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Tuesday, November 17, 2015

How It Is

This article, which I'll warn you in advance is lacking in brevity, is about what happens when philosophy meets the reality of a comic or hobby game store's operational struggles.

It's happening to DSG right now, and we're at a decision point.  If I chart the wrong course, I could severely hurt DSG.  Even if I make the right calls, if I base them on the wrong reasons, the execution will be wrong and I could still fail.  I could sit still and do nothing, which, if wrong, could result in failure.  If I make the right decision, DSG should benefit tremendously.

Oh, and I don't have enough information to make the decision.  But I have to make it anyway.  So I have made it.  In consultation with my business partners, we came to a consensus, and as the administrator, I am pulling the trigger on it.

So.  How did I approach this?  (You lean forward, intrigued...)

I am a student of Objectivism.  (Wait, come back!  We have caaaaake!)

Don't worry, I'm not recruiting.  In fact, Objectivism doesn't work that way; you're supposed to integrate concepts for yourself, firsthand, not be talked into it.  That's part of why I say I'm a "student of Objectivism."  I don't claim to understand it perfectly.

But one thing I do understand about Objectivism is a concept my good friend Chuck Prime summed up in one simple phrase: "Don't lie to yourself."

That reaches far.  You know what it means.  People evade.  They rationalize away bad decisions.  There are the obvious examples, of course, like the alcoholic who swears he can stop any time he wants to and doesn't have a problem.  I eat a cookie even though I know it's bad for me.  I lie to myself that it's not consequential.  But it is, and that's why I am out of shape.  There are differences in degree, obviously.   The gambler who believes if she makes enough bad bets, the next one will finally pay off.  The spouse who manipulates his or her loved one out of a misguided expectation that they can change that person, or that they can prevent that person from changing.

What "Don't lie to yourself" really means, is an advocacy of recognition of reality.  This doesn't mean we can't think big and dream bigger.  What it means is that we can't expect to wish our way to that outcome.  We have to acknowledge what is, and when we have accepted it, we will have the insight to act, to bring about the change we want.

Wishful thinking achieves nothing.  Wishful thinking can be very dangerous as a rationale for business decisions, in place of observed facts and plain logic.  Instead of making a decision based on the best available information, that decision is instead based on fiction, the fantasy of how the person wishes the situation could be, rather than how it is.

If I'm trying not to lie to myself, wishful thinking is about the wrongest thing I can do.

So what does that have to do with the game trade?  Stay with me here.

Often on this blog I've said that customer buying preferences are not inherently right or wrong, but just a pattern of behavior.  It is up to the store owner to adapt to customer behavior, not up to the customer to behave as the store owner wishes they might.

Store owners wish all customers were wealthy multi-genre gamers who spend lavishly on a regular basis.  In reality, very few customers are like this.  An observable majority of customers of the comic and hobby game trade are enthusiastic and passionate about their comic or tabletop interests, but make their purchasing decision based primarily on price, secondarily on availability, and only after that do other factors come into play.

Again, the above is neither right nor wrong.  The information above is how it is.  Certainly it rings true anecdotally as well.  I am a married father of three; my household is on a tight budget, and you had better damned well believe that I shop on price a great deal of the time.

"But you've said yourself, Bahr, here on this business blog, repeatedly, that this trade is based on boutique store business models.  That discounting is bad.  So does price matter or doesn't it?"

Price matters because of how it relates to value.  Many of these same customers spend hundreds, even thousands of dollars, on games.  How price-sensitive could they possibly be if they are doing that?

They assess price, but on a deeper level the customer decides whether the item is worth it.

Value is the backstop to price's promise.  And if value fulfills that promise, price comes out looking like a champion, regardless of what the number actually is.

Value can be objective or subjective, and price elasticity is an expression of the spectrum thereof.  I like to teach the two extremes of price elasticity with the examples of a ten-dollar bill and a human heart.  A tenner is perfectly elastic.  You will sell an infinite number of them at $9.99 and zero of them, ever, at $10.01.  A human heart is as inelastic as a good or service could feasibly be.  A buyer who needs it will buy one, and only one, and it won't much matter how high the price is.

On the purely objective end of the spectrum, goods like water, gold, and steel have chemical and/or biological properties that make them worth a given amount fairly reliably.  Even if someone doesn't want to buy that gold right now, it's not going to be difficult to find a buyer at market value in short order.  That predictability reinforces the value perception of the objective good.

Games are entertainment goods, by definition indulgence purchases.  Their value is much more likely to be on the subjective end of the spectrum, far more elastic.  How much fun does a customer think he or she will have with this item?  And generally due to market iterations, we have seen price strata arise that are tied loosely to the cost of the production of the good but can sway in either direction based on the reputation of the publisher, the characteristics of the product line, expected resale value retention, and so on.  Games Workshop gets to charge more for miniatures and sell them, because the quality is perceived as excellent.  Magic cards hold value because the market for them is so liquid and format staples are perpetually in demand.

A wise company manages their product distribution to maximize its value.  Vertical pricing and distribution agreement structures are legal now, thanks to a 2006 Supreme Court ruling.  That's how Wizards of the Coast was able to get distributors to lock online-only businesses out of access to Magic: the Gathering.  The most obvious examples are outside our industry, of course.  Apple, PING, Subaru, Nintendo.  Each uses a combination of selective access, quantity limitation, quality guarantees, and market positioning to reinforce the value of their wares so that customers are willing to pay full price.  And it works!  It works so well that the resale value of these items remains high, despite that secondary-market transactions take place completely outside any control whatsoever of these manufacturers.

I mentioned Wizards of the Coast.  Other companies in our industry are doing this now as well.  Games Workshop is known to do it; they forbid their direct accounts from selling new product online, they enforce a minimum advertised price (MAP), they require that retailers stock and merchandise their item in a manner that is master-planned to reinforce the value of the product line, and the discount differential versus third-party distribution makes for an extremely effective dangling carrot.

Recently WizKids took a huge step into this fray, limiting initial orders on HeroClix and Dice Masters product to fifty cases per store.  This affected huge online discounters while having close to zero impact on small local game stores.  Why do this?  Because WizKids knows, just as Wizards of the Coast knew in 2006, that if a collectible game isn't being played at the local level, it will eventually sputter out, and small local game store support is the linchpin to that mechanism.  So far it has worked for HeroClix: the first expansion released under the new plan, Superman vs Wonder Woman, held at nearly MSRP for weeks on Amazon before follow-up orders and volume saturated supply, and as of this writing the Amazon low is still less than 20% off MSRP for the critical SKU, the "booster brick."  The HeroClix set before that, Nick Fury, is readily available online at discounts approaching or in excess of 50%.  That's a pronounced increase in value perception.  This week, Dice Masters will get its first controlled release, Amazing Spider-Man.  I am optimistic and excited to see what happens.

Not all publishers in our industry are on board with this plan.  By not supporting the value of their products with vertically integrated resale structure, they allow a landscape in which their products are bought en masse by massive online discounters and countless garage dealers and flea market hucksters and sold in a race to razor-thin profit margins and the bottom dollar.  This percolates through to every major resale channel: Amazon, eBay, Craigslist, et cetera.  And ultimately that makes these products' value, subjective or otherwise, plummet.

So, on products that seem like they should have robust value, because they are good games,  especially when they are good games with large audiences, my customers have the option of paying me list price for the item, or obtaining it for less money, sometimes a lot less money, from another source.

I do offer some things in the value proposition that customers have, at times, found persuasive.  Immediacy.  You get the item now, and time is a scarce resource for many.  Tactile appeal.  You can pick it up and check it out.  Risk.  Ever order something through the mail and had it arrive late, incorrect, or damaged?  Ease of transaction.  This includes things like using store credit, and also (less so nowadays) discomfort about using one's credit cards online, and like such.  Degree of incremental difference.  As in, the local price is higher perhaps, but is it higher enough to bother sourcing the item another way?  Few people care about the price difference on the $14.99 SKU that's $12.68 online.  A lot of people care about the $99.99 SKU that's $57.34 online.  And then there are abstract social factors.  There be dragons, venture not into yon uncharted currents.

Accordingly, I must recognize the impact of price on the value proposition.  If I pretend price doesn't matter because I can tug at a social lever of "supporting one's local game store," I am lying to myself.  I believe a lot of customers do want to support their LGS.  I know many of them personally.  I know their intentions are sincere.  A lot of these customers are extremely supportive of DSG.  I also know they can read the numbers on a price tag perfectly well.  And it's disingenuous of me to expect them to set their own value judgment aside, arbitrarily, and pay full list price for a product every time, if the manufacturer isn't even willing to take steps to make the product's value worth that price.  And it's not fair to expect those customers to subsidize the other players either.

The manufacturer that hits this issue the closest for me, because of the combination of having great products, a huge audience, and significant devaluation of their products because of online discounting, is Fantasy Flight Games (FFG).

Fantasy Flight holds the tabletop license for Star Wars, so as you might imagine, they have many products that would have been market-viable even if they weren't that great.  But as it happens, they're generally excellent.  The X-Wing Miniatures Game is the flagbearer.  There are also the Star Wars Living Card Game; the Imperial Assault Miniatures Game; the Armada Miniatures Game; the three-faceted roleplaying system Edge of the Empire, Age of Rebellion, and Force and Destiny; and more, including a deep-engine tabletop board game called Star Wars: Rebellion due to arrive in early 2016.

Games Workshop also licenses the Warhammer line to FFG for card and board games, which have included 40K Conquest, Fantasy Roleplay, Dark Heresy Roleplay, Forbidden Stars, 40K Relic, and as of next week, the Warhammer Quest cooperative card game.  Other FFG games that are hits include Android Netrunner, a reboot of the WOTC 1996 asymmetrical TCG; A Game of Thrones Living Card Game; Talisman, an evergreen classic now in its fourth edition; XCOM cooperative board game; Civilization; Cosmic Encounter; Battlestar Galactica; Citadels; Descent: Journey in the Dark; BattleLore; Fury of Dracula; it goes on.

These games have a huge audience and their metrics on my sales floor have been underperforming their reach for literally years now.  This has continued despite constant efforts to promote sales, efforts both internal and external to DSG.  In-house, I have given FFG games massive boosts in shelf presence and room positioning, product champions have volunteered to provide extensive organized play and drawn big turnouts, I have spent advertising dollars specifically to draw in and grow the audience for these games.  Externally, the 2014 dockworkers' strike resolved, filling my racks with product, FFG continued to produce organized play premium goods that players wanted, and the tabletop game industry has grown overall.

Despite all that, a majority of my sales of FFG games have been either low price-point SKUs, pre-order bundles offered at a discount, revenue from a special Independence Day sale we ran, or closeout/overstock mark-downs.  Some angel customers have willingly supported the store full-tilt and that's something I will never forget, and I will always look out for those individuals when it comes time for retailer support of various kinds.  Moving out from those angel customers at the core, we have our tournament regulars in the next orbit, who were the next most frequent buyers.  And moving out further, we have tournament attendees who simply bought all their stuff on Amazon, in some cases speaking vocally about it right in the store.  That's as far out as the store goes: there are hundreds of members of some of the FFG regional Facebook groups, and online discount deals are a common topic that propagates.  These guys are buying tons of product and they aren't buying it from me.  I once thought I was just doing a lousy job running the line, but checking against other retailers both local and national confirmed that my situation was more common than the other way around.

More frustratingly, FFG has made things worse at times.  We understand the Target timed exclusive on the X-Wing Force Awakens core set.  Disney made you do it, we get it.  That SKU has been a colossal choke in the game trade because so many of the players got it at Target on Force Friday -- and why shouldn't they have?  It was the only choice they were given!  But just last week during the X-Wing World Championship, FFG's own commentators told viewers and listeners that they could buy their new X-Wing product on Amazon, rather than supporting their LGS.  That was obviously a gaffe, but it shows how firmly rooted the idea is, that FFG's own people think of it off the cuff.  It's cheaper online.  Just buy it there.   Our product isn't worth any more than the cheapest you can find it.  Our product's value is less than the price we suggest for it.  MSRP, after all, stands for "manufacturer's suggested retail price."

After extensive metric review and other research, DSG has decided that maintaining FFG product at list price (MSRP) is no longer viable at this time.  The turn rate doesn't meet the level we hold every product line accountable at in order to justify its space in the store and the cash tied up in its shelf stock.  This is symptomatic of board games overall, because with many publishers it's the same problem.  There are board game publishers devalued further than Fantasy Flight, and unfortunately they are the norm lately rather than the exception, but their audiences aren't as large and their product lines aren't as broad.  I can keep one copy of Upper Deck's Marvel Legendary on the shelf as customer courtesy, even though it's an infrequent sell.  Notable exceptions, board game publishers meeting or exceeding turns at list, include Steve Jackson Games (publisher of Munchkin) and Looney Labs (publisher of Fluxx).

So what do we do about FFG?  If I am correct that the product is good and the problem is that the manufacturer is not upholding its value well, then its price should be extremely elastic.  That is, a reduction in price should cause a greater-than-par increase in sales.  (This means FFG is leaving money on the table by failing to protect the value of their product.)

If I cut a margin in half, I have to sell twice as many units to make up for it.  The overhead math on that can reach a little farther, because of the costs of labor and space and other factors it's more like we'd need to sell to four or five times as much, but let's just suppose we are dealing with spherical sheep in a vacuum here, and call it 1:1.

If I'm wrong, then lowering the price shouldn't make much difference.  Sales won't pick up, and I'll make less revenue than if I had done nothing.  FFG games are inelastic; they're just not as good as I thought, and maybe FFG was right to encourage people to scrap for them at bottom dollar.  Perhaps that is the case.

From the context you may infer that I am going to reduce the price on Fantasy Flight products in my store, and you would be correct.  But there's more.

I won't do this haphazardly, of course, and this is something that has been under development for a while.  I have made some arrangements within our supply line that make a move like this even possible to consider.  That was the first big factor.  But beyond that, I want the product's value to stand for itself.  And at the same time, if there is a benefit to advertising a lower price -- and decades of Wal-Mart adverts establish that pretty well -- then I want that benefit too.

So we're doing this on two fronts.

Effective immediately, and at least through the end of 2015, Desert Sky Games and Comics is price-matching Amazon for Fantasy Flight Games and WizKids products on purchases totaling $35 or more.

There is some fine print, of course.  We're going to use the main Amazon price, not third-party seller offers.  By requiring the $35 ticket, everyone gets Amazon Prime -- we're not going to count Amazon main shipping in the price match, unless the SKU item is not eligible for Prime.  Mixing and matching is fine.  Heck, if you want, you can buy $50 worth of Magic cards and one pack of $5 Fantasy Flight sleeves and by golly we'll Amazon price-match those sleeves because your total ticket is over $35.  Other terms and conditions apply but that's the clutch of it.

Why am I including both FFG, which is not upholding its products' value, and WizKids, which is upholding its products' value?  Because I think the outcome will tell the entire story.  I think the price match will be much less elastic on WizKids items.  I think their new products are going to be worth more.  I think WizKids will become a healthier product line, pound-for-pound.  Not just HeroClix and Dice Masters, but also D&D and Pathfinder miniatures and the rest of what they produce.  And this will make me put more money into their lines and more calendar into their events, hopefully creating a virtuous cycle.

We're also going to count everything.  This will be a study in metrics and an experiment in retail psychology data gathering the likes of which we have never engaged before.  And, honestly, Magic, comics, and miniatures are so strong for us right now that we have the luxury to do this with a line that is flagging.  We're curious to see whether this sort of thing might be workable in the future across the board game category, which has had a lot of devaluation.  I'm not expecting iPhone levels of price resiliency, but I'd be happy not seeing marquee SKUs at fifty cents over wholesale.  There is no excuse on the planet for the 5th Edition Dungeon Master's Guide to be available at 45% off MSRP online, as it is right this moment as I type this.  List price is a complete fiction at that point.

We did a test run on this last weekend when we had several FFG tournaments going.  We announced it to the players and were cheered.  Throughout the day, they hit that X-Wing shelf like the antidote was in there.  About a thousand dollars in FFG product moved in a single afternoon.  The Amazon price match ranged from a worst-case ~40% discount (Force Awakens core sets) to no discount at all (X-Wing Most Wanted).  The discount averaged almost 18%.  The volume moved was... more.

Did we make the correct decision?  I won't know for a while yet.  There is much data to gather, much observation to make.  But I know this.  At no point in this process did I lie to myself.  From beginning to end, we forced ourself to look at the landscape not how we wished it was, but how it is.



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