Value Added Tax

I've spent the last couple of days doing my VAT return. So I thought I'd cover a bit about why I'm voluntarily registered for VAT and what it entails. I'm not sure how this works in other countries, and hence how useful it'll be to readers from overseas - but I think it's pretty similar throughout Europe at least.

VAT is a sales tax that is supposed to be charged when it's sold to a personal customer (rather than another business). It's charged on almost everything, and when you buy something in a store that is mostly used by personal customers it's usually included in the price you see advertised (and not really mentioned). In the UK its recently been cut from 17.5% to 15% in an attempt to boost our faltering economy.

When a VAT-registered business sells to another VAT-registered business the price is shown as 'ex. VAT' (the actual price) and 'inc. VAT' (the price they pay). That's right - VAT registered businesses pay the same price as a personal customer. So why register for VAT? First there's a legal obligation: if your turnover is over a certain threshold (currently £67K in the UK) then you have to register. My turnover is nowhere near that - so why did I register?

The idea behind VAT is that it's only really paid once - by the end consumer. Everyone else in the supply chain charges it on their sales (outputs) and pays it on their purchases (inputs). But the two cancel each other out. Each quarter you submit a VAT return to HMRC, telling them how much VAT you charged on your outputs and how much you paid on your inputs. You then pay them the difference (if you charged more than you paid) or get a rebate (if you paid more than you charged). It's a bit more complicated than that, but that's it in a nutshell. If you're VAT registered you're only really paying the ex. VAT price on purchases (saving you the 15% extra for VAT which you claim back) and you're only really charging the ex. VAT price on your sales, and taking the extra 15% on behalf of HMRC.

Since this is reducing your costs, and your customer's costs (they're only really paying your ex. VAT price) it seemed like a good idea. Sure, when you sell directly to a customer (e.g. at a convention or for pre-orders) the VAT comes out of that, but you're making a decent margin on those (almost) MSRP sales anyway.

Being VAT registered means you've got to keep your books up-to-date (which you should be doing anyway) and you've got to keep a VAT account - a record of all your sales and purchases, including how much VAT you've paid and charged. It's an added faff, but when you're making the occasional large sale to a distributor it's not too onerous. Admittedly, when I've a hundred or so individual pre-orders going out over a few days it's a hassle, but again: margins!

I've spent the last few days doing accounting-type things since the deadline for my latest VAT return (Oct-Dec '08) is tomorrow and the deadline for my income tax return for last year (April 6th 2007 to April 5th 2008) is also tomorrow. I did the income tax return first (in the UK you don't normal have to do them, since income tax is usually taken out of your wages automatically). The VAT return was Wednesday afternoon & evening and all day Thursday's work. First I had to bring my books up-to-date (bad Jackson - no banana!). I'd left off doing November and December, which was mostly due to November being a big job due to the Carpe Astra pre-orders. Once that was done I needed to fill in the VAT return. It's a simple form (nine boxes, two of which are calculated for you!), but my VAT account (which I do in OpenOffice Spreadsheet) was a bit too simplistic. It worked fine for the previous return, but this time I'd bought some things in the EU (Carpe Astra) and sold some things to the EU (my new European distributors and a few shops at Essen). There's a few boxes that I'd been able to leave blank last time that I had to fill in this time, and the VAT account took some re-jigging to do that.

Last time I got a hefty rebate, having bought the entire It's Alive! print-run at the end of that quarter, but not sold much yet. This time I owed a lot :-(

In summation then, if you're intending to buy your games in the EU, run your business in the EU and sell mostly to distributors, then I think being VAT-registered is a good idea. Of course, I'm not an accountant, so don't treat anything I've said as gospel!

The Price Of Games

You see a lot of complaints these days about the prices of games, whether it's the price of games coming into the UK or the price of games in the US. Why are prices where they are?

There are four links in the chain: manufacturer, publisher, distributor and shop/online store. Each one has costs and each one needs to make some money or they won't be around for long.

Manufacturer

The manufacturer's costs include: set-up costs for all the manufacturing (things like litho-printing plates, die-cut tools), staff costs, electricity, ink, paper, cardboard, wood and the assembling time. These will have increased recently (especially the electricity costs and the transport for cardboard, paper and wood). Plus the manufacturers will need to make a cut for themselves - I've no idea what the manufacturer's mark-up is.

Publisher

This is obviously the one I know the most about! The publisher's costs include: the manufacture, shipping from the manufacturer, royalies, advertising and warehousing. In addition, there's a few minor incidentals that might be easily forgotten: registering for barcodes, taxes, phone calls (all over the world), etc. I've read in a few places you should aim for a margin of 100%, i.e. if the game costs you £3 to manufacturer, you should charge £6 for it at wholesale. I've not managed to get a 100% margin on anything yet, but it's a goal! Out of that have to come your warehousing and advertising costs and some profit for your company/wages.

Distributor

The distributor buys games at around 40% of retail and sells around 60%, so a 50% markup. Distributors costs include: paying the publisher, warehousing, advertising to their customers and shipping (both from publishers and to shops). Distributors seem to do ok on their 50% margin, they generally have several staff - even the smaller ones in smaller countries. Distributors can improve their cash-flow by taking games 'on consignment', they take the games, but only pay for them once they've sold them. Consignment deals usually require the distributor to regularly report how many games they've sold, so the publishers can invoice them for those sales. Publishers can often get more for games on consignment since there's less risk involved for the distributor and the deal helps the distributor's cash flow at the expense of the publisher's cash flow.

Shop

A shop has a very different situation from an online-store so I'll treat them separately. First the physical bricks-and-mortar shop. The shop gets what sounds like a big cut. If it was manufactured for £3, sold to a distributor for £6, sold to the shop at £9, then the RRP is £15. The shop's cut is £6, the largest of all. But, unlike everyone else, they have to pay expensive rent on retail space, rather than a cheap warehouse and/or office. Additional costs include: staff, taxes (certainly in the UK VAT would come out of their cut).

Online Store

An online store occupies the same link in the chain, but they can run their business very differently. Without the costs of retail space and with fewer staff they can reduce their outgoings. They can run their business from a warehouse in a low-rent area, and through the internet can reach a lot more customers. For the successful ones, this means they can buy in greater bulk and hence earn discounts from the distributors. This allows the online stores to offer the games at a discount below the RRP, which further increases their market share.

Why are game costs so high? The currency fluctuations at the moment haven't helped. A game from a German pulisher that costs a distributor 8 Euros, was at one point £6.15, which led to a RRP of approximately £15.40. If the same distributor re-orders the same game from the same publisher at the same price at the moment, the exchange rate changes everything. The game now costs the distributor £7.54, and the RRP changes to £18.70 a hike of £3.30 or 20%. Further to this, the high oil prices recently pushed up shipping prices, and seeing as these affect the publisher and distributor these increases are multiplied through the margins.

So in answer to the early question: it's complicated!

How Many Copies?

How big to make a print run is a classic publisher conundrum - where you're publishing board games, books or pretty much anything else where the cost is largely made up of the components of the finished article (unlike computer games where the cost is mostly development, not production).

If you make too many then you're going to be left holding the ball. You'll be paying the costs for warehousing your stock, you're unlikely to break-even and hence will end up out of pocket and it'll be very demoralising.

Conversely, if you make too few, the cost per item will increase, possibly pricing your product out of the market or significantly reducing your margins. Even if your product is affordable and you sell out of your print run - do you do another printing? Will the demand that appears to be there evaporate before the re-print reaches the market?

You've got to hit the sweet-spot, where your product is competitively priced, your margins are enough for you to run your business on and you ideally sell out of the whole print run. But where is that sweet spot? That's really hard question to answer.

I don't have a really good grip on the market yet, I'm too new to it. So instead I'm doing the smallest runs I can afford - possibly a mistake, but it's the least risky route to take and at the moment I can't afford too much risk.

The way I determine the print run size is to price up the cost of the components, artwork, playtesting materials and designer's royalties. On top of that I add my cut which includes: marketing, my salary (hopefully at some point!), warehousing and transportation. This is the wholesale price. Wholesale is approximately 40% of retail (the distributors and shops need to make a cut too), so multiply that figure by 2.5 to get the retail price. Now we have a problem. It's a £25 game and the price I've just got from my calculations is £250. Hmmm. Needs some work. So then I try to bring the cost down. I can change the components for cheaper ones (though I'm loathe to end up with something that feels cheap - I think the quality of Carpe Astra is just right), cut the art budget or make more copies.

Making more copies makes things cheaper for two reasons: fixed costs and variable costs. Fixed costs are things like artwork, the artist will charge the same whether you make 10 copies or 250,000 copies. If they charge £2,000 and you make 10 copies the art adds £200 to the price of the game (times 2.5!), if you make 250,000 copies it adds 0.8 pence to the cost. The variable costs are things like printing and components. It costs more to print 250,000 copies than 10 copies. But the increase is not proportional. Modern factory manufacturing is at its best when it's churning out loads of the same things. There are set-up costs and labour costs associated with changing tasks. So the more you make of something the cheaper each one gets. So printing 250,000 games is cheaper (per copy) than printing 10 copies.

So the aim is to make as many copies as I can to reduce costs. But wait a minute, a minute ago I said that making lots of copies is too risky. If I make too many I'm stuffed, I'll lose money - not make it. And, there's another problem: Capital.

When I made It's Alive! and Carpe Astra that was my first time dealing with two different manufacturing companies. I had to pay half the estimated price up front (you pay for way they deliver - which can be within 10% of what you asked for, e.g. if I asked for 2,000 copies they can deliver and charge for anywhere between 1,800 and 2,200). The other half was due around the time the games were delivered. This time round I'm a known quantity, so I get slightly better treatment (I've got a month to pay after invoicing - around the time of delivery). Still, I'll not get a chance to recoup much money before the manufacturing bill is due. Pre-orders pay when the games are ready, but most of my sales go to distributors on 30 days payment terms - I'll get no money from them until after I pay for the manufacturing. So in addition to not wanting to make too many games, I can only make as many games as I can afford to pay for before I start selling the game itself.

It's a fine line to walk. The real money is in big print runs, but I'm not yet in a position to do those, so I have to stay small. This means smaller margins and more expensive games. Hopefully, I'll get a winner that I can re-print confidently soon.

And The Winners Are...

Thanks to everyone who offered to playtest Sumeria for me. I was overwhelmed by the response - thanks!

I've chosen the winners for the playtest copies using some incredibly arcane judging criteria:

• UK: Andy Evans
• Europe: E Decker
• North America: FunkyBlue & Sorrellbo

I'll be contacting the winners via email/Geekmail shortly. Thanks to everyone who volunteered - better luck next time!

Sumeria

Wow! What a response. Not only did I get three or four times more comments than a single response has received before, but the most hits for the blog ever in a day, by a factor of three too. I hope some of you hang around and continue to read!

Sumeria is moving along fairly swiftly now. I've signed Harald Lieske (Sutter's Mill, ...aber bitte mit Sahne, Dominion) to do the art and I've started getting the bits together for the prototype copies. I've placed an order with Spiel Material to get the necessary wooden bits (there's quite a lot) and I've got a manufacturing quote from LudoFact, the Germans who did a great job on Carpe Astra. I'm getting enough bits to make five prototypes. I'm sending two to the US, one to the UK (there's already another couple in the UK, mine and Steve's) and one to Europe (there's already another in Europe too). I'm trying to hit my main markets where I already have distribution (hence no Asia or Australasia - sorry!). The fifth set of bits I'll hang onto and use to make a prototype with the finished art to submit to the UK Game of the Year award which is given out at the UK Games Expo.

With an artist decided and a manufacturing quote I've been able to finalise the price at £25 - higher than Carpe Astra because of the large number of wooden pieces and the quad-folded board. I've started taking a few pre-orders too.

I'll decide today where the prototype copies are going, then I can start getting them together. I'll knock up a rough box, add the wooden pieces from Germany when they arrive and add a board and the tiles which I'll have to paste-up and cut out by hand. It will be a return to my roots, making games by hand :-)

In other news, I've just signed a distribution agreement with Alliance Games Distributors, the largest distributors in the US to carry my games. They are going to start with It's Alive! and then hopefully take some Carpe Astra shortly. I've also received an order from a Taiwanese distributor, so things are looking up. January is looking to be my second best month ever, after October which got a huge boost thanks to Essen.

Playtesting Three: Blind

The third stage of playtesting is 'blind playtesting'. By this point you've an almost finished game and an almost finished rulebook. You provide this to people (ideally not friends and family - but people who can be honest with you) and let them learn the game from the rules - rather than being taught the game by you. You can either watch them, taking notes but not teaching them how to play, or for more un-biased feedback you can just send them a copy of the game and let them send you the feedback.

As usual, there are pros and cons. To get good feedback on the rulebook, the rule book needs to be nearly finished - it doesn't need final art, but it should have the diagrams and almost final layout. The playtesters are likely to provide feedback about the game rules too: They like it; they don't; what about changing this rule or that rule or the components. You'll have to be able to judge the feedback according to your goals. A lighter gamer might suggest something that makes the game simpler, and which makes the game much better in their eyes. A heavier gamer might suggest a change that makes the game deeper. Which do you use? Or neither? You'll need a pretty good idea of where in the market you want to position the game, and judge the feedback according to those criteria. Since this is something you'll likely do near the end of the game's development it's hard both to accept changes (you're happy with the game as it is) and conversely it's hard to stop fiddling with things. You need to be able to judge the suggested changes objectively against your criteria for the game (harder said than done) and draw a line under the game when you're happy with it.

Hopefully, at this stage you've got a great game that everyone loves. Be prepared for some people to hate it though. If you get negative feedback, you'll need to judge whether it's due to a flaw in the game, or just not the playtester's kind of game. Again, this can be difficult.

Want to find out what blind playtesing feels like? Help me playtest Sumeria. I'm looking for four volunteers, two in the US, one in the UK and one in Germany/Europe. It's a family euro-game so: simple rules, fairly deep gameplay, plenty of choices, wafer-thin theme. If that's not your kind of thing please don't apply, I don't need hardcore American gamers telling me it's rubbish because of a lack of plastic miniatures and dice-based combat!

What's in it for you?

• You get a prototype copy of Sumeria months before it's released
• You get your name in the rules as a playtester
• You're entitled to a 50% discount on the finished product

What do you have to do?

• Play the game a lot with your game groups
• Make a note of: who played, whether they've played before, who won, play time
• Provide feedback on the game (including suggested rule changes)
• Provide feedback on the rules - how can I improve the clarity and completeness

How do you sign up? Leave a note in the comments to this post stating which country you live in and why you'd make an excellent playtester. I'll pick the lucky recipients at the end of this week.

Finding My (Gaming) Feet

It's always hard when you move to a new area. You don't know anyone or where anything is. It takes a while to find your feet and get settled in.

Gaming is helping me get to know some people down here this time. When I moved to York I knew there was a board games club there, but it took me best part of a year to actually make it to Beyond Monopoly! through which I made several good friends and managed to organise a playtesting group. This time I'm going to be more organised.

In advance of our move, I asked around on BoardGameGeek for information about the area and got introduced to a few people that way. Yesterday I had one of them round for an afternoon of gaming :-). Matt and I played two games of Race for the Galaxy, two games of Dominion and my first game of Le Havre - Uwe Rosenberg's follow-up to the extremely popular Agricola.

I'm hoping to join another local group on Tuesday and then make it along to Matt's games club on Thursday. Games are a great medium for making new friends :-)

Today's main order of business is sales. I've got to wait in for the courier to collect the first order from my new German distributor, so I figure I might as well chase up all my contacts in distributors that haven't yet ordered as well as a few who's orders I'm waiting on.

Moving Forward

I'm back properly at work now and there's a few things on my plate:

Yesterday I completed (but couldn't file due to a technical issue) my self-assessment tax return for the tax year from April 2007 - April 2008. This was for before I quit my job to concentrate on Reiver Games full-time, so it's fairly small fry and I wasn't drawing a salary (not that I am yet!). The return took nearly a full day, it was more complicated than the previous year's and as a result I needed to spend a decent chunk of the day on the phone to Her Majesty's Revenue and Customs. There's only so much time you can spend listening to hold music before you lose the will to live. Still the bottom line is: last year my turnover was 250% higher than the previous year (actually only 9 months) and my profit was 1000% higher. This year there will be a huge jump in my turnover, but I doubt I'll be profitable, having had to pay the manufacturing cost of It's Alive! and Carpe Astra up front and only having seven months to sell It's Alive! (it was delivered in September) and four and a half to sell Carpe Astra. Still, in the current economic climate I think I'm doing ok. Not stellar, but ok.

Today began with a trip into town to meet my new Business Specialist at the local branch of my bank. I took along It's Alive! and Carpe Astra and she loved them, she was very impressed. I think she was also impressed by how the company was doing too. We chatted for an hour and a quarter and I think I'm off to a good start with the new branch.

This afternoon, I was back to struggling with the technical issue for my tax return. After several calls I've managed to fix the problem (the error message: 'You're logged in elsewhere, or your agent is logged in at the same time' means 'This text box accepts up to 255 characters, without carriage returns' - that's some quality programming!), so I'm just waiting for the system to acknowledge that I've filed, so I can pay the tax I owe on my Reiver Games profit for that year.

In other news, I've picked up another German distributor, I'll be sending them their stock on Monday, their order came in too late for today's courier deadline.

In other news, a US distributor wants to return the consignment stock of It's Alive! they took at Essen, they thought they were getting a North American exclusive but I didn't. The crossed wires led to me sorting out deals with several other US distributors and them ending with a lot more stock than they wanted for a non-exclusive deal. They want to return 240 copies of It's Alive! Sounds terrible, but conveniently another distributor in the next state wants 250 copies of It's Alive! I can see a deal where the other US distributor gets a cheap shipping deal, as instead of paying to get the games from the UK by sea, they just pay for a couple of hundred miles haulage :-) Now that was well-timed!

Back Online

We moved down South last Monday/Tuesday. Since then I've had no internet access. I've been making trips into Bedford (about eight miles away) when I can, to use the free wifi in the Bedford Creative Arts Gallery. But the company has been effectively on hold for nine days.

I've tried to keep things going: I've collected some stock from my warehouse, shipped an order of Carpe Astra to Germany, I've been investigating shipping costs for a large order to a new US distributor and I've been getting manufacturing and art quotes for Sumeria. But without regular internet access I've felt very cut off.

Now I'm back online all the time, I'm trying to close a few orders that I've been waiting on for a while and sort a few other things out that I've been waiting on.

Jack's back!