosthaven later at a discount. $250 minus $80 cost equals $170 per game x 30 copies = $5,100 gross sales, times 8% net profit percentage = $408 of net profit. As we can see, the $1,911 of lost opportunity cost is not offset by $408 of net profit from Frosthaven. We have a net loss, assuming opportunity costs, of $1,503. I will be really happy to see my $2,890 of (additional) gross sales in December, but if you missed out on Frosthaven, you're probably ahead as a retailer. You might have a lower turn rate, or lower profit margin, in which case you might actually make money? I'll let you do your own math.

Edit: Should I consider the pre sale of 13 copies of vapor ($2,210), and the 4.6 turns of that money, to offset this cost?  

This assumes you have opportunity costs. This assumes you have other product you could have bought instead that would have performed at an average rate. A lot of us are increasingly not able to identify average performing game trade inventory, as we have all the good stuff in our trade. This also assume money has value, which at the time of placing this order, it honestly didn't. Rolling in government money I didn't want to give back, locking in a sure thing for a 21 month return was like buying a game trade bond, when you're used to playing the stock market. 

I think the best way for a retailer to handle Kickstarters is first, try to back projects where you pay upon shipping, and second, consider this money to be separate from your purchasing budget, which removes it from thoughts of opportunity cost. Perhaps call it marketing, where good money goes to die. Backing Kickstarter projects makes my store stand out from competition. It's a flex, a power play, because who has $1,503 to lose on one game?

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