Tuesday, May 22, 2018

The Five-Percent Solution

If Sherlock Holmes were to examine Business Insider, he would surely wonder why that website so rarely publishes content about the insides of businesses.  What might impress Sherlock more would be a great article in which they recently charted how high-income and low-income Americans spend their money.

The lede of the article is that poor people get taken to the cleaners on housing and transportation costs, while rich people tend to spend an inordinate amount of money protecting their assets and personal position.  And within that context there's a little nugget that's relevant to the comic and hobby game industry, that rich and poor alike spend about 5% of their money on entertainment.

Further in the article we get breakdowns of household and individual spending on entertainment in raw dollars.  Household:

And individual:

The discrepancy by income level shouldn't be a surprise.  Five percent of a big number is a lot, while five percent of a smaller number is less.

But do you see the far more relevant thing, in terms of this industry?

Take a look again and see if you can get it.  I'll wait.  In fact here's a nice photo of a customized SNES console to give you some spoiler space.

See it yet?

More context.  Five percent of the total spending is on entertainment.  Of that, only some portion is going to be on tabletop games or even video games.  Some will be on movies, some on concerts, sporting events, outdoor recreation, bowling nights or beach vacations, even people visiting the glow-in-the-dark mini golf place next door to us.

Let's go out on a limb and say that our average customer is someone who spends half their entertainment dollars on our merch categories.  Then we have to remember that there are Amazon, TCGPlayer, and other comic and hobby game stores!  Let's be extremely generous and say that our specific store gets a fifth of that figure.  So a tenth of their total entertainment expenditure.

Now do you see it?

Look at how those absolute dollars correlate to the prices of the stuff we sell.

Oh my goodness, right?

Look here.  At one tenth, a rich household spending $5,919 per year on entertainment probably spends $600 in our store.  A poor household spending $1,270 per year brings us all of $120.

On the individual scale, $1,909 for the rich is just under $200 per person to us, while the poor, at $747, are going to end up spending about $75 per year as individuals.

And if there was ever a hard lesson that a store can't count on serving the same group of grinders day in and day out, that should be it.

There isn't enough money coming from any one customer segment or cohort to support the business.

Now let's be more fair.  I cater to some devoted gamers, for Magic and other games, competitive or casual but undoubtedly focused, who spend a hell of a lot more than $600 every year and aren't even rich people.  In some cases there are guys who drop most of that in a month and aren't rich, though a few of them are professionals dragging in decent coin and so they're well enough off to afford it for sure.  And hey, some people just obsess on a narrow range of hobbies.  Nothin' wrong with that.  Lord knows that's what I do.

But the reality is any given face that comes in the door, we're going to be lucky if they bring us, on average, more than $75 to $200 worth of annual sales.  While that's a number I am perfectly happy to cater to, it also is a number that tells us some crucial things:

1. We must always be acquiring new customers, because the existing regulars cannot be expected to float the entire store on their own.  It's not fair to them and not realistic to expect this.  Many, many clubhouse stores expect essentially this to occur.  We must be welcoming to the visitor who is not already deeply geek-literate.  The curious, the dabbler, the person interested enough to poke their nose in the door and see what they find.

2. We should be highly skeptical of products that sell for more than $75, and doubly so for products that sell for more than $200.  Because those products are effectively non-starters for a significant part of our audience, or would constitute nearly the entirety of their annual spending with us.  When Wizards of the Coast says that booster boxes are not a meaningful purchase configuration for the majority of Magic players, maybe they aren't as obviously wrong as Magic-focused stores and competitive players assume.  And yet we've had over a year now of product overload.  Knoweth the left hand what the right hand is doing?

3. Positive experience cultivation with each transaction is far more important than we already rated it.  And we already considered it pretty damned important!  This unfortunately empowers negative review culture, which as we all know is the clap.

4. Many aspects of the comic and hobby game industry are too fiddly to withstand the implications of these numbers.  Which, again, are skewed generously in our favor for the purpose of this exercise, so you have to imagine they're worse in application.  Comics look better proportionately when you consider this; a pull-box customer who gets four titles a month is well within the parameters.  Wide categories like video games and board games are a bit safer here.  For something like Warhammer, it seems like they're utterly dependent on deeply committed hobbyists way on one end of the scale.  I can't imagine how other wargame miniatures ever gain traction.

5. A gasoline price spike basically wipes out the entertainment fund for poorer people, if we're taking into consideration the initial graph showing that they incur an outsized burden from housing and transportation expenses.  Did it happen that way in the past?  It's tough to isolate this effect from the general economic meltdown of 2008-2009, but we already know a ton of game stores went under during that time-frame; was this another piece of the equation?  I bet if we had sufficient data collection to see the expenditures by income level, we'd see the poor player spending dropped off right around the time we were at $4/gallon.

It seems like every time I learn more about business, I wonder why I'm in this particular industry that seems to swim against every economic and social tide with such reckless abandon.  That might just be our value proposition, the fact that we're here to delight the people whom the rest of the recreation industries have disregarded.  But it sure does suggest that we've voluntarily made it more difficult for ourselves to make a living.

Anyway, time for me to go enjoy some of that food that I spent somewhere between 11% and 15% of my household income on.

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