Cost vs. Revenue
Scro:
I guess as a full time business dude, and a part time game designer, I might have something to say on the subject.
First of all, the $8 revenue you make when you sell a copy isn't 'profit', per se, but rather a marginal contribution against your fixed cost. It's only after all the fixed costs are paid off that you will make any profit. We exist in such a niche market that the difference is important-- fixed costs will eat your lunch. And fixed costs are exactly what you are talking about.
The question to ask yourself is this: will this thing I'm paying for help me sell copies? How many copies?
Example: How many of my customers won't buy this book if it has no cover art? How much revenue is that? Is that more than the cost of cover art?
Chances are this means that you might or might not want cover art, and you probably don't want an ISBN.
My approach is this: zero fixed cost books. I either do my own artwork, or I trade copies and/or mentions for it. I get fairly close to designing books for free, excluding my time and freebie copies to contributors. The result is that I only have to worry about cost per copy. Since I do small run and POD stuff, I basically don't have to worry about this, because I only print books I know I can sell. Do I make a killing? No, I hardly make anything off of it. It is a hobby, and I imagine it will stay that way.
Scro:
Ack. Somehow this ended up in its own thread. So let's make a thread of it... what do YOU think?
guildofblades:
Profit Margin is extremely important for a business and especially important for a niche business with low overall volumes.
The Guild has always striven for the strongest possible profit margins while staying within our target suggested retail prices for the products we produce. This has meant a continual evaluation of how to produce things and the continual investment in machinery and processes that can make production cheaper (both from a pure cost basis and from a labor/time cost basis).
As a business understanding your profit margins and how they can impact your business decisions is critical. A few years back we took a very hard look at our wholesale based business compared to our e-commerce based business and found that a single copy of a game sold via e-commerce was four times as profitable as a single copy of that same game sold through the three tier distribution system. Understanding that caused us to look at the volumes we were getting through the three tier system vs the volumes we could potential get via direct sales and caused a dynamic shift in the way we market and distribute our games.
Understanding margin will help you to understand what your "true" break even point is on any new project. Its certainly never 1 item sold.
I think game retailers need to understand the impact margin has on their business. For years now retailers have continued to focus on high profile game titles in the face of shrinking discounts from the manufacturers of those games. Those discounts have been in gradual decline, but the fundamental adjustment to the retailers' margin has had a major detrimental impact on the health of their businesses. In spite of this fact (I suspect because most retailers are ignorant of the true impact of profit margins on their business), this trend continues.
When drafting the business plan for our own store, we took a hard look at profit margins and the products and services we would offer through the store. Profit margins were a key decision making factor in all things. So the copy and print elements of the store can have average profit margins of around 76%. Used games and game liquidations can provide average profit margins of 80%. The store will be buying Guild of Blades game from our manufacturing division at our standard preferred retailer program at a 60% margin (ala, 60% discount) and we're working on establishing direct purchasing agreements from other manufacturers at comperable levels. We are strategically choosing NOT to focus on D&D or Magic (margins around 42%) or Upper Deck card games (margins around 40%) or Fantasy Flight box boxed games (margins 38%). We'll stock a small smattering of D&D and Magic and won't be touching the rest by any other means than secured special orders. Instead our store will be offering products from smaller companies at higher margins and going hog wild full line on those we can get the best margins from. We do plan to order a strong selection from IPR, but due it the low discount (42%) we'll be marking most of those games above MSRP to bring them to a full 50% margin or better.
Anyways. The point. The average game retail store these days operates at margins around 42-44%. Those margins compared to the average margins our own retail store will be attaining makes for a huge difference. For instance, on gross annual sales of $280,000, which is a bit above average for the average surviving game store, but not much, the margin difference means a gross profit after COGS but before covering overhead and all fixed expenses (like rent, salaries, etc), the store would have $176,000 vs the traditional $73,000. That is a huge difference.
Margins on the manufacturing and publishing side are no different.
Manufacturing costs for Guild of Blades products tend to run between 6-12% of MSRP. We configure all of our price structures on the assumption that the product will be sold via wholesale at a 60% discount, even though most are actually sold direct. So a product with a cost of 12% and sold at 40% (60% discount) would have a gross margin (after COGS) of 70%. A product with a 6% cost sold at 40% would have a gross margin of 85%.
What publishers want to try and avoid is low margin products, because as you pointed out, it just doesn't leave a lot of money left over for covering overhead and other fixed expenses, much less being able to re-invest money into the types of things that will enable you to grow your company. When possible avoid situations where your gross margin ever goes below 50%. We all sell product into a nich market and the volumes involved with such will never be able to recover from a low gross margin. As compared to the dollar store market where gross margins on some products might go as low as 10%, but where the products are sold in the millions every quarter.
Ryan S. Johnson
Guild of Blades Publishing Group
http://www.guildofblades.com
http://www.1483online.com
http://www.thermopylae-online.com
Eero Tuovinen:
I don't know that I've ever said it, but Ryan's mini-essays on these publishing topics are both fun and educative, and illustrative of his professional perspective, which is slightly different from us demi-professionals. I think it's great that Ryan has so much to say to us even when we only rarely meet on any details pertaining to game design itself.
Anyway, go on about the actual topic. I don't have anything majorly interesting to say about it; I've generally just tried to keep my expenses on projects under one-quarter of the projected resale value of the entire print run, which has served me well enough to this date. Of course I pinch the penny just like everybody else within that frame as well.
Ron Edwards:
Hi there,
This is a good manifesto statement. It matches well with the lessons a lot of people here have learned, and that we try to explain to newcomers all the time. At the end of the day, one's fixed costs really are the killers of a small business (at whatever size). The interesting things to me are (1) that one does, in fact, get to choose what fixed costs to accept, just as you say; and (2) that "the day" is also a bit customizable.
For instance, regarding #1, I've accepted that convention-going and printing costs are major fixed costs for the Sorcerer line of books. It ain't cheap, and I don't accept the latter for my other books, which are printed on a different model. Every publisher has to choose, but the great thing is, unlike "the industry" dogma that was shoved down our throats for so long, that there is a choice. A game doesn't physically have to be X and Y or Z merely in order to "be" a published game.
Regarding #2, here there's a lot to consider as well. What's meant by "the end of the day?" If I go to a convention and it costs me money for lodging and so forth, then the revenue from the books I sell there probably isn't going to cover all those costs as well as the more individualized fixed costs of printing the books. What matters, though, is looking at the way books sell over the course of the whole year, and seeing the spike of sales at the con turn into more sales and major promotion for the remainder of the year. Or better, the volume of books sold at the con being considered to offset the printing costs of all books sold that year, such that the other book sales can be thought of as a cumulative, gradual way to overcome the trip costs of the con.
There's a range of choice here, too. Ultimately, for me, at the volume and type of books I sell, the "end of the day" is probably best considered the fiscal year. For others, it might be a literal day, and for others, it might be a quarter.
Finally, your post fits well overall into a point which has been made here many times at the Forge: that the definition of success is up to the individual publisher. You might be interested in the idea, usually re-stated in those discussions, that the term "this is my hobby" or "it's just a hobby" aren't very useful. I tend to think in terms of financial success in terms of pure sustainability without external funding, entirely independently of the scale of the operation. By that way of thinking, many of the most well-known RPG companies are not successful; they merely manage to impose the illusion of success via speculator or inheritance-based funding, and many of the smallest RPG companies are remarkably successful.
I call the former vanity or "just hobby" publishing, not the latter.
Best, Ron
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