Wednesday, January 28

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!

7 comments:

Mal said...

Really enjoying the nuts-n-bolts business related posts at the moment. Fascinating stuff - keep em coming! :)

Jack said...

Thanks, Mal!

I'll see what I can do.

Cheers,

Jack

Tao - Starlit Citadel said...

Hi Jack, great post. One thing, since I can comment on the costs for online businesses - the one thing people forget is that because your an online business, your cost in marketing is VERY high. Finding customers is not a case of very targeted local marketing via newspapers, word of mouth, etc - your customers are across the country. So to reach them, your marketing costs are much, much higher.

Jack said...

Hiya Tao,

Great point - I'd skipped over that. Do you mostly use online ads like Google & BGG - or is your spend elsewhere?

Cheers,

Jack

Tao - Starlit Citadel said...

Very distributed depending on strategy.

For ours, Adwords is the largest. I found BGG rather expensive for what we got from it - so we only do that during Q4.

I've tested other sites, most have been so-so to okay. I actually spend most on SEO, PR and am testing a run-of-network system that targets old customers that seems to work well so far.

Sadly, there just aren't any magazines that I'd target so far. Possibly in the future, but for now, we're all online. Excluding cons.

Jack said...

Hiya Tao,

Thanks for the info. What's a run-of-network system?

Cheers,

Jack

Tao - Starlit Citadel said...

Eh, I am probably using the wrong term.

Advertising networks (http://en.wikipedia.org/wiki/Advertising_network) - like 24/7, Tribal Fusion, Google's Adsense or Textlink Ads are all of the type. Basically, they are a middle-man company for putting up your ads across a variety of advertising sites from big publishing sites down to little blogs.

When you undertake a run-of-network campaign with them, your advertisement runs on all their sites they have links to (normally a few thousand). Thus, the run of the network.

Can also be done on a remnant basis (i.e. any space that isn't used); that's cheaper but still relatively expensive.