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Links: Selling Direct, Increasing Turns, and Gaming While Skydiving

by W. Eric Martin

• U.S. publisher Steve Jackson Games has published its annual stakeholder report for 2022, with gross income from the year being “a bit north of $4.7 million”. Notes outgoing CEO Phil Reed: “We could have booked a small profit; for tax purposes we dumped some slow-moving inventory and showed a small loss. (Let’s see a Fortune 500 company give you a report that explicit, never mind doing it in two sentences.)”

Two sections of the report are worth quoting as they mimic what I hear from other publishers and go hand-in-hand with one another:

Direct Sales

As distribution sales continue to…change?…we have explored more direct sales opportunities. There are few things as frustrating as hearing “when does this come out?” when the game in question shipped months ago, so we devoted more energy to growing our direct sales – to gamers and retailers – in 2022. Our new Shopify store went into testing late in the year. We put an awful lot of work into every game, and we want to make sure that you find out about it. We’d love it if you buy it, too, but first you have to find out about it.

Exhibit AKickstarter

We had another strong year on Kickstarter, running a lot of large and small campaigns and seeing success in every single one. Kickstarter the marketplace has been good to us, and Kickstarter the corporation has become a valuable partner.

A downside that didn’t become apparent until the year was over: Some people saw how much we were using Kickstarter and assumed that we had to do it for cash flow. Nope! We did it because it got a lot of games into the right hands and let us control inventory more effectively. The cash flow was just a lovely bonus.

I’ve written about publisher frustrations with distribution previously, but the topic was on the lips of many once again at GAMA Expo 2023, with publishers making strong pushes to retailers to place direct orders.

In general, distributors don’t care about moving specific products; they care about moving whatever they have on hand. I’ve heard that a distributor needs to move 90% of an item before it makes a profit on that item, and that threshold encourages distributors to keep less of any one particular item on hand. After all, hundreds of games are released each month, so why bother restocking game A when games B-F are on the way? We sold out of A, which means we made a profit on it, so let’s not re-open that door and risk having goods stuck on hand.

As a result, distributors don’t have an incentive to push any particular product, which is a letdown for publishers since they would very much appreciate distributors pushing their products to retailers. Since that’s not happening, publishers are promoting direct sales to retail stores — not specifically to cut out the middleman, but to ensure that a store that wants a particular item will have access to it. (I’ve seen plenty of stores complain that game X is unavailable from distributor Y and Z, with the publisher responding that game X is in stock at their warehouse, so…drop us a line.)

That “direct sales to store” approach would be ideal if not for three things:

1. Time: Ordering directly from publishers takes more time than ordering from distributors since you need to deal with each publisher independently. (This is one reason people order tires, honey, and socks in one go from Amazon rather than shopping at three stores.)

2. Space: Even with all the time in the world, a retail store has a fixed volume, and it can’t possibly carry every game available, especially since a direct purchase from a publisher is typically for a full case (usually six or twelve copies), whereas a distributor will sell in smaller quantities. This is one advantage of ordering from distributors; you can keep a single copy of a game on hand, replacing it as needed.

3. Money: This ties into the space issue. If you order a case from a publisher, you’ll likely pay less per copy than buying from a distributor — but you’re buying more copies, and if those copies don’t turn quickly, then you have money locked on the shelf that could be used for something else.

(A store’s “turn rate” is effectively how many times it sells through its inventory in a year. If you have $50,000 of inventory on hand, and the cost of the goods you sold was $200,000, then your turn rate is 4 (200,000/50,000). To increase your turn rate, you can lower inventory on hand, carry only the top-selling products, do a better job of selling games, improve your marketing, etc. Having a high turn rate doesn’t necessarily mean you’re profitable since that depends on what you earned from selling those goods, what your other costs were, and so on, but better a high turn than low.)

(When I worked at a game store in the early 1990s, I vastly beefed up the miniatures and RPG section by bringing in older items that the distributors still had on hand, and while sales shot up due to the wider variety, the turn rate dropped a lot, which earned me a call from management as they wanted a higher rate. Placing smaller orders more frequently would lessen the cost of inventory on hand at any one time, while ideally still leading to more sales due to more diverse stock. This took more time on my part, but so be it.)

Thus, even when retailers do order directly from publishers, they don’t tend to order everything from publishers — only high-volume games that turn consistently thanks to what’s hot in their local market, promotion at game days, etc. They order the rest from distributors, and they still don’t buy everything on the market…so if you’re a publisher, you start looking for the even more direct route of selling directly to individuals. Hence Kickstarter.

After all, if I’m a fan of designer Y or game Z from publisher Ω, I will likely be looking from more, so why not market to me directly with whatever you have to sell. Maybe my local store doesn’t carry your games, maybe I don’t have a local store — doesn’t matter. You don’t know my circumstances; only that game Z has sold ∑ copies, which gives you some idea of how many expansions or spinoffs or similar games from designer Y you might sell, with the crowdfunding campaign giving the additional bonus of solid pre-order numbers, plus capital up front.

And when a publisher looks at those numbers, it might think, “Yeah, that’s a decent enough number to sell directly”, but putting that same title through distribution — or even selling directly to stores — might not make financial sense given the discount from MSRP that accompanies such sales. AEG, for example, announced in 2022 that it would keep running annual campaigns for Thunderstone Quest expansions “as long as there’s customer support”. (Retailers in its “Alpha Store program” can also purchase these titles.) Apparently enough Thunderstone Quest players exist to support the design and development of new expansions, but not enough to support efforts to place those expansions in distribution.

AEG is using a similar sales tactic with a crowdfunding campaign for a quartet of expansions that I covered in mid-May 2023. I’ve seen comments from people who feel that AEG is too big to use crowdfunding for this campaign, that those games are wildly successful and it makes no sense to crowdfund them, but I would wager everything I own that these people have no idea how many copies of each game have been sold and what percentage of those games’ owners purchase expansions. These people think they know how to run AEG’s business better than AEG does, and I would suggest they are wrong.

Through this campaign, AEG can sell those expansions directly to players, get a better idea of how many to produce, and possibly pick up new players for those games thanks to the discovery process on Kickstarter. The same is true for pretty much every crowdfunding campaign out there, and it’s why companies like CMON and Queen Games continue to run them. They want to boost their turn rate, so they’re making decisions to improve the chances of that happening.

As PAX’s Matt Morgan succinctly noted on my earlier AEG coverage: “No publisher should have to justify their use of crowdfunding. It serves an invaluable purpose for both big and small creators.”

That said, naturally you have no obligation to support such campaigns. You can decide that company ∂ is untrustworthy based on past crowdfunding efforts, or it has too many open campaigns, or you don’t want to pay today for games at some unknown time, or you’ve been burned by crowdfunding in general, or you want to actually play the game first, or whatever.

Just as companies have the freedom to use crowdfunding, individuals have the freedom to avoid companies using crowdfunding — but anyone complaining about company ∂ running a crowdfunding campaign is noise in the wind. It seems foolish to think that any of us know better than the publishers themselves when it comes to making decisions about what’s best for their financial well-being…just as I would hope that others don’t argue about me making decisions about what’s best for my financial well-being.

• Okay, that was longer than I had originally intended, so let’s close with the first video from new YouTube channel Above Board TV:

Youtube Video


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