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Tuesday, January 6, 2015

Repost: The Discounting Dilemma Game Stores Face

The first question of the year comes from Miguel in Chandler, AZ, who asks why DSGCW doesn't offer discounts on its products.  Okay, actually, that question is from me.  But it's something we are asked relatively frequently.

In fact, DSGCW does offer discounts.  What we don't do is discount things all the time, or offer standing discounts on entire product lines or to particular people or groups, with a couple of exceptions.  I wrote an article explaining the business case for discounting in the hobby game industry for Ben Drago's excellent GameHead.com website a couple years ago, and with GameHead on indefinite hiatus it seems like a great opportunity to republish the article here.  The original link will follow.

The one updated bit of commentary I'll offer is this: In the article, I discuss all tabletop game and comic stores as falling under the boutique model, which I recognize is too narrow on my part.  Not all tabletop game or comic stores are boutiques.  Some follow a different framework model, which in a previous article here on the Backstage Pass I described as the Shoebox and the Bowling Alley.  In either case, however, it holds true that neither of them operate in a manner that makes indiscriminate volume discounting work.  The closest would be the Bowling Alley, which can discount on products as long as it is making hay on event participation and concessions, a challenge all its own.

The Discounting Dilemma Game Stores Face
by Michael Bahr
originally published October 9, 2012

I have been a stakeholder in several game stores over the years, some failed and some successful.  So far, my current endeavor, Desert Sky Games in Gilbert, Arizona, is off to a great start.  But my first plate appearance in the game store business came in Mesa, Arizona in 1998, when I opened the Wizard’s Tower Gaming Center – and I grounded out.  Wizard’s Tower failed because of discounting more than any other factor.

With Wizard’s Tower, I planned to compete on price with the other local game stores and become the Costco – or at least the Walgreens – of hobby gaming.  I relentlessly discounted product in order to accelerate turnover and pump up gross sales.  It worked as designed, after a fashion: I built tremendous sales velocity and an enthusiastic clientele.  And why wouldn’t they be enthusiastic?  We are only human, and of course we all want to get shiny things and pay less for them.  Amazon and eBay weren’t factors yet, and my primary competition was Atomic Comics, seven miles away.  The coast was as clear as it realistically could be.

You can probably guess what happened.  Wizard’s Tower only made it seven months, while Atomic Comics lasted until 2011, and even then its closure was for non-sales reasons.  Wizard’s Tower had only an 18-month lease, which is extremely short by retail standards, but I was so mired in debt from the store’s brief tenure that I had to declare Chapter 7 bankruptcy.

I made plenty of other first-attempt mistakes with Wizard’s Tower, as it was woefully under-capitalized, not built out, located in a light-box strip mall, and so forth, but none of that mattered as much as discounting.  Wizard’s Tower moved a lot of money and a lot of product every week, but its profit margin was too thin to keep operating, even though I had no staff to pay and collected only a subsistence-level wage for myself.  I discounted too much, too often, and too deeply, and gave away the revenue that should have been my store’s lifeblood.

My story is not unique.  Game store owners grapple with the discount question on a regular basis, not the least reason being that there are some customers who constantly importune them for price breaks, haggling as though every Friendly Local Game Store door also bore a sign reading "Not A Real Store, More Like A Flea Market!" (Game store owners are not doing themselves any favors when most of them allow their stores to fall into a state of uncleanliness and disrepair resembling that of a flea market). Hagglers keep at it no matter how many times they are told "no" because it works. Eventually, many owners tire of it and give in. It never occurs to them that this is so dangerous because it is not a two-way street. The store won’t be able to charge, you know, a little extra over MSRP to help pay the bills, just by nagging the customer back every once in a while. The customer will leave and buy somewhere else, and the store is left empty-handed.

Those owners who do the research or learn at trade shows like GAMA are smart enough to avoid the worst of the discounting pitfalls, usually by swearing off discounting outright as they would a friend’s invitation to join an MLM scheme.  Swearing off discounting entirely is a better answer than doing the opposite, but it leaves the store vulnerable to both the rack and the vise of inventory management: stockouts, which can cause customers to defect to a competitor or buy online; and overstocks, which tie up the store’s money in merchandise that isn’t moving.  The owners who won’t discount often fail to attract volunteer organized play support as well, which inhibits the growth of the store’s player community. Discounting, carefully implemented, can be a solution to these problems, but if taken too far, a game store risks selling its seed corn.  And some aspiring game store owners, not having learned the lesson I learned from Wizard’s Tower, may still think the discount volume model is viable.

Below, I will explain three reasons why discounting in general is unhealthy for game stores.  Then, I will explain the five very specific circumstances in which discounting works very well for game stores and turns a potential hazard into a net positive, and why.  Some of the following is set forth in general terms in Sarah Petty’s Worth Every Penny and Paco Underhill’s Why We Buy: The Science of Shopping, two books that should be mandatory reading for anyone considering operating a game store.  For this article, I am adapting Petty’s and Underhill’s principles to the peculiar circumstances of the hobby gaming industry.

THREE REASONS NOT TO DISCOUNT

1. It’s Not That Kind of Store – Literally

First and foremost, a hobby gaming store is not a department or warehouse store, and for reasons beyond the scope of this article, probably never can be.  Not even Star City Games is operating the way Costco does; if anything, SCG is this industry’s scaled-down long-tail analogue of Amazon.  The fundamental retail model the entire hobby gaming industry is oriented toward is properly called a boutique.  A boutique vends niche products to a customer base seeking out those products specifically, and typically does so in a low-overhead, low-stock, often owner-operated environment.  Staff expertise and organized play, as well as niche product selection in and of itself, add value.  A volume retailer achieves profit through economy of scale and volume disposal of essential goods, and discounts to assure itself of market share and continual customer traffic, all using master-planned processes and lowest-common-denominator labor.  Convenience, competitive pricing, and virtually assured stock availability add value.  From the ground up, the structural, financial, and logistical organization of the volume retailer is fundamentally different from that of the boutique.  Costco makes profit in volume even when a margin is razor-thin.  Your friendly local game store cannot.

2. Customers Smell Panic, Endangering the Brand

America loves a winner, and the typical deep discount stinks of a need for liquid cash in a hurry, giving the impression that your game store is in trouble and is a loser.  This means a panic sale devalues the brand overall, and the brand is a big part of what makes a friendly local game store stand out in its market and attract buyers.  Nobody wants to become invested in a cause that’s not long for this world, unless they are a cultist or an NHL hockey fan.  Even worse, a sale having nothing to do with a panic scenario is still dangerous because the discounted value that attaches to your products on a promotional basis becomes the "real" value of those products in the minds of your customers, so good luck making any sales when you put the prices back to "normal."  To put it another way: Is the customer who found your store and used a $20 Groupon to buy the $49.99 Ascension: Shuffling of the Thousand ever going to spend the $45-$50 MSRP each for more board games?  Unlikely.
Which, by the way, don’t ever promote through Groupon.  Just don’t.  Trust me on this one.

3. Customers Learn to Shop the Sale

On a visceral level, a shopper likes the idea of gaining a Thing at a price less than what that Thing is worth.  Through habit, shoppers become inured to the relative merits of the underlying products, and become mentally conditioned to buy whatever is on sale and refrain from a purchase entirely otherwise.   Major volume retailers tailor their operations to this and spend untold amounts of labor to rotate sales among stock to normalize quantities on hand and clear out items that might otherwise expire or are going to be replaced by newer promotions.  Have you noticed that the "summer movie blockbuster" cans of Coca-Cola are nowhere to be seen now, while the "NFL Football" cans are everywhere?  Back in May, they stocked infinity million cases of soda at every grocery store on the continent.  How could they possibly have sold through it all?  Rotating sales on a continuous basis, that’s how.  All those dirt-cheap Independence Day and Labor Day soda sales cleared that stock out.  There is nothing like this in the hobby gaming industry because game stores sell niche products, collectibles, and almost universally non-perishable goods, much of which stays in stock perpetually on a long-tail basis.  Game store concessions, where present, are in such limited quantities that "restocking from the back" is sufficient to keep them current.  If your game store customers get used to sales and learn to shop the sale, over time you’ll move fewer and fewer items that aren’t on sale and virtually never reach full margin on your gross.  If the net profit of a game store is around 7% to 9% of gross sales, you can see that even a mild recurring sale of 10%, given time to infect the entire inventory base, could wipe out all of a store’s profit.

Given the three main reasons not to discount, it is easy to see a tri-factor litmus test emerging: a discount that a game store offers must work within the business structure in place, must not damage the brand, and must not discourage customers from normal purchasing by training them only to "shop the sale."  Fortunately, there are seven discounting methods that pass this litmus test that a boutique store can use in a prudent and effective manner.  Of those seven ways, five apply to hobby gaming stores (The two that do not translate to the hobby gaming industry are training discounts, such as having a cosmetology student cut your hair, and business-to-business pseudo-barter, mainly applicable to vendors of bespoke or artisan goods who need raw materials to craft into inventory).  There is one additional way that boutique stores can discount without hazard, but it is a corner case based on different circumstances.  I will address it last.

FIVE WAYS TO MAKE DISCOUNTING WORK

1. Bulk/Bundling

Offering discounts on products bundled together or bought in bulk is an acceptable form of discounting because it meets all three criteria by a comfortable margin.  A hobby gaming store can sell a complete box of booster packs, for example, at a slight discount from the MSRP of every individual pack in that box.  Acquisition of a booster box is easy through the industry’s normal distribution channels. No store will be seen as desperate unless the discount is too steep.  But most importantly, this discount works psychologically.  Customers understand why they are getting the discount: because they are agreeing to spend money at a certain threshold, generally more than a casual impulse purchase, offering the retailer a cash flow boost and some logistical economy of scale.  It’s not charity; both retailer and customer are accruing a benefit.  Customers understand why they can’t just have this discount on everything they buy: because items purchased a la carte do not offer the retailer a high ticket total or logistical cost reduction.  And, importantly, customers understand that the only thing they have to do to qualify for this discount again is take advantage of another bulk or bundle offer or, if none is posted, make one up and see if the store owner is receptive.  

For example, Desert Sky Games does not discount on board games such as Dominion, but if someone asked me if they could buy the entire Dominion series for $375 cash, a ~15% discount from the total MSRP of around ~$430, I would be strongly inclined to accept that offer.  The buyer is offering me a big ticket and logistical efficiency – I can restock all nine Dominion SKUs with a single phone call – and in return, all the buyer asks of me is a one-time price break.  Fifteen percent is higher than most discount offers I might devise on my own, but unless I thought I was going to have a sudden sales run on Dominion before I could get a restock, the risk of this deal backfiring on me is close to zero.

Many stores discount by bulk or bundling whether they realize it or not.  Does your store hold Magic: The Gathering booster drafts for, say, $15 per head, with prize support to round out a booster box?  That sale is a bundle deal.  For that $15, the buyer gets about five booster packs at less than MSRP and judge-supported organized play services, and in return for that discount the buyer agrees to enter a competition in which three of those packs are consumed to provide his play materials, most of which he can keep afterward, and the rest are pooled with those bought by the other entrants for distribution to the players based on the outcome.  The store gains the value of sales velocity and volume, and also gains the value of a participant in organized play, which mutually attracts other participants who want a chance to play the game and test their mettle against their peers.  The buyer gets the entertainment and event benefits and a price break to boot.  Win-win.  No wonder booster drafts are so popular!

A caution: This is not a good tool for deep discounts, and it is not a tool suited merely for turning over volume.  Given the quantity of product that is tied up in a bulk or bundle deal, the raw math of how much margin you are sacrificing should be straightforward.  Every time I see a box flipper on eBay selling in-print MTG for less than ~$100 per box, I know I am looking at someone who is failing to use this tool properly, who has painted themselves into a corner with overstock or debt, or who is operating in such tremendous volume that the cost of goods is lower.  Above all, a bulk/bundle sale should not be allowed to cannibalize a sale that could have been made at MSRP.

2. Prepaid Pre-Orders

This discounting tool helps solve the stockout problem.  A prepaid pre-order discount happens when a customer wants Game X and it is not on the shelf, and the shopkeep offers to order it for the customer at $39.99 paid up front, rather than charging the $49.99 MSRP.  This is a very generous 20% off MSRP, but that is because the value prospect for the store is very high in this case: The store accomplishes immediate profit over cost-of-goods-sold in advance of the sale, and on top of that generally makes a happy customer, which stimulates future sales.  The customer, of course, gets a steep discount, which from his or her perspective more than makes up for the inconvenience of not being able to take home their niche game on the spot.

Offering discounts on prepaid pre-orders is such a clear and obvious win-win scenario, and it staggers me that many retailers are unwilling to do it, and moreso because the reason for their reluctance can often be chalked up to simple sloth.  It is a bother for many game store owners to break their routine to place a special order, and thus many of them simply opt not to do it.  Even more egregious is that a store with a proper software infrastructure in place, which means Microsoft RMS for Windows or Light Speed Retail for OS X, has at its disposal a tool that should make the placement and tracking of special orders trivially easy.  At Desert Sky Games, we use Light Speed, which allows you to quote the sale and take payment, but then leaves the payment unapplied to the invoice with the SKU in a "back-ordered" status until delivery.  Then, the order arrives, the shopkeep adds it to inventory, and the item is allocated to that invoice, at which time payment can be applied and the invoice can finally be closed.  The software does all the work except placing the order itself, and, depending on whether the distributor accepts a software-generated purchase order, it can even do that.  Honestly, if this is too much of a "bother," maybe the retail business isn’t for you.

Let’s check the litmus test.  Is a boutique set up to be able to place and fulfill special orders?  This is the very essence of what a boutique is structured to do.  Will it damage the brand?  Quite the opposite: it should improve the brand’s standing in the eyes of at least one customer – and, if that customer is vocal within his or her social circles, potentially many more.  Does it train the customer to shop the sale?  Not at all.  Like with the bulk/bundle discount, the customer knows why the discount is being offered (as an apology for the store being out of stock on the product the customer wanted to buy), the customer knows why the discount isn’t universal (because many products are in stock and the customer can buy those immediately), and the customer knows exactly which circumstances must arise for the discount to become available again (a stockout on an item that is still in print). 

3. Clearance/Ding-and-Dent

This discounting tool helps solve the overstock problem.  Inevitably, a game store accumulates badly shelf-worn merchandise and stock of discontinued games that, whatever their quality or lack thereof, have not sold.  Usually more significant damage to merchandise is compensated by distributors if reported right away, so obviously management should stay on top of that, but in this case we’re referring to products that have dented boxes, books that have been handled enough by browsers that their pages are no longer crisp and clean, and heavily played trading card game singles (or, for that matter, most used games, if your store sells any).  For discontinued games, if the store is not planning to restock, the cost of goods shifts from a replacement threshold to recoupment income.  The sunk-money fallacy teaches that there is no longer any point in attempting to "protect" the wholesale amount originally spent for the product; that money is spent and gone, it won’t be spent again, and it is thus no longer tied to the amount on the product’s price tag.  From the store’s point of view, the only goal remaining is to get as much money for that product as possible.  Charging too much will result in the item rotting away on the shelf, while charging too little forfeits potential revenue.  The desired balancing point is the highest possible price that is still sufficiently low that a buyer will find it attractive.  Usually, an eBay auction finds this balancing point organically, or a point close to it before shipping charges come into play.

In both cases, this discount passes the three litmus test factors, but only just.  A boutique is perfectly capable of selling clearance or ding-and-dent product on a price exception basis.  Doing so does not dilute the brand because customers have long since accepted clearance sales and scratch-and-dent departments as part and parcel of the retail world – in examples such as IKEA, customers aggressively shop the scratch-and-dent section of the store for bargains, to no discernible extent of cannibalization from the store’s standard product offerings.  Finally, the danger point with this type of discounting: it can, if handled coarsely, train customers to shop the sale.  Clearancing and ding-and-dent should be removed to a separate area of the store from normal products, or if possible sequestered to a time-limited periodic event, to prevent customers from getting into the mindset of seeking such items first.  It is true that there exist some customers who are bargain hunters to the core and are only interested in your blowout rack, or as we call it at DSG, "The Bazaar."  That is not cause for concern, as the offering then becomes an attraction enticing them to visit your store when they might not have done so otherwise. Customers come in endless varieties.  The greater concern comes from The Bazaar growing to such a share of your store’s sales that it takes a bite out of normal margin sales of new product.  After your wares make a brief run in The Bazaar, I recommend blowing out such material on eBay, and if that’s still not feasible (such as for large collections of out-of-print TCG commons), donate them and take the tax write-off.  Make sure your customer understands why the discount is being offered (because the item is discontinued and won’t be supported going forward, or is no longer in like-new condition), understands why the discount is not universal (because most of what you sell IS supported and minty fresh), and understands that no given product is guaranteed to be discounted in that way in the future, so they are better off buying new if they really want the best experience now, with no compromises.

4. Quid Pro Quo

This discounting tool helps solve the problem of attracting sufficient volunteer organized play support.  This discount is generally not across-the-board but is limited to a given product line.  The retailer may extend the discount also to concessions, because the sales bump that comes from customers having a good experience with a happy volunteer tends to outweigh the marginal extra cost for drinks and snacks for one person.  If the tournament judge decides to quit, however, the store is not caught in the lurch.  The store does not immediately have to contact the Federal Judge Guild and hire another judge.  Someone on the staff can step in until another volunteer arises, or in the worst case, a more experienced judge may work for direct compensation.  By contrast, a tailor of bespoke suits who had a pseudo-barter arrangement with a cotton vendor would be dead in the water without the material supply, so that would be a different discounting scenario.
This discount is not likely to be a daily concern for most game stores, and it passes the tests: a boutique store can do it, the potential effect on the brand is all upside, and it doesn’t train customers to shop the sale because there is no "sale."  A customer understands why the discount exists (because the volunteer is working), understands why it’s not universal (because other people are not working), and understands what it would take to earn the discount in the future (they would need to timely fill the store’s planned or unplanned need for a volunteer).  As with the other examples, it is a win-win scenario for all.

5. Evanescence

Besides being a gothic metal band from Arkansas, "evanescence" is a characteristic whereby a subject is only present briefly and then disappears.  In law, the term refers to things such as traces of alcohol in the blood; police are authorized to draw blood from drunk-driving suspects without waiting for a search warrant because the evidence disappears quickly as it is processed in the bloodstream.  The two most common uses of the concept in sales relate to event tickets and lodging.  If the Super Bowl is on February 3rd, a ticket to the game is worth thousands of dollars on February 2nd and is worth almost nothing on or after February 4th.  That front-row ticket to the Evanescence concert becomes worthless in the space of only 90 minutes or so once the concert begins.  For a hotel, the stakes are similarly high: a hotel room unsold sits empty and earns nothing, while still making up part of the hotel’s capital costs and operational costs to keep and maintain.  A Miami hotel can charge a high rate for rooms on the day of the Super Bowl because it knows it will probably rent out every room that night, while a Lubbock hotel in the quiet doldrums of October is given incentive to collect whatever money it can get for any given room or likely end up earning nothing.  Las Vegas casino hotels are actuarial masters of this concept, which is why it is no accident that they offer hotel rooms on a complimentary basis to visitors who spend time gambling on the premises.  Movie theaters do the same thing: the showtimes most likely to sell out are deemed "special engagements" when discount passes and offers are not valid for entry, whereas a film exhibited in its third week is unlikely to sell out on a Tuesday evening and the theater management is more than happy to admit you with a coupon (in the hope that you will buy concessions at full mark-up, which is their core revenue source anyway). 

Most game stores achieve no benefit on location from evanescence and I readily admit that my own is no exception.  The mistaken but most common analogy is that of a tournament event, but a tournament entry actually becomes MORE valuable, not less, as the event fills up and becomes closer to starting, because good event attendance at a game store attracts more attendees in a virtuous cycle.  The best use of evanescence discounts for a game store are probably found when the store is operating a vendor table at an off-site event.  From Gen Con down to the lowliest of local comic monthlies, there is a cost in time and logistics for a store to vend at the event.  Many stores hand-wave these expenses as the cost of marketing, but that is the last refuge of a scoundrel in a business like this one that depends on smart spending.  Better to go to the event with a solid array of goods, and lower the price of those goods throughout the event until there is as little as possible left to take home afterward.  There is no need to sell the family farm, of course – if the store plans to tour the major conventions all year, from Phoenix in May to Origins in June to San Diego in July to Gen Con and PAX in August, the prices can slide over the course of that entire span.  Importantly, it is an opportunity to make revenue and save on logistics and freight while providing a great experience to a customer.  It passes the test: a boutique can do it, the brand benefits, and a customer is not trained to "shop the sale" because convention attendance is an expensive prospect in and of itself.  A customer understands why the discount is offered (because it’s convention time!), understands why it’s not universal (because usually it’s NOT convention time!), and understands how to get the discount in the future (wait until next year!).

Capstone Concept: The Emotion Engine

All of these discounts are attractive to customers in a monetary sense, of course, but there is an important emotional principle involved.  A customer understands on a deeper level that these discounts are "fair."  They aren’t arbitrary.  The customer isn’t missing out on a deal just because he isn’t the owner’s drinking buddy.  The customer isn’t being denied a price break just because the evening shift clerk is jealous or doesn’t like her.  The criteria for these discounts are clear and obvious in a way that most customers easily understand, and customers recognize the fairness inherent in that, even if they don’t communicate that back to you.  Don’t dismiss the notions of fairness and unfairness as being irrelevant to retail, because the opposite is true.  People learn as children to be upset at real or perceived unfairness.  Psychologically, while maturing, a person develops a Pavlovian discharge of endorphins, causing feelings of comfort and happiness, when something "unfair" is corrected or "made fair."  This is plainly evident in the joy we feel when the downtrodden movie hero finally defeats the arrogant movie villain who kidnapped their true love/killed their parents/scoured the Shire.  So, if a customer experiences feelings of comfort and happiness when they buy things from you, and those feelings become associated with that activity deep within their mind, what do you suppose that customer will be inclined to do, again and again?

The corner case of which I spoke above is a customer qualification that can be offered without discrimination, but that will not upset a customer who learns that the discount isn’t open to them.  (It is "fair.")  At Desert Sky Games, we discount across-the-board to owners, employees, and military personnel (active and veterans).  The owner and employee discounts need little explanation: owners have already contributed up front to the store’s livelihood, and a discount allows for administrative simplicity rather than forcing books reconciliation after a buy. For employees, it is a perk associated with the job, and probably has some incremental positive effect on retention costs. For military personnel, we discount 10% across the board.  Show us a current or expired U.S. Armed Forces ID and the discount will be added to your customer card in our system, and will automatically apply every time you buy.  It’s true that the store sacrifices its profit on purchases by military personnel, but military personnel sacrifice blood, sweat, and time with their families so that we can live in a free country and have a store at all, so we consider it the least we can do.

Hopefully, this article has given any game store owners among you some guidance as you wrestle with the conundrum of whether, how, and when to discount.  For those of you reading who are pure consumers, now you may see why sometimes a discount is gladly offered and other times kindly withheld – and now you can suggest bundling, pre-orders, clearances and the like as ways to encourage that store to discount safely and appropriately.  Your store will hopefully last longer than the seven months of hair-pulling agony I spent not realizing why Wizard’s Tower wasn’t working despite so much money passing through my hands.  Well, now I know, and so do you.

See you at the gaming table – New Worlds Await!

Original article link:
http://www.gamehead.com/article/1936/discounting-dilemma-game-stores-face

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