Virtual Distributorship. Idea...

[guildofblades]

Hi Everyone,

This is a topic I have tossed out for discussion on a indie board game group I am a member of. I thought I would toss it up here at the forge for discussion as well.

So I will toss out there once more the concept of the drop ship virtual distributorship. I personally think it is what all the smaller companies in the industry needs. A viable form of distribution.

Also intend to present this idea to the member of the Forge, which is sort of the board game design group equivelant for smaller and indie role playing game publishers. Though as a group it strikes me as a bit more established than its board game equivelant.

I have seen this business applied to the discount industry (think dollar stores and other reduced price product type stores)by several companies, at least one of which seems modestly successful. It works like this.

1) Principly it is run through a website, but it can have a printed catalog ordering method as well.

2) Publishers who participate get an account on this site and may upload their products. However, for this model to work, it is best to think of products in terms of "packages". See below.

3) Since this is a drop ship distributorship, it would work as such. Retailers who order from the site will order "packages" from various vendors. The retailer get charged a base shipping rate for a single package, then additional shipping for additional packages, but at reduced shipping rates. To make the shipping cost reasonable for retailers; meaning they can not afford to be stock with the shipping costs for ordering a bunch of products individually and to have them shipped indvidually, that is where the concept of product "packages" comes in.

4) A Product Package. This can be any configuration of product the manufacturer wants to offer. The idea here is NOT to sell invidiual products 1 copy at a time. In the discount market product is most often sold by the "case". This, of course, really doesn't work for
hobby retailers since they do not have the foot traffic to sell dozens and dozens of an individual game (though large format board games can often have case lot quantities as low as 6 or even 3). But in principle, most hobby retailers aren't going to want to stock the "average" indie title more than 1-3 copies deep. However, they as retailers do NOT want to be charged shipping on orders that only include 1-3 units, as the shipping is cost prohibative for the retailer. Now do we as publishers want to be in the habbit of shippig 1-3 units at a time at wholesale type discounts. Making a whopping $10-$50 gross per order just is not time efficient to package.

So as manufacturers, to make a virtual distributorship work, we have to offer "packages" of products. How big a "package" you offer would depend on the threshhold your company has with regards to what is a reasonable amount of product to package vs the income you recieve from it. For example;

Our company produces a number of of games in a World War I series. These games are below with associated MSRPs.

1) The War to End All Wars (wwi core game) $34.95
2) The Great War in Africa $24.95
3) North American Upgrade Set $19.95
4) Rise of the Red Army $34.95
5) WWI Extra Armies Upgrade $11.95

So, selling any one of these titles at a 55-60% discount is not an efficient transaction for me or the retailer. However, if I offer the following as a package:

3 copies of The War to End All Wars
2 copies of The Great War in Africa
2 copies of The Rise of the Red Army
1 copy of The North American Upgrade Set
1 copy of WWI Extra Armies Upgrade

then I am offering a package with a suggested retail price of $256.55 and at a 60% discount, that is a wholesale value of $102.62. Now that is worthwhile for us to package and the shipping charge is reasonable for the retailer.

So, for a publisher with several or more products this type of system can work really well. But what about the small publisher with just 1 title? Well,for these publishers, they can reach out, through a private message system built for the publishers using this
distribution model, to partner with a limited number of other small publishers to combine their product offerings to create "packages" suitable in size and product mix to attract retail orders. The system can even be set up to track the monies each manufacturer earns as their part of a joint package sells. However, this would still mandate the products be stored in one location so they can be packaged and shipped together.

5) Pricing & Discount.
Under this type of distribution model, each manufacturer gets to set their discount level that is ultimately offered to retailers. In the hobby game distrbution system nearly all publishers offer products to distributors at a 55-60% discount and the distributors offer nearly all products to the retailer at the same discount (usually 42-50% and usually based on order volume), regardless of what the manufacturer offers. This forces all publishers into nearly the same discount structure and stiffles various different business models. Under the virtual distributorship, each manufacturer would be able to set the
discount offered for their "packages". In effect, the virtual distributorship will tack on the same mark up percentage to every package offered. If, for example, the virtual distributorship charges 18%, then a product with an MSRP of $10, sold through the virtual distributorship at a 60% discount ($4.00)would then sell to the retailer for $4.72, or roughly a 52.8% discount. As you note, that is a stronger discount than is normal. Theory says the virtual distributorship does not have full time staff (salary expenses), a
warehouse to maintain or a full time sales staff, then it can operate while taking a smaller percentage than the distribution tier normally does. Publishers than have the choice of capturing those extra percentage points to add to their own bottom line or they can give those points to the retailer as extra discount and make ordering and stocking their product more atractive, or split the two concepts right down the middle.

The virtual distributorship would, however, still have some expenses. Website to host and someone who would need to be compensated for building the darn thing in the first place. It would have to obsorb to credit card fees from order recieved, plus obsorb part of the shipping fees for orders placed by retailers that included more than one vendor. And of course, advertising to help build a boarder customer base. Printing a physical catalog and distributing it to all likely retailers.

The virtual distributorship is the only type of distributorship a group of smaller publishers is likely going to be able to manage. A physical distribution operation takes either a lot of space and a lot of capital to launch, or at least a lot of space and asks a lot of
publishers to warehouse that space with product on consignment. And that creates all sorts of other problems.

Successful retail shops really need something like this. Hobby game distributors have continually narrowed the range of products they offer and only want to distribute more mainstream products. Retailers in education markets and other niche markets may not even be lucky enough to have a central distribution options for games servicing their niche at all. However, almost invariably, it is the stores that offer a wide and diverse selection of product that are the most profitable and most stable over time. These stores currently go out of their way to order direct from manufacturers who are not sold through
distribution companies. They are, by force, more selective of what companies they will order direct from because in simply dealing direct they have more work to juggle.

Well, there is one other serious problem that needs be confronted to launch such a venture. The strength of the venture relies on getting a multitude of small publishers to willingly use the service as a distribution option. The more publishers involved, the more useful the service becomes for retailers. Of course, once you get a lot of small
companies together, jointly running what has the potential to become a huge market force, you'll have administration challenges and politics. Put too much control into one person's hands and invariably they'll view the whole shebang as "theirs". What is needed is an "organization", preferably set up as a non profit corporation, with the organization having a charter set up to empower the broader membership against the personal interests of select members.

For such a venture to come together, a core of indie companies must come together to forge such an organization and lay the ground work. Once in place, they must collectively work to gather broader participation from many indie companies, weather they produce board games, RPGs, card games, miniature games and miniatures and/or other forms of games currently lacking viable distribution channels.

People of this co-op group have come together to seek ways to help get their games "out there". I can think of nothing we could that could create a larger impact than establishing a viable distribution service for indie companies.

Ryan S. Johnson
Guild of Blades Publishing Group
http://www.guildofblades.com

[MatrixGamer]

Spot on!

I would love to sell games through this kind of system. It would be easy on me but it would also be easy on game stores. If the site was well made it could build up a brand name like "Amazon" or "Ebay". It would have to restrict sales to stores - ie no direct sales at the discount - but that could be done.

I hope that there is some computer wiz out there who wants to do this. They need computer skill, a willingness to market us game companies - like Matthews Simmons Marketing does now for Games Quarterly Catalog. Patience and determination.

This is what I think could break the old distribution system. It's all about how what is available is communicated to the stores.

Chris Engle
Hamster Press

[Andrew Cooper]

Well, I would be willing to handle a good bit (perhaps even all) of the programming involved but we'd also need server space (ideally a whole server) and bandwidth and someone with a bit more business experience.  I don't know if discussing all of that is appropriate for this thread but I'd certainly be willing (even eager) to discuss it elsewhere. 

[jdagna]

I definitely agree that this is what's needed, and would love to be on board both as a publisher and in the operations of the distributorship.

I've actually tried to get this going to some extent by selling another company's game line to distributors along with my own, but it's so small scale that it doesn't really make it worth my while.  Something bigger would certainly be preferable.

[MatrixGamer]

If the game designers here, the members of the GPA, and word was posted on various forums and blogs then I'm certain there would be enough interest. I'm also fairly certain the bigger companies would join - since it is just another revenue stream. They might not join but if there was enough other variety of product then that wouldn't matter. People would come for the sheer novelty of it all.

So..."Build it and they will come."

Chris Engle
Hamster Press

[Josh Roby]

Ryan, I'm missing something.  Why does this not require a central warehousing facility?  I thought the whole idea was to save shipping charges by shipping them together -- how do we accomplish this if not by packaging everything from the same, central, location?

I'm very interested in hearing how this would work; I'm just not getting this part, I think.

[jdagna]

Ryan, I'm missing something.  Why does this not require a central warehousing facility?  I thought the whole idea was to save shipping charges by shipping them together -- how do we accomplish this if not by packaging everything from the same, central, location?

I'm very interested in hearing how this would work; I'm just not getting this part, I think.

As I'm understanding it, there are two ways to keep shipping costs reasonable without a central warehouse.  I'll use some extremely rough numbers to illustrate it all.

First, the idea of having retailers buy in packages.  If a retailer spends $15 on a book that costs you $8 to ship, you haven't made much profit (you've probably lost money when you look at your printing costs).  But you can ship two books for only $9 and three books for $10 and so on.  Your income per dollar of shipping goes up as the order size gets bigger.  So as an individual publisher, you set out packages that are reasonably-sized for both the retailer's need to keep inventory down and your need to keep shipping reasonable.  I have four books in a single product line; I might set up a package that's two core books and one of each of three supplements, with a total retail value of $105.  Then I'm only spending $12 or so to ship an order that gets me $40 or so.

Second, if publishers have a small number of products, they can work out deals with other publishers to create joint packages.  One of those publishers does have to do some warehousing, but it may only be half a dozen titles and they can be in small quantities, unlike a giant central distributor.  As an example, I'm currently offering another publisher's book for sale to distributors along with my own lines.  Using my earlier package as an example, I might increase it's size by adding a pair of his books to it, making the total price $145, and only raising our shipping a small amount.  And, since the virtual distributor would be collecting money and paying publishers, it's even better than what I'm doing now because I don't have to worry about cutting the other guy a check.

So it's still not quite as efficient as a centralized distributor in terms of shipping, but it does eliminate other inefficiencies of a distributor, like paying for the large warehouse and having lots of money tied up in inventory.

(As a side note: even with four titles, I'm often asked by distributors if I'll bend the rules on my minimum orders.  So, honestly, selling a package of six books to a retailer through a virtual distributor wouldn't be all that much more expensive in shipping for me.)

[Andrew Cooper]

Okay guys, I'm really very interested in this now just from a programming point of view.  I'd be willing to work on this project but I'm really going to need some publishers who want to take the lead in determining exactly (a functionality list) of what the program (website) needs to be able to do.  While I'm grasping the basics very well, I'm not enough of a publisher at this point to know exactly what information needs to be processed, how it needs to be processed, and where it needs to go after processing.  Are there any publishers out there interested enough to actually discuss nuts and bolts?

[Josh Roby]

Oh, I see -- the webpage would be a central clearinghouse of information about packages created by different publishers.  One given package would be assembled by one publisher; packages from more than one publisher would be assembled by one of the publishers.  Orders for packages would be routed through the website.

Interesting -- if I was anywhere near manufacturing, I'd throw my hat in.  I'll hop on board in Winter 2006 if there's a board to be hopping onto.

[jdagna]

So what's the first step towards getting this going, Ryan?  Are you just measuring potential interest, or are you hoping someone will pick up the torch and make this happen?

As I see it, we're (as in the organization) is going to need four major roles filled:
1) Operations: someone to keep tabs on the people and projects involved, making sure they have what they need
2) Technical: someone to handle the web site and programming necessary
3) Sales Rep: someone who already has a rapport with a wide variety of gaming stores, who can get them online and help us maximize whatever advertising goes on
4) Accounting: someone to handle funds, pay bills and publishers, handle business and tax stuff, etc.

The roles don't have to be separate people, and they don't have to be individuals either, depending on how things actually get set up.  I would be interesting in helping with the back end accounting or operations roles.

And, we need sources for seed money, whether that represents investors/partners or other things we can sell up front.  For example, if there's a budget for advertising the distributorship, we could piggyback a publisher's ad to defray some of the advertising costs.  (Perhaps something like DriveThruRPG.com's ads, which always feature a particular game for sale there in addition to talking about DTRPG itself).

You mention setting this up as a non-profit.  It seems like there is certainly a potential for profit here, but are you just assuming that any income above expenses will go either to compensate people who keep the organization running, or back to member companies in some way?

[guildofblades]

Hi,

Sorry for not getting back to this thread sooner. My fiance, who current resides over seas, is getting ready to apply for a visa, and well, dealing with the US department of immigration is about as much fun as going to the dentist and having teeth pulled with no pain killers. It will likely be a couple of days before I can devote attention to this topic as it deserves. But I will try and address your questions.

As for the "Not for Profit Status", I believe that is important because if the corporation is a for profit corporation, then we have to address where and whom those profits go. And that can bring up a whole nother level of ugly tax issues and also might not allow us to create the sort of governing body we really want.

As a not for profit company, owned by an association, the association as a whole owns the business. There are no "profits" per se, so we do not need to worry about who that money goes to. It goes to no one. But YES, there is the potential for the distributorship to turn a profit. Actually, we NEED it to turn a basic profit off of its normal operations. Not neccessarily a large one, but the profit has to be there. Because the whole venture collapses almost overnight if the thing is running in the red and all of a sudden the membership as a whole is asked to pitch in money to keep her afloat. Just wouldn't work. Members would join this association most for the intent purpose of getting to use the distributorship so they can generate extra sales and earn money. So in that regards, other than a small annual membership dues, the money always has to flow to the publishing members, not the other way around.

However, if the system is designed for the distributorship to turn a profit, then yes, the association will have to decide how to spend those profits. The most logical place is on marketing the distribution service so the virtual distributorship can grow its retailer customer base, thus giving all the participating members a wider channel of potential distribution. There are a lot of ways to run various marketing campaigns, from near zero cash outlay right up to spending millions and millions. I am fairly sure there will never be enough profits from the virtual distributorship for us to explore them all.

However, lets say for example a time comes where the memberships is perfectly happy with the amount of revenues the distributorship is spending on its regular marketing efforts and there is still surplus monies. That there is why it is beneficial for this to be an association. The association should, in my opinion, be dedicated to more than just running the virtual distributorship. If we were looking for a focus, I guess it could be game marketing. So perhaps the Game Publishers Marketing Association or something like that. The virtual distributorship could be the flagship project that more or less the organization is centered on. However, other marketing initiatives could be undertaken as well. Or resources could be spent towards establishing member benefits plans and services outsourcing. i.e, using the clout of the association to get its members better credit card merchant services, leveraging the weight of the distributorship's volume as part of a deal that lets the merchant service provider give that same deal to the individual member companies for their credit card processing from their own websites. How would you like to make an extra 1% on everything you sell online?

As for organizational structure, I see a need for a board of directors. Volunteer of course, and to be voted on by the membership at large.

As for the running of the distributorship, the more automated the better. And that includes payment systems and accounting. None of this should be done by hand. Only be reviewed.

With regards to marketing, to be honest, I really do not think the virtual distributor should enter the market with a big bang and a lot of money backing it. Its premise is its flexibility, its low cost operations and its ability to make available nearly all products from all companies. It will have two natural marketing strengths, neither of which will require much money to take advantage of. Those being the ability present a very large catalog of products mostly unable to be attained through most other wholesellers, and a whole bunch of companies very likely willing to plug the service and draw potential retailers to it. I think launch advertising should be basic and the we should begin initially by letting these strength work. In essence, for the most part, let the site grow on its own momentum.

As the the "staff" of volunteers of the organization that steer the distributorship, I think minimalistic is best initially. It is best the service not promise more than it can deliver. Start small and grow from there. When I have more time, I'll be happy to duscuss this aspect, or at least my thoughts, more.

Ryan S. Johnson
Guild of Blades Publishing Group
http://www.guildofblades.com

[jdagna]

That clarifies quite a few things... thanks for answering my questions, Ryan.

Giving the association an "ulterior motive" beyond the distributorship makes sense.  In speaking of profits, I was considering them as profits after marketing and any other expenses, since it's certainly easy for a non-profit to find way to deal with extra money.  However, if things go well, I think this distributorship should reach a point where the cost-effectiveness of marketing starts to drop (there are only so many gaming/hobby stores out there).  If it has a wider goal of promoting the hobby or enabling member publishers, then that's a logical way to deal with any amount of success.

I agree that marketing is certainly something to build up to in any event.  A lot of initial "marketing" will presumably come from member publishers pointing retailer inquiries over to the site, I'm sure.

Seed money is still going to be necessary in terms of creating the corporation, obtaining permits/licenses, getting everything that's needed for the web site and payment processing and so on.  These things are not cheap, even if we take maximum advantage of what people can donate.  Do you think we can reasonably cover these costs based on membership fees alone?  I honestly don't have any good estimates for either the costs or the income.

I'll be interested to hear more about how you envision setting up the staff and workflow.  Automation of day-to-day activities is definitely the way to go wherever possible and I'm really not familiar enough with this kind of a business to know how much is possible.

It does seems to me that a lot of people will have to put a lot of work into this thing to get it started, though.  Just the amount of programming and design to get the web site functional seems pretty labor intensive to me.  Incorporation, by laws and all the other necessary paperwork also seem fairly demanding.

[guildofblades]

Hi Everyone,

Sorry for not getting back to this thread sooner. My personal life has been hectic the last couple of weeks. Anyway, I checked with the members of the board game group where this discussion began and they are fine with using that list as the central place to discuss this topic in more detail.

I figure it is best to collect all interested parties and consolidate them into one discussion, rather than me trying to support two entirely different threads on different sites. If you are interested in continuing with this discussion, please join the following Yahoo Group discussion list

http://games.groups.yahoo.com/group/BGDC/join

Thanks,
Ryan S. Johnson
Guild of Blades Publishing Group
http://www.guildofblades.com