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Observations about changes in game distribution (and publishing)

At GenCon I attended several seminars about game publishing and game distribution. I’m not intending to self publish games, though I will self-publish some books, but I am interested in distribution in connection with selecting a publisher for the new edition of Britannia. A designer negotiating contracts needs to know how games are sold. So I’m not an expert about this compared with an experienced publisher. But I think I can tell you enough to make this interesting. I knew most of this before I went to GenCon but still we can call it “what I learned about game distribution and publishing at GenCon”.

Typical distribution. Tabletop hobby games are sold in three fundamentally different ways. One is sales directly by the publisher to customers, either at conventions or online. The second is online sales by retailers. The third is sales in “brick-and-mortar” retail game stores where people walk in and buy games.

Another but much less common method is sales through non-specialty retailers such as Barnes & Noble and Target. Mass-market games such as Monopoly are sold through Toys “R” Us, Walmart, and other big retailers. Hobby game publishers always want to “get in on the action” of mass-market distribution, and that’s why sales in Barnes & Noble and Target are exciting for those publishers.

I’ve listed the three major methods in reverse order of sales volume. Most hobby games are still sold through game shops, or shops that list games is one of their major segments along with comics and other popular culture.

Only the first method, direct sales by the publisher, enables the publisher to receive 100% of the “manufacturer’s suggested retail price”, MSRP. Sales to distributors are typically at 40% of MSRP, though some of the bigger manufacturers evidently get a little more. The distributor then adds 10% of MSRP to the cost when they sell to the retailer. So the retailer is typically getting a game at 50% of the MSRP and they have to decide how close to the MSRP they will sell it for. The brick-and-mortar shops generally go to the full MSRP while the online retailers take a smaller percentage and hope to succeed through volume and through much lower fixed costs, because they’re not supporting a storefront.

The by-far largest hobby games distributor in the United States is Alliance. A distributor in similar position in Britain is SDVM. Why there is one distributor that’s the “800 pound gorilla” in these two countries I do not know.

The percentage of MSRP received by the publisher from sales through game shops and online retailers may be the same, about 40%. The problem is that online retailers rely on volume and low fixed costs because they don’t have a shop to maintain. As a result they can undersell the brick-and-mortar retailers. This can drive the brick-and-mortar game shops out of the equation. In the 21st century it’s very common for people to go into a shop, learn all they can about an item, and then go home and buy it online for (say)
five dollars less. In the age of smart phones it’s not exceptional to see someone point a smart phone at a barcode and look at the online price right on the spot. Though I rarely visit a game shop, I’ve seen this happen at Origins.

Cheap Internet sales tend to crowd out sales direct from the publisher. In general, the publisher itself must charge MSRP online so that it won’t be seen as underselling retail shops. Usually the publisher can give a discount at a convention - which doesn’t mean it will - because that’s expected, and the volume is low enough that it doesn’t bother the brick-and-mortar people.

If the online sellers charge much less than MSRP, the publisher itself isn’t likely to sell much online. That’s a big hit, because they get 40% (roughly) from the online seller’s sale, compared to 100% of their own online sale.

Price setting. Some publishers, consequently, are trying to find ways to keep online retailers out of the equation so that the actual price to consumers is closer to the MSRP. That helps brick-and-mortar retailers immensely, and the idea is that more games will be sold if the game is available in brick-and-mortar retailers. I don’t know if anyone has any data about this, but clearly some percentage of games is purchased on impulse, someone sees it in a store and decides to buy it. This is helped in hobby game stores by various demos and events that may go on to bring attention to certain games. Your average game player is not someone who reads BoardgameGeek frequently, and the same may be true about the average game buyer.

One way to keep the price near MSRP is a fairly new law that allows manufacturers to require sellers to maintain at least (IIRC) 80% of MSRP price on items. A few manufacturers, such as Mayfair, take advantage of this but one can wonder how well it can be enforced.

Another method is to keep the games out of the hands of the online retailers. But if you work through normal distributors the distributors happily sell to the online retailers who may give them much bigger orders than a typical brick-and-mortar shop. GameSalute (see below) has an option for small publishers to sell only through GameSalute’s online store and through brick-and-mortar stores in order to keep the actual price of the game close to the MSRP. Also, if a manufacturer negotiates exclusive distribution with a distributor, as Mayfair and FFG have recently, then perhaps part of the deal is agreement that the distributor will not sell to online retailers. I don’t know, but I cannot figure out why else a big company would negotiate an exclusive distribution deal (well, other than getting better than 40% of the MSRP. But then would the distributor do it?).

While many hobby game buyers accustomed to online purchases may feel that buying a game for 30% off the MSRP is their god-given right, it doesn’t necessarily make sense for publishers. And it’s the publishers who are risking their money.

Aggregation and fulfillment. If you’re a small publisher you may not be able to get the attention of a big distributor like Alliance or SDVM. If they don’t expect your game to sell a lot then they may not bother to bring it to the attention of their customers, the retail shops. And if you’re a small publisher, the distributor may simply assume your game isn’t going to sell much, if they bother to think about it at all amongst the hundreds of games published each year. In that case you may go to an aggregator. The aggregator puts together packages from many small publishers to sell to distributors. In order to make a profit the aggregator pays the publisher just 33% of the MSRP.

There are publishers who try to act as their own distributors, selling directly to retailers, but this is time-consuming and requires some knowledge and data about retailers. In this category we also have GameSalute. This is a relatively new company that offers fulfillment to small publishers. Fulfillment means that GameSalute takes care of all the details of sales for the publisher, taking a cut of the revenue. GameSalute has gone to this in a big way and has a large stable of games, sometimes with exclusive distribution. I think that in effect they have become a distributor for the small publishers because they try to sell directly to shops rather than to Alliance or other distributors. (Another fulfillment company I’ve heard of but know nothing about: Impressions.)

The difference between aggregation and fulfillment is that the latter may warehouse the inventory of small publishers games and take care of all the details of selling while the aggregator is more strictly a middleman between small publishers and distributors. I’m sure there are shades in between, each company may offer somewhat different services

These percentages are very important to publishers of course, but are also very important to game designers because royalties are usually based on the revenue of the publisher, not on the MSRP. Frequently in the revenue calculations some shipping is subtracted as well - the publisher usually pays to ship product to distributors - so it’s difficult to calculate anything exactly.

The mass-market. Mass-market games are often purchased around Christmas time as gifts. One of the things that sets mass-market games apart from hobby games is that people who are not game players recognize the titles of mass-market games like Monopoly and Sorry and Battleship. They’re more likely to buy a game as a gift if they recognize the name. Another aspect of mass-market games is that many people think they already know how to play the game that they’re purchasing as a gift – even though in practice most people don’t even play Monopoly correctly. Mass-market titles become brands so strong that we see big movies being produced “based on” mass-market game titles like this past summer’s Battleship movie.

Just as important, when people buy tabletop games as gifts they typically don’t want to pay $50 or $60, so it’s another characteristic of mass-market games that they tend to be down in the $25-35 range.

Settlers of Catan, while it is a little too complicated to be a mass-market game, is nonetheless approaching the brand recognition status of some of the mass-market games. There is actually a simpler version of Settlers of Catan aimed at the mass market, unfortunately called Catan: Junior.

Kickstarter
The most popular seminar subject at GenCon was Kickstarter, because Kickstarter.com is a source of funding for many creative projects including games. At present it is available only in the US, and I know of one foreign company that incorporated in the US specifically so that they could use Kickstarter.

Kickstarter is part of crowd funding, raising funds to produce something from a lot of people rather than from individual investors or venture capitalists. As far as I know the original crowd funding was called the “ransom method.” A writer offered to write a short story and distribute it for free to everyone if enough people offered contributions to meet his stated goal. He used this method several times and may still be doing it.

Kickstarter was founded on a patron model. The contributors were supposed to offer funding for worthwhile projects as patrons rather than as customers who were receiving something specific in return. But for games at least it has become the equivalent of a pre-order system, not so different in effect from the P 500 system used by GMT and other wargame publishers. In a pre-order system you get enough orders for whatever you’re going to produce that you know you have enough money to afford to produce it. GMT originally called it P 500 because they wanted 500 pre-orders, although nowadays 750 would be desirable.

Kickstarter includes lots of perks other than the actual game to help people feel like they’re part of the process, to “see how the sausage is made” as one GenCon panelist put it, but there are potential tax differences between a patron model and a pre-order model important enough that the Kickstarter people insist that they’re running a patron model even as game companies use it for pre-orders.

A survey of people involved with supporting video games on Kickstarter shows that most of them feel it’s very important that they get a downloadable or even physical copy of the game they’re supporting:
http://www.gamasutra.com/view/feature/176839/gamasutras_kickstarter_surv...
(Anyone interested in using Kickstarter for funding should read the survey results.)

Pre-orders are very important to small and even medium-sized companies. GMT deviated from their model once with a game that they were sure was excellent. They printed a larger-than-usual run. When that game sold poorly they nearly went out of business. When a Kickstarter campaign achieves 10 times as much funding as desired – this is not unheard of for games – that makes a publisher’s job that much easier.

Publishing
Let me interject a few comments here about publishing. One factor dominates publishing costs: the number of copies of a game that are printed. Much of the costs of printing are fixed costs, the same lump sum no matter how many are printed. As a result the price per unit goes down rapidly as a number printed goes up. For example I saw the difference between the price for 1,500 and 2,000 copies of a boardgame through Ludofact in Germany not long ago and it was “awesome”. Yet the major problem with printing more copies is that if you don’t sell them you’re going to lose money. And the almost-as-important problem is, if you print more games where are you going to store them? The third problem is if you print more games you need to have more money up front. Since the economic downturn, printers are much less likely to print without money in hand.

Many years ago the conventional wisdom was that your MSRP for a game would have to be six times the manufacturing costs. Lately I’ve heard 5 to 1, 4 to 1 (which must really be pushing it), even 8 to 1 for a company that’s known for selling fairly expensive games. If you think about it, if you’re selling most games through distributor at 40% of MSRP and your printing costs are half that (20%) then you have a ratio of 5 to 1. But that means that the other 20% of the MSRP has to pay for all your other expenses including shipping, and provide your profit. If you go to 6 to 1 then your printing costs are about 16% and you have 24% for other expenses. That assumes you’re going through a normal distributor; if you’re a small publisher and you have to go through an aggregator then you’re really getting squeezed even at 6 to 1.

Publishing on demand (POD) avoids the up front/fixed costs of conventional printing and avoids the inventory costs because a game is only printed when someone buys it. But the quality of POD board and card games is not quite as good as the quality of typical game printing, and there is less flexibility in components. If you’re only printing books, as in RPG books, print quality is no longer a problem. The print quality of RPG Now and associated companies (who I’m told use Lightning Source, the biggest POD printer in the country) is just as good as the printing of many conventional book publishers. There are a few publishers who have their own printing equipment – more or less POD equipment – to take yet another middleman out of the equation.

I was going to talk about considerations for game designers to negotiate a contract in light of the numbers above but this is already quite long so I’ll leave that for another day.

Comments

Great post. Right on the

Great post. Right on the money....or the ever shrinking amount as your product goes down the line.

Times are changing

I think the situation regarding the necessity of distributors is at something of a crossroads. What we have is an old business model that is rapidly being superseded, due to an altered/altering business environment.

Not so long ago publishers required distributors to get their games into the brick and mortar stores - and brick and mortar stores where the only real selling fronts for goods of any type. The ease of set up in relation to web stores has meant that a lot of game stores now have their own web presence and conduct a lot of business through that medium themselves.

The inclusion of a distributor in the supply chain makes things simpler, but the cost to benefit ration is falling. This gives large publishers more directional command and influence, which is why the exclusive agreements have probably begun to surface.

The larger publishers now have a big bargaining chip and the distributors are waking up to the fact that they need to tie things down early or face the possibility of loosing custom in the future.

If I use a distributor to channel games to online retailers and brick and mortar stores (which have been hit heavily with closures due to the internet in recent years) what am I actually getting in exchange for their cut.

Distribution and order fulfillment – You can now get that with the emergence of dedicated order fulfillment services with 'link to' website provisions.

The order is made online by the customer, it goes to the fulfillment partner and they send it out (they also offer picking, packing, return handling, direct customer service lines, storage, inventory management and domestic/international shipping services).

You can order from manufacturers (world wide if needed), co-ordinate deliveries, have the pieces packed into complete units, stored and then shipped out.

The kicker is that you only pay for the resources used when you actually use them. A business can save on employment costs, overheads, large scale investments in infrastructure, and down time expenditure during slow periods (storage only). These services are charged as and when needed, not per unit in the form of a percentage.

And thanks to the web you can find a multitude of companies that offer this type of service. Type order fulfilment services into google and see all the offerings

So using a dedicated game distributor now means you are paying a percentage on each unit irrespective of the changing circumstances in your business – the competition for distribution has increased significantly in recent years and the distributors are aware of this.

It’s also not uncommon to find yourself in a position where you are paying someone a flat unchanging fee for sending your product to a retailer who will then sell it online. And all the distributor has done that you supposedly cant is make a phone call to the brick and mortar or online retailers. It’s also easier to find brick and mortar retailers online and give them a call yourself these days.

So what could the future hold in terms of cutting out the fixed percentage distributors?

It could possibly signify the return of co-operatives, where smaller publishers work together to establish sales channels.

Make no mistake the high street is dying on its arse, the ease of internet ordering is killing it quickly, sorry but it is. So what do B&M retailers offer for 50%,

Mainly, product visibility and a few impulse buys. As you said, customers will generally look at a game and then buy online – possibly from the publishers themselves if they are cheaper. More attractively they shoulder the financial upkeep of the buildings and overheads required to support this provision (which is the reason for their high %)

With publisher controlled distribution B&M retailers could be offered low stock levels for games (reducing their storage costs, space and general overheads). They could be linked into your website, which is linked to your order fulfillment partner. The B&M secures a sale either online or in store and the goods are delivered for local pickup in a couple of days – possibly with a discount for the inconvenience.

With regular deliveries the B&M can maintain full stock levels without having to risk buying in small bulk. Their sales and services will benefit from the fluidity that linked in distribution governed by the publisher can offer. And they can use smaller premises (with lower running costs) or shift space away from storage to display.

The customer can go into a shop, look at a game, order it and pick it up later at a reduced cost. The B&M stores become look see drop off/collection points. And the publisher controls the prices because the distributor is working to order.

Publisher web sales could also be helped by following the unique gift giving model. A publisher can’t offer a lower price because they may be seen a sale stealing. However, they can offer B&M only game content which will differentiate the games sold IN B&M’s from the publisher offerings.

If you want to pay a little less buy direct from the publisher, if you want those tasty goodies that aren’t available elsewhere, buy from the B&M – you pay a little more but you get more in your game.

The great advantage remaining to distributors are their established sales networks and one stop coordinating which makes transactions easier. It will take a little time to band together a network of retailers and forge direct links between publishers and retailers that can be relied upon.

However, that isn’t out of reach. After all, if you cut out the distributors (in their current form) the retailers and the publishers can split the saving difference to increase both their profits at the expense of the outmoded business model of the distributors.

Competition will continue to diminish the power of fixed percentage distributors for the foreseeable future. Publishers and retailers now have other options available to them, they just need to discover them and take advantage of them.

Hence the distributors desire to tie up exclusive contracts before it becomes harder for them to do that. If they have a large publisher on tap they can use that as leverage in their negotiations with retailers. Continue to deal with us or you won’t get all these great games, we will cut off your supply – think Intel. And obviously they also secure a valuable revenue line for the future. In return the large publishers can strike very good deals with the distributors.

Value Proposition

Something I have not seen in this thread is the question of who the customer is and what is the value proposition for them. For a distributor, the B&M store and the online store are the customers. So what does a distributor offer either of these customers? One stop shopping, one-stop sourcing, and one-stop shipping - with free shipping after a certain minimum. Part of the value proposition has also been fill rates - if a customer (store) orders it, how likely is the distributor to have a copy of the product on hand to fill the order? Customers go where it's easy to do business, generally speaking. The exception is when the desire for the product outweighs the ease of doing business.

And if you are a store that has a favorite distributor but that distributor is not the one with the exclusive distribution arrangement for the product that the store's customers want, it just became harder to do business with your favorite distributor. Because A) they're no longer a one stop shop, B) there not one-source, and C) you're not getting orders shipped from oneplace. Also if you order $500 of product usually from one place, if you now split up your order for $400 to favorite distributor and $100 to distributor B for the product your customer has to have and you have to stock to keep your customers coming in - you have just lost free shipping. That hits the bottom line.

And what of the question of fill rates? Part of the one-stop shop idea is to have depth of coverage - even if it's only one or two copies of everything. And since distributors have been cutting back on the number of SKUs they stock, especially from smaller publishers - this part of the value proposition is eroding as well.

It makes sense for big publishers to go exclusive in some cases. But that dilutes the value of a distributor's function, even though it may drive some incremental sales from being the "sole source" for a product line.

Given that no business lasts long without a compelling "value proposition", a distributor either needs to embrace the current one or invent a newer one or narrower one so that it makes sense for customers to continue doing business with them.

As a publisher, we have made a decision to engage the services of a consolidator for many of the reasons above - they offer a single point of contact for our entire product line to the world. And conversely they offer us instant access globally to distributors and markets where it might take months or years to make contacts. The value proposition is very clear to me. Whether that consolidator ships to a distributor or direct to a B&M or online retailer it still means my product is getting out there, which is what matters to me as his customer.

as to the designer....

Lewis -

There was a very good thread here on BGDF that dealt with what designers expect and how they approach publishers. It was from 2009, but most of the info I believe is still relevant. You can find it here-

http://www.bgdf.com/node/1373

BTW - I still hold to the pay upfront model. ;-)

Your Buddy, Chester

Online vs. in-person

The first problem with any creative endeavor is obscurity. What B&M stores do is remove some of the obscurity, as the average game buyer isn't much (if at all) a BGG etc. reader. This also ties into the Age of Instant Gratification. In a B&M, you can have the game you want NOW rather than waiting a few days if you order online.

Yet I speak as a person who buys almost everything except groceries and gasoline online.

I know of no figures about this, for example what percentage of FFG and Mayfar games are sold through B&M as opposed to online outlets. I suspect the figures for smaller publishers would lean higher toward online.

Nor have I seen figures for the economy in general, how much is bought online as opposed to in person.

Columbia Games announced several years ago they were only selling direct (online and conventions), but they are a niche publisher even within the niche of hobby games (block wargames). I can't think offhand of another publisher with this strategy.

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