Tuesday, September 15, 2020

Cash Cow Conundra

Every business has its meal ticket.  That is, every business does that thing that results in must-have revenue at sustainable margins.  There is typically some hedging or add-on business, but it's ancillary to the main event.  We're talking about the core offering, the goods or services that draw most customers to the business.
"Cows Cowing" - Photo (C)2020 Michael Bahr

For a small specialty business, the greatest success comes when the meal ticket is resilient.  When it's ready to withstand competition, technological change, variance in customer interest, and economic difficulties.  A product line or service offering that meets those criteria becomes a cash cow for that business.  It is the driver of profitability, the reinforcer of brand, and the guarantor of payroll.

The pop culture, comic, collectible, and hobby game business offers a choice of product and service categories to stores like Desert Sky Games, and many of them have the potential to be cash cows if properly developed.  There is a danger, however.  A store owner who misevaluates how the cash cow factors apply to their business risks losing big.  This can include changes of landscape, and a store could be in a poor position to adapt.  Imagine if you will a devoted indie wargaming store, featuring Warhammer and the next four or five most popular minis games, three or more paint racks, multiple tool and supply options, appropriate organized play, and matching ancillaries.  That seems pretty great until Games Workshop drops a Warhammer store right nearby.  That devoted wargaming store still has ways to make money, and the Warhammer store is supposed to demo the product and introduce new gamers to the hobby to the indie's theoretical benefit, but in practice what often ends up happening is that serious Warhammer players gravitate to the company store, the brand vertical, because of exclusives, stock assurance, brand recognition, any number of factors.  Warhammer is a higher-voltage minis wargame than every other minis wargame in print, combined, and the indie suddenly sees its product mix become far less viable.  It would be like a firearms store suddenly not being able to carry Glocks.

The galaxy-brain-meme version of understanding what makes a meal ticket into a cash cow is to understand when it's possible to harness that and then commoditize another category for competitive advantage.  The classic example of this, which I've cited before, is of course Microsoft's original deal with IBM to provide the Disk Operating System (DOS) for the original PC.  IBM did not insist on an exclusive deal because what other computer manufacturer of the time could outsell them?  But by seeing that software was the real platform, Microsoft got to make that their cash cow while commoditizing hardware to where any PC clone with a compatible BIOS could run Microsoft's DOS and thus run IBM PC software without having to purchase an IBM PC.  The cheapest clone available at the needed horsepower level would be enough to fire up WordPerfect or AutoCAD or the day's latest computer games, and IBM was left out in the cold earning nothing on that sale.

Amazon commoditized books (and commoditizes other consumer goods even now) in order to sell web infrastructure services, advertising services, marketplace platform services, data mining, and more.  Everyone thinks of Amazon as being in the business of selling things, but they don't give one whit about that.  Selling things isn't their meal ticket; selling things is the lure, the attraction, the catch.  Amazon makes their money by owning and operating the infrastructure that benefits from consumer goods being deliverable-on-demand commodities.  All they had to do was fulfill their own prophecy and the money firehose swung permanently to the "on" position for them.

There are many, many game stores now who have taken things about one layer of abstraction into the commoditization vs cash cow meal ticket concept, and their solution is this: Sealed TCG product is the commodity, to be sold at a nickel over cost, and singles are the cash cow.  This is only partly wrong and only partly stupid.

First, let's dispose of the singles question by observing that they are indeed a meal ticket cash cow if properly deployed at scale and transacted with expertise.  That is probably the most accessible cash cow from a newcomer vantage point in terms of reaching bare profitability.  It takes a while to ramp up from there, but it's doable.  If you are in town up against a Grand Prix dealer, God help you, but even then it can be done.  The wobbliest leg of the singles equation is competition; they stand up pretty well to technological change (so far), variance in customer interest, and economic difficulties.

Second, addressing the commoditization of sealed product.  Sealed TCG product when it's not Magic or Pokemon, and sometimes Yugimans, is a bad hold in virtually all cases.  There has been a resurgence lately in the price of some out-of-print product, such as the booster box prices for the old Decipher Star Wars CCG.  But in most cases, if you try to hold sealed TCG product that isn't Magic or Pokemon, you end up with hard-to-move chaff with little-to-no value, that depends for its consumer value on a robust tournament community that often does not exist.  Sealed product that is Magic and to a lesser extent Pokemon, is the opposite of this.  It is not only evergreen but perpetually gains value in almost all cases.  Every last booster pack of Magic on the shelf is going to sell.  One day, one way, to some player, it's gone.  Every last one.  You don't have to do anything special but have it after the other proximate options no longer do, and at a price that the player immediately in front of the counter finds palatable.  So there is no need to commoditize TCG sealed.  A store can allow the meat on that bone to nourish.

In the Before Times, when tournaments were a thing, many stores bemoaned the competitive need to run events at a loss or breakeven in order to drive sales of TCG product, both sealed and singles.  While using organized play in this manner can be frustrating for labor load reasons and others, it is actually a smart further step on the logical approach to the competitive formula described in this article.  TCG singles and sealed can both become cash cows when you commoditize events!

Without any doubt there exists some AHA! epiphany about what can be commoditized next so that the store can monetize events directly at the expense of a thing, and maybe that thing is something to do with streaming.  It's tough to say because streaming is, in essence, a commodity ab initio.  Virtually nobody who is doing it is making any real money except for a tippy-top niche few who have caught lightning in a bottle and successfully executed the conversion on that.  So I don't know if it's streaming, but I suspect it is not.  It's also not coffee, because if you can embrace the reality of being a restauranteur and bring adequate deployment capital to bear, coffee monetizes itself Outstandingly Well Thanks For Asking and becomes an even further buttress supporting the notion of relegating events to the altar of commoditization.  Food is an order of magnitude more involved than coffee alone, but is the same conceptual idea.  Kiddie camps?  Escape rooms?  There's a lot being tried right now, and some of it is working in some cases.  This is probably the leading edge of where the hobby game industry is right now, 2020, or well as of March 2020 anyway, on the question of where the money is earned in TCGs and tabletop.

This concept leads to further discussion and I think there are better people than me to expand upon it, so I am going to leave it with something of an open hook here and encourage anyone with insight on their commoditization vs cash cow meal ticket situation to weigh in on your social media platform of choice (the share button should be right below) or your blog or whatever.  Let's hear it.

What does DSG do?  Our cash cow is video games.  Our meal tickets that come up a bit short of cash cow status are TCG singles and to some extent TCG sealed.  We leave a lot of money on the table in the TCG category in order to compete in a crowded local market.  We commoditize board games, selling them at deep discounts purely as a marketing tool and an arrival-encourager.  We also commoditize used movies/music/media as well since it's a logistical appendage to our video game business.  In the words of the Portal turrets, we do what we must because we can.  Anyway, this combined approach is tailored to the combination of markets in which DSG does business and competes (Phoenix area, East Valley, our own website, TCGPlayer Marketplace, Amazon, and to a lesser extent eBay and Facebook), and may not necessarily be right or even profitable for all stores.